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Income tax — "reserve" was not a reserve

My client was a manufacturer of truck bodies used by freight companies. When the trucking industry experienced a downturn in 2000, my client had to work out a deal with a U.S. financing company in order to continue to sell its trucks. My client had to contribute $1,000 per truck to a fund, held by the freight company, that the financing company could use to cover the costs of truckers who did not meet their monthly payments. Although the funds were spent by my client and could not be recovered, my client referred to the payments in its accounting records as a "reserve", because they were a reserve held by the freight company for the financing company to draw on.

The CRA saw the word "reserve" and pounced, reassessing my client to deny some $275,000 in payments made to this fund.

I filed a Notice of Objection for my client, describing and documenting the precise nature of the payments in question. I explained in detail that these payments were not a "reserve" to my client because they had actually been paid. I showed that the case law, the Canadian Institute of Chartered Accountants' Handbook, and other sources all defined a "reserve" as an amount set aside, not an amount paid out.

The CRA Appeals Officer agreed with me and cancelled the reassessment.

Problem vanished!

(2006)