Paragraph 12(1)(e) - Reserves for certain goods and services, etc.
Cases
Argus Holdings Ltd. v. The Queen, 2000 DTC 6681, Docket: A-216-99 (FCA)
For accounting purposes the taxpayer, which operated a racquetball club, had brought initiation fees into income over a ten-year period on a straight-line basis. Before affirming a finding of the Tax Court Judge that the taxpayer, in substance, had thereby been deducting a reserve under s. 20(1)(m), McDonald J.A. stated (para. 20):
"... It is not the accounting treatment of an amount which governs deductibility, but rather the true nature of the amount deducted. The fact that the Appellant's books of account do not describe the amounts in question as a reserve does not mean that the Appellant did not in fact take a reserve."
However, it would distort income to bring all of the reserves previously claimed into income in the year of reassessment, and the matter was referred back to the Minister for redetermination on the basis that the initiation fees were taxable in the year of receipt.
Sears Canada Inc. v. The Queen, 89 DTC 5039 (FCA)
The amount of a s. 20(1)(m) reserve which RC had allowed as a deduction in computing the taxpayer's income in 1975 (a year not subject to appeal) was required to be added back in 1976 notwithstanding that the 1975 deduction was contrary to law. "[T]he obligation to add back the 1975 reserve depends entirely on the fact that it had been claimed and allowed, the legality thereof being immaterial."
Dominion of Canada General Insurance Co. v. The Queen, 86 DTC 6154, [1986] 1 CTC 423 (FCA)
The words of s. 12(1)(e) "are directed toward the inclusion in income of an 'amount' that was 'deducted' in the previous year and not toward an amount that was 'deductible' in that year." Where an amount was in fact deducted in a previous year by a taxpayer purporting to comply with the provisions of s. 20(1)(m), that amount will be brought into income under s. 12(1)(e) notwithstanding that the deduction in the previous year may not have been properly taken. "This is particularly so where, as here, the assessment of that [previous year's] income has been made and accepted and cannot now be challenged."
Abed Estate v. The Queen, 82 DTC 6099, [1982] CTC 115 (FCA)
The non-resident taxpayer did not file any income tax returns on the ground, later established in court to be unfounded, that he was Treaty-exempt. He was assessed for the taxation years 1960 to 1964, but not 1959, on the basis that a s. 20(1)(n) (then, S.85B(1)(d)) reserve should be deducted from his profit from a 1959 sale of land, and included in the income of those subsequent years pursuant to s. 12(1)(e)(ii) (then, S.85B(1)(e)). It was held that because he had the option of including the full amount of the profit in his 1959 income, and the record did not disclose that there had been an assessment for the 1959 year, that no part of the profit made in 1959 could be included in his income for the subsequent years.
See Also
Dubawn Holdings Inc. v. The Queen, 94 DTC 1252 (TCC)
A reserve which the taxpayer had erroneously deducted from income in his 1984 taxation year (which now was statute-barred) was required to be included in income for his 1985 taxation year. Mogan TCJ. stated (p. 1257):
"... if a reserve is in fact claimed and allowed in a particular taxation year, the legality of the allowance is not material and the amount that was in fact deducted must be included in computing the income for the immediately following year".
Administrative Policy
24 March 1995 T.I. 950729 (C.T.O. "Sale Price of Shares - Closing")
Discussion whether an increase in the sale price of shares between the date of an agreement of sale and the closing date represents interest or an adjustment to the proceeds of disposition.
Paragraph 12(1)(f) - Insurance proceeds expended
Administrative Policy
4 March 2015 T.I. 2014-0550761E5 F - 44(1) et disposition partielle
A portion of a building was destroyed by fire, with a portion of the insurance proceeds used to reconstruct it. CRA stated (TaxInterpretations translation):
[T]he compensation payable to the corporation under the insurance policy appear to come within paragraph (f) of the definition of "proceeds of disposition" in section 54… .
[I]t is thus necessary to determine if the damages received were, within a reasonable period, expended for repairing damages caused to the property. If that is the case, paragraph 12(1)(f) provides that the compensation received will be included in the computation of the income of the taxpayer… .
See summary under s. 44(1).
Paragraph 12(1)(g) - Payments based on production or use
Cases
The Queen v. Larsen, 99 DTC 5757, Docket: A-570-98 (FCA)
The taxpayer and his three siblings gave a lumber company the right to enter their land to remove timber during a five-month period for consideration of $70 per cubic metre of timber removed.
In finding that the lump-sum payment received by the taxpayers was not an income receipt, Noël J.A. stated ( at p. 5760) that "the case law has consistently excluded from the ambit of 12(1)(g) receipts arising from a one-time contract for the removal of timber".
The Queen v. Mel-Bar Ranches, 89 DTC 5189 (FCTD)
A timber-sale agreement between the taxpayer (a farmer) and the purchaser provided for the purchase of 25,500 tonnes "more or less" of fir at a price of $11.85 per tonne subject to specified adjustments. In fact, the purchaser was unable to cut the full 25,500 tonnes, and the taxpayer received $11.85 for each tonne cut. Strayer, J. held that it should be characterized as a one-time contract for the removal of all the usable timber in a specified area within a specified time, with the result that s. 12(1)(g) did not apply.
Consumers' Gas Company Ltd. v. The Queen, 82 DTC 6300, [1982] CTC 339 (FCTD), aff'd , 84 DTC 6058, [1984] CTC 83 (FCA)
Where the taxpayer was compensated for changing the location of its pipelines it was found that the amounts received were not "dependent upon the use of or production from Plaintiff's property".
Porta-Test Systems Ltd. v. The Queen, 80 DTC 6046, [1980] CTC 71 (FCTD)
A royalty to be received by the taxpayer was calculated as the greater of 5% of the licensee's net sales for the following three years and $150,000. Since, at the time of signing the royalty agreement the licensee's estimated net sales for the following three years were only $1,500,000, only $75,000 (= 5% x $1,500,000) was includible in the taxpayer's income under s. 12(1)(g).
Lackie v. The Queen, 79 DTC 5309, [1979] CTC 389 (FCA)
Payments received by the owner of a gravel pit, equal to $.20 per ton of gravel removed by the licensee, were amounts that were dependent on the use of property, including real property, notwithstanding that the level of payments was subject to possible upward adjustment at the end of the term of the agreement if a minimum aggregate level of payments had not been made.
MNR v. Gault, 65 DTC 5157, [1965] CTC 261 (Ex Ct)
An arrangement under which a taxpayer, which had purchased the goodwill of an insurance business of the vendor thereof, including client lists, agreed to pay to the vendor 50% of the commissions received by it from former clients of the vendor for the following three-year period, was regarded as falling within s. 6(1)(j) of the pre-1972 Act on the basis that the amounts paid to the vendor were dependent upon the use of the client lists.
Gingras v. MNR, 63 DTC 1142 (Ex Ct)
S.6(1)(j) of the pre-1972 Act was found to be applicable to the sale by the taxpayer to a corporation controlled by him of copyright for a fixed sum payable to the extent of 3.5% of direct sales made by the corporation.
MNR v. Wain-Town Gas and Oil Co. Ltd., 52 DTC 1138, [1952] CTC 147, [1952] 2 S.C.R. 377
The taxpayer, which assigned its franchise to supply municipalities with natural gas to another company in consideration for amounts (described in the assignment as "royalties") which were stipulated percentages of the revenues derived by the assignee from sales of gas, was held to receive the royalties as income pursuant to s. 3(1)(f) of the Income War Tax Act, which provided for the inclusion of "rents, royalties, annuities or other like periodical receipts which depend upon the production or use of any real or personal property". The payments were "royalties" in the business sense of that word in Canada, and dependent upon the use of the franchise.
See Also
Fiducie Claude Deragon v. The Queen, 2015 CCI 294
Vendors agreed to sell shares for a sale price of $16 million, of which $2 million was payable in subsequent years only if an EBITDA condition respecting the sold companies was satisfied. The sales agreements contained a simple price adjustment clause based on the final audited shareholders’ equity of the sold companies. When a substantial deficiency in shareholders’ equity subsequently emerged, a negotiated Settlement Agreement concluded more than a year after the sale reduced the sale price by $0.5 million (to $15.5 million), increased the portion of the sale price payable under the reverse earn-out to $3 million – and provided that the vendors would reimburse a further portion of the sale price out of amounts received by them under the earn-out.
Favreau J respected the retroactive downward adjustment, pursuant to the Settlement Agreement, of the proceeds of disposition by $0.5 million but, by the same token, considered that the reverse earnout amounts of $3 million could not be excluded from the proceeds of disposition notwithstanding their contingent nature. However, he did not permit a downward adjustment to the proceeds of disposition for the contingent obligation to refund the sale price to the purchasers.
He also noted that the taxpayer had relied on IT-462, para. 9 to avoid income treatment of the proceeds under s. 12(1)(g) (and did not comment on any capital loss recognition in subsequent years, which were not before him).
See summary under s. 54 – proceeds of disposition – para. (a).
Smith v. The Queen, 2011 DTC 1332 [at 1870], 2011 TCC 461
The taxpayer sold the client list respecting his insurance brokerage business for a stipulated dollar sale price (payable in five annual instalments) which was equal to 2.25 times the amount represented in the sales agreement to be the future annual sales commission. However, the sale agreement provided that the annual instalments would be adjusted up or down in proportion to the amount that the sales commissions earned that year exceeded or fell short of the expected annual commissions.
Favreau J. found (at para. 15):
The source of the commissions received was indeed the client list, all amounts received by the appellant, although expressed as instalments of the sale price of the client list, were dependant entirely on the use of or production from that property and were taxable under paragraph 12(1)(g) of the Act.
Wright v. The Queen, 2003 DTC 763, Docket: 2000-1849-IT-G (TCC)
The taxpayers and their father had used 430 acres of a 5,700 acre property in Manitoba for farming for many years before farming ceased in the early 1970s. Commencing in 1995 they entered into two contracts for the sale of all the timber on different sections of the property for a stipulated price plus one-half of the increased revenue realized by the contractor as a result of any increase in the price of lumber.
In finding that s. 12(1)(g) did not apply to receipts received by the taxpayer from the contract notwithstanding that the cutting extended over a period of five years and that there were two separate contracts with the contractor, Miller T.C.J. stated (at p. 769) that:
"The case law appears to have developed with respect to the cutting of timber on farmland to the point that, to fall outside the scope of paragraph 12 (1)(g) requires only that the property be initially acquired for farming, and that the sale of timber is a one time sale of all the timber on the property."
Rouleau v. MNR, 91 DTC 120 (TCC)
On the sale of the taxpayer's chartered accountancy practice, it was agreed that the sale price for the goodwill would be 20% of gross fees earned from his clientele by the purchasers over the following five-year period. The amounts received by him were eligible capital amounts rather than income pursuant to s. 12(1)(g). Garon J. noted the lack of symmetry which would result from receipts from the sale of goodwill being treated as income, and the purchase price for goodwill being treated as an eligible capital expenditure.
Pacific Pine Co., Ltd. v. MNR, 61 DTC 95 (TAB)
S.6(1)(j) of the pre-1972 Act did not apply where the taxpayer sold a timber licence for a purchase price payable in 16 quarterly instalments whose total quantum was fixed provided that the purchaser obtained at least 10,400,000 feet of timber from the lands in question.
Mr. R. v. MNR, 50 DTC 398 (ITAB)
An agreement for the assignment by the taxpayer to a drug company of the taxpayer's rights under patent to a medicinal preparation in consideration for a down payment of $1,000, and for $999,000 to be paid at a specified rate for each capsule sold by the purchaser, gave rise to income receipts to the taxpayer under s. 3(1)(f) of the Income War Tax Act. In light inter alia of the right of the purchaser to terminate the agreement whenever the manufacture and sale of the preparation became unprofitable without any obligation to pay the balance of the $999,000, that amount was characterized (p. 400) only as indicating "a maximum amount which, once paid, will discharge the company, rather than an amount which must necessarily be paid by the company for the acquisition of the right ...".
Administrative Policy
12 January 2015 T.I. 2014-0555071E5 - POD subject to earn-out
In an arm's length sale, the corporate "Vendor" disposes of the "Property" (including land options agreements, permits, engineering data and technical and environmental reports) acquired in the development phase of a proposed wind turbine farm. The proceeds allocated to the Property's disposition will be deducted from the Vendor's cumulative Canadian exploration expense ("cumulative CEE") pool, and any remaining proceeds will be considered to relate to goodwill. Respecting the portion allocated to goodwill, CRA stated:
In your situation, the taxpayer is entitled to receive a maximum amount in respect of goodwill that may be reduced where the electricity generation capacity of the wind turbine system is below a certain stated capacity. …[Based on IT-462] provided that the maximum amount represents the fair market value of goodwill at the time of the disposition and provided that there is a reasonable expectation that the electricity generation capacity of the wind turbine system will be met, the maximum amount will be considered to be POD pursuant to element E of the CEC definition.
…[T]he cost recovery method, as described in…IT-426R…applies only to the sale of shares and not to the sale of goodwill.
27 August 2014 T.I. 2014-0529221E5 F - Changement de méthode pour déclarer un gain
Could a taxpayer, who did not use the cost recovery method to report the capital gain on the disposition of shares subject to an earnout agreement in a previous taxation year (notwithstanding that the method was available to him at the time) and instead reported his best estimate of the proceeds, request a correction of his previous years income tax returns in order to use this method? CRA stated (TaxInterpretations translation):
The reason which led the taxpayer to wish a change to the method used for reporting the capital gain for a preceding taxation year is that the estimate made at that time differed from that which he now anticipates. From this fact, we believe that there is no error to correct and that the CRA is unable to reassess his prior years' returns.
24 February 2014 T.I. 2013-0505391E5 F - Clause de earnout renversé
CRA confirmed its position in 2000-0051115 that:
Where the cost recovery method is not used and the sale price of a property is not certain at the time of the disposition because of an earnout agreement, a taxpayer may estimate the proceeds of disposition and use this amount to compute the capital gain or capital loss pursuant to subsection 40(1) of the Act. Where a taxpayer chooses this method… no amount is deductible as a reserve under subparagraph 40(1)(a)(iii) of the Act by virtue of the fact that…[a] "legally enforceable" entitlement to proceeds of disposition pursuant to the earnout agreement cannot be established until certain future events have occurred such that no amount is "payable" at the time the property is disposed of.
In the case of a reverse earn-out clause (i.e., "the sale price initially is fixed to a maximum equivalent to fair market value…but this sale price can be reduced in accordance with pre-established conditions…" so that on such reduction no reimbursement of the sale price occurs):
the true [réel] proceeds of disposition are not determinable at the moment of the disposition of the shares. Consequently…the taxpayer will not be entitled to a capital gains reserve under subparagraph 40(1)(a)(iii).
14 May 2013 T.I. 2013-0480561E5 F - Méthode de recouvrement du coût
Mr. A holds all the shares of a Canadian-controlled private corporation (Aco), which has a calendar fiscal period and whose only asset is shares of another CCPC (Bco), which has an October 31 year end.
Situation A
Aco sells 35% of its shares of Bco and then, on January 1 of Year 1, disposes of the rest of the shares to an arm's length purchaser ("Buyer"), with the proceeds (other than the first payment on the January 1 disposition date) being subject to an earn-out based on Bco's sales. Accordingly, the annual amounts payable on January 1 of Year 2 through to January 1 of Year 6 are subject to the attainment of specified sales objectives of Bco for Bco's fiscal period ending on October 31 of the preceding year – but are subject to an adjustment on April 30 of the payable year.
Question
Would the 5-year requirement in IT-426R, para. 2(d) be satisfied?
Response
CRA stated (TaxInterpretations translation):
…CRA considers that the earnout clause…terminates at the moment when the last conditional amount becomes payable in accordance with the sale contract…In our view, it could be possible to calculate with precision a payment in advance of the moment when the financial statements of Bco become available….
In this case, the earnout clause..must terminate on October 31 of Year 6 in order for the condition stipulated in paragraph 2(d) of the Bulletin to be satisfied….[I]f it were not possible to calculate all payments with precision within the period of five years…we would be of the view that the duration of the earnout clause…likely exceeded five years.
Situation B
Mr. A sells 35% of his shares of Aco and then, on January 1 of Year 1, disposes of the rest of the shares to Buyer, with the proceeds (other than the first payment on the January 1 disposition date) being subject to an earn-out based on Bco's sales. Accordingly, the annual amounts payable on January 1 of Years 2 and 3 are based on the sales of Bco – but are subject to an adjustment on April 30 of Year 2 or 3, as the case may be.
Question
Would A be able to use the cost recovery method?
Response
CRA stated (TaxInterpretations translation):
[T]he earnout clause is not tied to future amounts generated by underlying properties utilized in the course of a business carried on by Aco but rather to properties held by Bco. Therefore, we are of the view that the cost recovery method cannot be utilized by Mr. A in this case.
