31 March 2014 Internal T.I. 2013-0514921I7 - Meaning of "gross revenue" follow-up

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) Whether any or all amounts received or receivable as volume discounts should be included in a corporation's "gross revenue" for purposes of subsection 402(3) of the Income Tax Regulations. (2) Whether this position represents a change of position.

Position: (1) Amounts received or receivable other than on account of capital. Amounts received or receivable that are adjustments to expenses would not be included in gross revenue.(2) This is a change of position only in respect of the definition of gross revenue for purposes of provincial income allocation.

Reasons: The purpose of the formula in 402(3) is to provide a proxy through which to allocate provincial income allocation. While gross revenue can be similar to financial statement revenue, it is technically not the same, as it includes amounts that are usually not included in financial statement revenue, such as those in paragraph 12(1)(a) and (b). This is a change in position on the meaning of gross revenue for purposes of provincial income allocation.

March 31, 2014

Legislative Amendments HEADQUARTERS
Legislative Policy Directorate Income Tax Rulings
Directorate
Andrew Deak
Attention: Luba Baran
2013-051492

Provincial Income Allocation – Meaning of "gross revenue" follow-up

We are replying to Robin Maley's email of December 3, 2013, in which we were asked for our views on the meaning of "gross revenue" for the purposes of the provincial income allocation formula used in Part IV of the Income Tax Regulations (the "Regulations"). Specifically, we were asked us to clarify:

(1) Whether any or all amounts received or receivable as volume discounts should be included in a corporation's "gross revenue" for purposes of subsection 402(3) of the Regulations; and

(2) Whether this position represents a change of position from F2010-0382161I7 or whether the two positions can be reconciled.

Subsection 124(1) of the Income Tax Act (the "Act") provides for an abatement of federal income tax payable by corporations. It takes the form of a deduction from the tax otherwise payable by a corporation equal to 10 percent of all of a corporation's "taxable income earned in a year in a province". Subsection 124(4) states that the "taxable income earned in the year in a province" is the amount determined in accordance with the prescribed rules found in Part IV of the Regulations.

Subsection 402(3) of the Regulations applies where a corporation has a permanent establishment in a province and a permanent establishment outside that province. Where this is the case, the corporation's taxable income earned in the province is determined in part based on the proportion of the corporation's gross revenue reasonably attributable to the corporation's permanent establishment in the province to the total gross revenue of the corporation.

It is our understanding that taxpayers tend to treat gross revenue to mean revenue for financial statement purposes (e.g., revenue according to International Financial Reporting Standards, Generally Accepted Accounting Principles for Small Businesses) or whatever method the taxpayer uses for calculating income for the purposes of section 9 of the Act. It is also our understanding that, for financial statement purposes, rebates and volume discounts are deducted from the cost of purchase. (footnote 1) Nonetheless, gross revenue is defined in subsection 248(1) of the Act as follows:

"gross revenue" of a taxpayer for a taxation year means the total of

(a) all amounts received in the year or receivable in the year (depending on the method regularly followed by the taxpayer in computing the taxpayer's income) otherwise than as or on account of capital, and

(b) all amounts (other than amounts referred to in paragraph (a)) included in computing the taxpayer's income from a business or property for the year because of subsection 12(3) or (4) or section 12.2 of this Act or subsection 12(8) of the Income Tax Act, chapter 148 of the Revised Statutes of Canada, 1952 .

Ms. Maley's email asked for clarification of our position on the definition of "gross revenue". Specifically, it asked us to address whether volume discounts received from suppliers would be included in gross revenue. The email referred us to our letter F2010-0382161I7, in which we stated that certain volume discounts would be included for calculating income for purposes of the Act. In that letter, we also said that volume discounts and rebates paid after the purchase are included in gross revenue.

Our comments

Paragraph (a) of the definition of gross revenue states that gross revenue includes "all amounts received in the year or receivable in the year… otherwise than as or on account of capital". This would indicate that a taxpayer should include all receipts and receivables, less any amounts that were on account of capital.

We also note that paragraph (b) of the definition was added to specifically include in gross revenue certain accrued amounts, which for financial statement purposes are likely already included in revenue. This would indicate gross revenue might have a meaning other than revenue for financial statement purposes.

Other provisions of the Act that use gross revenue can assist us in our analysis. One example can be found in subsection 1102(16) of the Regulations, which states:

"For the purposes of paragraph (15)(b), "revenue" means gross revenue minus the aggregate of

(a) amounts that were paid or credited in the period, to customers of the business, in relation to such revenue as a bonus, rebate or discount or for returned or damaged goods; and

(b) amounts included therein by virtue of section 13 or subsection 23(1) of the Act."

