Prepaid amounts that relate to goods and services to be received or benefits expected to be derived in a future taxation year are deductible in the taxation year in which the goods or services are received or benefit derived. Subsection 18(9) concurs with the general rule that expenses must be incurred to earn income in order to be deductible. It ensures that the expenses are matched to the year in which the benefit is derived by requiring the taxpayer to defer and amortize prepaid expenses over the period to which they reasonably relate when computing profit under section 9. The rule in paragraph 18(9)(a) specifically states that no deduction may be claimed for the following outlays or expenses:
- Services to be rendered after the taxation year;
- Amounts on account of payment for interest, taxes (except tax on insurance premiums), rent or royalty in respect of a period after year end; and
- Insurance in respect of a period after year end, except for certain insurers and for certain amounts paid for group term life insurance.
An exception is provided for farmers and fishermen who use the cash basis of accounting.