15 August 1991 Ruling 911363 F - Application of Section 85

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.

19(1)

Dear Madam:

Re:  Application of Section 85 of the Income Tax Act (the "Act")

This is in reply to your letter of May 13, 1991 in which you requested our comments regarding the application of the above-noted section of the Act.  Your specific questions were as follows.

(1)     

(2)     

(3)                           24(1)

(4)     

(5)     

To the extent that the facts outlined above represent actual proposed transactions, your enquiry should be the subject of a request for an advance income tax ruling.  However, we can offer the following general comments.

The Department will recognize that a corporation is carrying on a professional practice if provincial law or the regulatory body for the particular profession does not provide that only individuals may practice the profession and if the activities of the corporation and its relationship to its employees and clients are similar to those associated with a corporation carrying on a business.

Section 34 of the Act sets out the rules where a qualifying taxpayer, which will include a corporation, may elect that no amount in respect of work in progress at the end of the year be included in his return of income for the year.  Revenue that has not been included in income as a result of making an election under section 34 of the Act will be included in income in the year that the work in progress is billed to the respective client.

Under the provisions of subsection 85(1) of the Act, work in progress may be transferred within specified limits, and one of the limits is its "cost amount".  The "cost amount", as defined in subsection 248(1) of the Act, of work in progress in respect of which an election under subsection 34(1) of the Act has been made is nil.

With regard to Question 5 above, unbilled disbursements are not eligible property as defined in section 85(1.1) of the Act.  Costs incurred in a taxation year to earn the income of the practice are deductible in computing the income for the year, even though the revenue may not be included in income until it is billed to clients.

The foregoing comments represent our general views with respect to the subject matter of your letter. The facts of a particular situation may lead to a different conclusion.  In accordance with paragraph 21 of Information Circular 70-6R2 the comments expressed herein do not constitute an advance income tax ruling and consequently are not binding on the Department.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch