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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Method of reporting income by a utility.
Position: On the earned basis.
Reasons: Provides the "truer picture" of profit.
Randy Hewlett, B.Comm.
XXXXXXXXXX 613-957-8973
2003-003651
November 13, 2003
Dear XXXXXXXXXX:
Re: Method Of Reporting Income By A Utility
We are writing in response to your letter of August 29, 2003, wherein you requested our opinion on the above noted issue.
Your letter described a situation in which a publicly regulated utility accrues for accounting purposes, the expenses it will incur for "employee future benefits,
post-employment benefits and post-retirement benefits". The utility also accrues for accounting purposes, the revenues the regulator will eventually allow it to charge to customers in recovering these expenses. For income tax purposes, you are of the view that the utility should be permitted to report the revenue on a "cash basis" and deduct the expenses on "a current year basis".
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office ("TSO"). However, we are prepared to offer the following general comments.
In general terms, we are of the view that for utility businesses, the "earned basis" of reporting income provides the "truer picture" of profit for purposes of subsection 9(1) of the Income Tax Act (the "Act"). This view is consistent with the decision of the Supreme Court of Canada ("SCC") in Canderel Ltd v The Queen (1998 DTC 6100), the leading case on the computation of profit for income tax purposes. Our view is also consistent with the decisions of the Federal Court of Appeal ("FCA") in West Kootenay Power and Light Company Limited v The Queen (1992 DTC 6023) and Maritime Telegraph and Telephone Company Limited v The Queen (1992 DTC 6191). The SCC in Canderel cited both of these FCA decisions approvingly.
In terms of accrued expenses in the nature of those described in your letter, it is unclear what is meant by "deducted on a current year basis", and therefore, without further information we are unable to provide definitive comments. However, we note that there are a myriad of provisions in the Act that could limit or prohibit deductibility. For example:
? Paragraph 18(1)(a) of the Act, which prohibits the deduction of an outlay or expense unless it was "made or incurred" for the purpose of gaining or producing income,
? Paragraph 18(1)(e) of the Act, which prohibits deductions for amounts that are on account of a reserve, a contingent liability or a sinking fund, and
? Subsection 18(9) of the Act, which prohibits the deduction of prepaid expenses.
Further inquiries with respect to this matter should be addressed to the relevant TSO, in accordance with the CCRA's position in paragraph 22 of IC-70-6R5 regarding technical interpretations on completed transactions. Given the complex nature of your situation, you should address your inquiry to the Verification and Enforcement Division. You will need to provide them with a complete description of all the facts and all relevant documentation. If requested by the TSO, we will provide them with our assistance.
We trust our comments will be of assistance to you.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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