Reserve for Prepaid Amount: Impact of the Ellis Vision Case
Question
In light of the Tax Court of Canada decision in Ellis Vision, Footnote 16 is the CRA reconsidering its position on whether amounts included in income under subsection 9(1) are eligible for a reserve under paragraph 20(1)(m)?
Response
When making a determination as to whether an amount is eligible for a reserve under paragraph 20(1)(m), the CRA examines the nature of the prepaid income and when it is realized. Even if a taxpayer is entitled to a reserve under paragraph 20(1)(m) for an amount included in income under section 9 (i.e., the amount could also have been included under paragraph 12(1)(a)), the amount of the reserve must be reasonable.
Per Ellis Vision, the amount of the reserve must be based on the taxpayer’s previous experience and the services that the taxpayer reasonably expects to render after the end of the year. To the extent that the taxpayer’s obligations are contingent, the amount of the reserve should be reduced.