19 February 2007 External T.I. 2006-0191371E5 - Income of Contractors

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Is a taxpayer who processes data to create survey maps entitled to use the completion method of revenue recognition as outlined in IT-92R2?

Position: No

Reasons: The processing of data to create survey maps would not fall within the scope of the administrative position in IT-92R2 that allows certain contractors to use the completion method of revenue recognition.

								2006-019137
XXXXXXXXXX 							Bruce Hartt
(613) 946-3558
February 19, 2007

Dear XXXXXXXXXX

Re: Income Recognition

We are writing in response to your letter of May 31, 2006, concerning the above-noted issue. In your letter you indicated that your client is a corporation that processes data to create survey maps, which it sells to customers in Canada. You state that although your client is not a contractor as described in paragraph 1 of IT-92R2, your client has been using the completed contract method of recognizing income and you would like our concurrence to allow them to continue using this method.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency (CRA). All publications referred to herein can be accessed on the CRA website at the following address: http://www.cra-arc.gc.ca/tax/technical/incometax/menu-e.html.

A taxpayer's income (or loss) from a business or property is computed under the rules set out in subdivision b of Division B of the Income Tax Act (the "Act"). In this regard, subsection 9(1) of the Act requires a taxpayer to report income when the amounts are earned. In addition, paragraph 12(1)(b) of the Act requires a taxpayer to include in income for the year any amount that becomes receivable in respect of services rendered in the course of a business in the year, even when the amount or any part thereof is not due until a subsequent year.

However, as outlined in Interpretation Bulletin IT-92R2, any prime contractor or subcontractor who is engaged in the construction of a building, road, dam, bridge or similar structure, in circumstances such that title thereto vests in a person other than the prime contractor or the subcontractor as it is constructed would be entitled to use the completion method of reporting contract revenue if certain conditions are met. Provided a taxpayer is a contractor as described above, paragraph 12 of IT-92R2 states that in computing the business income of such a contractor, "where [the] contracts may reasonably be expected to be completed within two years from the date of their commencement, for the convenience of both the taxpayer and the [Agency] an alternative method commonly called the "completion method" of reporting contract revenue may be adopted, namely to take the whole revenue (including holdbacks) from each contract into income of the year in which the work thereon is physically completed."

In our view, a corporation that processes data to create survey maps to sell, such as the one described in your incoming letter, would not fall within the scope of the position in IT-92R2 on the basis that it does not meet the definition of contractor as required and consequently we do not agree with your view that your client be allowed to use the completed contract method of recognizing income.

We trust our comments will be of assistance to you.

Yours truly,

Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch