22 February 1982 Income Tax Severed Letter 7-1753 - [820222]

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.

REVENUE CANADA TAXATION

DATE FEB 22 1982

TO- A   EDMONTON DISTRICT OFFICE            HEAD OFFICE
        Chief of Audit                      Corporate Rulings Division
                                            P.K. Tang
                                            996-1834
ATTENTION R. Loewen                         Ref: 7-1753
Business Audit

This is in reply to your memorandum of February 1, 1982 wherein you requested our confirmation that the holdback deducted by XXXX in calculating its taxable income in 1979 should be denied.

XXXX

- the date on which the Contractor has completed the Work; and

- the date on which the Contractor has sent to the Company proof satisfactory to the Company that all liabilities of the Contractor incurred in the performance of the Work have been fully discharged;

and

- the date following the date of expiration of the statutory holdback period stipulated in any builder's or mechanic's lien legislation applicable to the work as defined in the Specification."

You are of the opinion the full 100% of the invoice amount should be included as income of XXXX and the XXXX holdback deduction claimed by the taxpayer on its 1979 T2S(1) form should be denied basically for the reason that contractors as descirbed in IT-92R do not include catering services, the agreement is not a normal construction contract and the terms of the Contract are only an arrangement of payment.

It appears to us that although XXXX, is in the business of industrial catering and is not a Company normally engaged in the construction business the contract entered into between XXXX and XXXX is the type of contract described under subparagraph 2(a)of IT-92R . Although IT-92R restricts its discussion of Holdback Receivables to contractors of building, roads, dams and similar structures, it is our opinion that the principle of treating such receivables for tax purposes could be extended to manufacturers and others who provide goods and services under similar contracts. In our view, the essential factor in determining the taxability of the holdback receivables is whether or not the amount of holdback becomes payable. If the amount becomes payable in the year under consideration it is necessary that such amount is included in calculating the taxpayer's income under paragraph 12(l)(b) of the Income Tax Act. Paragraph 3 of IT-92R states that where the construction contracts provide for final payments to be made only when the architect or engineer has issued a certificate such amounts need not be included in income for tax purposes until the certificate is issued since such amounts are not yet receivable by the contractor.

In our view, the stand taken in the Interpretation Bulletin seems to be in line with the decision given in the Exchequer Court case of MNR v John Colford Contracting Co. Ltd. 60 DTC 1131 wherein Mr. Justice Kearney stated that in the absence of a statutory definition to the contrary "amount receivable" (as that phrase was used in old 85B(l)(b))should be interpreted as meaning an amount which the intended recipient has a clear legal though not necessarily immediate right to receive, and he concluded that holdbacks did not take on the quality of receivables until the issuance of the certificates.

In reviewing the contract between XXXX and XXXX it is our opinion that the XXXX holdback of the amount invoiced by XXXX will NOT be payable until such time as XXXXXXXX in its sole discretion deems appropriate provided that such amount must be paid by the latest of certain dates as described in clause 5(a)(iv)of the Agreement. Therefore, it would appear that until such time as the amount of the holdback becomes payable XXXX cannot be said to have a clear and legal entitlement to that amount. As such, it is our opinion that this amount should not be included in its income under paragraph 12(l)(b) of the Act.

We trust the above will be of assistance to you. Your files are enclosed herewith.

Chief Services, Public Utilities and Exempt Corporations Corporate Rulings Division Legislation Branch