3 June 1998 External T.I. 9732975 - FISCAL PERIOD RESERVE

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.

XXXXXXXXXX 973297
B. Kerr
Attention: XXXXXXXXXX

June 3, 1998

Dear Sirs:

Re: Ceasing to be Resident

This is in response to your letter of December 8, 1997, concerning the claiming of a reserve under subsection 34.2(4) of the Income Tax Act (the “Act”).

The situation described involves a taxpayer that is a physician who has elected to maintain an off-calendar year fiscal period ending on January 31 under the provisions of subsection 249.1(4) of the Act. The taxpayer proposes to leave Canada on January 5, 1998 and become a resident of the United States. You have asked us whether he can claim the reserve for 1997.

Our Comments

The situation described in your letter involves an actual fact situation. If it relates to a completed transaction, you should contact the appropriate Tax Services Office, since the review of such transactions falls within their responsibility and it is the practice of the Department not to comment on such transactions when the identities of the taxpayers are not known. If it relates to a proposed transaction, assurance as the tax consequences will only be given in an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada. However, we can provide the following general comments.

Subparagraph 34.2(6)(a)(ii) of the Act denies the claiming of a reserve in computing a taxpayer’s income for a taxation year from a business where at the end of the year or at any time in the following taxation year, the taxpayer is non-resident and does not carry on the business through a permanent establishment in Canada. As you have pointed out, since the taxpayer is moving in the 1998 taxation year but prior to filing his 1997 tax return he knows that the provision would apply to deny the reserve for 1997. However, if the move takes place in the subsequent year after the prior year’s return is filed, the taxpayer would have to file an amended return to deny the reserve.

Although this is the correct reading of the provision, we have consulted with the Department of Finance and it is our understanding that the intention of the provision was to deny the reserve in the year the taxpayer ceases to be resident and that the wording used was based on the perceived application of the rules provided under subsection 128.1(4) of the Act when ceasing to be resident. The provisions of paragraph 128.1(4)(a) generally apply to create two taxation years. However, this paragraph only applies to a taxpayer that is a corporation or a trust. Therefore, notwithstanding the wording, it is our view that the reserve would be allowed for 1997 and the provisions of subparagraph 34.2(6)(a)(ii) will apply for 1998 to ensure that no reserve is allowed for the year the taxpayer ceases to be resident of Canada.

We trust that these comments will be of assistance.

Yours truly,

for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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