23 June 2000 External T.I. 1999-0011445 - inclusions & deductions in/from income

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: Contractor using percentage of completion method to report income changes to completed contract method in the following year. Can they use subsection 248(28) to avoid reporting the amount of income previously reported under the percentage of completion method that is being included again under the completed contract basis in the following year?

Position:

Reasons:

									1999-001144
XXXXXXXXXX 								S. Tevlin
(613) 957-2093
Attention:  XXXXXXXXXX 

June 23, 2000

Dear Sirs:

Re: Contractors Income

We are writing in response to your letter dated September 17, 1999 wherein you requested our opinion with respect to the reporting of income for tax purposes by a contractor. The contractor will, for financial statement reporting purposes, convert from the percentage of completion method to the completed contract method which will result in certain revenues previously recognized being recognized again.

In particular you have asked whether subsection 248(28) of the Income Tax Act (the "Act") would apply to ensure that revenue previously reported by a contractor under the percentage of completion method will not be included in income again in a following year when the taxpayer converts to the completed contract method, subsequent to a change of control.

In this regard we offer the following general comments:

Subsection 248(28) of the Act generally provides that, unless a contrary intention is evident, no provision should be interpreted to require an amount to be included or deducted more than once in computing a taxpayer's income. In our opinion this means that the provision is aimed at providing relief in situations where two provisions of the Act may equally apply to require the inclusion of an amount in income or permit a deduction from income.

The use of the limiting phrase "subject to this Part" in subsection 9(1) of the Act means that subsection 9(1) must defer to other provisions of Part I where other such provisions dictate that income from a business is to be calculated on some basis other than profit.

In the situation described, the same income would be reported twice pursuant to section 9 of the Act under both methods of reporting contracting income. As such we do not see that subsection 248(28) of the Act would have application to this particular fact situation.

The principles established by the Supreme Court in Canderel Limited v. The Queen, 98 DTC 6100 S.C., regarding the computation of income were summarized as follows on page 6110:

"(1) The determination of profit is a question of law.

(2) The profit of a business for a taxation year is to be determined by setting against the revenues from the business for that year the expenses incurred in earning said income.

(3) In seeking to ascertain profit the goal is to obtain an accurate picture of the taxpayer's profit for the given year.

(4) In ascertaining profit the taxpayer is free to adopt any method which is consistent with:

(a) the provisions of the Income Tax Act;

(b) established case law principles or "rules of law"; and

(c) well-accepted business principles.

(5) Well-accepted business principles, which include but are not limited to the formal codification found in G.A.A.P., are not rules of law but interpretative aids. To the extent that they may influence the calculation of income, they will do so only on a case-by-case basis, depending on the facts of the taxpayer's financial situation.

(6) On reassessment, once the taxpayer has shown that he has provided an accurate picture of income for the year, which is consistent with the Act, the case law, and well-accepted business principles, the onus shifts to the Minister to show either that the figure provided does not represent an accurate picture, or that another method of computation would provide a more accurate picture."

Canderel sets out a methodology for determining income under section 9 of the Act which may be relevant to some factual situations.

Subject to the comments in paragraph 13 of Interpretation Bulletin IT-9IR2 it is our opinion that considering the court's comments in Canderel it would be reasonable to permit a T2(S)(1) adjustment in year 2 to reduce the year 2 contracting income, reported under the completed contract method, by the amount of income previously reported in year 1 under the percentage of completion method, for the purposes of computing profit in year 2 under section 9 of the Act. As such, subsection 248(28) of the Act would have no application.

The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R3, and are not binding on the Canada Customs and Revenue Agency.

We trust our comments will be of assistance to you.

Yours truly,

Paul Lynch
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch