Kruger Incorporated v. Canada, 2016 FCA 186

non-statutory mark-to-market accounting was permissible under s. 9

The taxpayer traded foreign currency options as a separate business from its pulp and paper business, with its principal option activity being the writing of European-style puts and calls with banks as the counterparties. It could lock in profit on these by entering into offsetting option contracts. In its 1998 taxation year, the taxpayer reported gains and losses on these options essentially on a mark-to-market basis (although it amortized option premiums paid and received over the term to maturity of the related options). This resulted in the taxpayer claiming a loss for ITA purposes approximately $72 million greater than if it had reported on the basis of losses (or gains) actually realized. For financial statement purposes, it had accounted for its foreign exchange operations using mark to market accounting starting in 1997. The year -end options values used by it "were reliable" (para. 77).

Before concluding (at para. 72) “that there was no basis on which the Tax Court judge could reject the appellant’s use of mark to market accounting in computing income from its dealings in foreign exchange options,” Noël CJ stated (at paras. 58, 59, 61, 71):

[T]he mark to market method is consistent with well accepted business principles, is GAAP’s preferred basis of accounting for foreign exchange option contracts and…the FASB and international accounting recognize that income generated by such dealings is best depicted in accordance with this method… .

…It is clear from [Canderel and Ikea] that the realization principle can give way to other methods of computing income pursuant to section 9 of the Act where these can be shown to provide a more accurate picture of the taxpayer’s income for the year… .

Canadian General Electric is in direct contradiction with the Tax Court judge’s holding that realization is an overarching principle which applies in the absence of a provision authorizing or requiring the application of a different method.

Given [Rip J's] findings...as to the broad recognition of mark to market accounting for purposes of computing income from dealing in foreign exchange options, and the uncontested evidence that banks, financial institutions and mutual funds which engage in this activity report their income on this basis with the CRA’s approval, it seems clear that mark to market provides a picture of the appellant’s income which is as accurate...as that which the principle of realization would provide.

The Minister was directed to reassess the 1998 taxation year on the basis that the taxpayer was entitled to use the mark to market method of accounting, but without deferring or amortizing any portion of the premiums paid or received during that year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Inventory derivatives not held for resale are not inventory 175
Tax Topics - Income Tax Act - Section 171 - Subsection 171(1) Minister implicitly directed to reduce taxpayer's income below that originally filed 100

Urbandale Realty Corp. Ltd. v. The Queen, 2000 DTC 6118 (FCA)

The taxpayer, a real estate developer, prepaid municipal real estate development charges applicable to one of its residential lots developments. In finding that the deduction of the charges, in full, in the year paid gave a more accurate picture of the taxpayer's income notwithstanding that GAAP would have required addition of the charges to the taxpayer's cost of land inventory, Noël J.A. noted that there was no evidence that payment of the charges increased the fair market value of the lands.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(9) 58

Canada v. Canada Safeway Limited, 98 DTC 6060, [1998] 1 CTC 120 (FCA)

The Queen v. Johnson and Johnson Inc., 94 DTC 6125 was followed in finding that a refund of federal sales previously paid in error did not represent income in the year of refund.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) sales tax refund not reimbursement 102

Toronto College Park Ltd. v. Canada, [1998] 1 S.C.R. 183

tenant inducement payments currently deductible as no linkage to future revenue

Given that the trial judge had made a finding that the primary purpose of the taxpayer in making two payments to or for the benefit of two tenants was to induce them to lease space in the building, the matching principle could not be applied because there was no linkage to future revenue. (If the matching principle had been applicable, the payments would have been amortized only over the terms of the leases, and not any renewal periods). Because the Minister had not persuaded the Court that the amortization of the payments would present even as accurate a picture of income as the method adopted by the taxpayer (current deduction of the full amount of the payments), the taxpayer was entitled to deduct the payments entirely in the year they were made.

Ikea Ltd. v. R., 98 DTC 6092, [1998] 1 S.C.R. 196, [1998] 2 C.T.C. 61

no conditions attached to use of receipt

Because there were no conditions attached to the use by the taxpayer of a tenant inducement payment (the sole condition precedent to receipt of the payment was the assumption of its obligations under the lease agreement), the payment was income to the taxpayer when received.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Compensation Payments tenant inducement payment was received in course of retail store operations 130
Tax Topics - Statutory Interpretation - Symmetry 28

Canderel Ltd. v. R., 98 DTC 6100, [1998] 1 S.C.R. 147, [1998] 2 C.T.C. 35

lease inducement payments currently deductible

The taxpayer, which had entered into an agreement with a property owner to develop the property as a commercial office development, paid just over $4 million in tenant inducement payments in order to get the project 85% leased.

Because the inducement payments thus could not be correlated directly or principally with the rents generated by the leases which they had induced (given that there were other current benefits that were generated such as obtaining permanent financing and earning performance-related fees), the taxpayer's method of expensing the payments in full achieved at least as accurate a picture, for tax purposes, of the taxpayer's financial position as would the method favoured by the Crown (amortization over the terms of the leases).

Locations of other summaries Wordcount
Tax Topics - General Concepts - Onus 105
Tax Topics - Income Tax Act - Section 18 - Subsection 18(9) 57
Tax Topics - Income Tax Act - Section 9 - Accounting Principles not following matching principle accorded with well-accepted business practices 153

The Queen v. Johnson & Johnson Inc., 94 DTC 6125, [1994] 1 CTC 244 (FCA)

A federal sales tax refund was not receivable by the taxpayer until the Minister had given some public and irrevocable indication thereof. Although, on this basis, the refund was receivable by the taxpayer in its 1983 taxation year, it did not represent income in that year. Instead, the refunds represented a reduction in its expenses for the earlier taxation years in which the federal sales tax paid by it had been included in its expenditures. Hugessen J.A. stated (pp. 6129-6130):

"Where... a business receives a payment, not as compensation for the goods or services which it provides but rather as a reimbursement for an expenditure which was not due and should never have been paid... it is not the year of receipt which is relevant for the determination of profit, but the year of the expenditure which is now found to have been no expenditure at all."

Friedberg v. Canada, 93 DTC 5507, [1993] 4 S.C.R. 285, [1993] 2 CTC 306

realization basis

The taxpayer, who was the general partner of a firm of commodity brokers, entered into spread positions in gold futures contracts, and in the same taxation year closed out the losing legs on his spread positions (while entering into further contracts to maintain his hedged position) but deferred closing out the remaining contracts until the subsequent taxation year. The Crown had failed to demonstrate that it was inappropriate for the taxpayer to report losses when they were actually incurred (on closing out the losing legs) and to not report gains until they are actually realized (in the subsequent year). In particular, the Court was not satisfied that the "marked to market" accounting method proposed by the Crown could describe income for income tax purposes, nor were they satisfied that a margin account balance is the appropriate measure of realized income for tax purposes.

Given that the method followed by the taxpayer did not entail the deduction of unincurred losses, it was not necessary to consider the income tax validity of the "lower of cost or market" method in this case.

West Kootenay Power and Light Co. Ltd. v. The Queen, 92 DTC 6023, [1992] 1 CTC 15 (FCA)

estimated amount was income

Hydro-Electric Utility included in its income for financial statement purposes an estimate of the value of electricity which had been consumed by its customers between the time they last had their meters read and the year-end and for which they had not yet been billed. In finding that the utility was required to follow this method of income recognition for tax purposes as well (rather than excluding accrued but unbilled revenue) MacGuigan J.A. stated that the taxpayer should follow whichever of the accounting methods available to it that "presents the 'truer picture'" of its revenue and that "more fairly and accurately portrays income" (p. 6028) and noted that the vice-president of finance of the utility had admitted that inclusion of the accrued revenue more accurately reflected the utility's profit picture for the year.

R. v. Fogazzi, 92 DTC 6421, [1992] 2 CTC 321 (Ont. C.J. (G.D.)), rev'd 93 DTC 5183 (Ont. CA)

If the accused had been taxable on amounts misappropriated by him (which was not the case), he would have been taxable in the year the money was misappropriated rather than the previous year in which he first received the money.

Maritime Telegraph and Telephone Company v. Her Majesty The Queen, 91 DTC 5038, [1991] 1 CTC 28 (FCTD), aff'd 92 DTC 6191 (FCA)

services performed but not billed

The taxpayer, which billed its clients for local and long distance charges on a monthly basis, and which prior to 1984 had included in its income the value of the services which it had performed but not yet billed, was found to be precluded from switching to the "billed method" of recognizing income for tax purposes. Reed J. stated (p. 5039):

"It is fair to conclude that the earned method accords a 'truer' picture of the company's income for the year in question than does the billed method. The plaintiff is engaged in providing a continuing service which by its very nature results in revenue accruing daily."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Accounting Principles 33

Westcoast Petroleum Ltd. v. The Queen, 89 DTC 5153, [1989] 1 CTC 363 (FCTD)

future obligation for offsetting tariff reduction

The taxpayer was not permitted to exclude from its income from a pipeline the portion of the tariffs charged by it to shippers which was in excess of the level of tariffs that had been properly authorized by the B.C. Energy Commission, notwithstanding that (in the submission of the taxpayer's counsel) one day the taxpayer would have to either lower its tariffs, or retain its present tariffs despite increased costs thereby in effect refunding the overage. The taxpayer's right to the money it had charged was unrestricted, and all that was required of it was to factor any surplus into its tariffs in subsequent years.

Dixie Lee (Maritimes) Ltd. v. The Queen, 88 DTC 6108, [1988] 1 CTC 193 (FCTD), aff'd 91 DTC 5518 (FCA)

substantial performance of services for franchise fees

In consideration of the payment to the taxpayer of franchise fees the taxpayer granted to the franchisee the right to use the taxpayer's name and materials for a term of 10 years and agreed to provide promotional and consulting services. McNair, J. accepted (at p. 6111) the position of the Crown's expert accountant that:

"all material conditions relating to the sale of a franchise had been substantially performed by the franchisor not later than three weeks following the opening of a franchised outlet, that the costs properly allocable to the earning of the initial franchise fee had been incurred by then, and that there was no requirement for refund or repayment of the initial franchise fee in any event,"

and that the full amount of the fees accordingly should be included in income at the time of receipt, rather than being brought into income over the term of the contracts.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(m) substantial performance of services in 1st year 123

Burrard Yarrows Corp. v. The Queen, 86 DTC 6459, [1986] 2 CTC 313 (FCTD), aff'd sub nomine Versatile Pacific Shipyards Inc. v. The Queen, 88 DTC 6352 (FCA)

The taxpayer, upon completing each of the various stages of construction of ships, became absolutely entitled to receive progress payments. The progress payments accordingly were revenue when received.

Zoel Chicoine Inc. v. The Queen, 86 DTC 6251, [1985] 2 CTC 320 (FCTD), aff'd 87 DTC 5409, [1987] 2 CTC 240 (FCA)

The taxpayer was entitled to receive a management fee equal to 10% of the net profits from a shopping centre including gains from its sale. Since the payments were not due until 60 days after the year-end, a 10% fee which the taxpayer received in 1974 from the sale in 1974 of the shopping centre was not taxable until 1975. The amount was not receivable until 1975, and the taxpayer had no absolute right in 1974 to it.

Gibralter Mines Ltd. v. The Queen, 85 DTC 5085, [1985] 1 CTC 116 (FCTD)

income determined annually

It was stated by Muldoon, J. that under the scheme of the Act, taxable income is determined on an annual basis, as opposed to being determined over some shorter period of time.

The Queen v. Imperial General Properties Ltd., 85 DTC 5045, [1985] 1 CTC 40 (FCA)

A submission was accepted that a property is sold when (1) the beneficial ownership has passed under a binding agreement of purchase and sale, and (2) the purchaser has obtained some possessory right which is inconsistent with the vendor's exclusive control over the property.

Locations of other summaries Wordcount
Tax Topics - Other Legislation/Constitution - Federal - Federal Courts Rules - Rule 408(1) 48
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(a) s. 12(1)(a)(i) inapplicable to deposits 49
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(b) balance of purchase price did not become receivable until condition precedent satisfied 96

Qualico Developments Ltd. v. The Queen, 84 DTC 6119, [1984] CTC 122, 84 DTC 6126 (FCA)

The costs of inventory should be deducted from income in the year of sale. To deduct such costs during a prior year in which such costs were incurred or laid out would have the effect of distorting income.

Commonwealth Construction Co. Ltd. v. The Queen, 82 DTC 6152, [1982] CTC 167 (FCTD), aff'd 84 DTC 6420, [1984] CTC 338 (FCA)

Amounts received by the taxpayer pursuant to judgment in a mechanics' lien action were ascertained amounts, and income in the years of receipt, notwithstanding that a portion of those amounts was returned in a subsequent year to the payer to secure an abandonment of an appeal of the judgment. The plaintiff was free to use the money as it chose after its receipt, a judgment "'must be assumed to be valid until interfered with by a higher tribunal'", and analogies to the receipt of deposits were fallacious.

Wilchar Construction Ltd. v. The Queen, 81 DTC 5318, [1981] CTC 415 (FCA)

Inclusion of uncertified progress claims in a construction company's income (as opposed to deferring recognition to the year of certification) was consistent with GAAP and acceptable for income tax purposes.

Olympia and York Developments Ltd. v. The Queen, 80 DTC 6184, [1980] CTC 265 (FCTD)

A sale of apartments by the taxpayer was held to occur under the laws of Quebec at the time of execution and delivery of the deed of sale rather than at the time of executing the memorandum of agreement because the taxpayer was not paid in full at the time of executing the memorandum of agreement, and the parties in the memorandum agreed that "the present memorandum of Agreement shall not be equivalent to a sale."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Disposition of Property complete divesting of all the benefits and burdens of ownership 59

Oxford Shopping Centres Ltd. v. The Queen, 79 DTC 5458, [1980] CTC 7, aff'd 81 DTC 5065, [1981] CTC 128 (FCA)

"[F]or income tax purposes, while the 'matching principle' will apply to expenses related to particular items of income, and in particular with respect to the computation of profit from the acquisition and sale of inventory ... it does not apply to the running expense of the business as a whole even though the deduction of a particularly heavy item of running expense in the year in which it is paid will distort the income for that particular year." Payments made by the taxpayer to the City of Calgary for street improvements that the taxpayer hoped would maintain or increase the popularity of its shopping centre were such a running expense, and could be fully deducted by it, if it so chose, in the year of payment.

Maple Leaf Mills Ltd. v. Minister of National Revenue, 76 DTC 6182, [1976] CTC 324, [1977] 1 S.C.R. 558

amounts received subject to repayment obligation

The taxpayer, upon its purchase of an oil tanker, received a secured revenue guarantee from the vendors. The amounts of the revenue deficiencies were income to it in the years in which they occurred, notwithstanding that a substantial portion of those amounts would not be payable to it until a sale of the vessel, and notwithstanding that amounts received by it under the agreement would be repayable in the event that revenues from the tanker later exceeded projected levels. "At all material times appellant had a clearly legal right to receive all the benefits that together would bring its income to the guaranteed minimum. There is also no doubt that the right of appellant to the amount of the debt resulting from the deficiency in any given year was held by it unconditionally. That amount was bound to accrue though not necessarily immediately."

Harlequin Enterprises Ltd. v. The Queen, 74 DTC 6634, [1974] CTC 838 (FCTD), aff'd 77 DTC 5164, [1977] CTC 208 (FCA)

no deduction for goods not yet returned

The taxpayer was obliged to accept the return of paperbacks previously shipped by it which remained unsold, and it deducted in computing its income a reserve equal to the gross margin of paperbacks on hand at wholesalers at the end of the year. Under the Sale of Goods Act (Ontario) the books had not been shipped on a sale or return basis in light, inter alia, (1) of a clause in the sales agreements providing that title to the books and risk of loss thereof passed at the time of delivery, and (2) the payment for the goods well in advance of the usual time for any return thereof. The sales accordingly were made at the time of delivery. Accounting principles did not support the deduction of a reserve equal to the entire profit element, including that attributable to the approximately 90% of the books that would not be returned. The reserve was non-deductible.

Françon Ltée v. MNR, 73 DTC 5514, [1973] CTC 708 (FCA)

In order to obtain an immediate release of construction holdbacks from the customers of its construction business, the taxpayer deposited securities with them, which were then released after the construction work which it had performed was certified.

Jackett C.J. held that although the holdbacks were in fact received by the taxpayer under this arrangement and therefore included in its income at the time of receipt, it was entitled to a deduction at that time for the value of the securities paid to the customers. This amount would then be included in its income when the securities were released to it.

Minister of National Revenue v. Benaby Realties Limited, 67 DTC 5275, [1967] CTC 418, [1968] S.C.R. 12

profits recognized when ascertained

In finding that the taxpayer realized income from land inventory in its 1955 taxation year (when an agreement was reached with the Crown fixing the amount of compensation for the expropriation of the land, and that amount was paid) rather than its 1954 taxation year (when the land was expropriated) Judson J. stated (p. 5277):

"My opinion is that the Canadian Income Tax Act requires that profits be taken into account or assessed in the year in which the amount is ascertained."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(b) accounts to be left open until determined 154

Minister of National Revenue v. Atlantic Engine Rebuilders Ltd., 67 DTC 5155, [1967] CTC 230, [1967] S.C.R. 477

deposits returned if future supply

In order to secure a regular supply of rebuildable engines, when the taxpayer sold engines which it had rebuilt to Ford dealers it required the dealer to supply it with another rebuildable engine of the same model and to pay a substantial non-forfeitable deposit which would be held by the taxpayer until the dealer did supply such an engine. Cartwright J. held that because the taxpayer knew that it might not be able to retain any part of the deposit received by it (and, in fact, the probability was 96% that the amount would be returned to the dealer in the near future) the realities of the situation were that sums so received were not part of its profits. To the extent that in the following year the taxpayer ceased to be under a liability to return the amount to the depositor, the amount received became a profit in that year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Nature of Income 134

Minister of National Revenue v. Lechter, 66 DTC 5300, [1966] CTC 434, [1966] S.C.R. 655

In the taxpayer's 1955 taxation year, he accepted the Department of Transport's formal offer of settlement for compensation in respect of its expropriation of his land inventory, and in his 1956 taxation year, the Treasury Board ratified the agreement and authorized the payment to the taxpayer. Abbott J. found that "in accordance with the ordinary rules of mandate, [the ratification of the Treasury Board] had retroactive effect to [the date of the agreement]", with the effect that the gain of the taxpayer was realized in his 1955 taxation year rather than 1956 taxation year.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Effective Date 92

Canadian General Electric Company v. The Minister of National Revenue, 61 DTC 1300, [1961] CTC 512, [1962] S.C.R. 3

accrual for FX changes on inventory unpaid purchase price

In 1950, 1951 and early 1952, the taxpayer purchased supplies from its U.S. parents and gave promissory notes evidencing the U.S.-dollar amounts owing by it in respect of the unpaid purchase prices. In its accounts (but not for purposes of its initially-filed tax returns), the taxpayer recorded the Canadian-dollar equivalent of the amounts owing at the times of purchase, and re-translated the amounts owing at each year end. The notes were paid off in 1951 and 1952, when the Canadian dollar had appreciated.

The taxpayer's profit for 1952 was based on the difference between (a) the amount actually paid by it, and (b) the Canadian-dollar equivalent of the amount owing at the beginning of the year translated at the December 31, 1951 exchange rate. The initially-recorded Canadian dollar equivalent of the purchase prices was itself an estimate, and there was no reason for not revising this estimate at each year-end in accordance with ordinary commercial principles. Such an accounting system did not entail the anticipation of future profits, but instead entailed the revision of an estimate of a liability which actually had been incurred.

MNR v. Colford Contracting Co. Ltd., 60 DTC 1131, [1960] CTC 178 (Ex Ct), briefly aff'd 62 DTC 1338, [1962] CTC 546 (SCC)

A contractor was required to recognize income from contracts for the installation of heating and plumbing systems as the progress payments became receivable.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(b) amount is receivable when an absolute, although not necessarily immediate, right to receive 75

Wilson and Wilson Ltd. v. MNR, 60 DTC 1018, [1960] CTC 1 (Ex Ct)

The taxpayer, which followed the "completed contract" method of recognizing income on long-term contracts for the excavation of sewers and water systems for accounting purposes, was permitted to deduct all the costs incurred by it in connection with those contracts only in the years those costs were made or incurred.

The contracts provided for the payment of 90% of the contract price (a fixed sum per lineal foot of work done) when the supervising engineer approved the account by monthly certification, and for the payment of all the 10% holdbacks when the contract was certified to have been completed. With respect to taxation years before the enactment of s. 12(1)(b), amounts under the contracts were earned (with the exception of the holdbacks) at the time of the monthly certification, and the holdbacks were earned at the time of final certification.

Minister of National Revenue v. Imperial Oil Co., 60 DTC 1219, [1960] CTC 275, [1960] S.C.R. 735

no profit from intra-company sale

In computing its "profits ... reasonably attributable to the production of oil or gas", the taxpayer treated oil delivered by its producing department to other departments and still unsold at the end of the year as having been sold by the producing department at a profit. In rejecting this method, Judson J. stated (p. 1224):

"In fact, the producing department was not a separate entity for tax purposes ... No company makes an actual profit merely by producing oil. There is no profit until the oil is sold."

MNR v. Publishers Guild of Canada Ltd., 57 DTC 1017, [1957] CTC 1 (Ex Ct)

The taxpayer, whose business was the selling of books and magazines through door-to-door canvassers, was found by Thorson P. to be entitled to recognize income in accordance with the instalment method (which excluded from its income in the year of sale the gross profit content of the instalments which remained unpaid at the end of that year) in light of evidence that the period of payments for instalments was protracted, the collection of the instalments was uncertain, the costs of collection were high (representing 80% of its administration costs), the accounts were of such doubtful value that they could not be discounted or readily sold, and there were no valuable rights of repossession of the books or magazines sold. In addition, under s. 3 of the Income War Tax Act, which referred to the annual net profit or gain directly or indirectly "received" by the taxpayer, the test was whether the income was received by the taxpayer during the taxation year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Accounting Principles 99

Sinnott News Company Ltd. v. The Minister of National Revenue, 56 DTC 1047, [1956] CTC 81, [1956] S.C.R. 433

The taxpayer was found to have made deliveries of periodicals to its retail dealers on a sale or return basis, with the result that the sale price for periodicals which still were on hand at the dealers at the end of the taxation year were excluded from the taxpayer's income for that year, notwithstanding that for accounting purposes it had booked the sale price of all deliveries made by it to the dealers and deducted a reserve for expected returns. Locke J. stated (p. 1052) that "the position of a person holding goods on sale or return who has not exercised his option to purchase or otherwise become liable to the owner will be the same as if they were held on consignment. In the case of the bankruptcy of the dealer, the property would not pass to the trustee in either case." Kellock J. (who concurred with the majority on other grounds) characterized a sale or return as entailing a transfer of property to the retail dealer, but subject to a condition subsequent which could result in the property re-vesting in the taxpayer.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence 32

Ken Steeves Sales Ltd. v. MNR, 55 DTC 1044, [1955] CTC 47 (Ex Ct)

The taxpayer, which in the first year of its operations deducted expenses on an accrual basis but excluded from its income sales that were reflected in accounts receivable rather than cash received, was required to include the uncollected amounts in its income. Cameron stated (at p. 1050) that the taxpayer's method was "incomplete and misleading and one which fails entirely to show the true state of a taxpayer's position".

Dominion Taxicab Association v. Minister of National Revenue, 54 DTC 1020, [1954] CTC 34, [1954] S.C.R. 82

deposit excluded

Taxi owners contracted with the taxpayer to pay the taxpayer $500 per taxi for the privilege of operating their taxis within the taxpayer's association. On the basis of a finding that the $500 paid was a deposit or joining fee and would become the absolute property of the taxpayer only if the particular owner withdrew from the association and the parties failed to agree on a satisfactory replacement for him, the $500 did not constitute income to the taxpayer.

Robertson Ltd. v. MNR, 2 DTC 655, [1944] CTC 75 (Ex Ct)

The taxpayer, which acted as agent for underwriting members of Lloyd's of London in the writing of workman's compensation, employer's liability and occupational disease insurance, was entitled to receive, at the time each contract took effect, an "advance fee" based on the estimated amount of the payroll of the employer for a specified period (generally six months or a year), and at the end of the specified period was entitled to an "additional fee" computed on the actual remuneration earned by the employees during that period. The binder which initially was issued specified that "the advance fee shall be held as a deposit by the Underwriters" (to whom the taxpayer had remitted a portion of the advance fees received by it) to be retained if the total earned fee was higher, and to be returned to the extent that the total earned fee was less than the advance fee. The binder also fixed a "minimum fee" which was to be retained in any event.

Thorson J. held that the advance fees were not income to the taxpayer to the extent the right of retention of such advance fees had not accrued to the underwriters during each taxation year in question:

"Where an amount is paid as a deposit by way of security for the performance of a contract and held as such, it cannot be regarded as profit or gain to the holder until the circumstances under which it may be retained by him to his own use have arisen and, until such time, is not taxable income in his hands, for it lacks the essential quality of income, namely, that the recipient should have an absolute right to it and be under no restriction, contractual or otherwise, as to its disposition, use or enjoyment." (p. 661)

See Also

Leonard v. The Queen, 2021 TCC 33, rev'd 2022 FCA 195

cost of mortgage debt acquired as adventure not deductible when expended

In finding that the taxpayer could not deduct his cost of purchasing distressed mortgage debt as an adventure in the nature of trade, Sommerfeldt J applied (at para. 82) the principle from Friesen that the cost of inventory was only deductible when it was disposed of.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Loss v. Loss - Debt loss on mortgage that was acquired in order to acquire the underlying property under foreclosure proceeding on income account was also from an adventure 347
Tax Topics - Income Tax Act - Section 171 - Subsection 171(1) Court not bound by an erroneous admission by one of the parties 115
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition foreclosure proceedings resulted in disposition of the mortgage but not of the debt it had previously secured 471
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition - Paragraph (b) - Subparagraph (b)(i) on a foreclosure, the taxpayer disposed of his mortgage, even though the debt it secured remained outstanding 429
Tax Topics - General Concepts - Evidence Manitoba law, being where the Tax Court hearing was held, was the lex fori governing the mortgage foreclosure proceeding at issue regarding a U.S. property 178

Paletta Estate v. The Queen, 2021 TCC 11, rev'd 2022 FCA 86

straddle trade losses recognized consistently with Friedberg

In order that he could shelter most or all of his income for his 2000 to 2006 taxation years through a straddle program (with much of his 2007 income also being sheltered), the taxpayer (“Paletta”) entered into series of foreign exchange (“FX”) forward contracts with UK brokers. To simplify somewhat a program that in fact entailed very numerous trades: for each forward that was long the particular currency (creating the “long leg”), there was a largely matching forward establishing a short position (agreeing to sell the same currency on a slightly different (future) value date, thereby creating the “short leg” with an almost exactly offsetting value, irrespective of the applicable FX fluctuations); and near each year end, he would the realize the targeted loss by closing out whichever of the long and short legs at that time was the loss leg of the straddle. The corresponding gain leg would not be closed out until near the beginning of the following year. In that following year the same trading pattern would be repeated but on a larger scale, given that the entire gain from closing out, in that year, the gain leg from the previous year’s trading needed to be offset in addition to his other taxable income for that year. Because of the almost perfect matching of the long and short legs (except over the year end), he was required to maintain only minimum margin.

In finding that the taxpayer’s claimed losses (except for an $8 million overstatement of the 2002 loss due to an “egregious error” – for which a gross negligence penalty was sustained) were fully deductible, Spiro J noted (at para. 191):

Friedberg stands for the proposition that straddle traders may report the results of their trades for tax purposes on a [realization] basis that does not reflect the true economic results of such trades.”

He further noted that the Parliamentary response to Friedberg (in ss. 18(17) to (23)) was not introduced until 2017.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 3 - Paragraph 3(a) - Business Source/Reasonable Expectation of Profit losses generated under straddles were deducible from a source notwithstanding that they generated small economic losses 261
Tax Topics - General Concepts - Sham FX straddles were not shams, and “window dressing” is not a standalone anti-avoidance doctrine 241
Tax Topics - Income Tax Act - Section 163 - Subsection 163(2) a reasonable person would have surfaced the omission of an $8M trading gain with an inquiry of his accountant 391

Mazo v. The Queen, 2016 TCC 232 (Informal Procedure)

revenue earned when credited to taxpayer's account with promoter

The taxpayer (Ms. Mazo) participated in and profited on balance from a pyramid scheme, which in form entailed the participants paying the promoter (“BIMIC”) around $3,200 each to join the bottom of a purported sales organization (the pyramid), recruiting people to join a level below them, and receiving a pay-out if the pyramid beneath them expanded to four levels deep. Money earned by them as a result of rising to the top in this manner as a “director of sales” could at their option be paid to them in cash or, among other options, retained as a credit in their account with BIMIC.

Graham J found (at para. 27) “that Ms. Mazo earned revenue from the scheme when funds from being a director of sales were deposited to her BIMIC account” rather than when (if at all) she subsequently withdrew cash from the account, stating:

Ms. Mazo’s clear evidence was that she believed the money was hers and that she had full access to it. There is no evidence to contradict her. Justice Rennie indicates that, when the scheme ultimately collapsed, any remaining funds in the BIMIC accounts were not paid out. [Cuzzetto v. Business In Motion International Corporation et al 2012 FCA 253] … However, that evidence was not before me.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Business pyramid scheme gives rise to business, not property, income 287
Tax Topics - Income Tax Act - Section 3 - Paragraph 3(a) - Business Source/Reasonable Expectation of Profit pyramid scheme a source of business income 92

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

inducement payments received by lessor from manufacturer not income until potential repayment obligation quantified

General Motors of Canada Limited ("GMC") made "residual value support payments" to the taxpayer ("GMAC"), which purchased vehicles subject to leases, in consideration for GMAC increasing the residual values (thereby reducing lease payments). These payments were received by GMAC on income account. For the period in issue, "true up" payments were made on the lease terminations based on the actual loss (if any) experienced by GMAC relative to the (inflated) residual value, so that if that loss were less than the support payment (or nil, if the customer purchased the vehicle for the residual value), GMAC refunded the support payment to GMC to that extent (and, conversely, received a further payment from GMC if the loss were greater.)

Graham J stated (at para. 37):

[T]he residual value support payments were earned at the end of the lease. Although GMAC had use of the money at the beginning of a lease, it did not have any entitlement to keep it until the lease ended and GM and GMAC knew whether GMAC had had to sell the vehicle and, if so, what price it had been sold for.

See summaries under s. 12(1)(x), s. 9 – compensation payments, and s. 9 – computation of profit.

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 258
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7.4) amounts replaced reduced lease income rather than contributing to leased vehicles' cost 239
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Timing capital tax accrued from day to day 226
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 284
Tax Topics - Income Tax Act - Section 9 - Computation of Profit surcharges received by lessor at lease termination for excess use were income 264

Kruger Incorporated v. The Queen, 2015 DTC 1127 [at 788], 2015 TCC 119, rev'd 2016 FCA 186

realization principle applied to FX options written by taxpayer

The taxpayer traded foreign currency options as a separate business from its pulp and paper business, with its principal option activity being the writing of European-style puts and calls with banks as the counterparties. The taxpayer reported gains and losses on these options essentially on a mark-to-market basis (although it amortized option premiums into income over the terms of the contracts). As there was no market for European style options, the taxpayer adhered to each counterparty bank's valuation of the contract (which often differed from other banks,' as their valuation models differed. For the year in question, this resulted in the taxpayer claiming a loss approximately $72 million greater than if it had reported on the basis of losses (or gains) actually realized.

In finding that the taxpayer instead should have used the realization method, Rip J stated (at paras. 114, 115):

The realization principle is basic to Canadian tax law. It provides certainty of a gain or loss.…

[D]erivative financial instruments are not "mark to market" property as defined by section 142.2. Yet the CRA has accommodated banks and others to value such contracts mark to market. … At the end of the day, however, it falls to Parliament to enact the law, the courts to interpret the law and the CRA to enforce the law… .

He also noted (at para. 116) that the inconsistent results produced by the mark-to-model approaches of the different banks (adopted by the taxpayer) shook his confidence in the use of those values by the taxpayer.

He proceeded to accept the taxpayer's alternative argument that the options contracts, if purchased by it, were held as inventory, and thereby could be valued under s. 10. However, the contracts which the taxpayer instead had written were liabilities rather than property, and thus not inventory.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 10 - Subsection 10(1) options contracts purchased, but not those written, were inventory 200
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Inventory options contracts purchased, but not those written, were inventory 122
Tax Topics - Income Tax Act - Section 4 - Subsection 4(1) - Paragraph 4(1)(a) paper manufacturer's large-scale options-trading operation was a separate business 166

Malo v. The Queen, 2012 DTC 1214 [at 3588], 2012 TCC 75 (Informal Procedure)

After finding that the taxpayer's losses from his stake in a tree-planting operation could not be deducted by virtue of failing to comply with the tax shelter rules in s. 237.1, Hogan J. stated in obiter dicta that the taxpayer's outlays (three payments of $25,000) represented the cost of inventory (namely, 750 tree sapplings that would not be sold until they matured), rather than current expenses or capital expenditures. Although the taxpayer received three identical itemized invoices for these amounts (allocating $5000 for soil preparation, for example), there was no evidence that the amounts had actually been spent in such a way.

Reilly v. The Queen, 2010 DTC 1223 [at 3623], 2010 TCC 326

cash basis of accounting for business expense generally not permitted

The taxpayer took the position that he engaged in an unsuccessful campaign in 1999 to become mayor of Delta, B.C. in order to enhance his profile and thereby increase his income as a real estate broker and developer. His campaign expenses were paid by a corporation of which he was a 40% shareholder, and reimbursed by him in 2001. In finding that the taxpayer was not entitled to deduct the 2001 outlay in computing his business income, Webb J stated (at para. 15):

Since it is clear that the well-established business principle is that revenues and expenses are to be determined on an accrual basis and not a cash basis and that “cash basis financial statements do not conform with generally accepted accounting principles”, it seems to me that only those persons who are granted permission under the Act to determine their income on a cash basis may do so. … [T]here is no provision of the Act that allows the Appellant, who is not an employee in relation to the services that he is providing as a realtor / broker / developer, to determine his income on a cash basis.

Langille v. The Queen, 2009 DTC 1431, 2009 TCC 398

Commissions in respect of policies issued before the taxpayer incorporated a corporation to which he transferred his insurance brokerage business, with virtually all of the agent services having been provided before that date, were income to the taxpayer and not of the corporation.

Destacamento v. The Queen, 2009 DTC 806, 2009 TCC 242 (Informal Procedure)

The taxpayers, who were life insurance salesmen, received advance commissions when they sold a policy but with a requirement to pay back a portion of the commissions if the customer cancelled the policy within two years. In finding that the full amount of the advance commissions were income when received, V.A. Miller, J. noted that there is no interest charged on the advance commissions and that the taxpayers were not subject to any restrictions on the right to dispose of the amounts so received by them.

2187878 Nova Scotia Limited v. The Queen, 2007 DTC 761, 2007 TCC 249

The portion of a large write-down that the taxpayer was able to verify as representing overstatements of income or understatements of expenses that had been fraudulently recorded by a controller (but without pocketing any of the misstated items) of the taxpayer who subsequently was fired was permitted as a deduction in the year of the write-down given that it was not possible for the taxpayer to determine which particular previous years the overstatements related to and given that disallowing the deduction in that year of the expense would be tantamount to requiring the taxpayer to pay tax on phantom income (most of which were statute-barred).

Ferro v. The Queen, 2003 DTC 491 (TCC)

The taxpayer, a litigation lawyer who entered into contingency fee arrangements with all his clients under which he was only entitled to render an account to them in the event that an action was settled or a judgment obtained, and who generally only paid the fees of third parties incurred in the litigation process (e.g., medical and investigation reports) when the matter was concluded, was entitled to deduct such fees as they were incurred. Teskey T.C.J. rejected the submission on behalf of the Minister that the unbilled disbursements should be shown as receivable in the year incurred, with the result that there was no net deduction in that year. He noted (at p. 496) that until a successful outcome of an action "there was no liability on the client and therefore it cannot be a receivable until the right to collect the amount occurs, that is a negotiated settlement or a court judgment."

Banner Pharmacaps NRO Ltd. v. The Queen, 2003 DTC 245, 2003 TCC 82, aff'd 2003 FCA 367, 2003 DTC 5642

aff'd on other grounds 2003 FCA 367, 2003 DTC 5642

A dividend was income to the taxpayer in the year the dividend was declared in light of the "underlying assumption in the Income Tax Act that income from business or property will be determined by the accrual method of accounting". Mogan T.C.J. stated (at p. 253) that:

"I question whether any corporation is permitted to adopt the cash method of accounting if it is part of a corporate group having transactions with one or more other corporations in the group which carry on an active business."

Iron Ore Co. of Canada v. The Queen, 2000 DTC 1725 (TCC)

Lamarre Proulx TCJ. found that Canada Safeway Ltd. v. The Queen, 98 DTC 6060 (FCA) was "modified" by Ikea Ltd. v. The Queen, [1998] 1 S.C.R. 196 and Canderel [1998] 1 S.C.R. 147 so that refunds (in this case, of Quebec sales tax) would have to be taken into income in the year their amount was ascertained.

Johnston v. Britannia Airways Ltd., [1994] BTC 298 (Ch. D.)

The taxpayer, which operated an airline, was effectively compelled to pay for the major overhaul of each jet engine after every 17,000 hours of air time. It deducted for accounting and income tax purposes the cost of each engine overhaul in advance of the performance of that work, by accruing the estimated cost of each overhaul on the basis of the number of hours flown. Knox J., in declining to overturn the finding of the special commissioners that this method of anticipating the costs of major engine overhauls presented a truer picture of annual profits than the two other methods of dealing with such costs that also were used in the aircraft industry and accorded with accountancy practice, stated (at p. 316) that "the fact that a liability is contingent or future in the sense that it will not fall to be discharged in the relevant accounting period is not a bar to the making of a proper provision against that liability in that accounting period", and that "the Court is slow to accept that accounts prepared in accordance with accepted principles of commercial accountancy are not adequate for tax purposes as a true statement of the taxpayer's profits for the relevant period".

R. & J. Engineering Corp. v. MNR, 92 DTC 1844 (TCC)

The taxpayer was unsuccessful in deferring the recognition of income under contracts relating to the installation of manufacturing equipment to the year of completion of the contracts, rather than the time of receipt of amounts under the contracts, given that the amounts received were not subject to any restrictions as to disposition, use for enjoyment. In particular, the taxpayer was unsuccessful in a submission that under the terms of the contracts it should not be regarded as being entitled to the amounts received by it until the successful completion of equipment acceptance tests.

Fleur de Lys Warehousing Ltd. v. MNR, 91 DTC 1343, [1992] 2 CTC 2158 (TCC)

A refund of municipal taxes constituted income to the taxpayer at the time it received a favourable decision of the tribunal to which it had appealed its assessment for the taxes, notwithstanding the appeal of that decision and the fact that such decision was not affirmed, and payment was not made, until subsequent taxation years.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 51

Yesac Creative Foods Inc. v. MNR, 91 DTC 413, [1991] 2 CTC 2622 (TCC)

Lease inducement payments, which the taxpayer received on income account, were required to be included in full in the year of receipt rather than being amortized over the term of the leases, given that the taxpayer deducted all its fitting-out costs in the year of receipt.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Compensation Payments 83

Recordwide Distributors, Inc. v. C.I.R., 82-2 U.S.TC 84:713 (C.A. 8)

The Court upheld the finding of the Tax Court that the taxpayer "dealt with its customers on a 'sale or returns' basis, and that the right to receive payment thus arose upon delivery of the merchandise to the taxpayer's customers". Accordingly, income was recognized at the time of delivery.

Willingale v. International Commercial Bank Ltd. (1978), 52 TC 242 (HL)

A regular part of a bank's business consisted of discounting or purchasing bills or notes. For accounting purposes the discounts were brought into income on a straight-line basis, but it was found for tax purposes that they were not realized until the notes were sold or matured in light of the finding of the Commissioners that:

"Current prices of discounted bills are affected by the risk involved in rates of interest which are subject to wide fluctuations. The amount of profit a purchaser or discounter of a bill may make is not ascertainable before the bill (a) is sold or (b) reaches maturity."

Lord Fraser stated:

"Interest accrues from day to day, or at other fixed intervals, but discount does not ... [W]hen a bill is discounted nothing is realized until the bill matures or is sold, and the whole profit is postponed or rolled up until one of these events occurs."

Kennedy v. MNR, 73 DTC 5359, [1973] CTC 437 (FCA)

In contrasting the determination of income under s. 8(1) (now s. 15(1)) and s. 9, Jackett C.J. stated:

"In the case of 'income', it is assumed, in the absence of special provision, that Parliament intends the tax to attach when the amount is paid and not when the liability is created. (The courts naturally react against taxation before the income amount is in the taxpayer's possession.)"

Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Other 60
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) benefit in year of note issuance/tenant improvement benefit based on PV of reversion boost 317

Burley Tobacco Growers Cooperative Association, Inc. v. U.S., 68-2 U.S.TC 87:579 (D.C. Ky.)

A farmer's tobacco cooperative organization required each grower who presented tobacco at its warehouse to make an annual contribution, which was held by the cooperative in trust until the grower demanded its repayment or the limitation period for making such a demand for a refund expired. Until the expiry of this period, the funds held in trust did not represent income. Thereafter such "funds were not subject to any legal restrictions as to their use within the scope of plaintiff's operations, and as the plaintiff had full dominion and discretionary control over their expenditure in the year in which the right of the grower to demand a refund either lapsed or was waived, the said funds constituted taxable income" (p. 87,581).

British South Africa Co. v. Varty, [1966] A.C. 381 (HL)

The taxpayer lent £200,000 to a gold mining company and received, at the time of making the loan, an option to subscribe for shares of the mining company at an exercise price somewhat in excess of their market price at that time. The exercise price was payable in kind, through a reduction in the amount of the loan.

The exercise of the option (which was inventory to the taxpayer) after the shares had more than doubled in value did not give rise to a taxable profit. Lord Hodson stated:

"I do not think that the exercise of an option is the exchange of one investment for another. It is the acquisition of the shares which gives rise to the realization of profit if and when the shares are sold to advantage, but the option was in this case never realized because it was never dealt with in the course of trade. The option was never dealt with at all. It was, on the other hand, retained until as had been intended it was exercised by the acquisition of shares."

Automobile Club of N.Y., Inc. v. CIR, 62-2 U.S.TC 85:342 (C.A. 2)

The taxpayer, which was a membership corporation functioning as an automobile club, sold savings plan coupons at face value to participating service stations and stores, which distributed the coupons to the taxpayer's members in add amount equal to 10% of each member's purchasers. Members could then either redeem the coupons in cash from the taxpayer or use the coupons to pay their annual dues. Coupons are redeemed by the service stations or stores only upon cancellation of their savings plan contracts.

Moore J. found that because it was impossible, given the absence in prior years of any consistent pattern to redemptions, to estimate what portion of these coupon sales in any year would result in redemptions, it was not unreasonable for the commissioner to include the excess of coupon sales over redemptions in the taxpayer's income for a taxable year.

Elson v. Prices Taylors, Ltd. (1962), 40 TC 671 (Ch. D.)

When a customer of the taxpayer ordered a "made-to-measure" suit he was asked for a deposit (although the receipt given to him showed only the purchase price and the balance owing, and did not use the word "deposit"). Ungoed-Thomas J. held that because "'deposit' bears a perfectly well and commonly known meaning of security for completion of the purchase" (p. 677) and because the payment was described as such to the customer, the payment should be regarded as a deposit and not merely a part-payment of the purchase price notwithstanding that senior employees of the taxpayer had been instructed that any customer who for any reason declined to take a suit he had ordered was to have his "deposit" refunded to him. He further held that because the deposit became the taxpayer's property on payment and any return of the deposit to the customer was made "not on account of any right of the customer to what was the Company's property, nor on account of any obligation under the contract, but because it was decided by the Company of its own volition, as a separate matter of policy, that it would be helpful to the Company's goodwill" (p. 678), the deposit was a trade receipt when received.

Words and Phrases

Anderson Logging Co. v. The Queen, 52 DTC 1215 (PC)

The taxpayer sold timber limits for minimum guaranteed payments of $180,000 of which $80,000 was paid on the date of the contract, $50,000 (or such greater sum as represented by $4 for each 1,000 feet of timber which have been cut to date) was payable one year later, and the remaining $50,000 was payable two years later. In finding that a profit of $131,250 which was shown in financial statements drawn up before the making of the final payment, did not represent income for purposes of the Income and Personal Property Taxation Act (B.C.), Lord Dunedin stated that it "was only a mere estimate necessarily contingent on the sums due by the purchaser being eventually paid" (p. 1217).

Jay's - The Jewellers, Ltd. v. C.I.R. (1947), 29 TC 274 (K.B.D.)

Where the taxpayer, which carried on a pawnbroker business, sold an unredeemed pledge for an amount between 10s. and £10, the surplus of the proceeds over the amount of the loan and accrued interest became the property of the pawnbroker after three years by virtue of the Pawnbrokers Act, 1872, and where the pledge was sold for more than £10, the borrower lost the right to recover the surplus after the expiration of the normal six-year period of limitation. Atkinson J. held that the surplus was not a trade receipt when received, but became a trade receipt after the expiration of the relevant period. Although, in the case of the expiration of the six-year period, the surplus amounts still would be owing to the customer whose remedy to recover was barred, "in practice those amounts would be dealt with and properly dealt with by the firm as their own" (p. 287).

Cowen's Ideal Trading Stamp Co. (Glasgow) Ltd. v. C.I.R. (1934), 19 TC 154 (C.S. (1st D.))

The taxpayer "sold" books of stamps to shopkeepers who distributed the stamps free of charge to retail customers in proportion to the value of goods purchased. The customers were entitled to exchange booklets of stamps at the taxpayer's warehouses for articles of value. The taxpayer's accounting practice was to initially credit the sale price of all stamps sold to a "Trading Stamp Account" and, at the end of the financial year, to transfer and credit to its "Trading Account" an amount equal to the redemption value of stamps presented to it during the year. Clyde L.P. upheld the finding of the Commissioners that the taxpayer's profit for the year should include all sales of stamps reduced by a reserve for unredeemed stamps whose amount took into account the facts that the taxpayer's cost of supplying goods to the retail customers was less than the redemption value of the stamps, and that only a portion of the unredeemed stamps ultimately would be redeemed.

Brown v. Helvering, 290 U.S. 193 (1933)

The full amount of the gross overriding commissions on business written by a fire insurance agent in a year were included in his income and he was not permitted to deduct any reserve on account of cancellations expected to occur in later years. With respect to the initial character of each overriding commissions as income when receivable, Brandeis J. stated (p. 199):

"... the mere fact that some portion of it might have to be refunded in some future year in the event of cancellation or reinsurance did not affect its quality as income ... When received, the general agent's right to it was absolute. It was under no restriction, contractual or otherwise, as to its disposition, use or enjoyment."

As to the non-deductibility of a reserve he stated (p. 200):

"No liability accrues during the taxable year on account of cancellations which it is expected may occur in future years, since the events necessary to create the liability do not occur during the taxable year. Except as otherwise specifically provided by statute, a liability does not accrue as long as it remains contingent."

Administrative Policy

7 June 2022 External T.I. 2019-0796641E5 - Stock options issued to a corporation

stock options may not generate business income until they vest

A Canadian-controlled private corporation (“CCPC”) is granted an option to acquire shares of an arm’s length CCPC. The option will only vest upon completion of a medical research project in which it is engaged in the course of its business. Such vesting occurs at the end of the third year, and the corporation exercises its option to purchase the shares at the beginning of the fourth year.

Regarding the timing of the recognition of any business income, CRA stated:

Generally speaking, where stock options are granted to a taxpayer as payment for consulting services rendered, the FMV of the underlying shares on this date over the aggregate of the exercise price of the option should be included in the taxpayer’s business income, pursuant to subsection 9(1). … [W]here it can be determined … that the option is granted in consideration for services that are to be rendered after the time of grant and upon the fulfillment of a condition or contingency, the income should instead be recognized when the services are rendered, the amount is quantifiable and the rights are unrestricted.

… [Here] the vesting of the option is linked to the completion of the long-term research project. As such, it may be difficult to conclude that the income is earned before the vesting date under the particular arrangement. … [G]enerally, it is at the time where the services have been rendered and the contingency has been fulfilled, that the FMV of the underlying share over the aggregate of the exercise price of the option should be included in income under subsection 9(1). …

… Where the facts indicate that the incremental value represents part of the consideration received by the taxpayer for consulting services rendered, the incremental value should generally be treated as business income for purposes of the Act.

13 August 2020 External T.I. 2019-0802891E5 F - Unclaimed RRSP Benefits

receipt of income by an administrator was not income of the beneficial owner until the year she was identified

The estate of the deceased annuitant of an RRSP was fully settled without the executor (his surviving wife and the sole beneficiary) being aware of the RRSP. Later, the RRSP became unclaimed property and the Quebec Commission for dealing with unclaimed property (the “DPBNR”) instructed the RRSP issuer to liquidate the RRSP and remit the proceeds in cash to it. In a subsequent taxation year, the surviving spouse claimed and received the amount from the DPBNR as the sole estate beneficiary.

CRA found that the amount paid to the surviving spouse was to be included in her income under the surrogatum principle as being in lieu of a payment received under s. 146(8). In finding that the income inclusion occurred in the year of receipt of the payment by her (when she had been identified) rather than in the year of receipt by the DPBNR, CRA stated:

[A]t the time the DPBNR (as administrator) received a benefit under an RRSP on behalf of an unidentified beneficiary (the beneficial owner), the beneficial owner was unknown and could not be identified. However, it is [its] longstanding position … that the CRA must … rely on the facts as they exist at the end of the taxation year. …

To the extent that, at the end of a particular taxation year in which the DPBNR received a benefit under an RRSP, the beneficial owner was not identified with certainty, the facts as they existed at the end of the particular taxation year did not permit the benefit to be included in computing a taxpayer's income. The fact that the identity of the beneficial owner is clarified in a subsequent year does not change the facts as they existed at the end of the particular taxation year. Consequently, an amount received in a particular taxation year by the DPBNR on behalf of a beneficial owner and paid in a subsequent year to the same beneficial owner, once identified, is not required to be included in computing the beneficial owner's income in the particular taxation year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 146 - Subsection 146(1) - Benefit - Paragraph (a) benefit includible in deceased annuitant’s return was not subject to "benefit"-(a) exclusion because it was not reported 312
Tax Topics - Income Tax Act - Section 146 - Subsection 146(8) s. 146(8) benefit paid to the taxpayer’s administrator was not includible in her income until the year she was identified and received the amount 377
Tax Topics - Income Tax Act - Section 146 - Subsection 146(4) - Paragraph 146(4)(c) tax imposed on RRSP under s. 146(4)(c) where RRSP issuer unaware of annuitant’s death 187
Tax Topics - General Concepts - Payment & Receipt constructive receipt of amount deducted on account of fees that were the recipient’s obligation 280
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose fees incurred as a consequence of receiving unclaimed property (which was taxable under s. 146(8)) were non-deductible 205

21 October 2015 Internal T.I. 2015-0592781I7 - treatment of bond locks

losses on interest or dividend rate hedges could be amortized/any gains immediately includible

Canco, which was wholly-owned by its Canadian Parent, entered into “Dividend Bond Locks” and “Interest Bond Locks” (collectively, the “Bond Locks”) with third-party counterparties. The Dividend Bond Locks were said by Canco to hedge against an increase in the dividend rate on preferred shares issued by Parent which provided for periodic resetting of the dividend rates thereon. Canco had to make a payment on the termination of the Dividend Bond Locks. The terms of the Interest Bond Locks were similar, except that they related to Debentures of Parent. Their settlement also was at a loss.

After finding that the losses realized by Canco were on income account, Headquarter went on to address the timing of their deduction:

[T]he benefits of the Bond Locks are primarily related to the interest stream on the Debentures and the dividend stream on the…Preferred Shares. The taxpayer does not seem to have made any representations that the Bond Locks provided any immediate benefits [unlike Canderel]. Accordingly… there is a good case to be made that amortization is appropriate… .

The taxpayer has asked that the CRA confirm that if losses on the Bond Locks are amortized, then gains should be amortized as well. However…Ikea specifically states that there is no possibility of an amortization of income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Futures/Forwards/Hedges hedges re dividend or interest obligations of parent on income account 212

9 October 2015 APFF Roundtable Q. 9, 2015-0595661C6 F - Question 9 - Table Ronde APFF 2015

damages clause might represent a condition permitting deferral of income recognition

In order to enhance customer retention, a manufacturer agrees with its independent distributors to disburse $1,000,000 to them over two years if the distributors agree to follow a specified program of excellence over a period of eight years, and to pay damages if they fail to do so. Under Canadian accounting principles, a distributor must include the amounts received as revenue over the eight-year period. Should this treatment also be followed for s. 9 purposes? After discussing Canderel, CRA stated:

Ikea Ltd. v. The Queen [f.n. [1998] 1 S.C.R. 198]… confirmed the importance of the realization principle under which amounts received or realized by a taxpayer – free of conditions or restrictions as to their use – are taxable in the years in which they are realized subject to any contrary provision in the Income Tax Act or other rules of law.

…[I]f it is determined that the $1,000,000 that the manufacturing corporation is obligated to disburse over two years (the “sum”) was, for the distributor corporation, free of conditions or restrictions respecting its use from the commencement of the contract, the sum could be included in the income of the distributor corporation in such taxation year [of commencement] under the terms of subsection 9(1).

Furthermore, an examination of the relevant documentation and the applicable private law would be necessary in order to determine if the damages clause…constitutes by itself a condition restricting the use of the sum by the distributor corporation.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(m) s. 20(1)(m) reserve may be claimable for an amount included under s. 9 rather than 12(1)(a) 167

23 December 2014 External T.I. 2013-0487791E5 F - Période d'amortissement du revenu d'emphytéose

sum received on granting an emphyteusis is proceeds because it is not a lease
aff'd by 2021-0917841E5 F

A corporation rents a property under an emphyteutic lease for a lump sum. Is it able to amortize that amount over the period stipulated in the deed constituting the emphyteusis? CRA responded (TaxInterpretations translation):

[A]t civil law, an emphyteusis is not a lease, but instead a division of the property rights [citing Gatineau v. Canada, 2013 FC 439]. Consequently, the taxation rules applicable to a lease do not apply… .

If the emphyteusis is made for consideration, the sum so provided, whether payable in a lump sum or by instalments, is considered as proceeds of disposition of the proceeds of disposition of a right of emphyteusis or of part or all of the property subject to the emphyteusis. In other words, the grant of an emphyteusis constitutes the disposition of property for income tax purposes. …[Accordingly] the sum received on the grant of an emphyteusis cannot be amortized over the term because the emphyteusis is not considered as a lease and the sum received is proceeds of disposition. However, by virtue of subsection 40(1)…a taxpayer can claim a reserve…

2012-047210 no longer reflects the CRA position… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition sum received on granting an emphyteusis is proceeds of disposition 191

6 February 2015 Internal T.I. 2015-0566681I7 F - Redevances perçues d'avance

lump sum irrevocable prepayment of contingent future royalties fully included

Corporation G and Corporation D, who were affiliated corporations, were the licensor and licensee of a licence to manufacture and sell a product in most world markets in return for a royalty calculated on net sales. In order for Corporation G to utilize non-capital losses which otherwise would have expired, Corporation D made a lump sum payment (the "Payment"), which was agreed to be an advance on any royalties arising from future sales of Product A, but with the Payment not, under any circumstances, being refundable by Corporation G.