20 December 2011 T.I. 2011-0423771E5
The position in IT-462, para. 5(c) (respecting the sale of property for a fixed sum plus additional amounts based on production exceeding a threshold) and in para. 5(b) continues to apply to dispositions of partnership property held as capital property.
11 May 2001 Memorandum 2001-007236
Respecting a submission that accrued royalties were not required to be included in the taxpayer's income because they were not received in the year as described in paragraph 12(1)(g), the Agency indicated that s. 12(1) does not exclude from income amounts that otherwise would be required to be included in income under s. 9(1) that, rather, expands the range of amounts that may be included in income.
24 September 1997 T.I. 971836
S.12(1)(g) can apply to the disposition of a partnership interest.
20 January 1994 Memorandum 932972
Re application of s. 12(1)(g) to woodlot operation.
30 December 1992 T.I. (Tax Window No. 27, p. 5, ¶2321)
S.12(1)(g) does not apply where the consideration received for the sale of software includes a note the timing of payment of which depends on the revenue produced from the exploitation of the software.
2 September 1992 Memorandum (Tax Window, No. 24, p. 17, ¶2222)
The sale of cutting rights for a fixed price for a fixed quantity of timber to be taken within a fixed period of time will not be subject to s. 12(1)(g).
IT-462 "Payments Based on Production or Use" 1 January 1995 (Archived)
5. When paragraph 12(1)(g) requires proceeds of dispositions of property to be included wholly or partly as income, subject to 3 above, the following rules apply when calculating what is income and what is on account of capital:
...(b) Where the agreement for sale provides for payments based on production or use plus a fixed sum, the former are brought into income under paragraph 12(1)(g) and the latter is treated as proceeds of disposition.
(c) Where the agreement for sale provides for a fixed sum, with an additional amount being payable in the event that production or use exceeds a stipulated figure, the fixed sum is treated as proceeds of disposition and the additional amount, if any, is brought into income under paragraph 12(1)(g). ...
9. Paragraph 12(1)(g) does not apply where the sale price of property is originally set at a maximum which is equivalent to the fair market value of the property at the time of the sale and which can be subsequently decreased if certain conditions related to production or use are not met in the future. In such a situation the proceeds will be on account of capital and if there is a reasonable expectation at the time of disposition of the property that the conditions will be met, then the disposition is treated in the ordinary manner, and the original maximum amount is considered to be the sale price of the property. If, subsequently, the conditions are not met then an appropriate adjustment will be made in the year in which the amount of the reduction in the sale price is known with certainty and will not vary in the future. Whether there is a reasonable expectation that conditions will be met is a question that is determined on the facts of the particular situation.
IT-426R "Shares Sold Subject to an Earnout Agreement" 26 Ocober 2004 (Archived)
2. Taxpayers may use the cost recovery method if the following conditions are met:
- (a) The vendor and purchaser are dealing with each other at arm's length.
- (b) The gain or loss on the sale of shares of the capital stock of a corporation is clearly of a capital nature.
- (c) It is reasonable to assume that the earnout feature relates to underlying goodwill the value of which cannot reasonably be expected to be agreed upon by the vendor and purchaser at the date of the sale.
- (d) The earnout feature in the sale agreement must end no later than 5 years after the end of the first taxation year of the corporation (whose shares are sold) in which the shares are sold. For the purposes of this condition, the CRA considers that an earnout feature in a sale agreement ends at the time the last contingent amount may become payable pursuant to the sale agreement.
- (e) The vendor submits, with his return of income for the year in which the shares were disposed of, a copy of the sale agreement [and] ... an undertaking to follow the procedure of reporting the gain or loss on the sale under the cost recovery method... .
- (f) The vendor is...resident in Canada ... .
3. Under the cost recovery method, the vendor reduces his adjusted cost base of the shares as amounts on account of the sale price become determinable. Once such an amount on account of the sale price exceeds the adjusted cost base of the shares (as reduced by any previous such amounts), the excess is considered to be a capital gain that is realized at the time that that amount became determinable, and the adjusted cost base becomes nil. All such amounts that subsequently become determinable are treated as capital gains at the subsequent time.
Articles
Scheuermann, "Income and Commodity Tax Aspects of Acquiring and Exploiting Technology", 1991 Conference Report, c. 45.
Richardson, "Purchase and Sale of a Business: Income Tax Aspects of Warranties, Price Adjustments and Earn-Outs", 1990 Corporate Management Tax Conference Report, pp. 10:11-10:23.
Paragraph 12(1)(i) - Bad debts recovered
See Also
Beck v. MNR, 92 DTC 1784 (TCC)
The taxpayer, which in 1983 had written off a debt owing to it by a corporation ("Brenloc"), in 1984 participated in transactions pursuant to which it and other creditors borrowed money from a bank, the creditors used the borrowed funds to subscribe for shares of a holding company, the holding company used those funds to subscribe for shares of Brenloc, and Brenloc used the funds to pay off the indebtedness owing to the creditors. In finding that s. 12(1)(i) applied to the taxpayer and in rejecting a submission "that most of the transactions were only book entries", Lamarre Proulx J. stated (p. 1786):
"I believe that the agreement says clearly that the parties agree that the debt that the Appellant had against Brenloc was paid at its face value pursuant to the agreement and that the debts were to be extinguished by payments made by Brenloc in accordance with the agreement."
Paragraph 12(1)(j) - Dividends from resident corporations
Cases
Banner Pharmacaps NRO Ltd. v. The Queen, 2003 FCA 367, 2003 DTC 5642 (FCA)
The wholly-owned Canadian subsidiary of the taxpayer declared a dividend on its shares, with the resolution stipulating that the dividend was to be payable "by the issuance of a demand promissory note".
The Court found that the Tax Court Judge had erred in finding that the dividend was includable in the income of the taxpayer in the year of declaration on the basis that the taxpayer was required to compute its income on a accrual basis: "The clear result of the combined operation of paragraph 12(1)(j) and clause 82(1)(a)(ii)(A) of the Income Tax Act is that such dividends are taxable only when received, not when they are merely receivable."
Paragraph 12(1)(l.1) - Partnership — interest deduction add back
Administrative Policy
28 July 2015 T.I. 2015-0567811E5 - Thin cap rules for members of a partnership
Canco (wholly-owned by NRco) and its wholly-owned subsidiary (Canco Sub) hold respective 99.9% and 0.1% interests in the "Partnership," which does not carry on business in Canada. The partnership agreement provides that income or loss is allocated only to those who are members at the end of the fiscal period (the calendar year). NRco (a non-resident) made an interest-bearing loan to the Partnership which then lent the proceeds to another Canadian corporation at a higher interest rate.
Before the end of 2015, Canco and Canco Sub disposed of their interests in the Partnership to non-resident subsidiaries of NRco, so that all of the Partnership income or loss for 2015 is allocated to them.
Would the Partnership have "deductible" interest for purposes of applying s. 12(1)(l.1) to Canco and Canco Sub given that its non-resident members at year end were not "taxpayers" and s. 96(1) does not require a partnership to compute income or deductions if no member is a taxpayer? CRA responded:
Canco and Canco Sub would determine their "specified proportion" for their 2015 taxation year based on the allocation of the Partnership's income for the fiscal period ending December 31, 2014… . Accordingly, subsection 18(7) would apply to deem Canco and Canco Sub to owe 99.1% and 0.1% of the Loan and to have paid the corresponding interest.
…[S]ubsection 96(1.01) would apply to deem Canco and Canco Sub to be members of the Partnership at the end of 2015… . [S]ubsection 96(1.01) applies for purposes of subsection 96(1)… . This means that although a person may have ceased to be a partner before the partnership's fiscal period end, subsection 96(1) is applicable and a portion of the partnership's net income or loss is allocable to the person pursuant to subsection 96(1).
…[T]the interest paid by the Partnership on the Loan is "deductible" by the Partnership for the purposes of subparagraph (i) of element A in the formula in paragraph 12(1)(l.1)… . Accordingly, paragraph 12(1)(l.1)… will apply to include an amount in the income of Canco and Canco Sub… .
Further, it might also be noted that the original structure could result in the application of section 245... .
Articles
Shane Onufrechuk, Warren Pashkowick, "Tax Considerations of Major Construction Projects", 2014 Conference Report, Canadian Tax Foundation, 10:1-35.
Proxy income inclusion does not boost unit ACB (p. 10:13)
[I]f a corporate partner exceeds the permitted 1.5:1 ratio, interest expense on partnership debts owing to specified non-residents will not be denied at the partnership level but will instead be added back to the corporation's income under paragraph 12(1)(1.1). It is notable that the proxy income inclusion under this paragraph is included in the partner's income and is therefore not an allocation of actual partnership income. As a result, there is no adjustment to the ACB of the partner's partnership interest related to this income.
Paragraph 12(1)(n.3) - Retirement compensation arrangement
Administrative Policy
17 December 2010 T.I. 2009-0338841E5 - Characterization of Income from an RCA
Are amounts received by an employer on the winding-up of an RCA (where its contributions were deducted in computing its business income) included in its income from business or property? CRA stated:
Since one of the conditions for an amount to be included in a taxpayer's income pursuant to paragraph 12(1)(n.3) is that the amount be received by the taxpayer in the course of a business… such income would be characterized as business income. … If it were determined that the amount was not received in the course of a business, the amount would nonetheless be included in income pursuant to subsection 56(1)… .
31 March 1995 T.I. 5-950295
"Any amount received by the employer from a custodian as a refund of refundable taxes is included in the employer's income under paragraph 12(1)(n.3) of the Act. Where, under an arrangement, the securing of assets for a letter of credit can be considered a contribution to a RCA and the letter of credit is subsequently cancelled, it is our view that an amount would be included in the income of the employer under paragraph 12(1)(n.3) ..."
Paragraph 12(1)(o)
Cases
Midwest Oil Production Ltd. v. The Queen, 82 DTC 6092, [1982] CTC 107 (FCTD), aff'd 83 DTC 5304, [1983] CTC 338 (FCA)
Because the word "receivable" relates to a change in custody or possession, not to a change in ownership, a royalty obligation to deliver crude oil to the Alberta government (or its agent) that already belonged to it gave rise to an amount being receivable by it. The amount receivable is not reduced by available Alberta drilling incentive credits.
Because s. 12(1)(o) taxes the producer, not the (Alberta) owner, of the petroleum, it does not contravene the constitutional prohibition against the taxation of provincial property.
Paragraph 12(1)(r) - Inventory adjustment
Administrative Policy
93 CPTJ - Q.5
The word "obsolescence" in s. 12(1)(r) is considered to refer to an amount respecting obsolescence of fixed assets where such amount is included as overhead in computing the value of the taxpayer's closing inventory for financial statement purposes, and does not refer to an amount deducted for obsolete goods that themselves form part of inventory.
Paragraph 12(1)(t) - Investment tax credit
Administrative Policy
15 August 2014 T.I. 2014-0522541E5 - Application of 12(1)(x)
The federal apprenticeship job creation tax credit ("AJCTC") is generally included in income under s. 12(1)(t). CRA noted:
Paragraph 12(1)(t) generally requires a taxpayer to include in income an amount deducted in a preceding taxation year under subsection 127(5) or (6)...in respect of a property acquired or an expenditure made in a preceding taxation year. If an amount is included in income under paragraph 12(1)(t)...in a taxation year, it is not included in income under paragraph 12(1)(x)...for that year or a later taxation year.
Paragraph 12(1)(x) - Inducement, reimbursement, etc.
Cases
Imperial Oil Resources Ltd. v. Attorney General of Canada, 2008 DTC 6657, 2008 FC 1037
The Alberta government gave the taxpayer a reduction in the royalties it would otherwise have to pay to Alberta on condition that the taxpayer invest in an expansion of the Syncrude project. In finding that s. 12(1)(x) did not apply to this reduction, O'Reilly, J. noted that this reduction formed an integral part of the royalty formula for the expanded project, and none of the components of the calculation could fairly be isolated from the rest and characterized separately.
Iron Ore Co. of Canada v. The Queen, 2001 DTC 5411, 2001 FCA 224
The taxpayer made an unsuccessful submission that a refund of Quebec sales tax was not a "refund" described in s. 12(1)(x(iv) because the word "refund", like other words described in s. 12(1)(x)(iv), referred to items of government assistance to the taxpayer.
The Queen v. Canada Safeway Ltd., 98 DTC 6060, docket A-896-96 (FCA)
In finding that a refund of federal sales tax that predecessors of the taxpayer previously had paid in error did not qualify as a reimbursement for purposes of s. 12(1)(x)(iv), Latourneau J.A. stated (at p. 6063):
"In the case of a refund of sums paid by error, there is, in my view, no flow of benefits between the respective parties: the money is simply returned to the payer. In addition, while the notion of reimbursement generally involves the intervention of a third party, that of refund implies the mere return of money between two parties."
The Queen v. CCLC Technologies Inc., 96 DTC 6527 (FCA)
eAn agreement the taxpayer entered into with the province of Alberta concerning a coal and heavy oil project was found to have resulted in the receipt by the taxpayer of "other ... assistance" for purposes of s. 12(1)(x)(iv) given that it was impossible to characterize the agreement as an ordinary business arrangement: "A business which invested money in ventures on the basis that it could not receive any net profit if the venture succeeded, and would gain an equity interest only if the venture proved uncommercial, would not long survive." (p. 6529)
In addition, the agreement could not reasonably be considered to be designed for the purpose of the government acquiring an interest in the taxpayer's property for purposes of s. 12(1)(x)(viii) given that in the circumstances the government's contribution was in the nature of a grant, subsidy or forgivable loan instead, as described above.
Westcoast Energy Inc. v. The Queen, 91 DTC 5334 (FCTD), briefly aff'd 92 DTC 6253 (FCA)
Damages which the taxpayer received in settlement of its suit based on the direct and indirect costs incurred by it in replacing a defective pipe line were not subject to tax under s. 12(1)(x), given that such amounts were not a "reimbursement" for purposes of that section. "The ordinary and legal meaning of the word does not contemplate an award of damages" (p. 5341).
See Also
GMAC Leaseco Corporation v. The Queen, 2015 TCC 146
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.)
GMAC argued that, because the support payments were not earned when received, the exclusion in s. 12(1)(x)(v) for income receipts did apply, so that s. 13(7.4) election to exclude those amounts from income had been validly made. Graham J found that for the same reason that a support payment was unearned (i.e., there was "no legal right to keep the amount"), it also was not received for s. 12(1)(x) purposes (para. 40). He also questioned (in f.n. 10) whether the s. 13(7.4) elections would have been available in any event because the "support payments were received to replace lost income rather than in respect of the cost of the vehicles."
See summaries under s. 9 – timing, s. 9 – compensation payments and s. 9 – computation of profit.
Henco Industries Limited v. The Queen, 2014 DTC 1161 [at 3528], 2014 TCC 192
A subdivision property of the taxpayer, a developer, was blockaded by Six Nations protesters. To diffuse the conflict, the Ontario government passed a by-law prohibiting any use of the property (rendering it valueless), and ultimately agreed to pay the taxpayer $15,800,000 in exchange for relinquishing its rights to the property and under a court order against the protesters, and for a release.
Before so agreeing but after the taxpayer's business operations were effectively halted, the government also paid $650,000 "to mitigate impact of continued occupation of [the land]." In finding that this amount was not taxable under s. 12(1)(x) as an amount received "in the course of earning income from a business," and after contrasting (at para. 121) the wording of s. 12(1)(a) "which simply says ‘in the course of a business'," C. Miller J stated (at para. 124):
[U]ntil Henco found out about the moratorium, and ultimately the imposition of a rezoning by-law precluding further development, Henco was still in business. ... But ... to the time of the $650,000 payment, though still in business, was Henco in the course of earning income from a business? I believe not.
Immunovaccine Technologies Inc. v. The Queen, 2014 DTC 5119 [at 7309], 2014 FCA 196, aff'g 2013 DTC 1101 [at 531], 2013 TCC 103
Under a federal program for fostering Maritimes development, the taxpayer received interest-free advances, which were not characterized as forgivable loans - but were repayable only out of a percentage of future revenues. The advances were "government assistance" which reduced the taxpayer's SR&ED credits. Although they were not subsidies or forgivable loans, they were "any other form of assistance," which Nadon JA found should be considered to be the case unless "the public authority in question is acting in a business rather than a governance capacity." See summary under s. 127(9) - government assistance.
Morguard Corporation v. The Queen, 2012 DTC 1099 [at 2959], 2012 TCC 55, aff'd 2013 DTC 5009 [at 5554], 2012 FCA 306
After finding that break fees totalling $7.7 million received by the taxpayer in an unsuccessful acquisition attempt were fully taxable to it under s. 9 given that "its ordinary business activities included trying to make corporate acquisitions such as its bid for Acanthus resulting in the break fee" (para. 45), Boyle J. briefly considered the Minister's alternative argument that the break fee was reimbursement under s. 12(1)(x) for the taxpayer's expenses in preparing the takeover bid. He stated obiter dicta that it was unlikely that the entire $7.7 million could be construed as reimbursement.
Alberta Power (2000) Ltd. v. The Queen, 2009 DTC 1514, 2009 TCC 412
On the early termination of a power purchase agreement between the taxpayer and the Alberta government, the taxpayer received $59.7 million from the Alberta government and the Alberta government became the beneficial owner of a power generation plant of the taxpayer, although the taxpayer continued as legal title owner and continued to operate the plant under an operating agreement with the Alberta government.
In finding that s. 12(1)(x) did not apply to the payment received by the taxpayer, Rossiter, ACJ noted (at para. 94) that this was not a reimbursement situation, i.e., "a situation where one party is forced to pay an amount that is properly the liability of another party and is therefore entitiled to be reimbursed the funds from the second party," and (at para. 99) that "paragraph 12(1)(x) of the Act was not enacted, in my view, for circumstances where someone has a legal obligation to make a payment, if the legal obligation arises from the course of legitimate negotiations", and went on to indicate that in any event, the exclusions in ss.12(1)(x)(v) and (viii) applied because the payment was credited to the undepreciated capital cost of the plant to the taxpayer, and represented a payment made in respect of the acquisition of property of the taxpayer (the beneficial ownership of the plant).
PSC Elstow Research Farm Inc. v. The Queen, 2009 DTC 168, 2008 TCC 694
Research grants received by the parent of the taxpayer were not includible in its income under s. 12(1)(x) to the extent that such assistance was spent on projects that were unrelated to the research facility of the taxpayer, given that s. 12(1)(x) did not include an amount in the taxpayer's income unless the amount was actually received by the taxpayer.
Hudson Bay Mining and Smelting Co., Ltd. v. The Queen, 2003 DTC 173 (TCC)
Tax credits received by the taxpayer from the Manitoba government were in respect of Canadian exploration expenses that it incurred as agent for its parent. Accordingly, such credits were not made in respect of an outlay or expense of the taxpayer and, therefore, were not included in income under s. 12(1)(x). Furthermore, the assistance would be deemed by the definition of cumulative Canadian exploration expense in the Act to be a reduction in the amount of those expenses so that s. 12(1)(x), being a provision of more general application, could not apply.
Coughlan v. The Queen, 2001 DTC 719, Docket: 1999-1758-IT-G (TCC)
Damages received by the taxpayer from a corporation of which he formerly was an officer and shareholder for conspiring to injure his reputation, and damages for failure of the corporation to indemnify him for his legal expenses, were not taxable under s. 12(1)(x). Notwithstanding that Revenue Canada had allowed him in previous years to deduct his litigation expenses, the amounts were received by him in order to protect his reputation and not in the course of earning income from a business or a property. Moreover, the amounts were unequivocally characterized by the Nova Scotia Court of Appeal as damage awards, and as such they were not a reimbursement of the amounts laid out by him to fund his litigation.
Bois Aisé de Roberval Inc. v. The Queen, 99 DTC 380, Docket: 96-2531-IT-G (TCC)
A refund of export taxes previously paid by the taxpayer was deemed to be income under the revised version of s. 12(1)(x)(iv), which had been specifically enacted to reverse The Queen v. Johnson & Johnson, 94 DTC 6125.
Quincaillerie Laberge Inc. v. The Queen, 95 DTC 155 (TCC)
After finding that $575,000 received by the taxpayer for agreeing to extend the term of a loan for $10,500,000, rather than exercising its rights to demand repayment thereof following a default, was income to it under s. 12(1)(x) (or s. 9(1), which had not been debated before him), Garon TCJ. went on to indicate (at p. 163) his doubts as to the correctness of a submission that an amount that normally would give rise to the realization of a capital gain could be deemed to be income by s. 12(1)(x):
"In the absence of a clear text establishing the manifest intention of Parliament, one cannot suppose that the latter wanted, through paragraph 12(1)(x), to make a fundamental, radical change to the system of capital gains and losses and convert a capital gain to income in its ordinary meaning within the context of the Income Tax Act and the case law pertaining to that Act."
Hill v. The Queen, 94 DTC 1078 (TCC), aff'd 95 DTC 5225 (FCA)
A law firm of which the taxpayer was a member was required to use a portion of the amount paid or to be paid to it as an inducement to sign a new lease, to acquire terms deposits to be held by it until it had incurred certain costs for leasehold improvements and, as to $1,200,000, until the term of the lease commenced approximately eight months later.
Mogan, TCJ. found that the term deposits were acquired only for the benefit of the landlord (i.e., for the purpose of providing security to it in respect of obligations of the firm under the lease agreement) and were not acquired by the firm in the ordinary course of earning income from its business. Accordingly, the portion of the leasehold inducement payment which the firm purported to apply to reduce the cost to it of term deposits pursuant to ss. 53(2.1) and 12(1)(vii) was not eligible for this treatment.
Tyoxide Canada Inc. v. The Queen, 93 DTC 1499 (TCC)
A Quebec tax credit, calculated as 10% of the wages of Quebec employees engaged in research activities, was included in income of the taxpayer for purposes of the Act under s. 12(1)(x)) and reduced the amount of the taxpayer's qualified expenditures for investment tax credit purposes pursuant to s. 127(11.1).) In response to a submission that the taxpayer had not actually "received" anything, Garon TCJ. noted that s. 12(1)(x)(iii) contemplated that a "deduction from tax" was an amount that was received, and further noted that because the right conferred on the taxpayer in respect of the tax credit came under the broad definition of "amount" in s. 248(1), it could be said that because the taxpayer benefited from that amount, it also was correct to say that the taxpayer had "received" the amount in the years in question.
