Large Corporation Tax
Paragraph 34 of Interpretation Bulletin IT-532, Part I.3 Tax on Large Corporations , lists some of the amounts that have to be included in the calculation of the capital tax base as loans and advances and, more particularly, mentions “outstanding cheques honoured by the corporation’s bank, to the extent they exceed funds on deposit, in the civil law jurisdiction of Quebec”. This comment does not represent what has been publicly communicated by CCRA, in particular at the round table of the Colloque sur la taxe sur le capital held in February 2003 by the Association de la planification fiscale et financière (APFF).
We are of the opinion that outstanding cheques are not, by themselves, loans and advances since the issuance of a cheque is not a payment under civil law. Under the Quebec Civil Code, the date that the payment of a debt is settled by a cheque is considered to be the date at which the cheque is honoured or paid by the bank. This usually happens on the date on which the cheque is debited from the debtor’s account.
Therefore, the book debts that have been reduced by outstanding cheques at the date of the fiscal year end cannot be considered as paid at that date for the purposes of Part I.3 tax of the Act. However, in accordance with subsection 181(3) of the Act, as the amounts to be used for the purposes of Part I.3 of the Act are those on the balance sheet presented to the shareholders, we are of the view that the amount by which debts are reduced by outstanding cheques on the balance sheet can only be included in the computation of the capital amount pursuant to subsection 181.2(3) of the Act to the extent that the amount is reflected on the balance sheet, which is usually in current liabilities as bank overdraft or the excess of the outstanding cheques over the balance of cash on hand.
Where the amount reflected on the balance sheet in respect of the outstanding cheques is made up of debts to be included in the capital pursuant to subsection 181.2(3) of the Act, and of debts not to be included in that capital, it is our view that the taxpayer must calculate capital by making a reasonable allocation of that amount between the underlying debts in order to reflect as accurately as possible the actual debts included on the balance sheet.
It is also our view that it is the law regulating outstanding cheques that has to be taken into consideration, not the law governing contracts with creditors.
The next version of Interpretation Bulletin IT-532 will take this interpretation into account.
Link to Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/itnews-29/archived-income-tax-technical-news-no-29.html#P18_659