14 February 2005 Internal T.I. 2004-0091181I7 - LCT - Canadian GAAP vs. U.S. GAAP

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.

Principal Issues: Whether a Canadian subsidiary of a U.S. parent should use Canadian GAAP prepared financial statements or U.S. GAAP prepared financial statements for Part I.3 tax purposes.

Position: It is our view that the Canadian subsidiary should use the financial statements prepared in accordance with Canadian GAAP.

Reasons: Generally, GAAP as referenced in subsection 181(3) is Canadian GAAP.

February 14, 2005

CALGARY TSO						HEADQUARTERS
							Income Tax Rulings
Attention:  Ken Insch 						  Directorate
                  Business Audit					J. Leigh
(613) 952-1505

							2004-009118

Part I.3 Tax - U.S. GAAP vs. Canadian GAAP

This is in reply to your memorandum of August 11, 2004 in which you asked for our views as to whether it would be appropriate to use a taxpayer's unconsolidated balance sheet prepared in accordance with U.S. GAAP for Part I.3 tax purposes.

You described a situation where a taxpayer is a wholly-owned Canadian subsidiary of a U.S. corporation which is in turn controlled by a multinational parent. The taxpayer's financial statements are prepared in accordance with Canadian GAAP for Canadian tax purposes, including the calculation of Part I.3 tax. The taxpayer also prepares unconsolidated financial statements for purposes of assisting its multinational parent in preparing its consolidated financial statements to be issued to its shareholders. These unconsolidated financial statements are prepared in accordance with U.S. GAAP. Since the taxpayer presents the unconsolidated balance sheet prepared in accordance with U.S. GAAP to its U.S. shareholder, you wonder whether the taxpayer should calculate its Part I.3 tax liability based on the amounts reflected in its U.S. GAAP prepared unconsolidated balance sheet.

Our comments

Pursuant to paragraph 181(3)(b) of the Income Tax Act (the "Act"), the balance sheet to be used is the one presented to the corporation's shareholders. Where the balance sheet presented to the shareholders cannot be used because it was not prepared in accordance with GAAP or no such balance sheet was prepared, paragraph 181(3)(b) of the Act provides that the amounts to be picked up are the amounts that would have been reflected in the balance sheet if the balance sheet had been prepared in accordance with GAAP.

Given that subsection 181(3) of the Act does not expressly refer to Canadian GAAP, we discussed this situation briefly with the Department of Finance who indicated that it is intended that where possible the calculation of capital for all taxpayers should be determined using the same set of rules, being a balance sheet that is prepared in accordance with Canadian GAAP. Accordingly, even though the Canadian subsidiary may have presented the U.S. GAAP prepared balance sheet rather than the Canadian GAAP prepared balance sheet to its U.S. parent, it would be appropriate for the Canadian subsidiary to use the Canadian GAAP prepared balance sheet for Part I.3 tax purposes. We are not expressing any view as to whether the Canadian balance sheet was prepared in accordance with Canadian GAAP.

In summary, while we have indicated that there may be situations where it might be acceptable to use a balance sheet prepared in accordance with foreign GAAP, such as in the case of a non-resident carrying on business in Canada through a permanent establishment, our view was and still is that the reference to GAAP in subsection 181(3) of the Act generally means Canadian GAAP.

We trust that the above will be of assistance.

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