6 December 2000 External T.I. 2000-0056265 - GAAP AND LCT

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1. Whether financial statements prepared in accordance with GAAP should be used for LCT purposes.

2. Whether a taxpayer is entitled to choose between alternative accounting treatments for LCT purposes.

3. Whether CCRA should consider adopting a rule to not challenge audited and certified GAAP financial statements for LCT purposes.

Position:

1. Yes, however paragraph 181(3)(a) prohibits the use of the equity and consolidation methods of accounting.

2. Yes, provided that GAAP permits alternative accounting treatments.

3. As a general rule, CCRA will accept audited and certified GAAP statements but this does not necessarily mean that such financial statements will be accepted without question in all cases.

Reasons:

1. Subsection 181(3).

2. Previous opinions.

3. CCRA may question audited and certified financial statements if there is reason to believe that a particular accounting treatment is not in accordance with GAAP.

TEI Conference
December 6, 2000

Question 4

GAAP AND LARGE CORPORATION TAX

A. When auditing taxpayers' computations of Large Corporation Tax ("LCT"), CCRA auditors are increasingly challenging the accounting treatment employed by companies in the preparation of their GAAP financial statements. Moreover, some CCRA auditors have proposed LCT adjustments with alternative financial statement treatments that may not accord with GAAP. Indeed, in at least one case, a CCRA auditor ignored the GAAP financial statements prepared by the taxpayer and computed LCT using financial statements containing an explicit disclaimer from the taxpayer's independent accountants that the statements were not prepared in accordance with GAAP.

As important, where GAAP affords accounting alternatives for the treatment of an item, taxpayers should be permitted to prepare their financial statements under any of the acceptable methods, and CCRA should accept the taxpayer's selection of a method for purposes of computing LCT. We invite a discussion of whether CCRA Head Office believes the field auditors should challenge the GAAP financial statements issued by companies, especially where the statements have been certified by the company's financial statement auditors.

B. In order to minimize disagreements over what constitutes GAAP, would CCRA consider adopting a rule that financial statements that have been audited and certified to be in accord with GAAP are presumptively accepted for purposes of computing LCT? We invite a discussion of the proposal.

Agency's Position

A. We are not in a position to discuss any specific cases that you may have encountered at this conference. However, you are invited to address any situations you have encountered that are of concern to you with the relevant Tax Services Office.

As you are aware, subsection 181(3) provides that the carrying values and amounts of the various components of a corporation's capital tax base are generally based on the amounts reflected in the balance sheet as prepared in accordance with GAAP and presented to the shareholders of the corporation. However, paragraph 181(3)(a) specifically prohibits the use of the equity and consolidated methods of accounting. Accordingly, if the only balance sheet prepared for presentation to the shareholders is on a consolidated basis, an unconsolidated balance sheet will have to be prepared for each of the parent and its subsidiary corporations for purposes of Part I.3. In such circumstances, it is our view that the unconsolidated balance sheets must be prepared using the same accounting principles (other than consolidation) used in preparing the consolidated balance sheet presented to the shareholders. Clearly, any unconsolidated balance sheet not prepared in accordance with GAAP cannot be used for purposes of computing the LCT.

With regard to accounting alternatives, as stated in paragraphs 16 and 17 of IT-532, Part I.3 - Tax on Large Corporations, where GAAP permits alternative accounting treatments, it is our view that the corporation may choose the one considered most appropriate, regardless of its impact on the capital tax base. Furthermore, the corporation is not subsequently prohibited from changing accounting principles provided that such change is in accordance with GAAP and is followed consistently thereafter.

B. As a general rule, CCRA will accept financial statements that have been audited and certified to be in accord with GAAP. This should not be construed as meaning that such financial statements will be accepted without question in all cases. Paragraph 181(3)(b) provides that, subject to certain exceptions, where a balance sheet does not reflect GAAP, the amounts to be used in computing LCT should be adjusted to reflect GAAP. In our view, this recognizes that balance sheets that are purported to be in accordance with GAAP may in fact not be. Accordingly, CCRA may question financial statements even if an unqualified opinion had been issued in respect of such statements if there is reason to believe that a particular accounting treatment is not in accordance with GAAP.

Author: Jenie Leigh
Division: Income Tax Rulings Directorate
Phone Number: 952-1505