| 24(1) | 7-903057 |
| N. Goldstein | |
| (613) 957-8953 |
19(1)
December 13, 1990
Dear Sirs:
We are writing in response to your letter of October 1, 1990 in which you requested Revenue Canada, Taxation's views as to whether certain debts, such as accounts receivable, owed by non-resident corporations to resident corporations will qualify for the investment allowance in subsection 181.2(4) of the Income Tax Act (the "Act"). You also asked if the indebtedness other than indebtedness that is represented by a bond, note, debenture or other similar obligation, must be outstanding for more than one year to qualify for the investment allowance.
Presently, subsection 181.2(4) of the Act provides that the following amounts are eligible for the investment allowance:
a) a share of another corporation,
b) a loan or advance to another corporation (other than a financial institution),
c) a bond, debenture, note, mortgage, hypothec or similar obligation of another corporation (other than a financial institution),
d) long-term debt of a financial institution,
e) an interest in a partnership.
The only exception for eligibility is contained in the postamble of subsection 181.2(4) of the Act and provides that the share of the capital stock or indebtedness of the corporation cannot be a share or indebtedness of a corporation that is exempt from tax under section 149 of the Act on all of its taxable income.
Unless a non-resident corporation is exempt from tax under section 149 of the Act, which generally would not be the case, it is our view that the indebtedness of a non-resident corporation, to the extent described in subsection 181.2(4) of the Act, will be included in the calculation of the investment allowance.
Draft amendments to the Act, issued in July 1990, propose to change the criteria under subsection 181.2(4) of the Act to add, as an eligible amount, a dividend payable to the corporation at the end of the year on a share of the capital stock of another corporation. The same amendment proposes to change the exception for eligibility for the investment allowance from shares or indebtedness of a corporation that is exempt from paying tax under section 149 on all of its taxable income to shares, dividends or indebtedness of a corporation that is exempt from tax under Part I.3 of the Act, otherwise than by reason of paragraph 181.1(3)(d) of the Act.
A non-resident corporation is generally exempt from tax under Part I.3 unless it is carrying on business in Canada through a permanent establishment at any time in the year. This exemption is by reason of paragraph 181.1(3)(d) of the Act. Therefore, in such circumstances it is our view that the indebtedness of a non-resident corporation that is not carrying on business in Canada through a permanent establishment may be an eligible amount in calculating the investment allowance notwithstanding the proposed amendments.
We do not interpret subsection 181.2(4) of the Act as requiring that a loan or advance, be represented by a bond, note, debenture or other similar obligation. We interpret the amounts in paragraphs 181.2(4)(c) and (d) of the Act to be independent of each other. If an account receivable is a loan or advance to another corporation, it is eligible for inclusion in the investment allowance whether or not the loan or advance is represented by a bond, debenture, note or similar obligation. It will be a question of fact whether an account receivable is a loan or advance. Generally it is our view that trade receivables will not constitute loans or advances. Whether or not an intercompany receivable is a loan or advance will depend on the particular circumstances. We do not interpret subsection 181.2(4) of the Act as requiring a minimum time period for an indebtedness, be it an account receivable or other debt, to exist in order for that indebtedness to be eligible for inclusion in the investment allowance.
We would advise that our opinions are based on the Income Tax Act and the draft amendments thereto issued in July 1990. While we trust our comments are of assistance to you, they do not constitute an advance income tax ruling and are, therefore, not binding upon the Department in respect of a particular situation.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate