5-910293
Dear Sirs:
This is in reply to your letter of January 23, 1991 with respect to the application of paragraph 181.2(3)(b) of the Income Tax Act (the "Act") to the write down of capital assets and goodwill. We apologize for the delay.
In certain situations, taxpayers may reduce the carrying cost of certain assets on their balance sheet in accordance with generally accepted accounting principles. The write downs are expensed for accounting purposes and the carrying value of the asset is reduced accordingly.
Section 3060 of the CICA Handbook requires that the write down of depreciable assets and intangibles be included as accumulated depreciation/amortization on the balance sheet.
Generally, it is our view that where the write down of a capital asset reduces retained earnings for accounting purposes the write down would be a provision or allowance within the definition of "reserve" in subsection 181(1) of the Act unless it meets the exception within that definition.
Since the definition of "reserve" in subsection 181(1) of the Act excludes allowances in respect of depreciation or depletion, it is our view that amounts in respect of the write down of depreciable capital assets and intangibles which are included in accumulated depreciation/amortization pursuant to paragraph 3060.58 of the CICA Handbook would not be considered "reserve" for purposes of paragraph 181.2(3)(b) of the Act.
The write down of other assets, such as land, shares and marketable securities, may constitute a provision or allowance for purposes of the definition of reserve in subsection 181(1) of the Act which would be included in the capital of a corporation pursuant to paragraph 181.2(3)(b) of the Act except to the extent such write downs were deducted in computing income for the year under Part I of the Act.
While we hope our comments are of assistance to you they do not constitute an advance income tax ruling and therefore are not binding on the Department in respect of a specific situation.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate