Words and Phrases - "contingent liability"
20 October 2004 Internal T.I. 2004-0086501I7 F - Droits compensateurs
In 2001, the U.S. government began imposed countervailing and anti-dumping duties ("CADD") on the export of softwood lumber products from Canada, including by the Corporation, and required that the duties be paid - or that a bond be posted equivalent to such duties, which the Corporation did. Under its agreements with its lumber suppliers, the price it paid was reduced according to the applicable CADD rate that was being imposed, but it was further agreed that if the CADD was reversed, that amount would be refunded to the suppliers.
After a finding by the International Trade Tribunal that there was not a current material injury to the US lumber producers, the Corporation was released by the US government from its potential obligations regarding the CADD for the years 2001 and 2002, in 2002, it repaid an amount corresponding to the CADD in question to its suppliers.
In finding that the Corporation was not entitled to a deduction in 2001 by virtue of s. 18(1)(e), the Directorate stated:
[T]he current case differs from these two judgments [in Samuel F. Investments and Dibro Investments], in that the eventuality at issue in the present case is far from certain. For example, the possibility that the CADDs would never be paid to the relevant US government authorities was real in the year in question since, in fact, all of the CADDs at issue in 2001 were found to be inappropriate on the basis that there had been no injury to the US lumber industry.
The answer to the question concerning the deduction of adjustments to purchases from suppliers that arose in XXXXXXXXXX 2002 as a result of the ITC's decision to cancel CADDs required prior to May 16, 2002 should be consistent with the tax treatment adopted for the CADDs discussed above.
Thus, we are of the view that this expense to the Corporation's suppliers could not have been incurred prior to the ITC's decision regarding the Corporation's requirement to pay CADD on lumber.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(vv) | posting of bonds for US countervailing duties did not constitute their being “paid” for s. 20(1)(vv) purposes | 264 |
Wawang Forest Products Ltd. v. The Queen, 2001 DTC 5212, 2001 FCA 80
If the taxpayer paid a logging contractor in full upon delivery to it of cut wood, it would be subject to liability to the workers' compensation board to the extent of unpaid workers' compensation contributions of the contractor. Accordingly, pursuant to terms in its contracts with the contractors, the taxpayer withheld from the payments made to them amounts (e.g., $0.50 per metric tonne of cut wood) that were estimated to be at least equal to the contribution liabilities of the contractors.
Reassessments that treated the portions of contract payments that had been held back as not being deductible until paid, were ordered to be reversed. Sharlow J.A. noted (at para. 9) that:
Generally, a taxpayer incurs an expense when it has a legal obligation to pay a sum of money. In most situations, the legal obligation exists upon the fulfilment of the contractual obligations to which the payment relates.
Further, she noted that a "contingent liability" cannot be an expense "incurred" within the meaning of s. 18(1)(a), and stated (at para. 16):
the correct question to ask, in determining whether a legal obligation is contingent at a particular point in time, is whether the legal obligation has come into existence at that time, or whether no obligation will come into existence until the occurrence of an event that may not occur.
Applying theses principles, she found that a legal obligation to pay the full contract amounts came into existence when the contractual obligation (delivery of wood) had been performed. Before noting the evidence that in some cases contractors never claimed the holdback amounts, she stated (at para. 15) that "an obligation to pay a certain amount does not become a contingent obligation merely because events may occur that result in a reduction in the quantum of the liability", and later also indicated (at para. 30) that (notwithstanding statements of Desjardins J.A. in the Newfoundland Light case to the contrary), a "legal obligation to pay an amount may exist even if there is some risk that the actual payment may be set off against potential counter claims".
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(e) | potential for holdback amounts not to be claimed did not render them contingent | 229 |
Mandel v. The Queen, 78 DTC 6518, [1978] CTC 780 (FCA), briefly aff'd 80 DTC 6148, [1980] CTC 130, [1980] 1 S.C.R. 318
A partnership purchased a film in an advanced state of production for a purchase price computed as the audited cost of production to the date of purchase, payable by way of a cash payment of $150,000, the balance (of $427,892) to be paid only out of profits generated by the film. Expert accountancy evidence indicated that an amount equal to the unpaid balance of the purchase price was properly includible in the capital cost of the film in the year of purchase only if the unpaid balance was a "real" liability rather than a contingent liability. It was held to be the latter since "it was a liability (from which the [partnership] purchasers admittedly could not unilaterally withdraw) to become subject to an obligation to pay the balance if, but only if, an event occurred which was by no means certain to occur [namely, the generation of profits]."
The Court also stated:
The amounts actually paid in the future from earnings, if any, would be taken into capital cost in the years of payment.