22 November 1989 Ministerial Correspondence 74234 F - Revenue Recognition

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.

Subject:  24(1) Revenue Recognition

24(1)

District Office Position

It is your view that commissions become receivable under paragraph 12(1)(b) at the time revenue is recognized under the written method.  Since both parties to the contract are bound by it, the real estate broker has, in your view, a clearly legal, though not necessarily immediate, right to receive the commission.  This conclusion is made notwithstanding the case of M.N.R. v. John Colford Contracting Co. Ltd. (60 DTC 1338) in that the Taxpayer has more than a 'precarious right to receive the amount in question. 

Taxpayer's Position

The Taxpayer's representative has referred to the Colford case and the case of H.W. Liebig & Co. v Leading Investments Ltd. (1986) (25 DLR (4th) 161) as support for the position that a real estate commission is not receivable under paragraph 12(1)(b) with respect to an unclosed sale.

In the Liebig decision rendered by the Supreme Court of Canada, the prospective vendor entered into an agreement with a broker who subsequently obtained an offer from a prospective purchaser.  When the purchaser was unable to complete the sale, the broker claimed that, notwithstanding that event, it was entitled to its commission.

In deciding that the broker was not entitled to a commission the Supreme Court commented that a broker's commission will be payable only out of the sale proceeds ant that it would only be in most unusual circumstances that a court would conclude that a vendor and a broker intended that the vendor would be liable to pay the commission if the purchaser introduced by the broker failed to complete the sale.

In relating the circumstances of this case to the principle set out in the Colford case, it is the representative's view that a real estate commission only becomes receivable by a broker at the time of closing for the purposes of paragraph 12(1)(b). 

The Taxpayer's representatives has also addressed the issue of whether an advice, which is sent a few weeks prior to closing to the person who will pay the commission represents an account rendered for the purposes of the deeming provisions in subparagraphs 12(1)(b)(i) and (ii).  As support the position that no account has been rendered by virtue of that event, reference was made to the definitions of "account rendered" and "account stated" in Black's Law Dictionary which are respectively set out below:

     An account made out by the creditor and presented to the debtor for his examination and acceptance.  When accepted, it becomes an account stated. (emphasis added)

     ...where there have been transactions between debtor and creditor resulting in the creation of matured debts and the parties by agreement compute a balance which the debtor promises to accept in full payment for the items of account.

Rulings Position

In view of the Liebig case, it is our view that in the absence of a specific clause in the listing agreement providing otherwise the Taxpayer is only entitled to receive a commission upon the happening of a specified event (i.e. a sale closes).  Accordingly, notwithstanding that a purchaser and a vendor may have entered into a binding agreement, it is our view that the real estate agent would only have a clear legal right to receive the commission at the time of the closing consistent with comments in paragraph 10 of IT-170R in which it is indicated that the closing date is normally the time that the vendor is entitled to the sales price of real property.

As a result of the foregoing comments, we have not addressed the issue of whether we would require a company to use the written method for tax purposes if the closed method was used for both financial statement and tax purposes. 

With respect to the deeming provisions of subparagraphs 12(1)(b)(i) and (ii), it is our view that as a result of the definitions of "account rendered" and "account stated" from Black's Law Dictionary, the courts would not regard a commission as being deemed to be receivable by virtue of an advice being mailed.

Although paragraph 12(1)(b) is not applicable to commissions earned which relate to unclosed sales, an additional amount to be included in income for a year even though it is not receivable.  21(1)(b).

With respect to those expenses, you have indicated that hey are normally not paid until after closing and that the payment thereof is not made unless the relevant sale closes. In relation to these circumstances, it was held in the Guay case (73 DTC 5373) that an expense is incurred for the purposes of paragraph 18(1)(a) when a taxpayer has a clearly legal, though not necessarily immediate, obligation to pay an amount .  Based on this principle and the information provided to us, it is our view that the expenses in question would follow that the Taxpayer should be allowed to use the closed method for tax purposes.

We regret the delay in replying.

Chief Services, Public Utilities & Exempt Corporations Section Specialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch