Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: The treatment of current income taxes payable for purposes of Part I.3 tax.
Position: Current income taxes payable are included for purposes of Part I.3 tax as other indebtedness or as a reserve.
Reasons: The actual amount of current income taxes payable as confirmed by the notice of assessment is an indebtedness in respect of the particular taxation year. Such an indebtedness would be included in the capital for purposes of Part I.3 tax where it remained outstanding at the end of the subsequent taxation year. The excess of the estimated current income taxes payable over the amount actually assessed and unpaid would be included as a provision.
January 8, 2001
MISSISSAUGA TSO HEADQUARTERS M. Trotier Attention: Sue Le 1262-45023 2000-005723
Current income taxes payable and Part 1.3 tax
This is in reply to your enquiry dealing with the treatment of current income taxes payable for purposes of Part I.3 tax.
Issue
Paragraph 26 of Interpretation Bulletin IT-532 refers to a provision for anticipated taxes. It states the following:
"A provision for anticipated taxes is considered a reserve and, accordingly, is added to capital unless a notice of assessment has been issued with respect to that amount, in which case the assessment establishes the tax liability which would only be included in the capital tax base pursuant to paragraph 181.2(3)(f) to the extent that the amount of the liability has been outstanding for more than 365 days before the end of the year."
You have asked whether or not the amount of current income taxes payable reflected on the balance sheet of a corporation is to be included in the capital base of the corporation as a "reserve" as defined in subsection 181(1) of the Income Tax Act. We have also been asked how the comments in paragraph 26 above apply with respect to such current income taxes payable.
Comments
It is generally accepted accounting principles that a liability is to be recorded at year end with respect to current income taxes payable. It is our understanding that this amount would be net of income tax instalments paid by the corporation in respect of the particular taxation year. An indebtedness is in existence at that time, however, the exact amount of this liability may not be known at year end such that an estimate has to be computed. The exact amount of this liability will be determined when a notice of assessment is issued and this subsequent to the preparation of the financial statements at year end.
We are of the view that the notice of assessment is confirmation as to whether or not the amount of current income taxes payable reflected on the balance sheet of the corporation is actually an indebtedness or a provision. The actual amount of the net balance of current income taxes payable determined by a notice of assessment is an indebtedness referred to in paragraph 181.2(3)(f) of the Income Tax Act but would only be included in the capital of the corporation if it is outstanding for more than 365 days before the end of the year. We note that paragraph 38 of IT-532 does indicate that current taxes payable are an example of indebtedness that could be included under paragraph 181.2(3)(f) of the Income Tax Act if outstanding for more than 365 days before the end of the year. This would include current income taxes payable in respect of a taxation year that remained outstanding at the end of a subsequent taxation year.
The definition of a "reserve" in subsection 181(1) of the Income Tax Act includes a provision. It is the legal nature of an item that determines its character for purposes of Part I.3 tax. As indicated above, the actual amount of current income taxes payable as confirmed by the notice of assessment is an indebtedness. Consequently, it is our view that the amount to be included as a "reserve" for purposes of Part I.3 tax of a corporation is equal to any excess of the estimated current income taxes payable reflected on the balance sheet of the corporation over the amount actually assessed and unpaid with respect to the particular taxation year. This amount would be the provision referred to in paragraph 26 described above.
We recognize that a notice of assessment for purposes of Part I tax will not have been issued at the time a taxpayer is preparing the return in respect of Part I.3 tax. However, generally the amount reflected on the balance sheet as current income taxes payable will not likely exceed the amount confirmed in the notice of assessment. Accordingly, for practical purposes the amount reflected on the balance sheet as current income taxes payable should be treated as other indebtedness. The notice of assessment would provide support of this fact or confirmation that all or some part of it constitutes a reserve to be included in capital under paragraph 181.2(3)(b) of the Income Tax Act.
We trust the above comments will be of assistance.
F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch