19 November 1996 External T.I. 9626615 - RESERVE FOR UNPAID WAGES

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:

Can a cash basis reporter indicate a liability on its financial statements and subsequently convert the liability to retained earnings without any tax consequences.

Position:

We provided the opinion that the tp should reverse the initial entries

Reasons:

It appears that the reporting of the liability was for managerial purposes with the offsetting debit charged to inventory.

XXXXXXXXXX							5-962661

Attention: XXXXXXXXXX

November 19, 1996

Dear Sirs:

Re: XXXXXXXXXX

This is in reply to your letter of August 1, 1996, in which you requested our opinion on behalf of the above noted company with respect to a particular fact situation.

Since the subject of your enquiry relates to a factual proposal, we are unable to provide you with any specific comments at this time. Confirmations of the tax implications in particular situations may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in the Department's Information Circular 70-6R2 available from your local Tax Services Office. However, while we are unable to address your specific situation, we can provide you with the following general comments on this topic.

It is our understanding your question relates to a situation where a taxpayer, who reports income on a cash basis, identifies a liability on the balance sheet in respect of unpaid wages which are not deductible for tax purposes until paid. It is also our understand the liability does not reflect an amount that is actually payable and that the liability was offset by an increase in inventory.

In these circumstances, it is our opinion that the taxpayer should reverse these entries in order to eliminate the liability and reduce the recorded value of inventory. We are also of the opinion that, in itself, this adjustment should not affect the calculation of taxable income.

The above comments are based on our understanding of the law as it applies in general and may or may not apply to the circumstances of a particular case. They do not form an advance income tax ruling and they are not binding on the Department.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch