29 March 1995 Internal T.I. 9419557 - FEDERAL SALES TAX REFUND

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:

Sales Tax Refund received in respect of a prior year. Whether income inclusion is in prior year to which refunds relates to (on basis of the decision in the Johnson case, 94 DTC 6125), or whether income inclusion could be in current year?

Position TAKEN:

To be included in income in year received.

Reasons FOR POSITION TAKEN:

1. Subparagraph 12(1)(x)(iv) requires inclusion in income when received.

2. On the basis of the Supreme Court decisions in Vaughan, 70 DTC 6368 and in Benaby, 67 DTC 5275, the "relation back" principle does not apply. Therefore, the refund would be included in income in year received.

		March 29, 1995

	Doug Reeh	Headquarters
	Large Files Case Manager	Income Tax Rulings and
	Calgary Tax Services	Interpretations Directorate
W. P. Guglich
(613) 957-8953

		941955

XXXXXXXXXX
Federal Sales Tax ("FST") Refund

This is in reply to your memorandum dated July 22, 1994 concerning the tax treatment of the FST refund and the related legal and accounting fees.

You inform us that

XXXXXXXXXX

XXXXXXXXXX recorded the interest as income in the 1993 taxation year. On the basis of the decision in the Johnson case 94 DTC 6125, XXXXXXXXXX considers the $XXXXXXXXXX FST refund to be income for the December 21, 1986 to December 21, 1988 period (these years are now statute barred).

You requested we address the following issues:

1.Is there any way you can currently attempt to include the refund as income in the current year or is it to be included in the statute barred years?

2.Are the legal and accounting fees deductible in the current year?

3.Could the interest be partially included in the statute barred years as it was partially earned then?

OUR VIEWS:

XXXXXXXXXX

In the current case involving XXXXXXXXXX, it is our view that the refund of $XXXXXXXXXX of FST should be included in income in the taxation year the refund was received by XXXXXXXXXX for the following reasons:

1.(a) Paragraph 12(1)(x) applies in that the FST refund can be considered an amount received by XXXXXXXXXX, in the course of earning income from a business, from a government, as a reimbursement in respect of an expense or outlay. The Department considers federal sales tax to be an expense (see paragraph 2 of Information Circular 77-11). The Tax Review Board in Horton Steel Works Ltd. v. M.N.R. 72 DTC 1123 stated "Sales Tax has always been recognized as a business expense".

(b) The Supreme Court in Benaby Realties Limited v. The Queen, 67 DTC 5275 and in Vaughan Construction Company Limited v. The Queen, 70 DTC 6368 held that the "relation back" principle did not apply and that the amounts received were required to be included in income in the year the amounts were ascertained (received). In both of these cases, property was expropriated in a prior year and the amount of compensation was ascertained in a subsequent year. However, the Supreme Court held that the income inclusion was not to be related back to the year of expropriation but the income inclusion was to be in the year the amount of compensation was ascertained. In our view this "no relation back" principle should also apply to FST refunds. The "no relation back" principle was not argued in the Johnson case.

2.Since GAAP requires a reasonable and proper matching of costs with revenue, it is our view that the accounting and legal fees relating to the FST refund are deductible in the same period the refund is included in income.

3.Paragraph 12(1)(c) of the Act requires a taxpayer to include in computing income for the year any amount of interest received or receivable in the year (depending on the method regularly followed by the taxpayer in computing the taxpayers profit). Consequently, it would depend on the method regularly followed by XXXXXXXXXX whether the interest is reported on the cash or accrual method. Interest would only become receivable when the right to receive the interest has been ascertained (before such ascertainment no amount of interest is receivable).

We apologize for the delay in responding to your inquiry.

for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch