Reserves that estimate an amount generally depend on a future event. The Income Tax Act is specific on the treatment of reserves. A reserve, unless otherwise specifically authorized by a provision in the Act, is disallowed as a deduction against income. Deductible reserves, such as the following, are specifically authorized in section 20 of the Act.
- Reserves for doubtful debts (paragraph 20(1)(1)), as previously discussed, may be deducted from income to the extent they are reasonable.
- Reserve for goods and services to be delivered after year end (subparagraph 20(1)(m)(i), (ii))
- Reserves for deposits on returnable containers (subparagraph 20(1)(m)(iv)).
- Manufacturer’s warranty reserve (paragraph 20(1)(m.1)).
- Reserves for unpaid amounts (paragraph 20(1)(n)).
Contingent liabilities, on the other hand, are potential liabilities that may not materialize. Paragraph 19(1)(e) disallows a deduction for all contingent liabilities and sinking funds,