Reserve for unearned amounts (s. 20(1)(m))

A seller with prepaid revenue or deposits at closing meets this rule. Paragraph 12(1)(a) includes in business income an amount received on account of services not rendered or goods not delivered before the end of the year. Paragraph 20(1)(m) then allows a reasonable amount as a reserve in respect of the items it lists.

What it covers

• Goods that it is reasonably anticipated will have to be delivered after the end of the year.
• Services that it is reasonably anticipated will have to be rendered after the end of the year.
• Periods for which rent, or other amounts for the possession or use of land or of chattels or movables, have been paid in advance.
• Repayments, under arrangements described in s. 12(1)(a)(ii), that it is reasonably anticipated will have to be made after the end of the year on the return or resale of articles other than bottles.

Limits

The paragraph is subject to s. 20(6), which substitutes a different limit for food or drink and transportation. Section 20(7) lists cases where it does not apply, including reserves for guarantees, indemnities or warranties and, apart from an insurer’s prescribed policy reserve for a non-life insurance business, for insurance. Ask a tax professional how prepaid amounts are treated in the final return. See what happens to customer deposits when a business is sold and compare the capital gains reserve.