Timing

Cases

McNeill v. The Queen, 2000 DTC 6211 (FCA)

Some years after the taxpayer sold his chartered accountancy practice to another firm, he was ordered to pay damages and costs of $465,908 in respect of the breach of his covenants in the sale agreement to provide consultancy services and not to compete with the purchaser as well as for breach of an independent fiduciary duty to the purchaser.

Rothstein J.A. found the amount of damages to be deductible in the year of the damages award notwithstanding that it related to prior periods, given that the amount of the damages was contingent until the time of the award.

Urbandale Realty Corp Ltd. v. The Queen, 97 DTC 5353 (FCTD)

The taxpayer, which carried on a land development business, deducted for both accounting and income tax purposes a one-time regional development charge of the Regional Municipality of Ottawa-Carleton that was designed to reduce the impact on the existing tax base of the indirect capital costs of new developments (in this case, lands of the taxpayer for which a draft plan a subdivision had been filed with the region). Dubé J. found that in subsequent taxation years, the lands in question would be developed and sold and that the matching principle therefore did not permit the taxpayer to make the deduction when the charge was paid.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(2) 64

Wil Mechanical Ltd. v. The Queen, 90 DTC 6475 (FCTD)

subcontractors entitled to holdback amounts

Although the taxpayer, as the subcontractor on various jobs, withheld 15% from the amounts it paid to the sub-subcontractors until, generally, the time that the work performed by the sub-subcontractors was approved by an engineer, McNair J. found that the sub-subcontractors were legally entitled to the full amount of the progress estimates at the time they submitted their invoices therefor, and that the taxpayer therefore was entitled to an immediate deduction for the amounts it held back. [C.R: 18(1)(a) - General]

Newfoundland Light & Power Co. Ltd. v. The Queen, 90 DTC 6166 (FCA)

liability re holdback amounts not yet ascertained

In computing the amount of maintenance expenses which were deducted by it, the taxpayer included holdbacks which were not payable by it to the contractors until the work had been accepted by the engineer through a certificate. Because "until the certificate is issued, the taxpayer ... does not know for sure the full cost of the work" (p. 6172), the holdbacks were excluded from the amount of its expenses which were "made or incurred" by it in the year.

The Queen v. Burnco Industries Ltd., 84 DTC 6348, [1984] CTC 337 (FCA)

The taxpayer was obligated under an agreement with a municipality to replace earth that it removed in the process of excavating a gravel pit. However, the taxpayer did not enter into a contract with a contractor to have the required "backfilling" work done until after the end of the taxation year. It was held that the taxpayer had not "incurred" an expense equal to the estimated cost of backfilling because "an expense cannot be said to be incurred by a taxpayer who is under no obligation to pay money to anyone."

Words and Phrases
incur to incur

The Queen v. V&R Enterprises Ltd., 79 DTC 5399, [1979] CTC 465 (FCTD)

valid year-end accrual of remuneration

It was found that management of a closely-held company rendered their services on the understanding that their remuneration for the year would be determined at the end of the year by the directors on the basis of the company's profits for the year (once the audit for the year was finalized), and that a legal obligation was thereby created to pay salaries. The salary expenses accrued by the company accordingly were not gifts or a reserve, and were deductible by the company in the year that the services were rendered.

Neonex International Ltd. v. The Queen, 78 DTC 6339, [1978] CTC 485 (FCA)

The taxpayer company, which was in the business of producing custom-made electrical signs, was precluded from deducting costs incurred during a year in constructing incompleted signs, but was instead required to include such costs in its inventory of work-in-progress. "The expenses incurred in connection with the partially completed signs were laid out to bring in income in the next or some other taxation year, not in the year in which they were claimed."

Tobias v. The Queen, 78 DTC 6028, [1978] CTC 113 (FCTD)

The taxpayer incurred approximately $106,000 in expenses over an 8-year period in an unsuccessful search for buried pirate treasure. Although he could have deducted the expenditures on an on-going basis, he was held to be entitled to deduct the full $106,000 at the conclusion of the period, when it was determined that the venture was a failure.

Frappier v. The Queen, 76 DTC 6066 (FCTD)

advances against future losses

Advances that the taxpayer (a licensed investment dealer) made to her clients to cover their potential losses when the brokerage firm with which she was associated went bankrupt, became deductible losses in the subsequent year when it was determined that the amount of such advances was not recoverable.

MNR v. Tower Investment Inc., 72 DTC 6161 (FCTD)

The taxpayer, which wished to secure tenants for a newly constructed apartment complex deducted the costs of its intensive radio advertising campaign over a three-year period for accounting and income tax purposes rather than solely in the years of expenditure. In confirming this treatment, Collier J. quoted from the comments of Jackett P., as he then was, in the Associated Investors case (67 DTC 5096) and concluded (at p. 6165):

"In my view, the distinctions made by Jackett P. are applicable in a case such as this. The advertising expenses laid out here were not current expenditures in the normal sense. They were laid out to bring in income not only for the years they were made but for future years."

Associated Investors of Canada Ltd. v. MNR, 67 DTC 5096 (Ex. Ct.)

The taxpayer, which was in the business of selling investment certificates to the public, made advances to its commission salesmen that were paid off when commissions were earned. Between 1954 and 1960, the excess of advances made to a provincial manager over the commissions earned by him amounted to over $85,000, of which $25,000 was written off by the taxpayer in each of its 1960 and 1961 taxation years.

In finding that the write-offs were deductible by the taxpayer in those years, Jackett P. noted that the advances were made as an integral part of the taxpayer's current business operations, and that the taxpayer did not sustain a loss in respect of those advances until they depreciated in value in its 1960 and 1961 taxation years.

See Also

GMAC Leaseco Corporation v. The Queen, 2015 DTC 1141 [at 908], 2015 TCC 146

capital tax accrued from day to day

In 2011, the taxpayer ("GMAC") filed an amended Ontario capital tax return for its calendar 2007 taxation year, which reduced the CCA claimed by it. This increased the Ontario capital tax payable by it. GMAC filed an amended federal tax return for the same year, in which it deducted the additional capital tax.

In rejecting the Minister's position that GMAC had no liability for the additional capital tax until 2011 when it amended its capital tax return, Graham J stated (at paras. 44-45):

[S.] 78(1) of the Corporations Tax Act …states that capital tax is "deemed to accrue proportionately as the days of each taxation year for which [it] is imposed pass". It appears from this subsection that GMAC's liability to pay the additional capital tax must have accrued in 2007. …

The idea that liability for capital tax would accrue in the relevant year regardless of when the tax was assessed… is consistent with the long established principle under the Income Tax Act that liability for tax arises not pursuant to the filing of a return or the issuing of an assessment or reassessment, but rather pursuant to the terms of the Income Tax Act itself [citing The Queen v. Simard-Beaudry Inc., 1971 CarswellNat 239 (FCTD); R. v. Riendeau¸ 91 DTC 5416 (FCA); and subsection 152(3).]

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) amount subject to potential repayment obligation was not received 240
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7.4) amounts replaced reduced lease income rather than contributing to leased vehicles' cost 217
Tax Topics - Income Tax Act - Section 9 - Compensation Payments payments received in consideration for reducing lease payments were compensation for lost lease income, and s. 9 income 248
Tax Topics - Income Tax Act - Section 9 - Computation of Profit surcharges received by lessor at lease termination for excess use were income 242
Tax Topics - Income Tax Act - Section 9 - Timing inducement payments received by lessor from manufacturer not income until potential repayment obligation quantified 199

Minin v. The Queen, 2008 DTC 4463, 2008 TCC 429

The taxpayer spent U.S.$70,000 on acquiring the exclusive rights to build a casino in Russia close to the Chinese border and on a feasibility study. This full amount became deductible early in 2000 when the Chinese government announced it would change its laws in a manner that made the project no longer viable.

Toth v. The Queen, 2004 DTC 2192, 2004 TCC 56 (Informal Procedure)

no deduction of seized funds before the year of forfeiture

The amount of funds derived by the taxpayer from the operation from an escort agency that were seized by the Quebec government could not be deducted in the year before that in which the funds were forfeited.

Gluecklar Metal Inc. v. The Queen, 2003 DTC 431 (TCC)

A corporate shareholder of the taxpayer had made interest-bearing loans to it and provided administrative services. On occasions during the 1989 to 1994 years, the taxpayer paid for the services and paid interest on the loans, but more often, it did not. After a review by the auditors, the taxpayer reached an agreement with the shareholder as to the amount that should be paid ($502,738).

In finding that the payment of the sum was deductible, notwithstanding that it related to prior years, McArthur T.C.J. stated (at p. 435) that the taxpayer's deduction in the year of payment "was consistent with the rule of law that running expenses which relate to an operating business as a whole, may be taken as a full deduction in the year paid."

Hawkes v. The Queen, 97 DTC 1258 (TCC)

Expenditures that the taxpayers made in order to obtain an assignment to them of a portion of damage proceeds that might be received by the assignor under a law suit were deductible when paid.

Buck Consultants v. The Queen, 96 DTC 1464 (TCC)

The taxpayer, which entered into a 15-year lease of office premises that provided for an initial 14-month rent-free period was not permitted any rent deduction during the 14-month period notwithstanding that generally accepted accounting principles would have permitted it to recognize a portion of the future rents during the initial period.

Svidal v. The Queen, [1995] 1 CTC 2692 (TCC)

In stating that the taxpayer, who previously had been required to include in income from a business proceeds of criminal activities, was not entitled to deduct from that income an amount in respect of a compensation order issued in a subsequent taxation year (pursuant to which the taxpayer had made no payments), the Court stated:

"Our fiscal system does not, except in specific circumstances set out in the Income Tax Act, permit the reopening of prior years to take into account events occurring in later years."

Gallagher v. Jones, [1993] BTC 310 (CA)

In finding that two leasing companies were not entitled to deduct the full amount of large initial lease payments made pursuant to leasing agreements which constituted finance leases for accounting purposes, but instead were only permitted to deduct the expenditures over the projected life of the leases in accordance with the matching principle, Bingham M.R. stated (pp. 328-329):

"Subject to any express or implied statutory rule, of which there is none here, the ordinary way to ascertain the profits or losses of a business is to apply accepted principles of commercial accountancy ... . I find it hard to understand how any judge-made rule could override the application of a generally accepted rule of commercial accountancy which (1) applied to the situation in question, (2) was not one of two or more rules applicable to the situation in question and (3) was not shown to be inconsistent with the true facts ..."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Accounting Principles 158

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

Discounts on short-term bankers acceptances and promissory notes drawn or issued by the taxpayer in order to raise money for use in its business as the finance arm of a group of companies were deductible on a straight-line basis over the terms of the bills or notes, rather than in full in the year in which the money was raised. Given that "as between the drawer and the holder of a note or bill, the burden of the liability incurred by the drawer increases with the passage of time between the discounting of the note or bill and its maturity" (p. 4,222), this method accorded with the principle that "it is proper to set against the taxpayer's gross income or profits for ... [a] period the net losses or outgoings referable to that period" (p. 4,222).

Baillargeon v. MNR, 92 DTC 1212 (TCC)

Investors in a MURB development paid for a "liquidity guarantee" under which the developer guaranteed that in each of the following five years it would cover any deficit resulting from the operation of the building up to $250,000 per year. The investors were entitled to deduct the fee paid by them when incurred and were not subject to the matching principle.

Murray v. MNR, 91 DTC 1147 (TCC)

In 1979 the taxpayer purchased an interest in a MURB from a promoter, in 1982 defaulted in making payments on a promissory note which he had given in consideration for his interest with the result that 1983 losses sustained on the project were absorbed by the promoter. In 1986 when the taxpayer settled the arrears with the promoter, the promoter for the first time provided the taxpayer with an accounting for his proportionate share of the losses which had been sustained. Taylor J. held that the taxpayer had sustained a loss in 1983 rather than 1986.

C.I.R. v. Lo and Lo, [1984] B.T.C. 281 (PC)

accrued retirement obligation

Each long-term employee of a law firm was entitled, upon retirement, to a lump-sum payment from the firm roughly equivalent to 1/24 of his annual salary as at the date of retirement multiplied by the number of his years of service. The firm's accrued liability to date for future staff retirement benefits, calculated in this fashion, was held to be "an expense incurred" because under such an arrangement "the right of the employee to receive his retirement benefit is absolute, in the sense that he need do nothing whatever except give a period of notice and pick up his money." (Inland Revenue Ordinance of Hong Kong, s. 16).

Words and Phrases
incur to incur

Beauchesne Inc. v. MNR, 75 DTC 119, [1975] CTC 2146 (T.R.B.), rev'd 77 DTC 5308, [1977] CTC 398 (FCTD)

rev'd on other grounds, 77 DTC 5308, [1977] CTC 398 (FCTD)

The taxpayer was reassessed in its 1968 taxation year for federal and provincial sales tax which it had failed to pay in respect of its sales in that and prior taxation years. Because the amounts reassessed in respect of the prior taxation years were payable by it in those taxation years, they were not deductible from its 1968 income.

Administrative Policy

S3-F9-C1 - Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime

timing of deduction for loss from theft or embezzlement

1.38 … In cases where the allowable loss is already reflected in the reported income or loss of a business, the amount of reported income or loss will not have to be adjusted. This might be the situation where the losses are reflected in overstated expense accounts. In any other case, the allowable loss will usually be deductible in computing income of the year in which the loss is discovered. Where the application of this rule would create a hardship (as might be the case when the theft has forced the taxpayer into bankruptcy), the taxpayer may request a deduction in the year (or years) in which the event causing the loss took place. This will not be possible if the year in question is statute-barred under subsection 152(4).

10 July 1996 Memorandum 961880 (CTO "Deductibility of Borrowing Costs - Moneylenders")

The timing of deduction of debt issue costs and loan origination costs by moneylenders for tax purposes is governed by GAAP, unless the moneylenders elect to follow the five-year amortization method provided by s. 20(1)(e). Where GAAP permits both the amortization and the immediate write-off of such expenses, the "truer picture" approach requires amortization.

Income Tax Technical News, No. 7, 21 February 1996 (cancelled)

Lease inducement payments made by a landlord on income account with respect to the initial lease of space in a project as well as payments made to facilitate the re-leasing of such space are now required to be amortized over the term of the related leases.

6 December 1995 TI 951066 (CTO "Lease Inducement of Payments")

Following the decision in Canderel ([1995] 2 CTC 22), RC is now of the view that inducement payments made to facilitate the re-leasing of property subject to a lease, whether to the same or to a new tenant, should be deferred and amortized over the lease period which they relate. Furthermore, costs such as commissions or legal fees incurred by a landlord in the course of leasing property should be deferred and amortized over the term of the related lease.

1995 TEI Round Table, Q. 34, No. 5M08860HH

"The Department has always taken the position that when a taxpayer makes an expenditure, for the purposes of complying with environmental legislation concerning a subsequent [year's] reclamation expense, that the amount is not deductible pursuant to 18(1)(a) or 18(1)(e). This will continue to be the Department's position in situations where amounts are set aside or set up as reserves for reclamation costs that will [occur] in a subsequent year."

10 February 1993 TI (Tax Window, No. 28, p. 17, ¶2409)

Individual partners are permitted to deduct expenses relating to the business of a partnership that does not have a calendar fiscal period on either a calendar-year basis or on the basis of the partnership's fiscal year-end. A partner wishing to switch methods should submit a written request to the local District Taxation Office.

27 July 1992 Letter 9205738 (January - February 1993 Access Letter, p. 10, ¶C9-254)

Given that recent case law in pronouncements of the CICA clarify that matching of expenses with related revenues is required, a limited partnership which is created to pay the selling commission of dealers selling mutual fund units will be required to amortize the selling commissions incurred in 1994 and subsequent years over the same period as that used for accounting periods. Selling commissions incurred before 1994 may be deducted 50% in the first year, 25% in the second year and 25% in the third year.

7 February 1992 TI (Tax Window, No. 16, p. 19, ¶1739)

The purchaser of player contracts when acquired as part of the purchase of a sports franchise will normally be able to amortize the cost of the contracts over the estimated useful playing life of the players.

18 November 1991 TI (Tax Window, No. 13, p. 12, ¶1596)

The portion of the fee paid for membership in a professional sports league that may reasonably be considered to relate to the acquisition of player rights will be deductible on an amortized basis over the average remaining term of the player contracts acquired.

91 CR - Q.29

Re deductibility of unamortized leasehold inducement payments where the property is sold.

81 CR - Q.23

A limited partnership may not deduct the expenses incurred, prior to the formation of such limited partnership, by a promoter who later charges those expenses to the partnership.

IT-417R "Prepaid Expenses and Deferred Charges".

IT-417R "Prepaid Expenses and Deferred Charges".

Discussion of timing of deduction of prepaid expenses, deferred charges and start-up costs.

IT-261R "Prepayments of Rents"

IC 77-11

Although in normal circumstances, sales tax is deductible for income tax purposes in the year in which it is payable, RC will permit the deduction of prior years' sales tax in the year in which the liability for the sales tax is determined by reassessment or by the final resolution of the dispute.

Accounting Pronouncements

EIC-52, dated 26 May 1994 "Lessee's Accounting on Re-negotiation of an Operating Lease".

CICA Emerging Issues Committee, EIC-33, November 20, 1991 "Distribution Costs of Mutual Funds Paid by Special Purpose Entities": Such costs should be accounted for as a deferred charge and amortized over the periods in which revenue is expected to be recognized.