GMAC Leaseco – Tax Court of Canada finds that an amount received subject to future adjustment was unearned – but, by the same token, it was not “received” for s. 12(1)(x) purposes

GMAC received "support payments" from GMC in order to inflate the residual values stated in its leases of cars to GMC customers, thereby reducing the lease payments but resulting in a likely loss on lease termination.  GMAC was obligated to pay GMC to the extent that the net amount of such losses was less than the support payments previously received.

Graham J found that the support payments were not earned until lease termination (when the repayment obligation could be quantified.)

This case would have wide ramifications and likely incite a Finance response, if it were considered to establish that any amount received which was subject to a potential future price adjustment is not income until that potential disappears.  More probably, this case should be considered a modest extension of cases dealing with provisional amounts such as deposits (e.g., Atlantic Engine, Dominion Taxicab, cf. Maple Leaf), so that where an amount is received which both parties agree is only an estimate of an amount which will not be established until later, it is only income when they agree on the consideration - or the case may simply be wrong as the Crown did not argue s. 12(1)(a).

GMAC argued that, because the support payments were not earned when received, the exclusion in s. 12(1)(x)(v) for income receipts did not apply, so that s. 13(7.4) elections to exclude those amounts from income had been validly made.  Graham J found that for the same reason that a support payment was unearned (i.e., there was "no legal right to keep the amount"), it also was not received for s. 12(1)(x) purposes.  He registered a reaction that the s. 13(7.4) election also would not be available because the "support payments were received to replace lost income rather than in respect of the cost of the vehicles."

He found that "excess kilometre charges" paid by customers on returning their vehicles at lease termination were income receipts rather than proceeds of disposition under s. 13(21), i.e., it was not good enough that they were received contemporaneously with the sale by GMAC of the returned vehicles and related to their depreciation in value.

Neal Armstrong.  Summaries of GMAC Leaseco Corporation v. The Queen, 2015 TCC 146 under s. 9 – timing, s. 12(1)(x), s. 9 – compensation payments, s. 9 – computation of profit, s. 18(1)(a) – timing.