31 October 1994 External T.I. 9421625 - INCOME RECOGNITION

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.

XXXXXXXXXX 942162

Attention: XXXXXXXXXX

October 31, 1994

Dear Sirs:

Re: Income Recognition on Manufacturing Projects in Process

This is in reply to your letter dated August 11, 1994 concerning the manufacture of XXXXXXXXXX on a made-to-order basis by your clients. The equipment is manufactured mainly on the clients' premises and are completed within 12 to 18 months from the date of commencement. Under the arrangement there are no formal terms with regard to ownership. For accounting purposes, a percentage of the income is included in computing income of your clients as each invoice is rendered to the customer. However, for tax purposes, you ask whether income from these projects should be recognized on the basis of each invoice issued (before or after completion), completion of a portion of the work or completion of the project as a whole.

The particular circumstances outlined in your letter appear to be actual transactions involving specific taxpayers. As mentioned in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, as amended by Special Release dated September 30, 1992, it is not the practice of this Department to provide opinions with respect to proposed transactions other than in the form of advance income tax rulings.

On the other hand, the tax consequences of completed transactions are best determined by our District Offices in the course of tax audits. This Directorate is therefore not in a position to give a definitive response to your inquiry. However, we are prepared to offer the following general comments which may be of some assistance. Unless as otherwise stated, all references to the Act are to the Income Tax Act.

We agree that Interpretation Bulletin IT-92R has no application in the circumstances described above. However, IT-170R may be of assistance as the situation concerns the manufacture of goods for sale or the provision of services.

Generally, the determination of income of a business for tax purposes is computed pursuant to section 9 of the Act. However, such determination is not necessarily based on generally accepted accounting principles. Rather, it is based on whether an amount received or receivable by a taxpayer has the quality of income, i.e., the right to the income is absolute and under no restriction, contractual or otherwise, as to its disposition, use or enjoyment. This is a question of fact to be determined in each case, especially where there are no specific terms as to entitlement and payments are being made by the customer to the manufacturer.

Paragraph 12(1)(b) of the Act requires that any "amount receivable" in respect of property sold by a taxpayer in the course of a business shall be included in computing income of the taxpayer. Paragraph 3 of IT-170R states that the taxable event in respect of property sold occurs on the date the sale price becomes receivable to the vendor. According to paragraph 5 of IT-170R, such amount would become receivable when the vendor has an absolute but not necessarily immediate right to be paid. Accordingly, for the purposes of subsection 9(1) or paragraph 12(1)(b) of the Act, it is our view that unless this requirement is met, an amount in respect of property sold or an amount that is received as an advance or deposit would not be brought into income solely on the basis of an invoice rendered, or on account of a portion of the work carried out. However, pursuant to paragraph 12(1)(b) of the Act, an amount that is on account of services rendered in the course of a business would be deemed to be an "amount receivable" on the day that an account was rendered in respect of such services.

Pursuant to paragraph 12(1)(a) of the Act, an amount received by a taxpayer (including an advance or deposit) in a year in the course of a business shall be included in computing income of the taxpayer for the year, where the amount otherwise may be regarded as not having been earned in the year. An amount may be considered not to have been earned in a year where the taxpayer does not have an absolute right to the amount in the year in the manner described above. An amount brought into income under paragraph 12(1)(a) of the Act would be subject to a reserve under paragraph 20(1)(m) of the Act, provided the requirements of that latter paragraph are met.

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

Yours truly,

for Director
Manufacturing Industries, Partnerships
and Trusts Division
Rulings Directorate
Policy and Legislation Branch