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.
Principal Issues: Whether it is possible for a taxpayer to deduct an amount under subsection 20(24) of the Act in respect of an amount included in income in the taxation year under paragraph 12(1)(e)?
Position: Yes.
Reasons: Subsection 20(24) of the Act provides for a deduction from income for certain payments made to obtain another person's agreement to assume obligations for which an amount has been "included under paragraph 12(1)(a) in computing a taxpayer's income for a taxation year". The application of subsection 20(24) of the Act is not restricted to a transferred obligation for which an amount has been included in a taxpayer's income in the current taxation year under paragraph 12(1)(a) (subsection 20(24) refers to "a taxation year"). Therefore, subsection 20(24) of the Act may also apply to a transferred obligation for which an amount has been included in a taxpayer's income in a taxation year under paragraph 12(1)(e).
XXXXXXXXXX Randy Hewlett
613-941-7239
2005-011498
March 7, 2005
Dear XXXXXXXXXX:
Re: Subsection 20(24) of the Income Tax Act (the "Act")
We are writing in response to your letter of February 7, 2005, wherein asked for our opinion on whether it is possible for a taxpayer to deduct an amount under subsection 20(24) of the Act in respect of an amount included in income in the taxation year under paragraph 12(1)(e).
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. However, we are prepared to offer the following general comments.
Pursuant to paragraph 12(1)(a) of the Act, a taxpayer is required to include in income from a business for a taxation year any amount received in the year that is on account of services not rendered or goods not delivered before the end of the year. With certain exceptions, a taxpayer is generally entitled to deduct a reasonable reserve under paragraph 20(1)(m) of the Act for "amounts described in paragraph 12(1)(a) have been included in computing the taxpayer's income from a business for the year or a previous year". Paragraph 12(1)(e) of the Act requires the taxpayer to include in income in a taxation the amount of any reserve deducted in the previous taxation year under paragraph 20(1)(m). A taxpayer may be permitted a reserve under paragraph 20(1)(m) of the Act should the obligation to render the services or deliver the goods remain outstanding at the end of a subsequent taxation year.
Subsection 20(24) of the Act provides for a deduction from income for certain payments made to obtain another person's agreement to assume obligations for which an amount has been included under paragraph 12(1)(a) in computing a taxpayer's income for a taxation year. The other person must include the amount received in income and may be entitled to claim a reserve under paragraph 20(1)(m) of the Act, however, the taxpayer is not entitled to a reserve under paragraph 20(1)(m) of the Act. The purpose of subsection 20(24) of the Act is to allow the taxpayer a deduction "for the particular year" in respect of an outstanding obligation for which the taxpayer has previously included an amount in income under paragraph 12(1)(a) in "a taxation year" but cannot claim the paragraph 20(1(m) reserve in the "particular" or "subsequent" taxation year because the obligation has been transferred. In our view, the application of subsection 20(24) of the Act is not restricted to a transferred obligation for which an amount has been included in a taxpayer's income in the current taxation year under paragraph 12(1)(a); the "particular year" and "a taxation year" do not have to be the same year. Therefore, we are of the view that subsection 20(24) of the Act may also apply to a transferred obligation for which an amount has been included in a taxpayer's income in a taxation year under paragraph 12(1)(e). We would also note that a subsection 20(24) deduction can be claimed in any subsequent taxation year in respect of an amount previously included in income under paragraph 12(1)(a) even where the taxpayer did not claim a 20(1)(m) reserve in respect of the amount.
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 Planning Branch
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