6 October 1995 APFF Roundtable Q. 34, 9522500 - CONTINGENT LIABILITY

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.

APFF - 1995

Question 34

Contingency reserves

A corporation carrying on an active business must make a payment to a third party under a court judgment by a first-instance court. This payment would be a current expense deductible under subsection 18(1)(a) of the Income Tax Act (“the Act”). However, the corporation appeals the judgment, which suspends its obligation to pay out the amount in question. Can the corporation still deduct the amount in computing its income, given the fact that its liability has not been removed until such time as an appeal court has rendered a judgment to the contrary?

Answer by the Department of Revenue

As provided in paragraph 9 of Interpretation Bulletin IT-215R, dated January 12, 1981, in order that an expense which is unpaid at the end of a taxation year may be deductible for tax purposes, the liability so created in respect of that expense must constitute a genuine liability of the taxpayer in that taxation year. In order for a genuine liability to exist, there must be an enforceable claim by the creditor for an ascertained amount. More generally, an amount which is due and payable at the end of a taxation year, can only constitute an allowable deduction in the year in which it becomes ascertained and unconditional.

Further, it must seem reasonably probable that the debt will actually be paid by the debtor. Uncertainty with respect to the payment of the debt when the very existence of the liability is contested could make the debt contingent.

Therefore, in the situation which you have described, if the corporation does not make any payments while awaiting the decision of a higher court and then contests the decision by the court of first instance for valid reasons, we are of the view that the amount awarded by that court would not be deductible.