23 January 1996 External T.I. 9521615 - FISCAL PERIOD LEGISLATION - RESERVE

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:

Whether a taxpayer would be entitled to a reserve as a result of the proposed legislation concerning fiscal periods.

Position:

Depends on all the facts of a particular situation.

New subsection 34.2(4) of the proposed legislation will provide for a reserve that a taxpayer may deduct in respect of December 31, 1995 income of a business carried on by the taxpayer that has a qualifying fiscal period. New subsection 34.2(1) will provide definitions of the terms "December 31, 1995 income" in respect of a business carried on by the taxpayer, and "qualifying fiscal period" in respect of a business of a taxpayer. New subsection 34.2(6) of the proposed legislation will describe situations where no reserve may be claimed.

Reasons:

Interpretation of the provisions of sections 34.2 and 249.1 of the proposed legislation contained in the Notice of Ways and Means Motion dated November 27, 1995.

		952161
XXXXXXXXXX	B. Kerr

Attention: XXXXXXXXXX

January 23, 1996

Re: Pending Legislation - Fiscal Periods

This is in response to your letter of August 14, 1995, concerning the pending legislation in respect of fiscal periods. In particular, you described a situation involving a change in fiscal period and asked whether a taxpayer, that is an individual, would be entitled to a reserve for December 31, 1995 income for qualifying fiscal periods.

Our Comments

Subsection 248(1) of the Income Tax Act (the "Act") defines the term "fiscal period" to mean the period for which the accounts of the business of the taxpayer have been ordinarily made up and accepted for the purposes of assessment under the Act, but no fiscal period may exceed 12 months or in the case of a corporation 53 weeks and also provides that no change in the usual and accepted fiscal period may be made without the concurrence of the Minister.

A Notice of Ways and Means Motion to amend the Act, dated November 27, 1995, was tabled in the House of Commons on December 12, 1995. These amendments implement certain measures announced in the Federal Budget of February 27, 1995, including legislation in respect of fiscal periods (the "proposed legislation").

The proposed legislation repeals the meaning of fiscal period in subsection 248(1) of the Act and replaces it with a new meaning under new subsection 249.1(1). New paragraph 249.1(1)(b) will apply to certain individuals, partnerships and professional corporations and will provide, inter alia, that no fiscal period may end after the end of the calendar year in which the period began. New subsection 249.1(7) provides that no change in the time when a fiscal period ends for the purposes of the Act may be made without the concurrence of the Minister.

However, as stated in paragraph 5 of Interpretation Bulletin IT - 179R, requests for a change in fiscal period are not required when the fiscal period is revised by operation of law. New section 249.1 of the proposed legislation will be applicable to fiscal periods that begin after 1994.

Since most affected taxpayers would otherwise be required to report more than 12 months of business income in computing income for the 1995 taxation year, new section 34.2 of the proposed legislation will provide a 10 year transitional period. New subsection 34.2(4) will provide for a reserve that a taxpayer may deduct in respect of December 31, 1995 income of a business carried on by the taxpayer that has a qualifying fiscal period. New subsection 34.2(1) will provide definitions of the terms "December 31, 1995 income" in respect of a business carried on by the taxpayer, and "qualifying fiscal period" in respect of a business of a taxpayer.

In addition, new subsection 34.2(2) will provide rules for the calculation of the income of a business for a qualifying fiscal period, new subsection 34.2(3) will define business, new subsection 34.2(5) will provide for the inclusion in income of the amount deducted under subsection 34.2(4) in the preceding taxation year and new subsection 34.2(6) of the proposed legislation will describe situations where no reserve may be claimed.

Whether a particular taxpayer will be able to claim a reserve will depend on all the facts of the particular situation. However, the decision to permanently adopt a fiscal period that ends on December 31, in and by itself, should not prevent the deducting of a reserve that a taxpayer would otherwise be entitled to under the provisions of section 34.2 of the proposed legislation.

In closing, we would also like to point out that the provisions of new subsection 249.1(4) allow certain individuals to elect not to have the provisions of new paragraph 249.1(1)(b) apply. This will permit such individuals to maintain fiscal periods that do not end on December 31. In such a case, commonly referred to as the "alternative fiscal-period method", new section 34.1 of the proposed legislation will provide rules to calculate additional business income that will be included in the individual's income and additional rules for the purpose of the reserve in new section 34.2 of the proposed legislation.

As stated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, the opinions expressed in this letter are not rulings and are consequently not binding on the Department.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch