2 July 2002 External T.I. 2002-0129345 - CONSTRUCTION HOLDBACKS NETTING

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 CCRA.

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

Principal Issues:

Whether a contractor's holdbacks receivable may be netted against its holdbacks payable for the purposes of Part I.3.

Position: No.

Reasons:

Items may only be netted for LCT purposes if permitted by GAAP. Since no such legal right of offset exists in circumstances where a contractor has both holdbacks receivable and holdbacks payable on its balance sheet because the customer from whom the holdbacks are receivable and subcontractor to whom the holdbacks are payable are entirely different parties, netting in these circumstances is not permitted by GAAP.

XXXXXXXXXX 							2002-012934
K. Cooper, LL.B.
July 2, 2002

Dear XXXXXXXXXX:

Re: Large Corporation Tax

This is in reply to your letter of March 4, 2002 wherein you requested that the Canada Customs and Revenue Agency ("CCRA") take an administrative position permitting the netting of a contractor's holdbacks receivable against its holdbacks payable for the purposes of Part I.3 of the Income Tax Act (the "Act").

The particular circumstances described in your letter appear to be a factual situation involving specific taxpayers. As explained in Information Circular 70-6R5 dated May 17, 2002, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve specific taxpayers and completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we can offer the following general comments which may be of assistance.

In your letter, you indicated that you were aware of the CCRA's position that it is only where the netting of assets and liabilities on financial statements is permitted by GAAP that the net amount of an item reflected on the balance sheet will represent the carrying value of that item for the purposes of determining the capital tax base. The offsetting or netting of assets and liabilities is generally not permissible under GAAP except in a few cases such as where a debtor, as a result of an agreement with a creditor, has a legal right to offset or eliminate all or a portion of an obligation due to a creditor by applying, against that obligation, an amount of an obligation due to the debtor by that same creditor and the parties intend to act upon that right. No such legal right of offset exists in circumstances where a contractor has both holdbacks receivable and holdbacks payable on its balance sheet since the customer from whom the holdbacks are receivable and subcontractor to whom the holdbacks are payable are entirely different parties. In the absence of a right of offset, we have no legal basis for permitting netting in these circumstances.

We hope that our comments will be of assistance.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch