CRA considers that a lump sum received on signing a 15-year supplier loyalty agreement is includible under s. 56.4 with no deferral available

CRA considered that a lump sum payment received from a major supplier for signing a 15-year “supplier loyalty agreement” would be includible in income when received under s. 56.4(2) on the grounds that the loyalty covenant was intended to restrict the way in which the taxpayer made its purchases (i.e., it was in respect of a “restrictive covenant”) – or, failing that, it would be included in the taxpayer’s income as an inducement under s. 12(1)(x). Either way, CRA considered that spreading the income inclusion over the 15-year term consistently with the accounting treatment “would be inconsistent with the provisions of the Act” (and added an inexplicable reference to this being prohibited by s. 18(1)(e), presumably for some reason other than basic confusion as to the difference between the issues of income and expense recognition).

CRA did not discuss Doteasy, which confirmed that Ellis Vision had found that "the paragraph 20(1)(m) reserve was available even though the amount might be included in income under [another section] so long as it was described in paragraph 12(1)(a)." Thus, provided the agreement to be loyal for the average length of a marriage is considered to be on account of future services, the s. 20(1)(m) reserve should be available even if the consideration is considered to be included in income under s. 56.4(2).

Neal Armstrong. Summaries of 2015-0618601E5 under s. 56.4(2), s. 12(1)(x) and s. 20(1)(m).