17 June 1996 External T.I. 9616125 - RESERVE - QUALIFYING FISCAL PERIOD

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 an individual taxpayer that ceases to operate a professional practice on June 30, 1995 would be entitled to any reserve under subsection 34.2(4) of the proposed legislation concerning fiscal periods.

Position:

Yes, provided the election in subsection 25(1) is made, the taxpayer would be entitled to a reserve in the 1995 taxation year, but not in the 1996 taxation year.

Reasons:

The taxpayer would have a "qualifying fiscal period" that begins after 1994 and ends at the end of 1995 because of the application of paragraph 249.1(1)(b) and section 25 thus satisfying the conditions in paragraph (a) of that term as defined in subsection 34.2(1) of the proposed legislation.  The taxpayer would therefore be entitled to a reserve under subsection 34.2(4) in 1995 since there would an amount in "A" of the definition of the term "December 31, 1995 income".  However, the taxpayer would no longer be entitled to a reserve in the 1996 taxation year by virtue of paragraph 34.2(6)(c) of the proposed legislation since he would not be carrying on the business at the beginning of that year .
						961612
XXXXXXXXXX						B. Kerr

Attention: XXXXXXXXXX

June 17, 1996

Dear Sirs:

Re: Fiscal Periods

This is in reply to your letter of April 18, 1996, sent to the Enquiries and Taxpayer Assistance Division and your letter of November 16, 1995, sent to the Winnipeg Tax Services office concerning the fiscal period rules.

The situation described in your letters involves a self-employed professional that reports his business income based on a fiscal period that ends on January 31. The taxpayer ceased to operate his professional practice on June 30, 1995 and became an employee of a particular corporation.

You have expressed concerns that the taxpayer would be required to report 17 months of income in his 1995 income tax return. You feel that this is unfair and suggest that the taxpayer should be allowed to report the stub period income in 1996 as would have been allowed under section 25, or that the taxpayer be entitled to gradually report the income over 10 years or that some form of tax relief be granted for the difference in tax rates that this causes.

Our Comments

On March 28, 1996, the Honourable Paul Martin, Minister of Finance, retabled the Notice of Ways and Means Motion to implement changes (the "proposed legislation") introduced in the February 27, 1995 budget. This Motion slightly revised the original motion which was tabled on December 12, 1995. One of those revisions relates to subsection 25(1) of the Income Tax Act which was to be repealed, but will instead be amended.

Subsection 25(1) will be replaced by the following applicable to fiscal periods that begin after 1994:

"Where an individual was the proprietor of a business and disposed of it during the fiscal period of the business, the fiscal period may, if the individual so elects and subsection 249.1(4) does not apply in respect of the business, be deemed to have ended at the time it would have ended if the individual had not disposed of the business during the fiscal period."

The effect of this is that such a taxpayer will have an amount in "A" of the definition of the term "December 31, 1995 income" since the taxpayer will have a "qualifying fiscal period" as a result of satisfying the conditions in subparagraph a(i) and clause a(ii)(A) of the definition of that term in subsection 34.2(1) of the proposed legislation. Therefore, for the 1995 taxation year, the taxpayer would be entitled to the reserve determined under subsection 34.2(4) of the proposed legislation. The amount of such reserve would be included in the taxpayer's income for the 1996 taxation year under subsection 34.2(5) of the proposed legislation. However, the taxpayer would not be entitled to any reserve in 1996, by virtue of paragraph 34.2(6)(c) of the proposed legislation. Accordingly, you may wish to amend the taxpayer's 1995 income tax return.

We trust that these comments will be of assistance.

Yours truly,

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