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: Where land is sold by a taxpayer and the entire profit is reported in the year of sale (1999), can a reasonable reserve be claimed under paragraph 20(1)(n) of the Income Tax Act (the "Act") in 2000 in respect of the unrealized profit? (an amount in respect of the proceeds is not payable until the year 2002)
Position: Yes
Reasons: Paragraph 20(1)(n) of the Act permits the taxpayer to claim a reasonable reserve in respect of the amount that can reasonably be regarded as a portion of the profit from the sale.
XXXXXXXXXX 1999-000616
M. Eisner
Attention: XXXXXXXXXX
February 3, 2000
Dear Sir:
Re: Reserve - Sale of Land
This is in reply to your letter of November 8, 1999, concerning the above-noted subject in the following circumstances.
X Co. is a Canadian-controlled private corporation as defined in subsection 125(7) of the Income Tax Act (the "Act"), which carries on a land development business. X Co. sold land to A Co. (an unrelated company) in 1998. As the proceeds of the sale were $100,000 and the cost of the property was $50,000, X Co. realized a gross profit of $50,000. As consideration, X received cash of $40,000 and a mortgage of $60,000, which is due in full in 2002.
In 1998, X Co. reported income of $50,000 and claimed a reserve of $30,000 under paragraph 20(1)(n) of the Act. In the 1999 taxation year, X Co. received no principal payments on the mortgage. However X Co. did not claim any reserve under paragraph 20(1)(n) of the Act in respect of the 1999 taxation year.
On the basis that there will also be no principal payments received on the mortgage in the 2000 taxation year, you have asked for our comments on whether X Co. would be able to claim a reserve of $30,000 under paragraph 20(1)(n) of the Act in that taxation year.
Where an amount has been included in income for the year or for a preceding taxation year as a result of the sale of land by a taxpayer in the course of its business and an amount is not payable until after the end of the year, paragraph 20(1)(n) of the Act permits the taxpayer to claim a reasonable reserve in respect of the unrealized profit.
In the circumstances, it is our general view that X Co. would be entitled to claim a reasonable reserve under paragraph 20(1)(n) of the Act for the unrealized profit with respect to the 2000 taxation year. We note that paragraph 20(8)(b) of the Act, which denies a reserve where the sale took place more than 36 months before the end of a particular year, would not apply to the 2000 taxation year.
These comments are of a general and do not apply to any particular transaction.
Yours truly,
John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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