| 921724 | |
| J.P. Dunn | |
| (613) 957-2747 |
September 10, 1992
CALGARY DISTRICT OFFICE HEAD OFFICE
Chief of AuditRulings DirectorateFinancial Institutions Division
Attn: L. Whiting
Audit Review 24(1)
Customer Contributions and Large Corporation Tax
We are writing in response to your memorandum of May 26, 1992 wherein you had requested the views of this Division as to whether certain amounts classified in the financial statements of the above referenced corporation as "Customer Contributions" should be included in the calculation of the capital of that corporation pursuant to subsection 181.2(3) of the Income Tax Act (the "Act") for purposes of Part I.3 Tax on Large Corporations.
It is our understanding that "Customer Contributions" are installation charges to customers in situations in which the full cost of the installation will not be recovered from the customer over the life of the installed assets at the standard rate in effect for a particular class of customer. In its submission to you, the corporation notes that,
24(1)
24(1)
Also, the Summary of Accounting Policies from the 24(1) financial report of the corporation (enclosed with your referral) notes that, 24(1) It is our opinion that these amounts constitute advances to the corporation at the end of the year and would, accordingly, be included in the determination of the capital of the corporation as provided in paragraph 181.2(3)(c) of the Act for the purpose of Part I.3 Tax. In the course of our review of this matter, reference was had to Black's Law Dictionary - Fifth Edition wherein the definition of "advance" includes, "to furnish capital in aid of a projected enterprise, in expectation of a return from it" and, "to furnish money for a specific purpose understood between the parties, the money or sum equivalent to be returned."
In the case at hand, the expectation of the return from or the sum equivalent to the money advanced would be the future receipt of service at a rate which is less than that which, in the absence of regulated rates, would otherwise be charged to the customer. As noted above by 24(1), the contribution is collected from the customer in order to compensate for the revenue deficiency which results from the difference between the standard rate in effect for the particular class of customer and that which would be required to recover the full cost of 24(1) investment in the service over the life of the asset.
Accordingly, as previously noted, we are of the view that "Customer Contributions" as presented on the balance sheet of the corporation should be included in the calculation the capital of the corporation for the purpose of Part I.3 Tax as being advances to the corporation at the end of the year as contemplated in paragraph 181.2(3)(c) of the Act.
We trust that our comments are of assistance to you.
Section ChiefFinancial InstitutionsFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch