7 October 1990 Income Tax Severed Letter - Receivables in respect of Services

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.

XXX

This is in reply to your letter dated May 8, 1990, in which you requested our opinion regarding the application of paragraph 12(1)(b) of the Income Tax Act (the "Act"). You describe the following situation XXX

The facts in your letter appear to relate to a specific proposed transaction. Accordingly, as mentioned in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, your query should take the form of a request for an advance income tax ruling. Although we cannot provide confirmation with respect to the tax consequences of specific proposed transactions in response to a request for an opinion, we have set below our general comments on the matters you have raised.

Section 9 of the Act states that, subject to the specific rules contained in Part I, a taxpayer's income for a taxation year is his profit therefrom for the year. Paragraph 12(1)(b) of the act requires that any amount receivable by a taxpayer in respect of services rendered in the course of a business in a year, shall be included in computing the income of the taxpayer for the year notwithstanding that the amount or any part thereof is not due until a subsequent year. The intent of paragraph 12(1)(b) of the Act is to include in a taxpayer's income "receivables" in respect of services that would because of undue delay in billing, otherwise not be included in income under subsection 9(1) of the Act.

In MNR v. Colford Contracting Co. Ltd., [[1960] C.T.C. 178] 60 DTC 1131, affirmed by the Supreme Court of Canada [[1962] C.T.C. 546] 62 DTC 1338, the word "receivable" as it occurs in the Act was interpreted by the Exchequer Court, to mean an amount in respect of which the taxpayer has an absolute though not necessarily immediate right to receive it. That is, an amount receivable is an amount which is collectible notwithstanding that it is not yet due. Mr. Justice Kearney stated the principle of distinction as follows (at page 1135):

"In the absence of a statutory definition to the contrary, I think it is not enough that the so-called recipient have a precarious right to receive the amount in question, but he must have a clearly legal, though not necessarily immediate, right to receive it. A second meaning, as mentioned by Cameron J., is "to be received," and Eric L. Kohler, in A dictionary for Accountants, 1957 edition, p. 408, defines it as "collectible, whether or not due." These two definitions, I think, connote entitlement."

The decision of the Supreme Court in Maple Leaf Mills Limited vs. M.N.R., [[1976] C.T.C. 324] [1976] CTC 324 has also affirmed the test used in Colford Contracting, supra, to determine what constitutes a receivable for the purposes of paragraph 12(1)(b) of the Act, that is that there must exist an unconditional right to receive the amount. It also stipulated a second element, namely that there must exist a binding agreement between the parties fixing the amount (MNR v. Benaby Realties Ltd. [[1967] C.T.C. 418] [1967] CTC 418). This second element does not appear to be at issue in your situation, as the quantum of the amounts has been determined.

The question of whether a right to receive an amount in a particular situation is unconditional (as opposed to being contingent) is a question of act which can only be determined from a review of all the relevant terms of the contract between the parties. It should be noted however that there is an important difference between a term and a suspensive condition. In rendering its decision in the case of A.G. Rodgers Real Estate Limited v. M.N.R., [[1984] C.T.C. 2051] 1984, DTC 1043, the Tax Court of Canada made the following comment regarding the distinction between "term" and "suspensive condition" in a contract.

"... In substance, the term is the space of time during which the debtor cannot be required to make, and the creditor to receive, the payment of the debt. The term may be a future and certain event which defers the payment of the debt. The suspensive condition is the one which differs the obligation to pay until the condition is completed.

A term differs from a suspensive condition inasmuch as it does not suspend the obligation, but only delays the execution of it. The obligation, on suspensive condition, shall exist only if the condition is realized."

These above comments are provided in accordance with the guidelines described in paragraph 21 of Information Circular 70-6R2.