25 April 1991 Income Tax Severed Letter

April 25, 1991

Calgary District Office                 Financial Industries
Audit Review                              Division
L. Whiting                              N. Goldstein
                                        (613) 952-9853

                                        7-903635
Large Corporation Tax

We are responding to your memorandum dated June 22, 1990, received by us on December 21, 1990, regarding the interpretation of certain provisions of the tax on large corporations. We apologize for the delay. Please note that all references are to the Income Tax Act.

In our opinion bank overdrafts would normally constitute loans or advances that would be included in the calculation of capital pursuant to paragraph 181.2(3)(c) regardless of the length of time outstanding. Accordingly, bank overdrafts will not be subject to the 365 day requirement in paragraph 181.2(3) (f) concerning other indebtedness of the corporation.

In our view trade accounts payable would not normally be considered either a loan or advance or a bond, debenture, note, mortgage, hypothec or similar obligation within the meaning of paragraphs 181.2(3) (c) and (d) but rather would be other indebtedness which may be required to be included in capital pursuant to paragraph 181.2(3)(f). Similarly as trade accounts receivable do not in our view constitute loans or advances, or bonds, debentures, notes, mortgages, hypothec or similar obligations within the meaning of paragraphs 181.2(4)(b) and (c) they would not constitute assets that are eligible for the investment allowance.

While we agree with your observation that in the case of two associated companies, both companies could put through journal entries to reclassify the amounts from trade receivables to advances in order to have the investment allowance apply, in our view, the significant facts in determining if an asset is eligible for the investment allowance is the underlying nature of the asset, not the accounting classification given to the asset Particularly in such situations, it will be necessary to consider on the facts as to whether the asset constitutes a loan or advance or a trade receivable

We trust the foregoing comments are of assistance

for Director
Financial Industries Division
Rulings Directorate
Legislative and Intergovernmental
  Affairs Branch
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