Principal Issues: [TaxInterpretations translation]
Can an amount owed to a factoring company be included in computing capital pursuant to subsection 181.2(3)?
Position:
Yes, if loan, advance or other indebtedness.
Reasons:
Legal and factual issue.
CAPITAL TAX ROUNDTABLE
APFF - INTERPROVINCIAL TAXATION & CAPITAL TAX SYMPOSIUM
Question 2
Liability item resulting from transactions with a factoring company
Corporation A obtains financing from a factoring company. Under the contract with Corporation A, the factoring company advances Corporation A a sum of money equivalent to a percentage of its accounts receivable. In addition, the factoring company collects the accounts receivable of Corporation A and uses the amounts collected to reduce the amount advanced to Corporation A, among other things. For accounting purposes, the accounts receivable remain on Corporation A's balance sheet and the amount received is recorded in current liabilities as an item due to the factoring company.
Can the CRA confirm that the amount owing to the factoring company will be included in the capital computation under subsection 181.2(3) of the Act?
CRA Response
Subsection 181.2(3) provides that the capital of a corporation for a taxation year includes certain liabilities of a corporation, including
- loans and advances made to it at the end of the year;
- all other indebtedness of the corporation, other than any indebtedness in respect of a lease, at the end of the year that has been outstanding for more than 365 days before the end of the year.
The CRA is of the view that where a term in Part I.3 of the Act is derived essentially from accounting nomenclature, such as reserves, allowances and other surpluses, the accounting treatment of the item in question will be used to determine whether the item is included in the capital computation. On the other hand, the CRA is of the view that legal form should continue to be considered with respect to items that are to be included in the capital computation as loans, advances or debt.
Note the distinction between the terms "loans", "advances" and "indebtedness". As the jurisprudence has shown, the term "indebtedness " has a broader meaning than the term "loans" since it includes not only the lender-borrower relationship but also a seller-buyer transaction. Indebtedness means an obligation to pay a sum of money. A loan is usually understood as the delivery to one party and receipt by another party of a sum of money which it has been agreed, expressly or impliedly, will be repaid with or without interest. The term "advance" has two possible meanings, namely that of a loan in the proper sense of the word and that of a deposit to be applied to the price of a contract before it is performed.
In our view, the legal characterization of the contractual relationship between Corporation A and the factoring company must be determined in order to establish whether the amount owed to the factoring company must be included under one of the elements of subsection 181.2(3), i.e., as a loan, an advance or other indebtedness. Such a determination must be based on an analysis of all the facts and documents surrounding the transaction.
Louise J. Roy
2005-011873
May 11 and 12, 2005