Dear Sirs:
Re: Tax on Large Corporations
We are writing in response to your correspondence of February 8,1991 wherein you requested the views of the Department with respect to a hypothetical situation, and more specifically, the effect of the assumed transactions upon the calculation of the taxable capital and the investment allowance of the corporation for the purpose the Part I.3 Tax on Large Corporations.
We apologize for the lengthly delay in providing our response.
Although we are not able to comment specifically on the hypothetical example provided, we would offer the following comments relative to the calculation of the particular amounts.
As indicated by you in your letter, paragraph 181.2(4)(a) of the Income Tax Act (the 'Act') provides that "the investment allowance of a corporation (other than a financial institution) for a taxation year is the aggregate of all amounts each of which is the carrying value at the end of the year of an asset of the corporation that is a share of another corporation". Also, paragraph 181(3)(b) of the Act states that for the purposes of determining the carrying value of a corporation's assets or any other amount in respect of a corporation's...investment allowance...the amounts reflected in the balance sheet...presented to the shareholders of the corporation...in accordance with generally accepted accounting principles...shall be used." Accordingly, to the extent that the valuation of an asset of a corporation is in accordance with the aforementioned generally accepted accounting principles and that such valuation cannot be considered to constitute the use of either the equity or consolidation methods of accounting, which methods are prohibited pursuant to paragraph 181(3)(a) of the Act for the purpose of determining the carrying value of any amount under Part I.3, it is our opinion that this amount which is reflected on the balance sheet presented to the shareholders is the amount to be used in the calculation of the investment allowance.
Similarly, with respect to the calculation of the capital of a corporation, the amount presented on the balance sheet representing the issued share capital of a corporation would be the amount included in that calculation pursuant to paragraph 181.2(3)(a) of the Act. Again, this interpretation presupposes that the presentation is in accordance with generally accepted accounting principles.
As noted previously, we are unable to consider a specific hypothetical situation in a general letter of opinion. Should you wish the views of the Department with respect to a completed transaction, you should contact the appropriate District Taxation Office. Alternatively, if the hypothetical situation presented constitutes an actual proposed transaction, you may wish to request an advance income tax ruling in accordance with the Department's requirements as set forth in Information Circular 70-R2 dated September 28,1990.
While we trust that our comments are of assistance to you, we would advise that they do not constitute an advance income tax ruling and are, therefore, not binding upon the Department in respect of any particular situation.
Yours truly,
for DirectorFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch