Principal Issues: [TaxInterpretations translation] In computing its profit under section 9 of the Income Tax Act, can a taxpayer carry forward the deduction of expenses to a year subsequent to that in which the expenses were incurred?
Position: General comments provided.
Reasons: In determining its profit for a taxation year for the purposes of section 9, a taxpayer must adopt a method of computation that is not inconsistent with the Income Tax Act or other established rules of law, that is consistent with accepted commercial principles, and that produces a true picture of its profit.
XXXXXXXXXX 2005-013968
François D. Bordeleau,
LL. B.
January 10, 2008
Dear Sir,
Subject: Expenditure carried forward
This is in response to your request of June 13, 2005, for our opinion regarding your client's ability to deduct expenses in a taxation year subsequent to the one in which they were incurred. We apologize for the delay in responding to your question.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated 17 May 2002, we generally do not provide written opinions on proposed transactions otherwise than by way of advance rulings. Furthermore, the determination of whether a completed transaction has received the appropriate tax treatment is a matter for the Tax Services Offices. However, we can offer the following general comments that we hope may be helpful to you.
As the Supreme Court of Canada stated in Canderel Ltd. Canada, [1998] 1 S.C.R. 147, in ascertaining profit for the purposes of section 9, the taxpayer is free to adopt any method which is not inconsistent with the provisions of the Income Tax Act; established case law principles or “rules of law”; and well-accepted business principles, for the purpose of achieving an accurate picture of profit.
The matching principle is one of several interpretive accounting principles that can be used to obtain a true picture of a taxpayer's profit for a particular taxation year. This principle requires a connection between expenses and the income that is generated by those expenses. Thus, where an expense is incurred primarily for the specific purpose of earning separate and identifiable income, accepted business principles dictate that the expense be deducted in the year the income is earned. However, the matching principle will not apply where an expense cannot be associated with a specific item of income.
Where an expense creates both immediate benefits and future income, we generally take the view that the expense should be deducted in the year it is incurred.
Finally, you indicated that the purpose of the deferral of expenses to a subsequent taxation year is to avoid an assessment to your client based on the absence of a source of income. We confirm that the Act does not permit the deferral of expenses for such purposes.
These opinions are not advance rulings and, as stated in paragraph 22 of Information Circular 70-6R5 of 17 May 2002, are not binding.
Best regards,
Randy Hewlett
Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate.