Incurring of Expense


Fédération des Caisses Populaires Desjardins de Montréal v. Canada, 2002 DTC 7413, 2001 FCA 27

The employees of the taxpayer earned vacation leave during a reference period running from May 1 to April 30 of each year. The Minister assessed on the basis that because premiums were required to be contributed by the taxpayer under statutory benefits legislation (and, in some cases, to a private pension plan and a private group insurance plan) only at the time the vacation pay was paid, the corresponding expense for such premiums was not incurred by the taxpayer until the year of payment of the vacation pay.

In finding that the premiums and contributions were deductible on an accrual basis, Desjardins J.A. found that there was an obligation for the premiums and contributions at the time the vacation leave was earned notwithstanding that the time at which premiums or contributions would be required to be paid was uncertain. In particular, the obligation was not one with a suspensive condition.

Wawang Forest Products Ltd. v. The Queen, 2001 DTC 5212, 2001 FCA 80

If the taxpayer paid a logging contractor in full upon delivery to it of cut wood, it would be subject to liability to the workers' compensation board to the extent of unpaid workers' compensation contributions of the contractor. Accordingly, pursuant to terms in its contracts with the contractors, the taxpayer withheld from the payments made to them amounts (e.g., $0.50 per metric tonne of cut wood) that were estimated to be at least equal to the contribution liabilities of the contractors.

Reassessments that treated the portions of contract payments that had been held back as not being deductible until paid, were ordered to be reversed. Sharlow J.A. noted (at para. 9) that:

Generally, a taxpayer incurs an expense when it has a legal obligation to pay a sum of money. In most situations, the legal obligation exists upon the fulfilment of the contractual obligations to which the payment relates.

Further, she noted that a "contingent liability" cannot be an expense "incurred" within the meaning of s. 18(1)(a), and stated (at para. 16):

the correct question to ask, in determining whether a legal obligation is contingent at a particular point in time, is whether the legal obligation has come into existence at that time, or whether no obligation will come into existence until the occurrence of an event that may not occur.

Applying theses principles, she found that a legal obligation to pay the full contract amounts came into existence when the contractual obligation (delivery of wood) had been performed. Before noting the evidence that in some cases contractors never claimed the holdback amounts, she stated (at para. 15) that "an obligation to pay a certain amount does not become a contingent obligation merely because events may occur that result in a reduction in the quantum of the liability", and later also indicated (at para. 30) that (notwithstanding statements of Desjardins J.A. in the Newfoundland Light case to the contrary), a "legal obligation to pay an amount may exist even if there is some risk that the actual payment may be set off against potential counter claims".

Words and Phrases
contingent liability
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(e) potential for holdback amounts not to be claimed did not render them contingent 229

Buck Consultants Ltd. v. Canada, 2000 DTC 6015 (FCA)

The taxpayer sought to deduct during a rent-free period a portion of the rent payments that would become payable for subsequent rental periods. The Court applied The Queen v. Burnco Industries Ltd., 84 DTC 6348, to find that no such deduction was permitted because the taxpayer had no obligation to pay any rent during the rent-free period.

Canada v. Robinson, 98 DTC 6232 (FCA)

payments made from co-owners to partnership of same individuals were non-deductible payments to themselves

A medical partnership comprised of 18 doctors leased its medical premises from a nominee corporation holding for a co-ownership of the doctors. The co-ownership paid a tenant inducement payment to the partnership, which it treated as a capital receipt but which was deducted by the co-owners on a pro rata basis over a period of 10 years . In finding that these payments were non-deductible, Robertson JA stated (at pp. 6235-6236):

In support of the proposition that a payment to oneself cannot give rise to a tax deduction, the Minister could have also relied on the common law rule against contracting with one's self. …

[T]he fact is that the same eighteen persons who formed the Partnership were the very same persons who comprised the Co-Tenancy. … [T]he agreement to pay the tenant inducement payment of $1.2 million was of no legal consequence and.. it cannot be considered an outlay or expense made for the purpose of gaining or producing income… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 - Subsection 96(1) - Paragraph 96(1)(a) doctors who leased their co-owned property to their professional partnership paid tenant inducement payment to themselves (no expense) 338

Placer Dome Inc. v. The Queen, 91 DTC 5261 (FCTD), rev'd 92 DTC 6402 (FCA)

When an employee of the taxpayer with more than one year's service elected to contribute up to 6% of his salary for the year to a trustee who was appointed to administer a stock purchase plan for the benefit of employees, the taxpayer made a contribution to the trustee equal to 1/2 of the employee contribution. On a monthly basis the trustee used the funds received by it first to purchase shares of employee members of the plan who wished to sell their shares, and used the balance, if any, to purchase shares from treasury, in both cases, at market prices. An employee could direct the trustee to give delivery of his shares or the cash proceeds thereof.

The amounts paid by the taxpayer to the trustee were part of the employees' remuneration package, and were currently deductible.

Her Majesty The Queen v. Nomad Sand and Gravel Limited, 91 DTC 5032, [1991] 1 CTC 60 (FCA)

The operator of a sand and gravel pit was obligated under the Pits and Quarries Control Act to pay to the Ontario government a levy of 2¢ per ton of material extracted from the pit as a deposit to be forfeited if a prescribed rehabilitation program was not carried out. In finding that the payments were not deductible, Urie J.A. stated (p. 5035):

"They do not have the characteristic of deductible expenses for tax purposes, in that they are not made once and for all, without recourse. Rather they are payments which may be refunded in whole or in part ..."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Accounting Principles 91

The Queen v. Ken & Ray's Collins Bay Supermarket Ltd., 75 DTC 5346, [1975] CTC 504 (FCTD)

gratuitous bonus

In respect of its 1969 and 1970 taxation years the taxpayer deducted management bonuses whose quantum was not ascertained until after the end of the taxation year and which, due in part to a reduction in the taxpayer's profitability, were not paid. Kerr, J. held that in order for the taxpayer to be considered to have "incurred" an expense in the year it must have obligated itself in the year to pay the bonuses. Instead, "the decision to grant bonuses was gratuitous".

Aluminium Co. of Canada Ltd. v. The Queen, 74 DTC 6408, [1974] CTC 471 (FCTD)

voluntary increase to payments for foreign tax purposes were deductible

Voluntary adjustments to the price of aluminium previously purchased by the taxpayer from its Jamaican subsidiary, which were made in order to placate Jamaican taxing officials, were deductible. "The authorities clearly indicate that an expenditure made as a 'gift' or as a matter of commercial morality will be allowed."

J.L. Guay Ltée v. MNR, 71 DTC 5423, [1971] CTC 686 (FCTD), aff'd 73 DTC 5374, [1973] CTC 506 (FCA), aff'd 75 DTC 5094, [1975] CTC 97 (SCC)

A general building contractor in accordance with the terms of its contracts with its subcontractors withheld 10% of the amounts invoiced on a monthly basis to it by its subcontractors. The amounts withheld became due 35 days after a completion certificate was issued by the architect. Noel, A.C.J. stated that the practice of the taxpayer in deducting amounts which were not due until a subsequent taxation year was "contrary to the rule that an expenditure may only be deducted from income for the period in which it was made".

Time Motors Limited v. Minister of National Revenue, 69 DTC 5149, [1969] CTC 190, [1969] S.C.R. 501

The taxpayer, which was a used car dealer, issued credit notes in partial payments of used cars acquired for resale. The notes were not transferrable, were valid only within a stated period of time (generally one or two years) and were good only for the purchase of a car of the taxpayer of not less than a stated value. Pigeon J. found that the issuance of the credit notes gave rise to an immediate enforceable obligation against the taxpayer notwithstanding that the merchandise to be obtained by virtue of a credit note was not specified. Accordingly, the credit notes were part of the cost of goods purchased by the taxpayer.

Rossmor Auto Supply Ltd. v. MNR, 62 DTC 1080, [1962] CTC 123 (Ex. Ct.)

The taxpayer made an interest-bearing loan of $50,000 to some customers (two related trucking companies) in consideration inter alia for their agreement to purchase all their tires and tubes from the taxpayer. Four years later, the taxpayer wrote off the uncollected balance of $28,846 of the loan in its accounts.

Thorson P. found that even if the loan otherwise would have met the requirements of s. 12(1)(a) of the 1952 Act, the amount of the write-off was not deductible as it did not represent an outlay or expense that was made or incurred in the year of the write-off.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(p) - Subparagraph 20(1)(p)(ii) interest-bearing loans to tire customers 100

See Also

Lewski v Commissioner of Taxation, [2017] FCAFC 145

obligation to pay purchase price was incurred on agreement date rather than subsequent closing

On June 30, 1999, a trust of which the taxpayer was a beneficiary had a 40% (later reduced to 2%) interest in a syndicate (that entered into an agreement to purchase an aged care facility in consideration for a “Settlement Amount” of $1.74 million to be paid on the settlement date (being the date of completion of a contemporaneous purchase of the business at the facility, slated to be October 31, 1999), with provision being made for further post-settlement amounts totalling $14.5 million. S. 8-1 of the Income Tax Assessment Act 1997 (Cth) provided:

You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

The Court referred inter alia to the statement in Commissioner of Taxation v Raymor (NSW) Pty Ltd (1990) 24 FCR 90 (at 101) that:

Once … it is appreciated that an outgoing may be deductible notwithstanding that it may be defeasible, there can be no logical reason why an outgoing pursuant to a contract may not be deductible notwithstanding that the ultimate price payable upon delivery of the goods the subject of a contract may be varied upwards or downwards to reflect the increased cost of the goods.

In finding that the trust’s share of the Settlement Amount was incurred by it on June 30, 1999, the Court stated (at paras. 103, 110):

[T]he Tribunal [below] relied on the fact that, under the Contract of Sale, the Glendale Property Syndicate was entitled to terminate the contract if an insolvency event occurred in relation to [the purchaser] as a basis for concluding that “it was not known whether the Contract of Sale would proceed” …. However, the cases discussed above do not suggest that, without more, this type of contingency is enough to conclude that an outgoing is not incurred upon execution of a contract. …

Neither approval [by the Department of Health and Aged Care] of the Purchaser as an Approved Provider nor approval of the transfer of the Approved Places from Prime Life Corporation to the Purchaser was a condition for payment of the balance of the purchase price. The obligation to pay the balance of the purchase price was not expressed to be conditional upon these matters.

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) an alternate resolution that the taxpayer was not entitled to an income distribution if Revenue denied a trust deduction made her entitlement contingent and non-includible 374
Tax Topics - Income Tax Act - Section 248 - Subsection 248(8) - Paragraph 248(8)(b) since the taxpayer through her husband as agent had knowledge of an income distribution, her subsequent purported disclaimer was not immediate 304
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13) a trust income declaration that was subject to a tax contingency did not result in an income inclusion to the beneficiary 149
Tax Topics - General Concepts - Agency knowledge of agent imputed to principal 217

Edison Transportation, LLC v. The Queen, 2016 TCC 80

discretionary finder’s fee not deductible

A Florida corporation (“iTransit”) served as a vehicle procurement arm for a second Florida corporation (“Gameday US”), which was in the business of providing transportation and traffic logistics for large sporting events. iTransit was owned 30% by the sole individual Florida-resident shareholder of Gameday US (“Vitrano”) and 70% by another Florida resident (“Pouncey”) who had procurement expertise. In 2008, Vitrano entered into a contract with the Vancouver Olympics organizing committee (“Vanoc”) on behalf of a new Canadian subsidiary of Gameday US (“Gameday Canada”) to provide transit bus services at the 2010 Winter Olympics, for fees payable by Gameday Canada to the taxpayer. Pouncey incorporated the taxpayer, which employed an individual (”Hill”), who had past experience in operating a coach company and in operating in past Olympic games. The taxpayer also entered into an agreement (the “iTransit Agreement”) prepared and executed late in 2010 but backdated by approximately two years pursuant to which it purportedly agreed to pay iTransit US$2,500,000 for support services and as a “commission” for securing the contract with Gameday Canada.

Pizzitelli J found (at para. 28) found that, at most, only approximately US$2.17 million of the amount was paid, and that this amount did not qualify as being deductible (other than the U.S.$400,000 portion conceded by CRA to relate to support services provided by iTransit), stating (at paras. 46, 47-48, 49):

[The iTransit Agreement was] an afterthought, something to legitimize the payment of amounts that had been made to iTransit for over two previous years to fund its operations… .

…[A]bsolutely no documentary evidence by way of receipts, vouchers , credit card statements or other supporting documentation was tendered in support of any expenses for which iTransit was seeking reimbursement.

Finally, the said agreement does not break down what portion was contemplated for support services versus what portion was for its assistance in securing the Gameday Canada contract… .

[E]ven if I accept payment can be made for past services, there must at least be some agreement as to the quantum or calculation of such fee or commission in advance in the context of business in order to characterize such payments as such. It is in the very nature of these types of payments that they are calculable on some objective basis and not merely discretionary… .

Finally, the evidence indicated that Pouncey had secured the contract with Gameday Canada on behalf of the (to-be incorporated) taxpayer rather than on behalf of iTransit.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Window Dressing appearance of 3rd party ownership was window dressing 111

Transalta Corporation v. The Queen, 2012 DTC 1106 [at 3044], 2012 TCC 86

Margeson J. accepted (at para. 101) that the stated capital (equal to fair market value) of shares which the taxpayer issued in payment of bonuses under its Performance Share Ownership Plan represented the expenditure made by the taxpayer on the bonuses. He rejected the Minister's position (at para.93) "that the Appellant incurred no expense in issuing shares under the PSOP."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt past services 42
Tax Topics - Income Tax Act - Section 7 - Subsection 7(3) - Paragraph 7(3)(b) no bilateral agreement to pay bonuses only in shares 229

Roth v. The Queen, 2005 DTC 1570, 2005 TCC 484, aff'd 2007 DTC 5222, 2007 FCA 38

purported transfer of knowhow to corportion did not entail acquisition of property

The purported transfer by the taxpayer of an undeveloped project (i.e., of know-how he had developed with respect to a proposed LNG project) was not documented with any conveyance document and, in any event, "information, ideas, knowledge and/or know-how do not fall within the meaning of the word 'property'" (p. 1579). As the transferee corporation had not acquired anything from the taxpayer (know-how not being included in the meaning of the word property), a journal entry showing $370,000 owing by it to the taxpayer for the purported transfer did not represent an expense incurred by it.

Northwood Pulp and Paper Ltd. v. The Queen, 96 DTC 1105 (TCC), aff'd 98 DTC 6640 (FCA)

The estimated costs of reforestation work which the taxpayer became obliged to perform in future years when it harvested timber, did not form part of the cost of its log inventory. The reforestation expenditures instead were deductible as period costs only as they were actually made or incurred.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 10 - Subsection 10(1) 50

Commissioner of Inland Revenue (New Zealand) v. Mitsubishi Motors Ltd., [1995] B.T.C. 398 (P.C.)

The trial judge was satisfied on the evidence that the taxpayer could make a reasonably accurate estimate that 63% of the vehicles sold by it in a year had defects that would manifest themselves within the period of time covered by its warranty. Accordingly, the estimated amount of warranty claims could be deducted in computing income in the year of sale in accordance with s. 104 of the Income Tax Act 1976 (New Zealand) which permitted the deduction of expenditures "necessarily incurred in carrying on a business for the purpose of gaining or producing the assessable income". Lord Hoffmann noted (at p. 403) that although the jurisprudential approach to this provision "prevents one from treating an aggregate of contingent liabilities as a statistical certainty, it does not rule out statistical estimation of facts which have happened but are unknown".

Mara Properties Ltd. v. The Queen, 93 DTC 1449, [1993] 2 CTC 3189 (TCC), ultimately aff'd 96 DTC 6309, [1996] 2 S.C.R. 161

ultimately aff'd on other grounds 96 DTC 6309, [1996] 2 S.C.R. 161

S.18(1)(a) could not apply to deny a loss realized by the taxpayer on the sale of inventory acquired by it pursuant to an s. 88(1) wind-up of its subsidiary because inter alia the deemed cost of the land to the taxpayer under an s. 88(1) could not be characterized as an "outlay or expense" of the taxpayer.

Coles Myer Finance Ltd. v. Federal Commissioner of Taxation, 93 A.T.C. 4214 (H.C.)

The taxpayer, a finance subsidiary, raised money through bankers acceptances (or "accommodation bills") and promissory notes having terms of no more than 180 days. In reversing a finding of the full court of the Federal Court that no portion of the discounts were deductible in the taxation year in which the money was raised because the liability was not "incurred" in such year as required by s. 51(1) of the Income Tax Assessment Act 1936-1984, the Court found that upon the acceptance of the bankers acceptances, the drawer (the taxpayer) undertook a continuing liability to pay the amount of the bill to the acceptor notwithstanding that a holder for value of the bankers acceptances was entitled to hold the acceptor (the bank) primarily liable on the bill. As for the making of a promissory note, "the obligation to pay at a future time created by such a note is clearly a present liability, there being no necessity for presentment of the note for the maker to be liable to pay out the note at maturity" (p. 4,219).

Co-operator's General Insurance Co. v. MNR, 93 DTC 303, [1993] 1 CTC 2316 (TCC)

Under the "experience rated" reinsurance treaties of the taxpayer, the annual premiums which it ultimately was required to bear in respect of each treaty year could not fall below a stated minimum premium amount, or above a stated maximum premium amount, with the additional premiums up to the maximum premium amount being paid to the extent that the aggregate of claims, which each exceeded a specified retention limit, also exceeded an aggregate deductible amount for the year. Given that it took between five to seven years to settle personal injury claims, it would be some time before the final premium amount could be determined. However, the taxpayer deducted the maximum premium in each treaty year because its past experience showed that the maximum premium would be reached.

In finding that the taxpayer could not deduct amounts in excess of the actual premiums payable in each year in accordance with the premium calculation formula in the reinsurance treaty, Brulé J. found that it failed to show that it was legally bound to pay the maximum premium in the years concerned to the reinsurer and that that obligation was not dependent upon future events.

ISBA Construction Inc. v. MNR, 90 DTC 1940, [1990] 2 CTC 2491 (TCC)

A bonus of $180,000 which the taxpayer's board of directors declared at a time that the corporation was illiquid was contingent due to the uncertainty as to the time, if any, of payment, and accordingly was non-deductible.

Lawrence v. MNR, 90 DTC 1491, [1990] 1 CTC 2567 (TCC)

Fees of a notary for his services rendered in connection with the development and sale of MURBs legally were payable by the vendors of the property and not by the purchasers. Accordingly, the purchasers were not entitled to deduct such expenses.

Ensign Tankers (Leasing) Ltd. v. Stokes, [1989] B.T.C. 410 (Ch.D.)

At 477:

"'To incur' means 'to render oneself liable to'."

Words and Phrases
incur to incur

Dibro Investments Ltd. v. MNR, 87 DTC 210, [1987] 1 CTC 2281 (TCC)

liability incurred notwithstanding subsequently negotiated reduction

Although the taxpayer was obligated to pay fees of 10% of its revenues to its franchisor, it withheld these payments in the taxation years in question in order to put pressure on the franchisor to enter into negotiations for a rate reduction. Such negotiations commenced after the taxation years in question, and ultimately resulted in a fee reduction for the taxation years in question.

In finding that the taxpayer was entitled to deduct the accrued amounts owing to the franchisor without rate reduction, Bonner TCJ found that in the years in question, the liability for those amounts was fixed and certain.

Edmonton Liquid Gas Ltd. v. The Queen, 84 DTC 6526, [1984] CTC 536 (FCA)

expense incurred as no refund rights

MacGuigan JA rejected the position of the Minister that amounts paid to a drilling operator in 1974 for drilling work to be performed in 1975 did not represent an "expense incurred in oil or gas well" in respect of the taxpayer's 1974 taxation year. He stated (at pp. 6530, 6531) that the word "incurred"

has always had the meaning of 'to become liable for or subject to'. ... [T]he proper test for defining expenses incurred by a taxpayer in a particular year must be cast in terms of the absoluteness of the transactions in which he engaged during that year: are the transactions absolute, with no contingencies as to disposition, use or enjoyment?

Here, the taxpayer had no refund rights with respect to the 1974 payment, so that it was incurred by it in 1974.

Words and Phrases
incur to incur

Canada Packers Ltd. v. MNR, 68 DTC 682 (TAB)

Because the taxpayer's fiscal year ended in the last Saturday in March of each year, it was possible for it to pay holiday pay for two Good Friday's in a fiscal year, or for none at all (as in the case in the taxation year in question). The taxpayer calculated the beginning of each calendar years total liability for holiday pay and charged to operating expense for each week in the calendar year's a fixed percentage of the total liability.

In finding that the taxpayer was not able to deduct any portion of this accrual that related to a Good Friday that occurred after the fiscal year end, Mr. Weldon found that this amount had not been incurred by the taxpayer in the year.

Administrative Policy

11 August 2020 Internal T.I. 2018-0782181I7 - Successored CCEE and Non-Capital Losses

successored resource expenses are not deductible under s. 9

After indicating that even though taking deductions under s. 66.7(3) to (5) from successored resource pools against income from successored properties can have the effect of preserving all or part of a current year’s loss from another business, such deductions cannot create or increase a taxpayer’s non-capital loss, the Directorate went on to state:

In particular, successored resource expenses cannot be deducted in computing the income or loss of a taxpayer from a business or property by virtue of the restriction in paragraph 18(1)(a) which, among other things, limits deductions in computing income from a business or property to outlays or expenses made or incurred by the taxpayer. Successored resource expenses under section 66.7 are, by their nature, not outlays or expenses made or incurred by the taxpayer that is seeking to deduct them, being the successor. Instead, successored deductions are with respect to outlays or expenses that were made or incurred by an original owner of the successored property.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 66.7 - Subsection 66.7(3) deductions of successored resource expenditures cannot generate a non-capital loss 322
Tax Topics - Income Tax Act - Section 3 - Paragraph 3(c) s. 3(c) deduction (e.g., under s. 67.3) cannot generate a non-capital loss 92

5 October 2018 APFF Roundtable Q. 16, 2018-0768871C6 F - Dépenses de bureau à domicile et d’automobile

payment of expenses of taxpayer by another does not preclude “incurring” by taxpayer
In 2019-0799241E5 F, CRA corrected Section 3.2 (3rd paragraph) by indicating that property taxes and home insurance costs of a home office generally are NOT deductible under ss. 8(13) and 8(1)(i).

Respecting the deductibility of home office and automobile expense of an independent contractor where such taxpayer owns the property and another person (who might be a spouse) pays such expenses, CRA stated:

For an expense to be considered to have been incurred for the purposes of paragraph 18(1)(a), it is not necessary that the expense be paid by the person incurring the expense. Consequently, the CRA is of the view that the mere fact that a taxpayer does not himself or herself pay an expense incurred by the taxpayer and that is instead paid by a third party is irrelevant in itself in determining whether paragraph 18(1)(a) prevents the deduction of the expense by the person who incurred it. …

Where business expenses have been paid by someone other than the taxpayer carrying on the business, the amounts so paid could, depending on the circumstances, be included in the income of the taxpayer's business or give rise to the application of section 80.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(g) example of proration of capped s. 13(7)(g) capital cost 157
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A capital cost of co-ownership interest 74
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property depreciable property must be owned 78
Tax Topics - Income Tax Act - Section 9 - Nature of Income payment of taxpayer’s expenses by another might give rise to s. 9 or 80 inclusion 199

28 October 2016 External T.I. 2016-0654331E5 F - Transfer of rights to income

where rental lands purchased subject to obligation to pay the rents to vendor, no income inclusion and deduction of the rents by the purchaser under ss. 9 and 18(1)(a)

An individual (A) sold leased land in Quebec to a non-arm’s length corporation of which A was not a shareholder on that basis that A retained the right to all the rents. After finding that the rentals received by the corporation would probably not have the "quality of income” since their receipt was subject to the obligation to pay them over to A, CRA stated:

Similarly, the payment of the amount to A would not be an expense incurred to earn income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Nature of Income where rental lands purchased subject to obligation to pay the rents to vendor, rents did not have quality of income to purchaser under s. 9 165
Tax Topics - Income Tax Act - Section 56 - Subsection 56(4) where rental lands purchased subject to obligation to pay the rents to NAL vendor, s. 56(4) trumps s. 9 to include rents in purchaser’s income 169
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2) s. 56(2) could apply to shareholder of purchaser of lands if vendor did not pay FMV consideration for retaining rights to rents 168

5 April 2013 External T.I. 2012-0471151E5 F - Binding Agreement

counter letter payments non-deductible because Quebec counter letter entered into after apparent letter

Opco, which acquires an immovable, shortly thereafter agrees with an unrelated individual to pay 40% of the annual net rental income to the individual. Will the 40% amounts be excluded from its income or qualify for deduction therefrom? CRA stated:

[T]he C.C.Q. allows parties to modify the provisions of an apparent contract by means of a contract commonly referred to as a counter letter. …

Between the parties, a counter letter prevails over an apparent contract. …

Generally, the CRA agrees to recognize a counter-letter for tax purposes to the extent that:

  • the counter letter is concluded before or at the same time as the apparent contract and does not constitute an ex post facto arrangement;
  • the counter-letter is not a sham;
  • the counter-letter is disclosed to the CRA and the relevant documents are sent to the CRA at the appropriate time (usually when filing the relevant tax returns);
  • the facts relating to the particular situation corroborate the parties' legal relationships to the counter-letter.

After concluding that the Agreement here would not so qualify as “the Agreement did not occur before or at the same time as the apparent contract,” so that the 40% rental amounts would not be excluded from Opco’s income, CRA went on to state that such amounts also would not be a deductible expense.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Computation of Profit side letter would not reduce owner’s entitlement to rents from property if not entered into at same time as property acquisition 270

13 March 2012 External T.I. 2012-0433661E5 F - Notion de dépense engagée

expense not incurred if obligation therefor dependent on future contingency

Before noting that “the concepts of ‘outlay or expense incurred’ under paragraph 18(1)(a) can apply to expenses incurred for the purposes of the medical expense tax credit,” CRA stated:

Wawang … stated:

[T]he correct question to ask, in determining whether a legal obligation is contingent at a particular point in time, is whether the legal obligation has come into existence at that time, or whether no obligation will come into existence until the occurrence of an event that may not occur.

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 118.2 - Subsection 118.2(2.1) expense incurred if obligation has come into existence 129

14 February 2012 Internal T.I. 2012-0435241I7 - Prepaid Rent and Escalating Rent Payments

escalating rents are not deductible by the tenant on a straight-line basis given that "the taxpayer is under no legal obligation to pay the increasing rent until later periods."

13 April 2010 External T.I. 2010-0358941E5 F - CIRD - franchise

expense generally incurred by taxpayer even where reimbursed by insurance company

An individual, covered by an insurance policy, carried out renovation work following water damage in the spring of 2009 and thereafter was reimbursed therefor by the insurance company except for the $300 deductible. Regarding whether this expense was a “qualifying expenditure” for home renovation tax credit purposes, CRA stated:

[I]t is [generally] the individual, and not the insurance company, who has incurred or made qualifying expenditures for the purposes of the HRTC in a situation where, inter alia, the individual has contracted directly with the contractor, is personally liable for the payment of expenses relating to qualifying renovations, and has ultimately paid for the renovations himself or herself.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 118.04 - Subsection 118.04(1) - Qualifying Expenditure qualifying expenditure generally not reduced by insurance reimbursement 111

16 June 2009 Internal T.I. 2009-0312851I7 - Deductibility of Average Rent for Long Term Lease

Escalating lease payments, which were deductible under GAAP on an average basis, would not give rise to a deduction for taxation purposes (to the extent of the excess of the average payment over the amount actually paid or payable in the taxation year) notwithstanding that such excess amount was credited to a liability account in the taxpayer's balance sheet, and was then assumed by a partnership on a transfer of a business division by the taxpayer to the partnership.

28 June 2010 External T.I. 2010-0357081E5 F - Crédit d'impôt pour la rénovation domiciliaire

home renovation expenses generally considered to be incurred by the individual even where reimbursed by insurance company

Can a qualifying expenditures incurred by an individual qualify as being incurred for home renovation tax credit purposes if a portion of those expenses are reimbursed by an insurance company? CRA responded:

Where renovation work is covered by an insurance policy, then it is a question of fact and law as to which, of the individual and the insurance company, incurred or made the qualifying expenditures related to the qualifying renovation work.

For purposes of the HRTC, it is generally our view that it is the individual, and not the insurance company, who has incurred or made qualifying expenditures as defined in the HRTC in a situation where, among other things, the individual has contracted directly with the contractor, is personally liable for the payment of expenses relating to qualifying renovations, and has ultimately paid for the renovations himself or herself.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 252 - Subsection 252(3) HRTC administrative exception that separated spouses are not treated as spouses 177
Tax Topics - Income Tax Act - Section 118.04 - Subsection 118.04(1) - Eligible Dwelling - Paragraph (b) ordinary inhabitation can commence at the end of the eligible period 163

29 January 2010 Internal T.I. 2009-0339541I7 F - Inclusion au revenu et provision

no deduction from prepaid fees of estimated cost of performance

Corporation A, which is involved in the distribution, warehousing, handling, and packaging of goods, invoices and receives revenue currently for such goods processing services to be rendered in the following six to 12 months. Corporation A deducts as expense an estimate of the rent and labour costs that it could eventually incur to meet its obligations to its customers. The Directorate stated:

[T]he terms of paragraphs 18(1)(a) and (e) generally do not allow for any deduction or allowance to account for obligations that Corporation A may eventually incur.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(a) advance fees for futures goods-handling services included in income under s. 12(1)(a) rather than s. 9 129
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(m) reserve available for future goods handling services to be performed 106

13 May 2009 External T.I. 2009-0314851E5 F - Frais d'administration, régimes de pensions

payment by employer to pension plan of ITCs generated by it on pension plan administration expenses could be deductible if pursuant to legal obligation

A registered pension plan agreement provides that the fees and expenses related to the administration of the pension plan and incurred by the employer in carrying on its business will be paid from the plan trust funds, unless the employer chooses to pay them directly. Can the employer deduct its payments to the plan trust of the amounts of ITCs and ITRs it has received in respect of those fees and expenses? After referring to s. 18(1)(a), CRA stated:

The courts have interpreted this paragraph as requiring, inter alia, a legal obligation to pay an amount in the year. This principle has been invoked … [in] Burnco Industries Wawang Forest … and Newfoundland Light… .

The payment by the employer of an amount to the pension plan trust equivalent to ITCs and ITRs received could, in our view, be deductible to the employer by virtue of paragraph 18(1)(a) to the extent that the employer can demonstrate that it has a legal obligation to pay that amount to the pension plan trust.

26 August 2005 Internal T.I. 2005-0131171I7 F - Alinéa 18(1) e) de la LIR

no expense incurred for maintenance obligation until contractual obligation to someone

A maintenance obligation to landlords did not give rise to a current deduction since no contractual obligation with specific counterparties had been entered into. The Directorate stated:

Burnco states that "an expense within the meaning of paragraph 18(1)(a) … is an obligation to pay a sum of money. An expense cannot be said to be incurred by a taxpayer who is under no obligation to pay money to anyone.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(e) no specific contractual obligation regarding maintenance obligation 103

26 February 2004 External T.I. 2003-0045471E5 F - Prêt à un actionnaire

forgiven amount not deductible in computing income

ABCco carries on a written communications consulting business and does not carry on a money lending business in the ordinary course of its business. Mr. A, who is the sole shareholder, and who is the only employee other than a part-time clerical employee with less than 1/10 of his compensation, is lent $500,000 by ABCco to purchase another home for his personal use.

After concluding that the loan likely was not excluded under s. 15(2.4)(e), so that it was included in Mr. A’s income under s. 15(2), CRA went on to indicate that, if the loan was subsequently forgiven, ABCco could not deduct the forgiven amount in computing its income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(2.4) - Paragraph 15(2.4)(e) housing loan not excluded if comparable employees would not have received it 208
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1.21) inclusion of home-acquisition loan under s. 15(2) precluded a further inclusion under s. 15(1.21) 122

14 July 2003 Internal T.I. 2003-0016677 F - BONIS A PAYER ET BENEFICES MARGINAUX

obligation of corporation to pay bonuses out of annual profits could be established by oral agreement and book entries
Also released under document number 2003-00166770.

A verbal agreement was reached before the end of each taxation year that the corporation would pay bonuses to employees/shareholders based on its profits, with the bonuses being recorded by a journal entry and then in its financial statements. At the end of the taxation year, the corporation still had sufficient funds to pay the bonuses and they were paid annually before the 180th day after the end of the taxation year.

The Directorate stated that the above could be sufficient to show that there was a liability for the bonuses at year end, noting that:

For example, in Brazolot Construction Limited v. MNR, 81 DTC 449 (TCC), the judge stated that he considered the established practice of previous years, the accounting entries in the books and the reference in the financial statements of the taxation year to be sufficient evidence of a legal obligation in that case.

Accrued vacation pay and health premiums on the bonus amounts also were deductible.

27 April 1995 External T.I. 9501685 - DEDUCTIBILITY OF RENT EXPENSE

Where, prior to the expiration of the original term of the lease, a renegotiated lease agreement is entered into which provides for a reduced rate of rent for a period which comprises the balance of the original lease term plus a 5-year extension, the treatment recommended by the Emerging Issues Committee of the CICA will not be followed for tax purposes because rent at the original (high) rate no longer is being incurred by the tenant.

11 April 1995 External T.I. 9414735 - DEDUCTIBILITY OF "NET SMELTER RETURN"

Discussion of whether net smelter return royalties paid under a mining lease are deductible.

93 C.P.T.J. - Q.42

Reclamation costs are recognized for purposes of the Act in the year they are incurred.

18 November 1992 Memorandum 921979 (December 1993 Access Letter, p. 407, ¶C9-286)

A reserve for vacation pay benefits earned by employees in the year that are reasonably expected to be taken in the following year represents amounts that can be estimated with a reasonable amount of accuracy and whose recipients are known and, therefore, is an amount that has been incurred in the year.

16 May 1991 TI (Tax Window, No. 3, p. 30, ¶1258)

Whether a "management fee" paid by a partnership to one of its corporate partners is an expense or a profit distribution is a question of fact, as to which the fact that the fee was based on partnership profits is not necessarily conclusive.

28 March 1991 TI (Tax Window, No. 1, p. 9, ¶1175)

Where a public corporation, which has made interest-free loans to its employees to enable them to acquire shares, subsequently forgives the loans in an amount equal to the decline in value of the shares, the amount of the forgiveness will be deductible under s. 9(1) provided that the reasonableness test in s. 67 is met. However, if the benefit involved was conferred on the individual in his capacity of shareholder rather than employee, the corporation will not be entitled to a deduction.