7 March 1996 External T.I. 9600155 - DEC 31 95 RESERVE, EARNED INCOME

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:

	Will a reserve included in income under proposed 	subsection 33(5) be included in earned income for RRSP 	purposes?

Position:

no, unles actively involved in business

Reasons:

earned income includes income from a business

	                               	960015
XXXXXXXXXX	                              M.P. Sarazin

Attention: XXXXXXXXXX

March 7, 1996

Dear Sirs:

This is in reply to your facsimile of December 21, 1995, wherein you requested our comments as to whether a "reserve for December 31, 1995 income" (the "Reserve"), within the meaning assigned by proposed section 34.2 which is described in the Amendments to the Income Tax Act: Explanatory Notes issued by the Minister of Finance in December 1995 (the "Draft Amendments"), would be included in "earned income" within the meaning assigned by subsection 146(1) of the Income Tax Act (the "Act").

You are of the view that the Reserve represents the recognition of income from a business which was previously deferred for income tax purposes and, as such, the Reserve should be included in an individual's earned income.

Comments

New section 34.2 sets out a 10-year reserve consequential on changes to the definition of "fiscal period" in the proposed section 249.1 described in the Draft Amendments. Under proposed subsection 34.2(4), a taxpayer is entitled to deduct a Reserve in computing its income from a business in respect of its December 31 1995 income, and proposed subsection 34.2(5) ensures that the taxpayer's income for the current taxation year from a business includes the amount of any Reserve claimed in the immediately preceding taxation year. Proposed subsection 34.2(6) describes certain circumstances in which a taxpayer may not claim a reserve in respect of its December 31, 1995 income. For instance, where the taxpayer is an individual, no reserve is available unless the business is principally carried on by the individual or a partnership of which the individual is a member. The expression "December 31, 1995 income" has the meaning assigned by proposed subsection 34.2(1).

Pursuant to subparagraph 146(1)(a)(ii) of the Act, a taxpayer's earned income includes income, for a period in the year throughout which the taxpayer was resident in Canada, from a business carried on by the taxpayer either alone or as a partner actively engaged in the business. Provided the business is carried on by the taxpayer or as a partner actively engaged in the business, we are of the view that a Reserve included in a taxpayer's income in a particular year under proposed subsection 34.2(5) will be included in computing the taxpayer's earned income and the Reserve claimed in the particular year under proposed subsection 34.2(4) will be deducted in computing the taxpayer's earned income. However, in the case where a partner has retired and the partner continues to claim a Reserve subsequent to retiring, the Reserve included in the retired partner's income would not be earned income because the partner is not actively engaged in the business.

We trust the above comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch