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 Issues:
Completion method - contract not completed within two years
Position TAKEN:
If the contract would be completed within 24 months from its commencement, but due to unforeseeable and uncontrollable circumstances the completion date was not until after the 2-year period, the contractor should continue to use the completion method to report the income from this contract.
Reasons FOR POSITION TAKEN:
Position taken before.
XXXXXXXXXX 5-941406
Attention: XXXXXXXXXX
June 21, 1994
Dear Sirs:
Re: Subsections 9(1) and 20(1)(m) of the Income Tax Act
We are replying to your letter dated May 18, 1994 wherein you requested an interpretation concerning the timing of the recognition of business income of a contractor using the completion method. More specifically, you are wondering if a contractor can report its income under the completion method where a contract is not terminated after two years as it was planned to.
As explained in Information Circular 70-6R2, it is not the Department's practice to comment on proposed transactions other than in the form of advance income tax rulings. Taxpayers seriously contemplating proposed transactions are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Should your situation involve completed transactions, you should submit all relevant facts and documentation to the appropriate taxation district office for their views. We are therefore not in a position to give you a definite response as to the application of the provisions of the Act. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation.
Generally, where a contractor reasonably estimated that a contract would be completed within 24 months from its commencement, but due to unforeseeable and uncontrollable circumstances such as labour problems, unusual weather, etc., the completion date was not until after the 2-year period, it is our view that the contractor should continue to use the completion method to report the income from this contract.
Paragraph 12 of IT-92R2 indicates that additions to a job requiring extra work to be performed which will postpone completion of the job from one taxation year to a later one should be treated as a separate contract and, generally, the completion method may still be used for the original contract.
However, in our opinion, if the original contract is written in such a way that it will be finished in less than two years but a change order or a series of change orders are made which are not treated as separate contracts and which cause the original contract to extend for more than two years, the Department may challenge the use of the completion method for the contract and may require the progress method to be used for the entire duration of the contract. This would be a question of fact to be determined after a review of all the pertinent facts.
Each alternative mentioned above might apply to your specific situation depending upon all the relevant facts and circumstances related to your case.
Unless as otherwise stated 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 above comments are an expression of opinion only and, as explained in paragraph 21 of Information Circular 70-6R2, are not binding on the Department.
We trust that these comments will be of assistance to you.
Yours truly,
for Acting Director
Manufacturing Industries,
Partnerships and Trusts Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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