27 January 2001 External T.I. 9134415 F - "Received" - Paragraph 28(1)(a)

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.

     913441

     C. Tremblay

     (613) 952-1361

24(1)

Attention:  19(1)

January 27, 1992

Dear Sirs:

Re:   "Received" - Paragraph 28(1)(a) of the Income Tax Act (the "Act")

This is in reply to your letter of December 2, 1991, requesting our comments with respect to the interpretation of paragraph 28(1)(a) of the Act as it applies to the following hypothetical situations.  The hypothetical facts given are as follows:

1.     The taxpayer is in the business of farming.

2.     The taxpayer has recorded income in the past on the cash basis, in accordance with subsection 28(1) of the Act.

3.     

     24(1)

You give 4 examples where a) the note is not formalized into a note payable and bears interest, b) does not bear interest, c) is formalized into a non-interest bearing promissory note payable in 24(1), and d) is formalized into an interest bearing promissory note with payment of the note and accrued interest due at maturity in 24(1).

You seek our views regarding when the 24(1) and related interest (if, any) would be required to be included in the taxpayer's income.

The situations that are described appear to involve a series of actual proposed transactions.  It is not the Department's practice to give written opinions concerning proposed transactions, as indicated in Information Circular 70-6R.  Should you wish to request an advance ruling on these or other transactions which may be proposed, please refer to Information Circular 70-6R for the procedure to be followed.  Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which may be of some assistance.

Our Comments

When computing income using the "cash" method paragraph 28(1)(a) of the Act requires that amounts be included in income when received or when deemed by the Act to be received.  The meaning of the term received is not necessarily limited to those situations where the income was actually received in cash.  Received has a broader meaning, and as stated in paragraph 9 of Interpretation Bulletin IT-433, an amount may be said to have been received by the taxpayer at the time when, for example, it was received by a person authorized to receive it on behalf of the taxpayer, it was offset against an amount owing by the taxpayer, it was paid or transferred to a third party pursuant to the direction of or with the concurrence of the taxpayer (this  may be implicit) or a security or other right or a certificate of indebtedness or other evidence of indebtedness was received in payment or part payment of a pre-existing debt of an income nature. 

Although it is usually considered that the creditor has accepted an instrument as conditional payment or as evidence of indebtedness, in the appropriate circumstances the instrument may be accepted as absolute payment and the debtor will be considered to have paid the debt.  In IT-77R, for instance, it states that a security will be considered to be received in absolute settlement of a debt if the creditor accepts the security at the risk of its being dishonoured, with his only legal recourse being an action against the issuer for failure to honour the obligation.

Generally, however, the cash basis farmer would not have to report the income from the sale of cattle until such time as he or she received payment or is deemed by any section of the Act to have received payment.

A taxpayer who elects under section 28 of the Act to compute income from a farming business in accordance with the cash method will be allowed to use that method in respect of interest income directly related to such a  business (e.g.  interest on unpaid trade receivables).  Such a taxpayer is, however, subject to paragraph 12(1)(c) and to the rules in subsections 12(3) to (11) as may be applicable with respect to interest income from all other sources.                                           

Please note that the foregoing comments are only an expression of our opinion and do not constitute an advance income tax ruling.  Such opinion might vary in an actual fact situation.

We trust our comments will prove helpful.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental  Affairs Branch