23 July 1996 External T.I. 9615915 - TIMING OF REVENUE RECOGNITION S

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:

The timing of the recognition of revenue and expenses in that segment of the service industry where services is performed upon the property of the client.

Position:

Revenue is recognized at the time the performance of the service contract is billed or able to be billed

Reasons:

The Department's position essentially coincides with the CICA recommended treatment of revenue and expense recognition.

									961591
XXXXXXXXXX							J.A. Szeszycki
(613) 957-2135

Attention: XXXXXXXXXX

July 23, 1996

Dear Sirs:

Re: Timing of Recognition of Revenue

This is in reply to your letter of April 17, 1996, and further to our telephone conversation (Szeszycki/XXXXXXXXXX) of June 12, in which you requested our views on the question of when revenues are recognized by a business in circumstances where the business provides some type of services with respect to the property of another person.

In your letter you have described three different stages in the completion of a service contract in the context of a business such as a repair shop or dry cleaners:

1.a service has been commenced but is not yet complete,

2.the service is complete but the property has not been picked up or otherwise returned to the client requesting the service, and

3.the requested service on the property has been completed and the property returned to the client.

Income (or loss) from a business is computed under the rules set out in subdivision b of Division B of the Income Tax Act (the "Act"). Specifically, paragraph 12(1)(b) of the Act provides generally that amounts become receivable (and recognized as income) on the day the account for the service is rendered, or would have been rendered if there were no undue delay in rendering the account. In addition, paragraph 12(1)(a) of the Act requires the inclusion in income of amounts received on account of services yet to be rendered.

You note that with respect to the scenario #3, if the contract has been completed and the goods returned within the fiscal year, it is clear that the revenues will be recognized in that fiscal year.

In general, the Department takes the view that revenues in respect of service contracts are recognized when the fee for the service is billed or able to be billed. Thus, in the second scenario, when the service has been completed but the client's property has not yet been returned to him or her, the revenue would be recognized in the fiscal year in which the service was performed, as long as there is a reasonable expectation that the amount is collectible. If the performance on the contract has not reached a stage where the client can be billed for the work done, then the revenue should not be recognized.

In the first scenario, no amount is included in income for tax purposes except for amounts described in paragraph 12(1)(a) of the Act. In such cases a taxpayer is likely entitled to a reserve under paragraph 20(1)(m) of the Act.

In the context described above, the recommendations of the CICA are normally followed with respect to the matching of expenses with related revenue in the period in which the revenue is recognized unless the treatment of a particular expenditure is treated distinctly by a specific provision of the Act.

We trust our comments will be of assistance to you.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch