NOV 17 1986
PENTICTON DISTRICT OFFICE P. Kelly Chief of Audit
SMALL BUSINESS AND GENERAL DIVISION T. Marcogliese (613) 957-2095 XXXX
This is in reply to your memorandum of August 14, 1986, concerning your request for our opinion on the income tax treatment of business interruption insurance. In addition, you question whether this income is viewed as logging income for purposes of subsection 127(1) and Regulation 700.
XXXX
Manufacturing and Processing Profits Deduction
Receipts, from a business interruption insurance policy, that are separate and distinct front any property damage coverage and which represent payments for the loss of earnings, are considered to be income. Interpretation Bulletin IT-182 paragraph 4 reads in part ... "where a taxpayer has a right to compensation for a property or income loss because of contract ... compensation. for loss or destruction of inventory or for loss of profits is considered to be income from the carrying on of the taxpayer's business". Regulation 5202 defines "adjusted business income" to include ... "all amounts each of which is the income of the corporation for the year from an active business carried on in Canada". It is our view that the insurance receipts are a substitute for the projected earnings of the company and, as such, qualify as active business income for purposes of the Manufacturing and Processing Deduction. However, in the determination of "Canadian, manufacturing and processing profits" the insurance proceeds would not be revenue from selling or leasing of goods manufactured or processed in Canada by it or manufacturing or processing of goods for sale or lease for purposes of the 10% de minimis rule.
"Manufacturing and processing" does not include logging and as stated in your memorandum XXXX normally qualifies for the M&P deduction under Regulation 5201. If the corporation is also involved in logging, they would not be eligible for the Small Manufacturers' Rule per Regulation 5201(c), and must look to the definitions in Regulation 5202 to determine the amounts needed for the formula contained in Regulation 5200.
Logging Tax Deduction
The Department's position is that business interruption insurance proceeds are received by virtue of the non-operation of a resource business. In the case of logging these receipts from the non-operation of the business are considered to be . . . "income from sources other than logging operations as that expression is used in Regulation 700(1)(d). Since the income from insurance is taken into account in determining sources other than logging the proceeds are deducted from the taxpayer's income for the purposes of subsection 127(1).
We hope these comments will be of assistance.
Chief Merchandising, Manufacturing and Construction Section Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch