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 Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Should an extended warranty on an asset used for business purposes be amortized over the period of the warranty or added to the cost of the asset.
Position TAKEN:
If said amount is incurred as consideration for services to be rendered, or for insurane in respect of a period, after the end of the year, no deduction.
Reasons FOR POSITION TAKEN:
18(9). If 18(9) does not apply, expenditure amortized over the period of the warranty .
July 11, 1995
EDMONTON TAX SERVICE HEADQUARTERS
Louise Johnson M. Shea-DesRosiers
Client Assistance (613) 957-8953
7-950599
Extended Warranty
This is in reply to your Memorandum of February 27, 1995 concerning the above-mentioned subject. We apologize for the delay in replying to your Memorandum.
You inquire as to whether a client, who purchases an extended warranty on an asset that will be used for business purposes, should amortize the amount over the period of the warranty or should add it to the cost of the asset.
Subsection 18(9) of the Act requires a taxpayer, who calculates his income on the accrual basis, to match certain specified expenditures to the taxation year to which they can reasonably be considered to relate. In our view, the amount paid for an extended warranty would be subject to subsection 18(9) of the Act where the said amount may reasonably be regarded as having been incurred as consideration for services to be rendered, or for insurance in respect of a period, after the end of the year.
As mentioned in paragraph 2 of Interpretation Bulletin IT-417R, the Department requires that the accounting for prepaid expenses and deferred charges be in accordance with the matching principle as required in generally accepted accounting principles, subject always to any contrary provision of the Act.
In case subsection 18(9) of the Act does not apply to the amount paid for an extended warranty, it is our view that such an expenditure is to be amortized over the period of the warranty if failure to defer the expense would distort the net profit not only of the year during which the expense was incurred but also of the subsequent year or years to which the benefit relates.
We trust the above comments will be of assistance to you.
for Chief
Financing, Leasing and Deferred
Income Plans Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
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