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:
Whether the income earned in the stub period of an affected taxpayer that incorporates his sole proprietorship in 1995 can be recognized using the 10-year transitional period reserve as a result of the proposed legislation concerning fiscal periods.
Position:
Depends on the facts of a particular case.
A reserve may be allowed for the 1995 taxation year but not for the 1996 or subsequent taxation years.
Reasons:
Provided that the individual was carrying on the business at the end of 1994 and an election is made under section 25 of the Act, the individual would have a qualifying fiscal period, such that a reserve may be claimed in 1995. However, as the individual would not be carrying on the business at the beginning of 1996 the reserve would no longer be available.
953079
XXXXXXXXXX B. Kerr
Attention: XXXXXXXXXX March 7, 1996
Dear Sirs:
Re: 10-Year Reserve - Fiscal Periods
This is in response to your letter of October 29, 1995, concerning the proposed changes in respect of fiscal periods. The situation described in your letter involves an individual operating a business as a sole proprietorship with a fiscal period that ended on April 30, 1995. On August 1, 1995, the business was incorporated and the assets were transferred to the corporation under the provisions of subsection 85(1) of the Income Tax Act (the "Act").
You have asked whether the income from the 3-month stub period can be recognized using the 10-year transitional period allowed for under the alternative method.
A Notice of Ways and Means Motion to amend the Act, dated November 27, 1995, was tabled in the House of Commons on December 12, 1995. These amendments implement certain measures announced in the Federal Budget of February 27, 1995, including legislation in respect of fiscal periods (the "proposed legislation").
The proposed legislation repeals the meaning of fiscal period in subsection 248(1) of the Act and replaces it with a new meaning under new subsection 249.1(1). In the case of an individual, the proposed legislation will provide that no fiscal period may end after the end of the calendar year in which the period began. New section 249.1 of the proposed legislation will be applicable to fiscal periods that begin after 1994.
The provisions of new subsection 249.1(4) allow certain individuals to elect not to have the provisions of new paragraph 249.1(1)(b) apply. This will permit such individuals to maintain fiscal periods that do not end on December 31. In such a case, commonly referred to as the "alternative fiscal-period method", new section 34.1 of the proposed legislation will provide rules to calculate additional business income that will be included in the individual's income and additional rules for the purpose of the reserve in new section 34.2 of the proposed legislation. However, the use of the alternative method provided under subsection 249.1(4) requires, inter alia, that the business be carried on by an individual throughout the period of time that began at the beginning of the fiscal period and ended at the end of the calendar year in which the fiscal period began.
Since most affected taxpayers would otherwise be required to report more than 12 months of business income in computing income for the 1995 taxation year, new section 34.2 of the proposed legislation will provide a 10 year transitional period. New subsection 34.2(4) will provide for a reserve that a taxpayer may deduct in respect of December 31, 1995 income of a business carried on by the taxpayer that has a qualifying fiscal period. New subsection 34.2(1) will provide definitions of the terms "December 31, 1995 income" in respect of a business carried on by the taxpayer, and "qualifying fiscal period" in respect of a business of a taxpayer. In order to have a qualifying fiscal period, inter alia, the taxpayer must have carried on the business at the end of 1994 and an election under section 25 would have to be made.
In addition, new subsection 34.2(2) will provide rules for the calculation of the income of a business for a qualifying fiscal period, new subsection 34.2(3) will define business, new subsection 34.2(5) will provide for the inclusion in income of the amount deducted under subsection 34.2(4) in the preceding taxation year and new subsection 34.2(6) of the proposed legislation will describe situations where no reserve may be claimed. In particular, new subparagraph 34.2(6)(c)(i) provides, that no reserve may be claimed in computing a taxpayer's income for a taxation year from a business where the taxpayer is an individual, and at the beginning of the year, the business is not carried on principally by the individual nor by members of a partnership of which the individual is a member.
Accordingly, in our view, the individual would not be allowed to elect to use the alternative method. Although the individual is not allowed to use the alternative method, provided that the individual carried on the business at the end of 1994 and makes the election in section 25 of the Act, a reserve under subsection 34.2(4) would be allowed for the 1995 taxation year. However, no reserve would be allowed for the 1996 or subsequent taxation years by virtue of subsection 34.2(6), such that the entire amount claimed in 1995 as a reserve under subsection 34.2(4) would be included in income in the 1996 taxation year.
As stated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, the opinions expressed in this letter are not rulings and are consequently not binding on the Department.
We trust that 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
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