14 November 1989 Internal T.I. 58497 F - Allowable Reserves

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.

November 14, 1989

Dear Sirs:

This is in reply to your letter of August 10, 1989 concerning allowable reserves under subparagraph 20(1)(m)(iv) in respect of returnable containers.

In the situation outlined in your letter, ABC Co. is a manufacturer and distributor of beverages.  ABC Co. charges its customers for containers in which the beverages are shipped, with the understanding that the amount charged will be refunded when the containers are returned by the customers.

Pursuant to paragraph 12(1)(a) of the Income Tax Act, ABC Co. includes in income all refundable amounts received.  ABC Co. includes in income all refundable amounts received.  ABC Co. has taken a reserve deduction pursuant to subparagraph 20(1)(m)(iv) with respect tot he deposits on these containers other than bottles.

ABC Co. will be transferring its manufacturing operations to a wholly owned subsidiary, MFG Co.  The containers which were previously owned by ABC Co. will also be transferred to MFG Co.  ABC Co.  will remain a distributing company and will be one of the customers of MFG Co.   MFG Co. will charge ABC Co. for deposits on containers and ABC Co. will continue to charge its customers for deposits on containers.

Our comments below do not relate to bottles.

With respect to your first query, subparagraph 12(1)(a)(ii) effectively provides that deposits received on returnable containers must be included in income while subparagraph 20(1)(m)(iv) allows a reasonable reserve to be claimed in respect of repayments for returnable containers that it is reasonably anticipated will have to be made after the end of the year.  As there is no ownership requirement, it is our view that this fact will not, in and by itself, prevent ABC Co. from claiming a reserve under subparagraph 20(1)(m)(iv).  However, as ABC Co. will be merely receiving deposits from customers and paying deposits to MFG Co. in respect of articles which remain the property of MFG Co., it is our view that it is not possible for ABC Co. to treat the containers as depreciable property.  Accordingly, pursuant to the comments in paragraph 11 of IT Bulletin 165R, a reserve under subparagraph 20(1)(m)(iv) could only be claimed in respect of the portion of the deposit charged to a customer which exceeded the deposit paid to MFG Co.

In the case of MFG Co., it is our view that the fact it is receiving deposits form and refunding deposits to ABC Co., which is a related company, will not, in and by itself, preclude it form claiming a reserve under subparagraph 20(1)(m)(iv).

These comments represent our opinion of the law as it applies generally.  As indicated in paragraph 24 of Information Circular 70-6R dated December 18, 1978, this opinion is not a ruling and , accordingly, it is not binding on Revenue Canada, Taxation.

We hope the above comments are of assistance to you.

Yours truly,

for Director Business and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch