25 August 1994 External T.I. 9413085 - RECOGNITION OF INCOME FROM SERVICES

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

PRINCIPAL ISSUE:

Whether the revenue from the performance of services should be recognized at the point in time when the services are completed or when it is possible to render the account?

Position TAKEN:

When the legal right to receive the amount arises.

Reasons FOR POSITION TAKEN:

Jurisprudence.

			5-941308
XXXXXXXXXX				L. Roy

Attention: XXXXXXXXXX

August 25, 1994

Dear Sir\Madam:

RE: Recognition of income from services

This is in reply to your letter of April 22, 1994 wherein you requested our opinion as to when the revenue from the performance of services should be recognized in the circumstances outlined in your letter.

All references to statute are to the Income Tax Act S.C. 1970-71-72, c.63, as amended, consolidated to June 10, 1993 (the "Act").

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2, dated September 28, 1990. Where the particular transactions are completed, the enquiry should be addressed to the relevant district taxation office. The following comments are, therefore, of a general nature only, and are not binding on the Department.

Paragraph 12(1)(b) of the Act requires that any amount receivable by a taxpayer in respect of services rendered in the course of a business in a year, shall be included in computing the income of the taxpayer for the year notwithstanding that the amount or any part thereof is not due until a subsequent year.

In order to apply paragraph 12(1)(b) of the Act it must be established that the amount is "receivable". In that respect, the Courts have established two elements that must be present for an amount to be receivable. The first element is that the taxpayer has a right to receive an amount and the second element requires that there is a binding agreement between the parties or a judgment fixing the amount.

A right to receive an amount exists when the taxpayer has an absolute and unconditional right, though not necessarily immediate, to receive the amount. An absolute and unconditional right exists when all suspensive conditions of a contract are met. A suspensive condition is an event which suspends the realization of the contract until such a condition is fulfilled.

The question of whether a right to receive an amount in a particular situation is absolute and unconditional is a question of fact which can only be determined from a review of all the relevant terms of the contract between the parties.

In the situation you have described, it is our view that the income could be recognized at a date later than the date of completion of the services.

We trust the above comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch