28 November 1995 External T.I. 9523545 - HOLDBACKS ON CONTRACTS FOR SERVICE

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.

	                	5-952354
XXXXXXXXXX         	A. Seidel
(613) 957-8974

Attention: XXXXXXXXXX

November 28, 1995

Dear Sirs:

Re: Holdbacks on Contract for Services

This is in reply to your letter dated August 2, 1995, wherein you requested our views concerning the income tax treatment for amounts holdback from the payment for services provided under a contract for services for the reclamation and site restoration resulting from oil and gas activity.

We note from the description of the facts that the matter in all probability relates to a completed transaction. When a requested interpretation relates to a completed transaction, it should be referred to the taxpayer's local tax services office for their consideration. However, we can provide you with the following general comments, which should not be construed as confirming the income tax consequences or implications with respect to any particular situation.

Our Comments

In general terms, the amount of holdback from the payment of a progress billing under the terms of a contract for services to reclaim and restore an oil and gas site is considered to be income in the year the amount is received or becomes receivable. The determination of income will include consideration of whether the amount received or receivable has the quality of income, for example, whether the contractor's right to it 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.

Reclamation and site restoration work is not normally considered to be "the construction of a building, road, dam, bridge or similar structure" that is mentioned in paragraph 1 of IT-92R2 entitled Income of Contractors. In determining when the holdback for reclamation or site restoration becomes receivable, we would wish to consider the terms of the contract under which the services were provided and the particulars of the requirement for the reclamation certificate which must be obtained from the environmental authority.

Where amounts are received in a taxation year in respect of reclamation or site restoration to be performed in a subsequent taxation year, the amount received would have to be included in income in the taxation year that it is received by virtue of paragraph 12(1)(a) of the Income Tax Act, but a reserve under paragraph 20(1)(m) of the Act may be available.

The foregoing comments represent our general views on the subject matter. As indicated in paragraph 21 of Information Circular 70-6R2, the above comments do not constitute an advance income tax ruling and accordingly are not binding on Revenue Canada.

Yours truly,

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