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.
August 25, 1994
NORTH YORK DISTRICT OFFICE HEAD OFFICE
G. Troy, Director Rulings Directorate
Attention: Konrad Karunaratne (613) 957-8953
Income Recognition - Short Term Contracts
This is in reply to your memorandum dated July 21, 1994 concerning the above-captioned subject.
Our understanding of the situation is as follows:
For such purposes the contractor entered into contracts (referred to in your submission as global contracts) that are made up of sub-contracts, segments or parts.
2.The contractor recognizes, for financial statement purposes, income computed under the percentage of completion method (the "progress method") and, for tax purposes, income under the "completion method".
3.It is your opinion that the contractor should include revenues into income upon completion of each so-called subcontract, segment or part by treating each as a separate contract. You request our opinion with regard to such treatment.
You forwarded copies of correspondence addressed to the contractor from two legal firms in which they expressed that although a contract not infrequently has two or more discrete parts or segments it properly should be regarded as a single composite or one total contract.
Based on our perusal of a copy of a contract (undated) entered into by the contractor and XXXXXXXXXX we agree with the opinions expressed by the legal firms, for the following reasons:
a)The contract was awarded on the basis of tendering information and a form of tender submitted by the contractor. In Article XXXXXXXXXX the contract indicates that such form of tender (including unit prices) and other information formed part of the contract documents referred to in the contract. Paragraph 1 of the contract states that
As well, the term "contract" is defined to include, among other things, the contract documents and the agreement to do the work by the contractor.
However, these were parts of the one contract which quoted a lump-sum contract price of $XXXXXXXXXX in respect of the contract as a whole, even though for tendering purposes such contract price was allocated among each segment of the work to be carried out under the contract.
c)Paragraph XXXXXXXXXX of the contract calls for monthly progress payments to be made for the estimated value, less holdbacks, of the work done and materials furnished by the contractor. Also, paragraph XXXXXXXXXX of the contract requires that release of holdbacks be made, among other things, on substantial completion of the contract rather than on the completion of segments of the contract. Accordingly, it is our view that certification by the engineer, for the purpose of progress payments and release of holdbacks by the owner, on completion or substantial completion of a segment of the contract would appear to be for convenience only between the parties.
Based on the above comments it is our conclusion that segments or parts of a contract, in and by themselves, are not agreements entered into separately from the contract of which they are a part. Also, in accordance with the terms of the contract, it is our view that the so-called subcontracts identified as XXXXXXXXXX as described in b) above would be such segments or parts of the contract entered into by the contractor and the owner.
Accordingly, based on your verbal confirmation that the global contracts are all completed within two years from the date of their commencement, we agree that the contractor may adopt the completion method to report income for tax purposes when such global contracts are completed.
We hope our comments will be helpful to you.
Manufacturing Industries, Partnerships
and Trusts Division
Policy and Legislation Branch
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