| 5-906532 | |
| Deductibility of Mine Site Reclamation Costs |
Question
The CICA has recently approved the issue of a new Handbook section on capital Assets. This section confirms that generally accepted accounting principles in Canada require that future removal and site restoration costs be accrued and charged to income in a rational and systematic manner when such costs are reasonably determinable. Such accruals during a mine's operating life are necessary to achieve a proper matching of income earned and expenses incurred to earn that income.
Given that profit from a business under section 9 is to be computed in accordance with generally accepted accounting principles unless the Act or a judicial decision otherwise requires, does Revenue Canada agree that accrued reclamation costs that are reasonably determinable are deducted for income tax purposes?
Department's Position
No. Section 9 of the Act states that a taxpayer's income or loss is his profit for the year, subject to the provisions of Part I of the Act. Paragraph 18(1)(e) of the Act prohibits a 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".
There is no provision in Part I permitting the deduction in question.
In Her Majesty The Queen v. Burnco industries Ltd. et al 1984 DTC 6348, the Federal Court of Appeal upheld the Department's disallowance of the taxpayers; anticipated costs of backfilling a gravel pit on the basis that no expense within the meaning of paragraph 18(1)(a) had yet been incurred, there being, at the particular time, no obligation to pay a sum of money to anyone. An obligation to do something which might in the future entail the necessity of paying money is not an expense for purposes of the Act.