The deduction must be based on identification of specific doubtful amounts and is limited to the maximum of doubtful debts identified in the year or…

The statement is false. The rules for deducting a reserve for doubtful debts under relevant tax legislation (e.g., Canada's Income Tax Act) require the amount to be reasonable based on an analysis of specific accounts receivable at the end of the current fiscal year. The method described in the statement is incorrect; it improperly suggests using data from a preceding year and applies a fixed "75 percent" limit that is not part of the standard calculation for this reserve. The deduction must be a justifiable estimate of the uncollectible portion of debts existing at the current year-end, not based on an arbitrary formula or historical amounts.

A. True: This is incorrect because the described calculation, involving a preceding year's maximum debt and a 75% statutory limit, does not conform to established tax principles for determining a reasonable reserve for doubtful debts.

1. Income Tax Act

R.S.C.

1985

c. 1 (5th Supp.)

s. 20(1)(l). This primary legal source allows for a deduction of "a reasonable amount as a reserve for doubtful debts

" without prescribing the specific formula mentioned in the question.

2. Canada Revenue Agency. (Archived). Interpretation Bulletin IT-442R - Bad debts and reserves for doubtful debts. Paragraphs 9 and 10 of this official guidance clarify that the reserve must be calculated at the end of the fiscal period based on the debts outstanding at that time

contradicting the use of a preceding year's data.

3. Byrd

C.

Chen

I.

& Jacobs

L. (2023). Canadian Tax Principles. Pearson Canada. Chapter 6

"Income or Loss from a Business

" explains that the reserve for doubtful debts is based on an estimate of receivables that will not be collected

determined at the end of the current taxation year. This aligns with the principle of a "reasonable" reserve and not the formula in the question.