The Directorate noted that the Payment appeared not to be a royalty as it did “not appear to be subject to any contingency,” but that it was “integral to the business of Corporation G and…business income to it.”

The Directorate indicated that the Payment (following Ellis Vision ) “could be considered as an amount paid in advance for the use of chattels,” in which case it would be included in income under s. 12(1)(a). However, “given that the Payment received by Corporation G does not contain any condition or limitation as to its use, an argument could be made that the Payment could also become within subsection 9(1).” It was not necessary for CRA to “resolve the issue of which of these two provisions prevails because Corporation G does not wish to benefit from a deduction under paragraph 20(1)(m).”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(a) irrevocable royalty prepayment under s. 12(1)(a) or 9 139

10 October 2014 APFF Roundtable Q. 13, 2014-0538111C6 F - Boni suite à la signature d'un contrat d'appro

Canderel and Ikea principles

The purchaser under a major supply agreement negotiated a "signing bonus" of $5 million (payable equally in the first and second year) in conisderation for agreeing with the supplier to puchase the raw materail under the six-year agreement, and with damages payable on specified events of non-performance. CRA did not specifically address the treatment to the supplier and purchaser and instead provide a general overview of the Canderel and Ikea principles.

11 March 2014 Internal T.I. 2013-0513221I7 F - Stock options

no s. 9(1) income inclusion from consultant being granted stock options until exercise

Publico determined to grant stock options to its directors and consultants, as a result of which a private corporation ("Corporation"), that had provided consulting services, was entitled to receive a grant of options. However, such options instead were granted directly to an individual sole shareholder of Corporation, who subsequently exercised and sold the acquired Publico shares, reporting a capital gain.

Before considering the application of ss. 56(4) or 56(2) to Corporation, the Directorate first addressed what would have been the tax consequences had the options been granted directly to Corporation, and stated:

[G]iven that the terms of Publico stock options must provide that they cannot be assigned or transferred, it was necessary for Corporation itself to exercise its options to acquire the shares of the capital stock of Publico. It therefore appears to us that the tax consequences for Corporation would normally be those arising from the exercise of those options. …

As to the nature of the income that would have arisen to Corporation at the time of the exercise of the options, we are of the view that this is consideration for the services that were to be rendered by Corporation to Publico. … Consequently, the income generated on the exercise of options granted by Publico would normally be added to the Corporation's business income under subsection 9(1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) double income inclusion under s. 56(2) or (4) to consulting corporation, and under s. 15(1) to its shareholder, where consultant's options issued directly by client to shareholder 113
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2) s. 56(2) benefit where corporation implicitly consented to consultant's options being issued by client directly to its shareholder 170
Tax Topics - Income Tax Act - Section 56 - Subsection 56(4) implicit transfer by corporation when stock options earned by it were issued directly by its client to its shareholder 175
Tax Topics - Income Tax Act - Section 248 - Subsection 248(28) s. 248(28) does not prevent a double income inclusion to corporation under s. 56 and shareholder under s. 15 226
Tax Topics - General Concepts - Fair Market Value - Options stock options with no in-the-money value could have nil FMV 134
Tax Topics - Income Tax Act - Section 52 - Subsection 52(1) s. 15 benefit due to shareholder receipt of stock options earned by corporation added to the ACB of the exercised shares 165

2 April 2013 External T.I. 2013-0475571E5 - Life insurance

In accordance with Destacamento and Demeterio, CRA found several bases on which a self-employed taxpayer's life insurance sales commissions must be included in income the years they are earned, notwithstanding that the taxpayer would be obligated to return ("chargeback") some or all of a commission if a customer cancelled a policy within the first twelve months:

  • The commissions "have the quality of income in the year of receipt" and should be included pursuant to s. 9.
  • Even if the commissions are unearned, they must be included in the year received (s. 12(1)(a)) or to offset amounts advanced in respect of life insurance contracts (s. 32(1)(a)).

Chargebacks would be deductible from income, assuming the chargebacks were incurred for the purpose of earning income from a business.

22 November 2011 External T.I. 2011-0404021E5 F - Revenu des entrepreneurs

renovation, and sewage system work, does not qualify as "construction" eligible for completion method

CRA takes the position that renovation of buildings or work on water supply and sewage systems is not a "construction activity" under IT-92R2, and, therefore, the completion method is not available for such contracts. Where only some of the contracts performed by contractors are covered by IT-92R2, they may use the completion method described in para. 12 of IT-92R2 only in respect of the construction contracts.

Words and Phrases

29 August 2011 Internal T.I. 2009-0336671I7 - Derivative

Interest rate swap transactions were entered into between a controlled foreign affiliate of the taxpayer ("BCo") and a foreign financial institution specializing in derivative contracts ("FCo"). There was a fixed coupon swap of FCo computed and paid every six months at a fixed notional interest rate on a US-dollar notional principal and a second arm payable by BCo on (presumably the same) US dollar notional principal at the prevailing US six-month LIBOR rate but payable every X years.

CRA rejected the taxpayer's position that a net amount payable or receivable by the taxpayer under this composite swap position should be computed on an annual basis, thereby resulting in current deductions of a net loss on an accrual basis. After referring to the realization principle, CRA stated:

...a gain could only be realized and a loss could only be incurred upon the termination of the swaps at the specified termination date. Only on the termination date would the taxpayer have the absolute right to receive, or the legal obligation to pay, the cash settlement. Only on the termination date could the cash settlement amount be ascertained.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(11) - Investment Contract interest rate swap not a debt obligation 93

20 March 2012 External T.I. 2011-0424461E5 F - Déduction d'une rétribution à un agent immobilier

commissions paid for leasing-up a new building generally are fully and currently deductible

A taxpayer who owns two properties that allow the earning of rental income, and pays a real estate agent commissions (based on a percentage of the rents for the initial term) for finding tenants to occupy a newly-built rental building. After noting that Cummings found “that the payment of fees to a real estate broker for finding tenants and entering into new leases is generally a current expense” and that Canderel found that “in order to obtain a better or a more accurate picture of the landlord's profit, the lease incentive payments were current expenses that were deductible in the year, and which were not subject to the matching principle because they brought significant and numerous benefits immediately in the year of payment,” CRA stated:

[A]ssuming, of course, that this remuneration represents an expense of a current nature … the remuneration would be deductible in the years in which it is paid. That approach would provide a fairer picture of the taxpayer's profit.

Income Tax Technical News-42, 31 May 2010

"For tax purposes, the realization principle is generally the rule of law."

4 May 2010 External T.I. 2009-0329391E5 F - Provision pour retour de marchandises

no profit required to be recognized on delivery of goods where a "true" return of unsold goods clause

Where a book publisher’s customers could return unsold books, it could not deduct a reserve from the profit required to be recognized by it on its sales. In contrast:

In a consignment sale situation or a sale under a "true" return of unsold goods clause, the taxpayer is not required to recognize, for tax purposes, the income from the sale of the goods before title passes to the purchaser.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(e) no reserve where book publisher’s customers could return unsold books, cf. where a "true" clause for the return of unsold goods 230

30 March 2011 External T.I. 2010-0390591E5 F - Cotisation spéciale

amounts assessed against the taxpayer by co-owners not deductible until expended on or in the business

All the condo owners in a condo complex that was used only in a high-end commercial accommodation business leased their units to a manager for a share equalling 50% of the aggregate rental income (but with the municipal taxes and condominium fees for common services continuing to be borne by the co-owners directly).

After the manager ceased operations, the syndicate of co-owners took over the operation of the condominium complex, but because there was no working capital, the syndicate retained for a period of 120 days all the revenues generated by the operation of the condominium complex. Now, the syndicate of co-owners has raised a special assessment, corresponding to the amount of the overdue rental income, to serve as working capital for the operation of the commercial accommodation business. Is this special assessment of the taxpayer (one of the co-owners, and amounting in the taxpayer’s case to $7,000) deductible in computing income?

After noting that under this arrangement, the taxpayer had paid $7,000 by way of “compensation” (i.e., set-off), stated:

[N]o deduction or capitalization of the expense is allowed before the amount is expended by the syndicate of co-owners. … [P]repaid expenses or expenses that are paid before they are actually incurred are not deductible in computing a taxpayer's income.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt amounts paid by set-off are both paid even though no movement of funds 274
Tax Topics - Income Tax Act - Section 248 - Subsection 248(16) - Paragraph 248(16)(a) - Subparagraph 248(16)(a)(i) addition for GST and subtraction for ITC 141

19 September 2008 Internal T.I. 2008-0272441I7 - GUILT LOCK DERIVATIVE

Under a "gilt lock" hedge, the taxpayer, between the time of deciding to issue the bonds and the time of actually issuing them would hedge against the change in price of the bonds in order to lock in its effective interest cost. For accounting purposes, it was permitted to amortize the payment made or received under such hedge over the term of the borrowing as an adjustment to the interest rate cost. This treatment also would be appropriate for tax purposes.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Financing Expenditures derivative that effectively locked in effective interest rate on proposed bond issuance on income account 115
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e) hedging expense to lock in interest rate 105

26 May 2008 Internal T.I. 2008-0272771I7 - Straight-line Amortization or Averaging of Rent

The smoothing of rent expenses generally required by GAAP is not permitted in computing income for tax purposes.

10 January 2008 External T.I. 2005-0139681E5 F - Dépenses reportées à une année ultérieure

expense generally is deductible when incurred if it generates both current and future benefits

In response to a query regarding a client's ability to deduct expenses in a taxation year subsequent to the one in which they were incurred, CRA discussed Canderel and the matching principle, and then stated:

Where an expense creates both immediate benefits and future income, we generally take the view that the expense should be deducted in the year it is incurred.

Finally, you indicated that the purpose of the deferral of expenses to a subsequent taxation year is to avoid an assessment to your client based on the absence of a source of income. We confirm that the Act does not permit the deferral of expenses for such purposes.

6 December 2006 External T.I. 2005-0163291E5 F - Résiliation d'une entente contractuelle

lump sum payment for termination of services contract likely fully deductible when paid

A corporation terminated a contractual services agreement and paid compensation to the other party equivalent to the present value of the amounts that would otherwise have been payable to that party for the balance of the term.

After referring to the statement in IT-467R2, para. 16 that “[w]here amounts originally payable under a contract would have been eligible for deduction from income had they been paid, amounts paid to terminate and settle that contract will also generally be eligible for deduction from income,” and noting that Canderel established that “the matching principle will not apply where an expense cannot be associated with specific income,” CRA stated:

Although the tax treatment of the amount of the compensation can only be determined following an analysis of all the relevant facts and circumstances, assuming that it is an expense of a current nature, we are of the view that the payment of the amount will generate several immediate benefits for your corporation. To this end, we are of the view that deducting the amount in the year in which it is paid would give a more accurate picture of your corporation's profit for the year in question.

29 June 2006 External T.I. 2006-0169231E5 F - Revenu de location

rents levelled under GAAP were required under s 9 to be recognized as the amounts became receivable

A taxpayer was required under GAAP to level out the rental payments receivable by it under an operating lease so that the rental income accrued to it evenly over the lease term. In finding that this approach was not acceptable under s. 9, CRA referred to the realization principle established inter alia under Ikea, and stated:

[I]t is our view that generally it is the amounts received or receivable as rent under a lease that are included in the lessor's income for tax purposes. Whether an amount received constitutes income or whether an amount is receivable in a particular situation is a question of fact that can only be determined after examining the terms of the agreements between the parties.

In our view, under the rules of law derived from the case law for computing a taxpayer's income for a taxation year, the inclusion of an amount of rent based on a theoretical or notional value determined in accordance with GAAP under C.I.C.A. Section 3065, paragraph .55 would generally not be an acceptable method.

7 June 2005 External T.I. 2005-0121921E5 F - Paiement à un emphytéote

notwithstanding Canderel, tenant inducement payment must be amortized under matching principle if incurred for specific purposes of producing identifiable future revenue

Regarding a payment made by a landowner to a related corporation as an inducement to enter into a contract granting a right of emphyteusis, CRA noted that Befega, 72 DTC 6170 found that expenses incurred in connection with an emphyteusis were capital expenditures, that were not deductible in computing income because they were made not only once and for all but also to provide an enduring benefit to the business, and then reiterated its position (based on Canderel) that it is necessary to determine whether a tenant inducement payment was incurred for the specific purpose of producing an identifiable item of income so as to engage the application of the matching principle or whether it gave rise to sufficient current benefits to be treated as a current expense in the year of payment.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Improvements v. Repairs or Running Expense Belgega -finding that inducement paid to prospective emphyteuta (tenant) was capital expenditure - noted 122

26 April 2005 External T.I. 2004-0107761E5 F - Aide à domicile/SAAQ

amount not business income until the entitlement thereto was determined

A taxpayer, injured in an automobile accident in 1994, received in 2004 a sum from the Quebec auto insurer (the “SAAQ”) to reimburse him for the amounts that he had paid to his wife for her personal care of him over the previous 10 years. CRA stated:

[T]he determination by the SAAQ to reimburse the taxpayer was made only in 2004 and the taxpayer's wife could not possibly have known whether she would receive an amount from the taxpayer while the taxpayer was waiting for the SAAQ to determine the amount. The entire amount determined in 2004 must therefore be included in the wife's 2004 income computation.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 3 - Paragraph 3(a) - Business Source/Reasonable Expectation of Profit Maurice inapplicable where the adult, mentally capable, victim receives the insurance himself and pays it as compensation for his wife’s care services 237

24 March 2003 Internal T.I. 2002-0177587 F - XXXXXXXXXX EN CONSIGNATION PERTE

loss when inventory disappears is deducted when the loss is discovered
Also released under document number 2002-01775870.

The taxpayer purchased artwork but left it on consignment with the vendor for sale on his behalf. When the artwork remained unsold, he asked for its return, at which point it emerged that the artwork had disappeared.

Regarding the timing of recognition of loss, if the artwork had been acquired as an adventure in the nature of trade, the Directorate affirmed the position in IT-185R that where no proceeds of disposition are received for property unlawfully taken, a disposition is considered to have occurred on the date the loss of the property was discovered.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Start-Up and Liquidation Costs business commences when a significant activity is initiated that is part of an income-generating process 112

9 January 2004 External T.I. 2003-0049195 F - Winding Up or a Contractor Subco

exclusion of contract holdbacks and unapproved invoices from construction contractor’s income is unaffected on s. 88(1) wind-up and flows through to parent
Also released under document number 2003-00491950.

Opco, which is wholly-owned by Holdco, and has been using the percentage-of-completion method in computing its income from its construction business, has excluded contract holdbacks and unapproved invoices from its income, and deducted work in progress (“WIP”). What is the treatment of those amounts on the winding-up of Opco into Holdco pursuant to s. 88(1)?

CCRA indicated that the amounts of unapproved billings and holdbacks would not be included in Subco's income in its taxation year during which such distribution occurred since, as set out in IT-92R, those amounts had not yet become receivable pursuant to s. 12(1)(b). These amounts would instead be includible in the income of Holdco when they became receivable.

Regarding the WIP, CRA indicated that the costs incurred by Opco in the performance of its contracts were deductible in computing income for the year in which they were incurred “even though some of the income in respect of those contracts would not be included in its income for tax purposes for that taxation year.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(e.1) s. 88(1)(e.1) would permit parent to step into shoes of sub re s. 12(1)(a) inclusion and s. 20(1)(m) reserve 161
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(m) deferred revenue of construction contractor would not be triggered on its s. 88(1) wind-up and parent would be put to claiming any available new s. 20(1)(m) reserve 161

24 March 2003 Internal T.I. 2003-0184127 - COMMODITY OPTIONS

"Where [commodity] options that are sold are on income account and the taxpayer is not a mutual fund trust (where the mark-to-market approach is permitted), the premium received will be included in income when it is received pursuant to section 9 of the Act, provided that the recipient is absolutely entitled to the amount (that is, the amount has the 'quality of income' when received, irrespective of whether the option has been exercised). Where a taxpayer pays a premium to obtain an option that will be held on income account, the amount paid will form part of the cost of the taxpayer's inventory. Although this position does not provide symmetry and may result in timing differences in computing income, the Act does not provide another result."

22 May 2002 Internal T.I. 2001-0106577 F - APPARIEMENT DES REVENUS ET DEPENSES

following Canderel, an upfront payment made under a multi-year supply contract is currently deductible

In recommending that a payment made by a corporation, on entering into a contract that gave it the right to make a supply over a period of years, be accepted as being immediately deductible, the Directorate referred to Canderel, and stated:

[T]he Corporation has valid arguments for claiming the deduction of the Payment in the XXXXXXXXXX year if it claims that the signing of the contract allowed it to obtain an immediate benefit, that the method used for tax purposes gives an accurate picture of the profit and that another method would not give a more accurate picture of the profit.


An open-end unit trust invests the proceeds of a public offering in a note of a bank and then enters into a total-return swap with the Bank respecting a bond index (some of the components of which correspond to bonds held by the bank). Under the Swap, the Trust agrees to make quarterly payments to the Bank equal to the interest received on the note, minus X% of the assets of the Trust.

The income of the Trust includes the interest accruing to it on the note, and is reduced by the quarterly payments made in each taxation year to the Bank. The return under the Swap based on the bond index is not included until maturity.

25 March 1999 Internal T.I. 9828577 - PART I.3/RESERVES,ADVANCES&SURPLUS

upfront fees received on interest/currency swaps likely were includible in income under s. 9 (so that no reserve under s. 20(1)(m) was available) on the basis that that had been legally earned, as the taxpayer was not required to provide any further services or deliver any goods.

3 May 2000 T.I. 1999 - 001391

Where a stock option is granted to a business supplier, the fair market value of the option will be included in the supplier's income at the time it is granted, and at the time of exercise the difference between the fair market value of the shares, and the aggregate of the exercise price and the amount previously included in the income, will be included in income at that time.

23 November 1999 External T.I. 9824405 - TIMING OF LOSS RECOGNITION--FUTURES CONTRACTS

At different times in year 1, a speculator entered into two separate futures contract, each with an arm's length third party. Under the first contract, he bought a predetermined number of U.S. dollars for delivery in year 2, and under the second contract he sold the same predetermined amount of U.S. dollars at a different preset price.

In response to a suggestion that the speculator should be able to recognize in year 1 the net economic loss because it became predetermined at that time, the Department indicated that generally a loss is only recognized when realized unless an application of the principals in Canderel would suggest a different approach to determining income.

22 February 2012 External T.I. 2008-0289021E5 - Fair Value Accounting - Liabilities

liabilities not to be marked to market

The correspondent noted that under the GAAP that prevailed in 2008 (contained in Section 3855 of the CICA Handbook) taxpayers whose financial liabilities were incurred for trading purposes were required to revalue those liabilities at fair value, and referred in particular to situations where such liabilities were revalued at a year end as a result of a change in prevailing interest rates.

CRA indicated that the income or loss arising for accounting purposes from such annual adjustments due to fluctuations in interest rates would not be recognized for purposes of the Act. Although CRA accepted the Canadian General Electric case, that "decision does not apply to the revaluation of a debt due to interest, credit or other adjustments." Furthermore, s. 18(1)(e) "specifically denies a deduction for reserves and contingent liabilities."

11 April 1990 T.I. AC58705 File 5-8705

premiums received for the issue of bonds (presumably on income account) were to be included in income at the time of issue under s. 9 rather than s. 12(1)(a) "as the premiums represent consideration for the issuance of the obligations and are received regardless of the period of time that the debt is outstanding." Therefore, under the Robertson test, the taxpayer's right to the premiums is "absolute and under no restriction," so that the amortization treatment available under GAAP was not applicable for income tax purposes. However, even if the bond premiums were instead included in income under s. 12(1)(a), a reserve under s. 20(1)(m) would not be available, so that the full amount again would be income in the year of issue.

Income Tax Technical News, No. 16, 8 March 1999: Comments on Canderel, College Park and Ikea cases.

Income Tax Technical News, No. 14, "Reporting of Derivative Income by Mutual Funds"

RC will accept (at the choice of the mutual fund) either the realization method or the mark-to-market method for recognizing income on futures, forwards and options that are considered to be held on income account.

Income Tax Technical News, No. 8, 30 September 1996, "Proceeds of Sale of a Condominium - First Closing Date or Second Closing Date".

23 July 1996 External T.I. 9615915 - TIMING OF REVENUE RECOGNITION S

In the business of providing services with respect to property of another person, revenue is recognized when the fee for the service is billed or is able to be billed.

5 December 1995 External T.I. 9516145 - LEASE INDUCEMENTS

"Where a rental agreement provides for a rent-free period and there is no legal obligation on the part of the tenant to pay rent in respect of that period, there is no income to be recognized by the landlord."

29 March 1995 Internal T.I. 9419557 - FEDERAL SALES TAX REFUND

A federal sales tax refund that is received in respect of a prior year is to be included in income in the year of receipt rather than in the prior year. The Johnson case (94 DTC 6125) failed to consider the "no relation back" principle established in the Benaby Realties (67 DTC 5275) and Vaughan Construction (70 DTC 6368) cases.

Income Tax Technical News, No. 1, 22 July 1994

Beginning July 1995, sales commission expenses incurred by limited partnerships in connection with the distribution of mutual funds must be amortized on a straight-line basis over three years.

19 July 1994 Memorandum (C.T.O. "Mutual Fund Limited Partnerships")

RC distinguishes mutual fund management corporations from limited partnerships and accepts that the former are allowed to deduct sales commission expenses in the year they are incurred. Unlike limited partnerships, "the mutual fund management corporations are fully integrated services corporations which provide investment management services in a wide variety of financial products and services ... [and] derive their income from management of the mutual fund assets by providing administrative and customer services".

31 October 1994 External T.I. 9421625 - INCOME RECOGNITION

Re whether a taxpayer that manufactures on a made-to-order basis and that, for accounting purposes, recognizes a percentage of income as each invoice is rendered to the customer, must follow the same basis of income recognition for tax purposes.

25 August 1994 Internal T.I. 9419527 - SHORT-TERM CONTRACTS

A contractor that has entered into contacts that are to be completed within two years of the date of commencement and that comprise various segments or parts is permitted to use the completion method.


Generally, where a contractor reasonably has estimated that a contract will be completed within 24 months from its commencement, but due to unforeseeable and uncontrollable circumstances such as labour problems, unusual weather, etc., the completion date does not occur until after the two-year period, the contractor should continue to use the completion method to report its income from its contract. Where the reason for the delayed completion is change orders which are not treated as separate contracts, RC may challenge the use of the completion method for the contract.

3 February 1994 External T.I. 5-932925

It is RC's understanding that the issuer of mortgage-backed securities administers the pooled mortgages and is entitled as payment for services to a servicing fee equal to the difference between the amount of interest accrued on the pooled mortgages and the amount of interest payable to the holders of mortgage-backed securities at the rate specified on the mortgage-backed securities certificate. RC considers that a requirement for accounting purposes to add the present value of the net interest spread to the proceeds from the sale of the mortgages pursuant to the accounting guidelines of OSFI is not relevant for income tax purposes, and that the issuer can include the servicing fee in its income as it becomes entitled to the difference between the amount of the interest accrued on the pooled mortgages, and the amount of interest payable to the holder of the mortgage-backed securities.

Halifax Round Table, February 1994, Q. 23

Where a taxpayer accrues in its financial statements at year end a portion of an invoice which is not released until after the year end, it may be required to include that amount in its income in accordance with GAAP even though s. 12(1)(b) may not apply.

1994 A.P.F.F. Round Table, Q. 25

A conditional sale of property to a client could be included in computing income under s. 9(1).

Rulings Directorate Discussion and Position Paper on Motion Picture Films and Video Tapes as Tax Shelters, Version 29/3/93 930501 (C.T.O. "Motion Picture Films - C.C.A.")

RC will permit a film limited partnership to report its revenue (including revenue subject to a revenue guarantee) on a cash basis (on the authority of Boosey and Hawkes (Canada) Ltd. 84 DTC 1728 (TCC)), if the cash basis truly reflects the income position of the taxpayer and provided that the flow of cash from the viewers through the distributors and sub-distributors or others to the limited partnership is not artificially dammed. In the case of a TV series, timing of the inclusion in income of the limited partnership of amounts received by the distributor will depend upon the agreements between the parties and the weight or relevance that a court will give to any conditions included in those agreements.

Where a put of a partnership interest is exercisable before income will be receivable by the partnership in an amount equal to the revenue guarantee, RC will examine their arrangement to determine whether the revenue flow to the partnership is artificially dammed.

9 January 1993 Memorandum (Tax Window, No. 30, p. 9, ¶2487)

Liquidated damages to be paid over a period of three to four years to a corporation for termination of a management agreement would be included in the corporation's income in full in the year the termination agreement was entered into.

13 May 1992 Internal T.I. 7-921151

Gold loans of gold producers should be revalued annually at the close of the borrower's tax year, with the resulting gain or loss included in computing its income for the year.

91 C.R. - Q.41

The date of disposition of property (and, therefore, the date upon which income commences to be earned by the purchaser) is the date the beneficial ownership is intended to pass to the purchaser and the time the vendor has an absolute but necessarily immediate right to be paid.

16 July 1991 T.I. (Tax Window, No. 6, p. 14, ¶1350)

Where a non-resident trust which has made the election under s. 216(1) receives a lump sum as payment of the entire three-year rent for Canadian premises owned by it, the entire amount must be included in its income in the year of receipt with no deduction as a reserve for prepaid rent.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 216 - Subsection 216(1) 49

14 May 1991 T.I. (Tax Window, No. 3, p. 13, ¶1238)

Where a construction contract originally is for less than two years, so that the completion method of revenue recognition is available, but a change order extends the original contract, the change order should be treated as a separate contract. If this is not done, RC may insist that the progress method be used with respect to the entire contract.

Under the completed contract method, the receipt of the final approval of the engineer or architect indicates that the contract has been completed.

15 January 1990 Memorandum (June 1990 Access Letter, ¶1287)

The accounting practices expressed by CIPREC respecting rent-free periods granted by lessors as inducements should be followed.

15 January 1990 Memorandum (June 1990 Access Letter, ¶1251)

Discussion of the tax consequences of a short sale occurring under the laws of Quebec.

89 C.R. - Q.30

RC is appealing the decision in Friedberg and is not reconsidering its position with respect to commodities straddle transactions.

89 C.R. - Q.22

The liability of a borrower of gold in the business of mining and selling gold should be valued at the borrower's year-end and any gain or loss indicated by such valuation the debt is reflected in the borrower's income for that year.

87 C.R. - Q.25

Condominium developers are required, in accordance with GAAP, to recognize their profit at the time of the first closing (occupation by the purchasers) rather than at the time of the second closing (registration).

85 C.R. - Q.31

The matching principle is mandatory subject to any contrary provision of the Act.

IT-479R, para. 28-32

Discussion of timing of recognition of gains and losses on exchange traded call and put options.

Para. 25: Gains or losses of a writer of naked options normally on inomce account, but CR will accept consistent reporting on capital account.

Para. 29: Premiums from writing call options on income account not recognized until exercise or expiry. (similarly re put options: para. 32).

IT-92R2 "Income of Contractors"

Discussion of recognition of holdbacks and discussion of "completion method".


Nigel P.J. Johnston, Roger E. Taylor, "Taxation of Hedges and Derivatives: Recent Developments", 2016 Conference Report (Canadian Tax Foundation), 13:1-36

Timing of employer loss recognition on hedge of phantom unit obligations (pp. 13:9-10)

Corporate employers may create phantom stock plans and similar arrangements… .

…Often, the employer will enter into a total return swap or forward contract with a counterparty under which the counterparty will pay the employer any increase in value of the shares and the employer will pay the counterparty the amount of any decrease in value of the shares plus financing cost. …

The decision is Kruger…should not require the employer to mark the swap to market for purposes of computing income for tax, since entering into the swap is not part of a business carried on separately from the employer's core business.

Applicability of Kruger to adventures in the nature of trade (p. 13:28)

[I]t is possible that because Kruger was decided in the context of a taxpayer carrying on a business of speculating in derivatives, rather than the context of a hedge of an item on income account (which may be regarded as something more akin to an adventure in the nature of trade), the decision may not be applicable. However, given the reasons for which the various accounting bodies require the use of the MTM [mark-to-market] method for computing income from derivative contracts—that the derivatives are fully liquid and their values capable of accurate measurement—and given the accepted relevance of that reasoning in Kruger to the measurement of income for income tax purposes, it is difficult to see why the reasoning would not also to the results of derivative contracts that hedge items on income account. [fn 103: Even if the profit or loss on the hedging derivative were regarded as an adventure in the nature of trade for income tax purposes, the recognition of an unrealized profit or loss would not run afoul of subsection 10(1.01) since Kruger decided that these foreign-currency options did not constitute inventory.]

Relevance of GAAP to tax hedge accounting (pp. 13:28-30)

[A]ssume that, on December 1 of year 1, X Co expects with a high degree of probability to sell product for US$100,000 early in year 2. To hedge the risk of currency movement between December 1 and the expected sale, X Co hedges the value of the expected sale proceeds by entering into a forward contract to sell US $100,000 at the December 1 spot rate on January 2 of year 2.

Under GAAP, without hedge accounting X Co would be required to carry the unrealized gain or loss on the hedging derivative to the statement of profit and loss at the end of year 1. The loss or gain on the sale proceeds as a result of currency fluctuation would not be reflected on the statement of profit and loss until they were received in year 2….

Applying hedge accounting to the example above, X Co would not be required to carry any unrealized gain or loss on the hedging derivative to the statement of profit and loss in year 1. Rather, such gain or loss would be carried in other comprehensive income (OCI) [fn 106: Under IFRS] on the equity side of the balance sheet until the proceeds of the expected sale were received in year 2. At that point, any gain or loss on the US-dollar proceeds as a result of currency fluctuation would be offset by the loss or gain on the hedging derivative carried in OCI, which would be indicated on the statement of profit and loss. [fn 107: ASPE would permit the same result, except that the unrealized gain or loss on the hedging derivative would not appear on the balance sheet (ASPE does not have the concept of OCI) but the gain or loss would offset the loss or gain on the US dollar proceeds when the proceeds were received such that no gain or loss on the US dollar proceeds would be recorded in the statement of profit and loss.]

X Co, having chosen hedge accounting, could argue on the basis of Kruger that hedge accounting provided a more accurate picture of income; it matched the results of the hedged item with the results of the hedging item, thus producing a better match of profit and related loss than the realization principle. ...

[P]rofits and losses are not exactly the same concepts as revenues and expenses, but it is difficult to see why the matching principle should not apply equally to linked profits and losses in order to produce an accurate picture of income.

Douglas S. Ewens, Michael J. Flatters, "Toward a more Coherent Theory of Dispositions", 1995 Canadian Tax Journal, Vol. 43, No. 5, p. 1377

Discussion of the realization principle.

Harris, "Developments in Asset-backed Financing: Tax Considerations", Business Vehicles, Vol. III, No. 3, 1997, p. 136

Allgood, "Recent Developments in Asset-Backed Securitization", 1993 Conference Report, c. 16

Critique of Revenue Canada's position on the distinction between the sale of receivables, and loan secured with receivables.

Allgood, "Eaton's Leads With Public Securitization of Credit Card Receivables", Corporate Finance, Vol. 1, No. 1, 1992, p. 5

The residual purchase price payment made by the receivables trust to the vendors is accounted for by the selling corporations as proceeds only once it is quantified and receivable, and is deductible to the trust in computing income when payable.

Mandell, Yip, "Tax Shelters in the 1990's", 1991 Conference Report, pp. 35:23-35:28

Discussion of when a film distributor is required to recognize income in respect of advances received from licensees.

Pagan, "Measurement of Commercial Profit for Tax Purposes (Or What Willingale Was Really About)", British Tax Review, 1992, No. 2, p. 75

"There is a body of opinion that Willingale was wrongly decided ..." (p. 80).

Tiley, "More on Receivability and Receipt", 1986 British Tax Review, p. 152.

Tiley, "Receivability and Receipt: The Problem of Timing Under Income Tax Legislation", 1982 British Tax Review, p. 23.

Accounting Pronouncements

CICA Emerging Issues Committee, EIC-65, 16 October 1995 "Law Firms - Revenue Recognition":

A law firm should recognize its fee revenue as it provides services using the percentage of completion method in accordance with CICA 3400. The completed contract method is not an acceptable method for a law firm to use in recognizing revenue from services requiring a series of Acts over a period of time... . [O]ther professional services firms may have similar circumstances to which the consensus in this Abstract would apply."

CICA Emerging Issues Committee, EIC-54, 30 June 1994 "Transfer of Receivables - Definition of Recourse".

CICA Emerging Issues Committee, EIC-32, 20 November 1991 "Gold Loans": The carrying value of a gold loan taken out by a gold producer should be marked to market on each balance sheet date, with the resulting gains or losses being recognized as they arise unless an effective hedge exists.