Timing and Income Taxation

Transcription

1 Timing and Income Taxation Brian J. Arnold Canadian Tax Foundation, Toronto Richard Marcovitz PwC Tax Services, Toronto Shawn D. Porter Deloitte, Toronto James R. Wilson PwC Law LLP, Toronto 67 th Annual Tax Conference 67e Conférence fiscale annuelle 2015 : The Principles of Income Measurement for Tax Purposes, 2 nd Edition first edition published in 1983 content is up to date as of January 1, 2014 book is available as an ebook (free to CTF members) book will be updated regularly with revisions to the text first update expected soon 2

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3 E-book: Annotations 5 2 nd Edition timing issues are ubiquitous timing issues are a hodgepodge of statutory rules, case law and administrative practice financial accounting principles and practices are often, but not always, relevant for income tax purposes throughout the book we struggle with the difficult relationship between accounting and tax (Chapter 2) the timing of revenue and expenses in measuring business profits necessarily involves the principles for determining profit 6

4 Contents Chapter 3 The concept of profit (the Canderel case) Chapter 4 The annual accounting requirement Chapters 6-7 Timing of recognition of revenue Chapters 8-10 Timing of the recognition of expenses Chapter 11 Foreign currency Chapter 12 Inventory 7 S. 9 Business Profit Background Parliament left determination of s. 9 business profit to courts and chose not to adopt GAAP as the statutory test Courts struggled with the elusive role of GAAP in the measurement and timing of business profit SCC decisions Symes (1993) and Canderel trilogy (Canderel, College Park and Ikea (1998)) provide important guidance in determining business profit 8

5 Canderel Framework Six Principles 1) Determination of s. 9 business profit is a question of law (not accounting) 2) Business profit is determined by netting income/expenses 3) Goal is to obtain accurate picture of taxpayer s profit 4) Taxpayer may adopt any method not inconsistent with statutory provisions, established case law principles (rules of law) and well-accepted business principles (essentially GAAP) 9 Canderel Framework Six Principles 5) Well-established business principles are not rules of law but interpretive aids applied on a case-by-case basis 6) If a taxpayer s method meets conditions, Minister s onus is to show figure doesn t represent an accurate picture of profit or another method provides a more accurate picture 10

6 Kruger (2015 TCC 119) Applying Canderel TCC decision in Kruger illustrates the difficulty of applying the Canderel framework Kruger carried on pulp and paper business and a separate business of trading in foreign currency options Kruger wrote options (liabilities) and purchased options (assets) Gains or losses from trading options reported using the mark-to-market method ( MTM ) issue was timing of recognition of losses (mostly related to written options (i.e., liabilities) 11 Kruger Applying Canderel Kruger argued it was entitled to use MTM method because it was well-accepted accounting principle based on 1962 SCC decision in General Electric and section 10 requirement to value inventory (the option contracts) at lower of cost or fair market value Crown argued: Kruger was required to use realization method based on 1992 SCC decision in Friedberg and option contracts were not inventory 12

7 Kruger Applying Canderel TCC rejected MTM method; generally, losses should be recognized on a realized basis However, TCC accepted that purchased (but not written) options were inventory that should be valued under s. 10(1) at fair market value (where lower than cost) TCC decision has been appealed by taxpayer 13 Questions for Discussion What is the relationship between the realization principle and the mark-tomarket principle for the recognition of business profits? Can General Electric and Friedberg be reconciled? 14

8 Questions for Discussion If mark-to-market is acceptable for GAAP, why isn t it acceptable for tax purposes? If Kruger had used market values rather than theoretical estimates, would the result have been different? 15 Questions for Discussion Is the asymmetrical treatment of purchased options and written options problematic? What is the significance of the accurate picture of profit test? Is that principle completely displaced by the principle that a taxpayer can use any method that is not inconsistent with statutory provisions, established case law principles and well-accepted business principles? 16

9 Questions for Discussion Should financial derivatives be included in inventory for tax purposes? Is the definition of inventory too broad? Should Finance be more active with respect to timing issues or should they continue to be left to the courts to develop? 17