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 repayable amounts related to a physician's overbilling in respect of services rendered can be carried back to the taxation year in which they were included in a taxpayer's income and deducted therefrom or whether they can only be deducted in the year in which the repayment is made. If they cannot be carried back, would the repayment reduce "December 31, 1995 income".
Position:
Depends on all the relevant facts of a particular situation.
The matching principle under GAAP should be applied to determine the truer picture of a taxpayer's profit under subsection 9(1). However, the determination of profit is also a matter of law and subject to the provisions of the Act. Paragraph 18(1)(a) provides that no deduction shall be made in respect of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property. Paragraph 18(1)(e) prevents the deduction of an amount as, or on account of, a reserve, a contingent liability or amount or a sinking fund except as expressly permitted by this Part.
Reasons:
18(1)(a), 18(1)(e). In order for an expense which is unpaid at the end of a taxation year to be deductible for tax purposes, it must constitute a genuine liability of the taxpayer in that taxation year. In order for a genuine liability to exist, there must be an enforceable claim by the creditor for an ascertained amount.
952844
XXXXXXXXXX B. Kerr
Attention: XXXXXXXXXX
February 5, 1996
Re: Social Contract Legislation in Ontario
This is in response to your letter of October 25, 1995, concerning the recovery of amounts paid to physicians over and above the cap on billings for the 1994-95 fiscal year as a result of the above-noted legislation.
The recoverable amounts are in respect of services rendered between April 1, 1994 and March 31, 1995 and will be deducted from the monthly remittance advice payments made to physicians for the months of October 1995 to February 1996. You have requested our views on whether the repayable amounts can be carried back to the taxation year in which they were included in a taxpayer's income and deducted therefrom or whether they can only be deducted in the year in which the repayment is made. If they cannot be carried back, would the repayment reduce "December 31, 1995 income".
The situation outlined in your letter involves an actual fact situation. To the extent that it relates to a past 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 this 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 to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Taxation.
The tax consequences of any particular transaction can only be determined on a case by case basis and depends on all the facts of a particular situation. Since you have not provided us with any details concerning the taxation year or fiscal period of any specific taxpayer or a copy of the applicable legislation, we cannot determine the proper tax treatment of the repayable amounts. However, we can offer the following general comments.
Subsection 9(1) of the Income Tax Act ("the Act") provides that a taxpayer's income for a taxation year from a business or property is the taxpayer's profit from that business or property for the year. A taxpayer's profit is generally determined in accordance with generally accepted accounting principles ("GAAP"). The matching principle under GAAP should be followed to represent a truer picture of a taxpayer's profit. This view is reflected by the Department in paragraph 2 of IT-417R as well as by the courts in the Metropolitan Properties Co. Ltd. (85 DTC 5128) case. However, the determination of profit is also a matter of law and subject to the provisions of the Act. For example, paragraph 18(1)(a) provides that no deduction shall be made in respect of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property. Paragraph 18(1)(e) prevents the deduction of an amount as, or on account of, a reserve, a contingent liability or amount or a sinking fund except as expressly permitted by this Part.
As stated in paragraphs 8 and 9 of Interpretation Bulletin IT-215R, a distinction must be made between a reserve for a liability which is future or contingent that would be prohibited by paragraph 18(1)(e) and an amount that represents an existing liability which would be deductible under paragraph 18(1)(a) if the expense is made or incurred by the taxpayer for the purpose of gaining or producing income from a business or property. In order for an expense which is unpaid at the end of a taxation year to be deductible for tax purposes, it must constitute a genuine liability of the taxpayer in that taxation year. In order for a genuine liability to exist, there must be an enforceable claim by the creditor for an ascertained amount. More generally, an amount which is due and payable at the end of a taxation year, can only constitute an allowable deduction in the year in which it becomes ascertained and unconditional. This view is also supportable by the courts, such as in the TNT Canada Inc. (88 DTC 6334) case.
With respect to December 31, 1995 income, 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").
New paragraph 249.1(1)(b) of the proposed legislation will apply to certain individuals, partnerships and professional corporations and will provide, inter alia, that no fiscal period may end after the end of the calendar year in which the 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. New subsection 34.2(2) will provide rules for the calculation of the income of a business for a qualifying fiscal period. Paragraph 34.2(2)(c) of the proposed legislation provides that for the purposes of the definition "December 31, 1995 income", a taxpayer's income from a business for a qualifying fiscal period shall be computed as if the maximum amount deductible in respect of a reserve, allowance or other amount were deducted.
In addition it should be pointed out that the proposed legislation, inter alia, contains several other relevant provisions. For example, 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.
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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