20 January 1995 Internal T.I. 9424657 - SUPPLIER'S REBATE

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:

Whether rebates received after year-end are taxable income in the year in which the rebates are earned or in the year in which they are received.

Position TAKEN:

In the year they are received.

Reasons FOR POSITION TAKEN:

Recognition of income is a question of law. Legal right to ascertainable amount is required. E5804.

			January 20, 1995

	CALGARY DISTRICT OFFICE					HEAD OFFICE
	Audit Division						Rulings Directorate
A. St-Amour
	Attention:  Sharon Schemenauer								(613) 957-8953

			7-942465

Supplier's Rebates
XXXXXXXXXX

This is in response to your memorandum of September 21, 1994, requesting our opinion with respect to the supplier's rebates received by XXXXXXXXXX as a participant of XXXXXXXXXX. We apologize for the delay in responding to your memorandum.

The facts as submitted are as follows:

XXXXXXXXXX

XXXXXXXXXX

Taxpayer position

XXXXXXXXXX indicates that the rebates received at the end of March and April are not considered for accounting and tax purposes as of December 31 because the amounts are not known at the date of the financial statements. They cannot be estimated because the calculations involve third party information not available to them. They also question the legal right to the rebates as of December 31, since the Participation Agreement stipulates that rebates are to be paid at the discretion of the Board of Directors.

District Office position

You are of the view that the rebates received in March and April should be included in income as of December 31 as a reduction to cost of goods sold, in accordance with generally accepted accounting principles ("GAAP") and subsection 9(1) of the Income Tax Act ("the Act"). You are of the view that a reasonable estimate can be made and there is assurance of collectibility of the rebate since rebates have always been received each year since XXXXXXXXXX.

Our comments

1)The issue is whether rebates received by XXXXXXXXXX after its year-end are taxable income in the year in which the rebates are earned or in the year in which they are received.

We are of the view that the accounting treatment is not always the proper way to record a transaction for the calculation of a taxpayer's taxable income. A determination must be made whether the amounts, as a matter of law, have the characteristics of income. As a matter of law, an amount is to be included in income if the taxpayer has an absolute right to the amount either immediately or at some time in the future (MNR v John Colford Contracting Co. Ltd., 60 DTC 1131 (confirmed be the Supreme Court 62 DTC 1338). Generally, amounts must be specifically ascertainable before they have the quality of income for tax purposes (MNR v. Benaby Realties Ltd. 67 DTC 5275 (SCC)). In John Colford, Kearney J., stated:

"In the absence of a statutory definition to the contrary, I think it is not enough that the so-called recipient have a precarious right to receive the amount in question, but he must have a clearly legal, though not necessarily immediate, right to receive it.."

XXXXXXXXXX

2)You have also questioned the tax treatment of these rebates by XXXXXXXXXX since it appears that they claim a deduction as of December 31 for the amounts paid after year end. Whether or not these amounts are deductible for tax purposes is a question of facts. A determination cannot be made in this particular case because the information is not available. However, we can provide the following general comments.

Pursuant to paragraph 18(1)(a) of the Act, an outlay or expense is not deductible except to the extent it was made or incurred for the purpose of gaining or producing income from a business or property. Paragraph 18(1)(e) provides that no deduction is allowed with respect to an amount as a reserve, a contingent liability or a sinking fund, except as expressly permitted by the Act.

For the purpose of paragraph 18(1)(e) it is most important that a liability and a reserve be distinguished when computing profit for the year. As stated in paragraph 9 of Interpretation Bulletin IT-215R, a liability is said to exist when a legal obligation to pay is present and certain and an amount is definite and ascertainable.

The courts have decided clearly that the computation of profit for income tax purposes is a question of law and that, although accounting principles and practices are relevant to the determination, they are not conclusive. Generally, the application of GAAP in the determination of a taxpayer's profit is to be allowed, unless the Act contains an express prohibition. The relevant prohibition is contained in paragraph 18(1)(e). Judge Cullen, in TNT Canada Inc. v The Queen, 88 DTC 6334 (FCTD) stated:

"In summary, the essential question is: was the actual amount (or any portion thereof) of the plaintiff's liability uncertain and unascertainable at the end of the 1980 taxation year? If so, then the amount must be considered a contingent liability and therefore not deductible under paragraph 18(1)(e) of the Act."

Judge Cullen then went on to cite Harlequin Enterprises Limited v The Queen, 74 DTC 6634 (FCTD) (appealed 77 DTC 5164 (FCA)), Cummings v. The Queen, 81 DTC 5207 (FCA), and Guay Ltee v MNR, 71 DTC 5423 (FCTD) (appealed 73 DTC 5373 (FCA); 75 DTC 5094(SCC) in stating at 6338 "... the case law is clear on the point that the facts of acceptability in accounting does not itself make the expenditures in question a proper deduction for tax purposes".

We trust the above comments will be of assistance to you. If you have any question do not hesitate to contact us.

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch