19 March 1991 Internal T.I. 9024817 F - 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.

7-902481

24(1)

This is in reply to your memorandum dated September 12, 1990 and your additional correspondence of November 16 and December 13, 1990.  You have asked us to re-evaluate our position which we gave to you in our letter dated March 29, 1990 with respect to the application of paragraph 18(1)(e) of the Income Tax Act (the "Act") to the above-mentioned taxpayer.  You have asked us to consider the additional arguments presented by the taxpayer's representative and the counter-arguments which you have provided.  We offer the following comments:

24(1)

24(1)

In J.L. Guay Ltee vs MNR (71 CTC 686 F.C.-T.D., confirmed 73 CTC 506 F.C.A. and 75 CTC 97 S.C.C.) Noel, A.C.J distinguishes deductible expenditures for a period from amounts set aside as a reserve wherein he observed at 692 that,

      "In most tax cases only amounts which can be exactly determined are accepted.  This means that, ordinarily, provisional amounts or estimates are rejected, and it is not recommended that data which is conditional, contingent or uncertain be used in calculating taxable profits.  If, indeed, provisional amounts or estimates are to be accepted, they must be certain.  But then it is always difficult to find a procedure by which to arrive at a figure which is certain.  Accountants are always inclined to set aside reserves for unliquidated liabilities, for, if they do not do so, the financial statement will not reflect the true position of the client's affairs.  The difficulty arises from the fact that making it possible to determine the taxpayer's tax liability is not the main purpose of accounting.  The accountant's report is, in fact, intended to give the taxpayer a general picture of his affairs so as to enable him to carry on his business with full knowledge of the facts.  To achieve this end, it is not necessary for the profit shown to be exact, but it must be reasonably close, while the Income Tax Act requires it to be exact, and it is thus necessarily arbitrary."

As the amounts paid by 24(1) Day & Ross Limited v. The Queen (76 DTC 6433 F.C.- T.D.) permitted a deduction for amounts paid which were definitely owing and payable, 24(1) We continue to maintain that TNT Canada Inc (88(2) CTC 91 F.C-T.D.), which held that the taxpayer was not entitled to deduct estimated expenses, 24(1)

We hope that our comments are of assistance to you.

ChiefFinancial Institutions SectionFinancial Industries DivisionRulings Directorate