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Large Corporations Tax Issue

Subject: Large Corporations Tax Number: 04-32 Date: 12/10/2004

Un-presented cheques should not be included in taxable capital.

In the recent case of Canadian Forest Products Limited v. the Queen (2004 DTC 2869), the Tax Court had to decide if un-presented cheques constituted a loan or an advance for large corporations tax purposes. In calculating large corporations tax, loans and advances outstanding at the end of a tax year are included in computing a taxpayer's capital base. In this case, the Tax Court had to deal with the question of whether cheques issued by the taxpayer in the ordinary course of its business near the end of its tax year were loans or advances to the extent that such cheques had not yet been presented for payment by the holder at the taxpayers bank. In other words, the cheques were outstanding. If all the cheques had been cashed, the taxpayer would have been overdrawn and there would have been a liability to the bank. In the taxpayer's financial statements, these amounts were shown as liabilities at the end of the year.

The Crown based its position on two key facts. The first one was that the taxpayer had a line of credit that it could have used to cover any cash shortfalls. If this line of credit had been used, it certainly would have been part of the loans and advances in calculating the capital tax base. The second fact that the Crown emphasized was the fact that the taxpayer's financial statements, which were prepared in accordance with GAAP, reflected the liabilities.

The judge looked at the definition or meaning of the expressions "loan" and "advance." The judge determined that in order for there to be a loan or advance there must be an actual payment rather than an anticipated payment. Since an un-presented cheque does not represent an actual payment, then the court determined that these un-presented cheques were not loans and were therefore not part of the capital tax base.

In those situations where the cheques have been written but not presented, they should not increase a taxpayer's large corporations tax base.

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