14 April 1983 Income Tax Severed Letter

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.

TO-A Mr. J.C. Lavigne                 FROM-DE Corporate Rulings Directorate
Director                               T. Harris
Appeals & Referrals Division       995-1723

ATTENTION P. Bush

RE: 1979 Notice of Objection

This is in response to your memorandum dated December 7, 1982 regarding XXXX Notice of Objection relating to the inclusion of storage (lay-away) sales in its income for the 1979 taxation year.

Following our review of the information available, we agree with your view that the re-assessments to include the storage sales in XXXX 1979 income should be confirmed as it is our opinion that a sale occurs at the time the agreement is executed. The factors in support of our contention are as follows:

(i) paragraph 3 of IT-170R states that "the taxable event under paragraph 12(l)(b) in respect of the sale of property can be stated as occurring on the date that the sale price becomes receivable to the vendor". As outlined in paragraph 5 of IT-170R an amount becomes receivable "when the vendor has an absolute but not necessarily immediate right to be paid". With respect to XXXX storage sales it is our view that XXXX has a receivable as of the date he sales contract is signed. According to paragraph 7 of XXXX standard sales contract:

"The Purchaser hereby agrees that in the event of his or her refusal to accept delivery of the subject matter of this sale, any amount paid as a deposit or otherwise may be retained at the option of the Seller as liquidated damages, and further action may be taken for additional damages."

"This paragraph recognizes the transaction as a sale and confirms XXXX right t'o sue for damages should the purchaser refuse to accept delivery of the goods. This-right is further enhanced for those storage sales where XXXX has placed the following stamp on the contracts:

"This merchandise is being held especially for you and is not subject to cancellation."

(ii) The Ontario Retail Sales Tax Act (R.S.M. 1980, C. 454) requires that the purchaser of specified taxable goods pay the sales tax "at the time of sale" and that the sales tax he remitted to the Treasurer of Ontario the following month. According to audit working paner B7-a, XXXX collects this sales tax at the time its storage sales contract's are executed.

The arguments put forth by XXXX representatives to support their contention that storage sales do not give rise to an amount receivable are as follows:

(i) the deposit may be returned to the customer on his request. In fact, a large number of "layaways" are cancelled;

(ii) the benefits and the risks of ownership of the goods have not passed from seller to buyer;

(iii) all the major activities connected with the business transaction have not been completed at the time a deposit is received. In fact, in some cases, the goods may not even exist but may have to be ordered;

(iv) finance companies will not discount layaway paner. If revenue can be demonstrated with certainty, it gives rise to an asset that can be pledged as security. Since this is not the case, it would seem that no revenue should he recognized.

The taxpayer's first argument is not supported by the wording of the contract. As noted previously, pursuant to paragraph 7 of the contract, XXXX is under no legal obligation to return a purchaser's deposit and lins the right to sue should a purchaser refuse to accent delivery of the goods. Consequently, the return of deposits or cancellation of a storage sale would represent a goodwill gesture on behalf of XXXX which is not sufficient to warrant deferral of revenue recognition until the time of delivery.

The taxpayers second argument is also not supported by the wording of the contract. Although the purchaser under a storage sale may not have, possession and use of the goods, paragraph 3 of the contract indicate., that the purchaser is legally at risk with respect to the goods, i.e. "Purchaser will keep property insured at all times against risk of destruction or damage by fire and perils commonly included within the definition of extended coverage or will indemnify Seller against loss from any such cause." Again, XXXX may not enforce this provision as a measure of goodwill, however, in the event that any goods sold as a storage sale are damaged or stolen, such goods would legally be at the risk of the purchaser.

For most storage sales the only activities required to complete the transaction are delivery of the' goods and payment of the balance of the sale price. These se activities Pnerall,y are not required to bind a contract and, consequently, would not constitute a "condition precedent" as described in pare ravhs 5 and 6 of IT-170R . Should either party fail to satisfy its obligations under the contract, the offending party would be liable to a legal action instituted by the other party to the transaction.

With respect to goods that have only been ordered by XXXX and may not exist at the time of signing the agreement, it is our understanding that these "sales" have not been included in XXXX income (see audit working paper B7-a). Further, pursuant to subsections 5(1) and (2) of the Ontario Sale of Goods Act, R.S.O. 1980, C. 462, as quoted below, the fact that the goods do not exist is not necessarily relevant where they are subject to a binding agreement.

5. - (1) a Contract for the sale of goods of the value of $40 or more is not enforceable by action unless the buyer accepts part of the goods so sold and actually receives them, or gives something in earnest to bind the contract or in part payment, or unless some note or memorandum in writing of the contract is made and signed by the party to be charged or his agent in that behalf.

(2) This section applies to every such contract notwithstanding that the goods may be intended to be delivered at some future time, or may not at the time of the contract be actually made, procured, or provided, or fit or ready for delivery, or some act may be requisite for the making or completing thereof, or rendering them fit for delivery

XXXX.

We should caution that our comments relating to XXXX storage sales and those contained in our memorandum of February 16, 1981 were based on our review of the rights of the buyers and sellers pursuant to the specific contracts examined. These comments should not necessarily be applied with respect to all plans which are called "lay-away".

XXXX.

We trust these comments will be of assistance.

Director General Corporate Rulings Directorate Legislation Branch