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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation] 1. Is the method adopted by a taxpayer to the effect that discounts or rebates, received or receivable, can reduce the cost of goods sold, and the cost of inventories, in accordance with EIC-144, acceptable for determining the cost of the inventory of a taxpayer and determining the profit for purposes of the Income Tax Act (the "Act")?
2. With respect to the situation presented in point 1, could section 12(1)(x) of the Act apply?
3. Does a change in methodology that involves the determination of the costs of the property in the inventory require the approval of the Minister?
Position: 1. Question of fact. Our current position is that discounts or rebates received or receivable after a purchase are income and must be included in the calculation of income. Any method of accounting for discounts or rebates that would be contrary to that principle would not be acceptable for income tax purposes.
2. Paragraph 12(1)(x) could potentially apply if any of the exceptions in that paragraph do not apply.
3. No.
Reasons: 1. Subsection 9(1).
2. If for any reason section 9 does not apply, paragraph 12(1)(x) could be considered.
3. Our position is set out in document 2009-0330401C6.
October 27, 2011
Laval Tax Services Office Income Tax Rulings Directorate
Audit of important files
Business and Partnerships Division
Attention: René Asselin, Manager
Lucie Allaire, advocate
2010-038216
Application of International Financial Reporting Standard #2 and EIC- Abstract 144
This memorandum is in response to your letter dated June 18, 2010 regarding the application of International Accounting Standard #2 ("IAS 2") and of EIC Abstract 144 Accounting by a Customer (including a reseller) for Certain Consideration Received from a Vendor, ("EIC-144") respecting discounts and rebates received or receivable by food wholesalers from suppliers, further to a few telephone conversations and e-mails (Potvin/Allaire). We apologize for the time required to respond to your request.
Your request relates only to discounts or rebates (a decrease in the price based on the volume of purchases made by a buyer in a particular period) and not to discounts on purchases, also known as early payment discounts, (a decrease of the invoiced price calculated when a buyer pays cash within a particular period). Specifically, your request is about a purchase rebate, the reduction of which can be measured by referenced to the quantities purchased or the number of purchases.
To illustrate the implications of applying EIC-144, you submitted an example regarding the purchase of three automobiles, which is the focus of the limited information you have provided. Based on your information, a taxpayer relied on EIC-144 in its financial statements for its 2004 taxation year to reduce the cost of goods sold, and particularly its year-end inventory, resulting in a significant decrease in net income.
We did not have access to the contractual arrangements between the food wholesalers and their suppliers, and we note that there was no representation from taxpayers in that regard.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Questions
You wish to obtain a directive of general application regarding EIC-144. Specifically, you are asking whether the reduction in the cost of goods sold, and particularly of year-end inventory, through discounts and rebates, received or receivable, is acceptable in determining the cost of inventory and in determining profit for income tax purposes. To that end, you are asking whether the discounts or rebates, received or receivable, should be included in the calculation of income under section 9, or possibly under paragraph 12(1)(x).
Finally, you wish to know if a method involving a change in the determination of the cost of goods sold must be disclosed to the Minister.
We will not comment on whether EIC-144 could have an effect or impact for years before its first year of application nor the impact of adjustments for years prior to the first year of adoption of EIC-144 by a taxpayer. Our comments are limited to the application of EIC-144 for future years after the first year of adoption by a taxpayer.
On the one hand, IAS 2 has been in effect since July 1, 2011. On the other hand, the Emerging Issues Committee Abstract EIC-144 is part of current Canadian generally accepted accounting principles ("GAAP").
EIC-144 provides guidance on how a reseller (client) should recognize the consideration received or receivable from a supplier, and includes section 1, Recognition of consideration received from a supplier, and section 3, Accounting by a buyer for a rebate of a supplier.
Under EIC-144, the consensus reached on section 1 should be applied retroactively to all financial statements for the interim periods and fiscal years ending after August 15, 2004. In addition, according to EIC-144, the consensus reached on section 3 should be applied retroactively to all financial statements for the interim periods and fiscal years beginning on or after February 15, 2005 and may be adopted early.
In Income Tax Technical News No. 44 issued on April 14, 2011, the Canada Revenue Agency ("CRA") states that it is prepared to accept Canadian GAAP or IFRS-based financial statements as the basis of profit for the purposes of section 9.
Also in Income Tax Technical News No. 42, the CRA indicated, following Canderel Limited v. The Queen 98 DTC 6100, that the determination of profit is a question of law and that accounting standards do not have the force of law. In Canderel, the Supreme Court decided that a taxpayer is free to adopt any method which is not inconsistent with the provisions of the Act, established case law principles, and well-accepted business principles.
The question of whether an amount has the characteristics of income is a question of fact that depends on the nature of the conditions attached to the amount received and a review of the parties' contractual obligations. The question of whether a discount or rebate is reasonably determinable and estimable so as to qualify as income is a question of fact.
The courts and the CRA generally accept that a taxpayer must include in the taxpayer’s income an amount received or receivable in the year if the taxpayer's entitlement to that amount is absolute and unconditional, whether by contract or otherwise, as to its disposition, use or enjoyment. An amount that meets that criterion is generally described as having the quality of income.
Discounts generally are received by the taxpayer at the moment of purchase as a reduction in the price payable by the taxpayer and do not represent income to it.
In contrast, rebates paid or payable after the purchase constitute revenue to the taxpayer. Thus, a rebate which is not provided at the moment of purchase, and which depends on a future event, must be taken into account in computing income under subsection 9(1).
If discounts or rebates are considered to be amounts received by a taxpayer in order to earn business or property income, we are of the view that paragraph 12(1)(x) could apply, provided that one of the exceptions in paragraph 12(1)(x) does not apply. One of the exceptions could relate to an amount that is otherwise included in computing a taxpayer's income in the year or a previous year, where, for example, the amount must be included in income by virtue of section 9.
Consequently, based on the limited facts submitted in this request and in the absence of representations to the contrary, any method of presenting discounts or rebates that is contrary to the principles set out above would not be an acceptable method for computing profit for income tax purposes.
Finally, we confirm that a change in the method of determining the cost of inventory items does not require the approval of the Minister.
For your information, unless exempted, 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 the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Ms. Celine Charbonneau at (613) 957-2137
We hope that these comments are of assistance.
François Bordeleau, LL.B.
Manager
Business and Partnerships Section
Income Tax Rulings Directorate
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