23 January 2009 Internal T.I. 2008-0300811I7 - Gift Certificates - Timing of Income Recognition

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:

1. When should a business recognize income from the sale of a gift certificate?

2. If at the date of sale, can a reserve be claimed in respect of any unredeemed gift certificates at a taxpayer's year-end?

Position:

1. Income should be recognized at the date of sale of the gift certificate.

2. Question of fact, but generally a reasonable reserve representing the amount of any outstanding gift certificates at a taxpayer's year-end (excluding expired gift certificates, where applicable) less a percentage for gift certificates which (on the basis of past experience) are not redeemed by their holders, could be claimed by a taxpayer.

Reasons:

1. Pursuant to paragraph 12(1)(a) of the Income Tax Act ("the Act").

2. Pursuant to subparagraph 20(1)(m)(i) of the Act. The reserve must be reasonable and in respect of goods in which it is "reasonably anticipated" will have to be delivered after the end of the year.

								January 23, 2009

Ms. Edith Keefe MacLeod				HEADQUARTERS
	Senior Business Services Agent		Income Tax Rulings
	Business Windows Call Centre	  		Directorate
	Edmonton Tax Services Office			Renee Sigouin											(613) 957-2128

		2008-030081

Gift Certificates - Timing of Income Recognition

We are writing in response to your email correspondence dated November 18, 2008 wherein you requested our comments regarding the timing of recognition of income from the sale of gift certificates including the effect of expiration dates thereon. You have advised that the gift certificates would be used for redemption at a later date for the purchase of goods.

Generally speaking, the business income of a taxpayer arising from the sale of gift certificates should be recognized at the date of sale of the gift certificate pursuant to subparagraph 12(1)(a)(i) of the Income Tax Act (the "Act"). Subparagraph 12(1)(a)(i) of the Act states that the income of a taxpayer from a business or property shall include any amount received by the taxpayer in the year in the course of a business "that is on account of services not rendered or goods not delivered before the end of the year or that, for any reason, may be regarded as not having been earned in the year or a previous year".

However, a deferral of the recognition of income to the period in which the goods are effectively delivered is available through the application of subparagraph 20(1)(m)(i) of the Act. This provision provides that, where an amount described in paragraph 12(1)(a) of the Act has been included in a taxpayer's income from a business for the year or a previous year, there may be deducted a reasonable amount as a reserve in respect of goods that it is reasonably anticipated will be delivered after the end of the year. The interaction of these provisions thereby allows the "earning event" (i.e., the delivery of the goods) to be the "recognition event" for income tax purposes.

The determination of what is considered a "reasonable reserve" can only be made after considering all of the facts and circumstances surrounding a particular situation. However, and where subsection 20(6) of the Act is not applicable, in our view a reasonable reserve would represent the amount of outstanding gift certificates at a taxpayer's year-end less a percentage for gift certificates which (on the basis of past experience) are not redeemed by their holders. Pursuant to the specific wording of subparagraph 20(1)(m)(i) of the Act, it is our view that a taxpayer could not claim a reserve in respect of gift certificates that had expired prior to the taxpayer's year-end because it would not reasonably be anticipated that the goods would be delivered after the end of the year. We trust that these comments will be of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch