Principal Issues: [TaxInterpretations translation] For the purposes of Part I.3, should funds received from a client and deposited in trust for the clients of travel agents be included in the capital of a corporation?
Position: Yes, if they are advances
Reasons: The amounts are shown as liabilities on the company's GAAP balance sheet.
XXXXXXXXXX 2007-022919 Michel Lambert CA, M.Fisc. September 21, 2007
Dear Sir,
Subject: Travel Agency
Application of paragraph 181.2(3)(c)
This is further to your letter of March 26, 2007, asking whether a corporation subject to Quebec and Ontario travel agent legislation must include in its taxable capital for purposes of Part I.3, pursuant to paragraph 181.2(3)(c), funds collected from clients for services to be rendered to them after the end of the corporation's year that are deposited in a trust account.
You indicated that the corporation reports, as an asset in its financial statements, the amounts deposited in trust accounts and records a corresponding liability called "customer deposits and deferred revenue".
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is our practice not to issue written opinions on proposed transactions otherwise than by way of advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
Section 33 of the Quebec Travel Agents Act (R.S.Q., chapter A-10) reads as follows:
The funds collected by a travel agent on account of other persons shall be transferred in trust. In such a case the travel agent shall act as trustee; the travel agent must deposit and maintain the funds in a trust account opened in Québec and comply with the conditions prescribed by regulation for the deposit and withdrawal of such funds.
The funds collected by a travel agent and which must be deposited in a trust account are deemed to be held in trust by the travel agent and an amount equal to the aggregate of the funds deemed held in trust must be considered as constituting a separate fund not forming part of the property of the travel agent or of the officers of the travel agent, whether or not the amount was kept distinctly and separately from the own funds of the travel agent or of the officers of the travel agent or from the mass of their property.
In accordance with the Regulation respecting travel agents (C. A-10, r.1), the funds kept in accordance with section 33 above may only be withdrawn for specific purposes, namely for services to be rendered to the client.
In Ontario, travel agents are subject to the Travel Industry Act, 2002. Section 27 of Ontario Regulation 26/05, made under this Act, requires, inter alia, that the registrant maintain a trust account for all money received from customers for travel services. The registrant may only withdraw or charge money held in a trust account for specific purposes, including making payment to the suppliers of the travel services in respect of which the money was received.
Subparagraph 181(3)(b)(i) provides as follows:
For the purposes of determining the carrying value of a corporation’s assets or any other amount under this Part in respect of a corporation’s capital, investment allowance, taxable capital or taxable capital employed in Canada for a taxation year or in respect of a partnership in which a corporation has an interest, (…)
(b) subject to paragraph 181(3)(a) and except as otherwise provided in this Part, the amounts reflected in the balance sheet
(i) presented to the shareholders of the corporation (…)
We are of the view that if a corporation's balance sheet is prepared in accordance with generally accepted accounting principles (GAAP), that balance sheet must be accepted for purposes of determining Part I.3 tax. Therefore, amounts received by a travel agent from customers and shown as liabilities must be included in capital if they are covered by the provisions of subsection 181.2(3) even if they are required to be placed in trust under the Quebec or Ontario legislation described above.
You indicated that the corporation has a liability on its balance sheet called "customer deposits and deferred income". It must therefore be determined whether this amount is part of the corporation's capital. Subsection 181.2(3) provides that the capital of a corporation, other than a financial institution, for a taxation year includes "loans and advances to the corporation at the end of the year".
The term "advance" is not defined in the Act. It is our view that this term includes an advance payment. Funds received from clients and placed in trust under the Quebec and Ontario legislation referred to above are, in our view, prepaid and advances for the purposes of the definition of capital in subsection 181.2(3).
As stated in Information Circular 70-6R5, this opinion is not an advance income tax ruling and is not binding.
Best regards,
Manager
Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.