Income tax questions for Revenue Canada: December 10, 1996

Tax Executive, The, Jan-Feb, 1997

Example 1 illustrates the financial statement presentation under the new rules.

Under the rules in effect until 1995, the financial statements would have reflected a net debt of $130 M every year. What is Revenue Canada's position on the treatment of the amounts presented as a hedge asset and a hedge liability in the example above for the purpose of computing taxable capital under section 181.2 of the Act?

Large Corporation Tax -- Unrealized Foreign Exchange Gain or Loss

New paragraphs 181.2(3)(b.1) and (k) introduced in the June 20, 1996, Notice of Ways and Means Motion, apply to 1995 and subsequent taxation years. Will Revenue Canada confirm that its assessment policy for years ending prior to 1995 will be to exclude unrealized foreign exchange gains and losses from the calculation of capital?

Large Corporation Tax -- Outstanding Cheques

At the May 1995 TEI Annual Conference in Hull, Revenue Canada commented that outstanding cheques must be included in determining the amount of a corporation's bank overdraft for purposes of computing the tax on large corporations under Part I.3 of the Act. In October 1995, the court in The Grocery People Ltd. v. The Minister of National Revenue (1996 ETC 90) commented, as follows

I'm prepared on the basis that no

liability exists between the bank

and its customer, the taxpayer in

this case, until such time as the

bank accepts the cheque for

payment and allows the account

to go into overdraft -- the mere

presentation of a cheque by the

taxpayer to its creditor does not

create a bank indebtedness and

using the plain meaning of the

words "loans and advances,"

there is no loan or advance

until the bank says there is and the

bank has not done so in this case.

Will the court's comment affect Revenue Canada's position that outstanding cheques be included as a bank overdraft liability for purposes of computing Part I.3 tax?

Overseas Credit

In a technical interpretation dated April 18, 1995 (document number 9500997), Revenue Canada stated that an employer will not be considered to be carrying on business in another country with respect to one of the specified types of activities set forth in clause 122.3(1)(b)(i)(B) of the Act unless the activity is the principal activity of the employer. Please clarify the basis for Revenue Canada's position since the Act does not specify that the required activity be a principal activity.

Permanent Establishment

Consider the following situation. Canadian Company A has permanent establishments in Ontario and Quebec. The Company has a maintenance contract to service Customer 1 at locations in province X and province Y (other than Ontario and Quebec) and Company A maintains between 5 and 10 employees at each customer location. The employees report to work daily at the customer's premises. There is a Company site supervisor at each location who reports to a Company Project Manager in Ontario.

Customer 1 provides the office area, spare parts, supplies, assemblies, test equipment, calibration services, and janitorial services. The test equipment at each Customer location is worth in excess of $100,000. The Customer's equipment being serviced at each location is worth in excess of $1,000,000. Company A's employees do not have the authority to contract on behalf of the Company at these locations. A computer and fax machine, owned by Company, are kept at each Customer location for use by Company's employees. Of the Company's aggregate gross revenues, 2.5 percent and 1.5 percent are derived from the Customer contract for work performed in Provinces X and Y respectively. Does Company A have a permanent establishment in Province X and Province Y if the Company's 5 to 10 employees are on site at each location for 1 month? 6 months? Or more than 12 months?