By reducing gross revenue by the amounts in paragraphs 1102(16)(a) and (b) to arrive at revenue, it follows that those amounts (e.g., volume rebates paid to customers) must have been included in gross revenue in the first place. Yet, for financial statement purposes, a taxpayer would generally not include these items in revenue. This would again indicate that gross revenue as per the Act might be different than revenue used for financial statement purposes.

Based on a strictly textual interpretation, any amount that is received or receivable would be included in the computation of gross revenue by virtue of paragraph (a) of the definition. This would appear to include, for example, expense reimbursements such as volume discounts received from suppliers (other than at the time of sale) and utility rebates received. To this amount any adjustments required by paragraph (b) of the definition would be added.

However, the meaning of gross revenue should also be considered in the full context of its use in Part IV of the Regulations and keeping in mind the purpose of its use within the scheme of Act. We further note that income for purposes of the Act is not the same as "gross revenue" for purposes of provincial income allocation purposes.

It has been proposed that gross revenue in subsection 248(1) has the same meaning as revenue for financial statement purposes or for purposes of determining income for section 9 of the Act. It has been suggested that the Federal Court of Appeal decision in West Kootenay Power & Light Co. v. R. (FCA) 92 DTC 6023, supports this view. In particular, the court stated, "[t]he approved principle is that whichever method presents the "truer picture" of a taxpayer's revenue, which more fairly and accurately portrays income and which matches revenue and expenditure, if one method does, is the one that must be followed." The issue of truer picture of income was also addressed in Canderel Ltd. v. The Queen (SCC) 98 DTC 6100.

We note that these cases dealt with the appropriate method for determining income for the purposes of section 9 of the Act and what is meant by profit or loss. In our view, these cases, while helpful, are not determinative of the issue because gross revenue is specifically defined in the Act, whereas profit and loss are not.

While using financial statement revenue would address the simplicity concerns and might provide a truer picture of a taxpayer's income-earning activities, the plain meaning of the words of the Act and Regulations cannot be ignored. In particular, using financial statement revenue would potentially render paragraph (b) of the definition of gross revenue meaningless because that paragraph includes in gross revenue a number of amounts that generally are included in revenue for financial statement purposes. This paragraph (b) implies that "gross revenue" has a meaning other than financial statement revenue.

It is also necessary to examine what is meant by the words "depending on the method regularly followed by the taxpayer in computing the taxpayer's income". In our view, most taxpayers are required to calculate their income on an accrual basis and would use a "received or receivable" basis, but taxpayers using the cash method (e.g., farmers or fishers) would use a received basis only. Further, the wording "all amounts received in the year or receivable in the year" necessitates including amounts that are required to be included in income under paragraphs 12(1)(a) ("any amount received") and 12(1)(b) ("any amount receivable").

In light of the above, it is our view that gross revenue for the purposes of Part IV of the Regulations includes all amounts received or receivable by a taxpayer, other than on account of capital, but does not include amounts received in respect of expenditures of the taxpayer. As well, material adjustments that are included in income pursuant to paragraphs 12(1)(a) or (b) should also be included in gross revenue for purposes of Part IV of the Regulations. However, for greater certainty, we note the following items as (a non-exhaustive list of) examples of what would not be included in gross revenue:

• amounts received or receivable on account of a taxpayer's expenditures, such as volume rebates, received by the taxpayer because these are adjustments to amounts of expenditures as opposed to receipts in respect of income-earning activities;
• financial assistance received by the taxpayer from a government in respect of expenditures incurred or to be incurred by the taxpayer;
• amounts included in income as a consequence of the disposition of capital property (e.g., pursuant to section 13, 14 or 38) because they are included in income on account of capital; and
• amounts that have already been included in gross revenue of a previous taxation year.

In practice, the result of this view is that "gross revenue" for provincial income allocation purposes may be similar to the taxpayer's financial statement revenue depending on the method adopted by the taxpayer. Technically, however, financial statement revenue is not the same "gross revenue" as defined in the Act and may differ significantly especially if there are amounts included in gross revenue pursuant to paragraphs 12(1)(a) and (b).

This is a change in position on the meaning of gross revenue for purposes of provincial income allocation from that taken in our letter F2010-0382161I7.

We trust that this information is helpful. If you have any questions regarding the above, please do not hesitate to contact me.

Terry Young, CPA, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 See, for example, CPA 3031.12.