18 March 1996 External T.I. 9529535 - REFUND OF MUNICIPAL AND SCHOOL TAXES

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:

Treatment of refund of municipal school taxes previously expensed, plus interest received.

Position TAKEN:

Tax refund, plus interest should be included in year received or receivable.

Reasons FOR POSITION TAKEN:

Paragraph 12(1)(x) establishes specific treatment for refund payments that differs from GAAP. Paragraph 12(1)(c) applies to the interest portion.

L. Barrows
XXXXXXXXXX							952953

March 18, 1996

Dear XXXXXXXXXX:

Re: Refund of Municipal and School Taxes

This is in reply to your letter of November 9, 1995 in which you requested our views on whether the Department would consider the application of subsection 220(3.1) to waive interest charges otherwise payable on adjustments to prior years' assessments. We apologize for the delay in our response.

The adjustments relate to a refund in 1995 of municipal and school taxes, plus interest applicable thereto. The property taxes were originally expensed against rental income received from rental property in the years 1992 through 1994. You propose to adjust the income of each prior period by an appropriate portion of the overall refund. This proposal is based on your understanding of Section 3600 of the CICA Handbook and initial discussions you had with the Business Enquiries Section of the Montreal Tax Services Office.

We should advise that written confirmation of the tax implications inherent in a particular fact situation is only given by this Directorate when there is a proposed transaction which is the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. However, in response to your request, we can provide the following general comments which are not binding on the Department.

Our Comments

For the purposes of section 9, it is the Department's view that income for tax purposes, should be computed in accordance with a method within GAAP that produces the "truer picture" and when there is only one acceptable method within GAAP and that method is reflected in the financial statements, the income for tax purposes, absent of a specific provision of the Income Tax Act (the "Act"), should not be different.

The provisions of paragraph 12(1)(x) of the Act establishes specific treatment of certain amounts received by a taxpayer in computing income for the year. It provides that certain inducements, reimbursements, contributions, allowances and assistance received by a taxpayer from a government, municipality or other public authority in the course of earning income from a business or property will be included in income for the year to the extent, inter alia, that they have not otherwise reduced the cost of a property or the amount of an outlay or expense.

In our view, this paragraph applies to a refund in that it can be considered an amount received in the year by the taxpayer, from a government, in the course of earning income from a property, as a reimbursement in respect of an expense or outlay. In addition, municipal and school taxes (municipal property taxes) are normally considered by the Department to be an expense of a rental property as discussed in general terms in paragraph 2 of IT-487.

It should also be noted that a pending amendment further clarifies this provision by adding a reference under subparagraph 12(1)(x)(iv) of the Act to amounts refunded as well as providing the condition that the amount received will only be included in income to the extent that it has not resulted in an assessment that reflected a reduction in the cost of the property or the amount of an outlay or expense. This amendment applies to amounts received after 1990.

Therefore, in our view, notwithstanding GAAP which normally applies in establishing rental income under section 9 of the Act, the total refund is specifically included in computing the taxpayer's 1995 income by virtue of paragraph 12(1)(x) of the Act. This treatment is similar to that of the interest portion of the refund by virtue of paragraph 12(1)(c) of the Act. Paragraph 12(1)(c) of the Act requires a taxpayer to include in computing income for the year any amount of interest received or receivable in the year (depending on the method regularly followed by the taxpayer in computing the taxpayer's profit). Consequently, it would depend on the method regularly followed by the taxpayer whether the interest is reported on the cash or accrual method. Interest would only become receivable when the right to receive the interest has been ascertained (before such ascertainment no amount of interest is receivable).

In the circumstances, it would seem that the Department's interpretation of subsection 220(3.1) relating to your situation is not required.

We trust these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch