22 November 2000 External T.I. 2000-0031595 - TIMING OF DED. FOR CASH-BASIS FARMER

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: In the case of a farmer using cash-based accounting, the timing of the deduction of (i) payments using VISA and (ii) withholdings from an employee.

Position: (i) When the VISA is used and (ii) when amounts are remitted.

Reasons: (i) An expense is considered paid regardless that it was paid using credit from a credit card. (ii) Notwithstanding the fact that the law deems withholdings to be held separate and apart from the farmer's other assets and in trust for her Majesty, it cannot be said that these amounts have been "paid" within the meaning of that term in subparagraph 28(1)(e)(i) until they are actually remitted to the Agency.

XXXXXXXXXX 	J. Gibbons, CGA
		2000-003159
Attention: XXXXXXXXXX 

November 22, 2000

Dear XXXXXXXXXX :

We are replying to your letter dated June 6, 2000, in which you raised a number of questions concerning the application of paragraph 28(1)(e) of the Income Tax Act (the "Act"). Your questions were as follows:

1. A farmer uses his Visa account in year 1 to pay for fertilizer. He pays his Visa bill in year 2. If the expense is deductible only in year 2, how is this distinguished from other forms of credit such as an operating loan from a bank? If the supplier extends credit, the expense is normally not deductible until the trade account is paid. If the supplier is paid with a bank-operating loan, the expense is paid when the supplier is paid.

2. The farmer withholds income tax, Canada Pension Plan premiums ("CPP") and EI premiums ("EI") from his employee in the last month of year 1. He pays the withholding by the 15th of the following month in year 2. The employee and employer portions are not kept in a separate account. Are the net wages deductible in year 1 and the withholdings deductible in year 2? When is the employer portion deductible?

3. Would the answer to 2 above differ if the withholdings and the employer portions were maintained in a separate account?

As requested, we have considered the questions outlined in your letter and have provided some comments below. However, we cannot confirm the tax implications of particular transactions unless the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. Thus, our comments are of a general nature only.

Our views

The issue to be decided in your questions is the interpretation of the requirement in subparagraph 28(1)(e)(i) of the Act, which describes amounts that "were paid in the year, or are deemed by ... [the] Act to have been paid in the year in the course of carrying on the business." Expenses will only be deductible in computing the income on a cash-basis if they meet this requirement, as well as the requirements in subparagraphs 28(1)(e)(ii) and (iii) of the Act.

It is our view that there is no difference whether an expense is paid in the year using a credit card or a bank-operating loan for purposes of applying subparagraph 28(1)(e)(i). That is, in both instances the expense will be considered paid when the farmer uses his or her VISA or draws on the loan to make the payment.

In regard to your question concerning the timing of a farmer' deduction for amounts withheld from an employee's pay for income taxes, EI and CPP, we are of the view that a farmer may only deduct the net amount of the employees' pay in year 1 since this is the only amount that is actually paid. Notwithstanding the fact that the law deems withholdings to be held separate and apart from the farmer's other assets and in trust for her Majesty, it cannot be said that these amounts have been "paid" within the meaning of that term in subparagraph 28(1)(e)(i) until they are actually remitted to the Agency in year 2. This is so even if the farmer in fact holds these amounts in a separate account. As well, the employer's portion of CPP and EI will also not be deductible until the amounts are actually paid to her Majesty. Further, we note that paragraph 248(7)(b) of the Act provides that withholdings are deemed to have been made on the day they are received by the Receiver General.

We trust that these comments will be of assistance.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate

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