Everett's Truck Stop Ltd. v. The Queen, 93 DTC 965 (TCC)
The assumption by another corporation ("Polar Oils") of the obligation of the taxpayer to pay $119,658 in consideration for the taxpayer's agreement to pay four cents per litre more for diesel fuel purchased by it from Polar Oils until the total overpayments amounted to $119,658, constituted an inducement under s. 12(1)(x). The amount of the inclusion under s. 12(1)(x) was the full amount rather than the amount of additional payments made by the taxpayer to Polar Oils in the taxation year.
No relief was available under s. 13(7.4) given the absence of a timely election.
St. John Dry Dock & Shipbuilding Co. v. MNR (1944), 2 DTC 663 (Ex Ct)
Before concluding that a subsidy received by the taxpayer from the federal government, pursuant to a statute, for the construction of a dry dock was a capital receipt, Thorson P. indicated that (at p. 669-670):
"The appellant was not entitled to receive nor did receive the subsidy in the course of its trade or business operations or because of them ... . There was no guarantee of trade or business profits earning nor was the subsidy given to supplement or increase the operational revenues of the appellant. Indeed, the subsidy payments had nothing to do with the trade or business operations of the appellant at all."
Higgs v. Olivier (1952), 33 TC 136 (C.A.)
Before going on to find that a lump sum received by an actor in consideration for his covenant not to exercise his vocation for a period of 18 months was a tax-free receipt, Sir Evershed M.R. stated (at p. 145) that "many sums of money received in the course of carrying on a trade, but not as a result of the trade as it was contemplated that it would be carried on in the normal course, may nevertheless be taxable".
Administrative Policy
12 September 2012 Annual CTF Roundtable Q. , 2012-0453381C6
An insolvent (but not bankrupt) company negotiates a settlement with CRA of unremitted GST for less than the balance owing. CRA stated that "this would be included in income pursuant to subsection 12(1)(x)."
15 August 2014 T.I. 2014-0522541E5 - Application of 12(1)(x)
The Ontario apprenticeship training tax credit ("ATTC") is generally included in income under s. 12(1)(x). After noting that a tax credit is considered to be received no later than when it reduces the tax payable for a taxation year, CRA stated that "the reduction of tax payable pursuant to section 43.13 of the [Corporations Tax Act] would occur in the taxation year after the taxation year in which the ATTC was used."
15 September 2014 Memorandum 2014-0545001I7 - Grants paid to employers of reservists
Amounts that are received from the Compensation for Employers of Reservists Program by employers of reservists and by self-employed individuals who are the reservist would be included in income pursuant to s. 9 (or, failing that, under s. 12(1)(x).
20 May 2014 T.I. 2013-0516121E5 F - Debt forgiveness
A compromise by Aco under Division I of Part III of the Bankruptcy and Insolvency Act resulted in reassessments owing by Aco for unremitted GST and QST including interest and penalties being compromised for the payment of a stipulated sum under a stipulated schedule. After finding that the forgiveness "gain" was not income under s. 9, CRA stated (TaxInterpretations translation) that:
[T]he portion of the amount of the gain arising from the settlement of interest and penalties could be an amount coming within subparagraph 12(1)(x)(iv). To the extent that subparagraph 12(1)(x)(iv) were determined to apply so as to include the amount of a gain arising from the settlement in the income of Aco, an election under subsection 12(2.2) could be made to reduce the amount of the affected expense… .
12 July 2011 Memorandum 2010-0366321I7
In indicating that a break fee should be included in income under s. 12(1)(x) even if it were not includable under s. 9(1), , CRA indicated that per BJ Serices it was received "in the course of earning income from a business or property," it was received as an inducement as the target had wished for the taxpayer to make an offer for the target's shares and, in addition, a portion of the break fee may be considered as a reimbursement for expense incurred by the taxpayer.
21 March 2011 T.I. 2011-039501
A particular Ontario tax on life insurance corporations ("SAT") is determined as a fixed percentage of the amount by which the corporation's taxable paid-up capital exceeds the total of the corporation's Ontario corporate income tax and corporate minimum tax payable for the year. By virtue of being added to the corporation's corporate minimum tax credit carry forward, this tax may then be deducted to reduce future years' income taxes.
The SAT is a capital tax and not an income tax, notwithstanding its potential creditability against income taxes payable, and therefore the incurring of the tax leads to a corresponding deduction in the computation of income.
As a consequence of this deductibility, when the SAT credit is applied to reduce Ontario corporate income taxes payable in a subsequent taxation year, we would consider it to be an amount received as a reimbursement of an amount that was deducted as an outlay or expense in a prior year, and the amount of the credit applied would be taxable under 12(1)(x)(iv).
2008 Ruling 2006-0217541R3 -
A Canadian public company ("Parentco") and non-resident subsidiaries ("Subco1 and Subco2", collectively "Subco") enter into a "Recharge Agreement" under which Subco pays to Parentco an amount equal to the stock option benefit enjoyed by Subco's employees on the exercise of options to acquire shares of Parentco or on a cash surrender of the options.
Provided that the payments received under the Recharge Agreement by Parentco are in respect of services rendered by the employees to Subco, for options granted after the date of the Recharge Agreement, or for the increase in the stock option benefit that arises after the date of the Recharge Agreement on pre-existing options, such payments are not included in the income of Parentco under ss. 9, 90, 5(1) or 56(2), or 12(1)(x).
2004 Ruling 2004-007680
//www.bci.ca/">www.bci.ca): Non-capital losses of BCI are transferred to its affiliate, Bell Canada, pursuant to transactions under which a subsidiary of Bell Canada ("Bell Subco") borrows up to $17 billion on a day-light loan and uses the borrowed money to subscribe for preferred shares of a newly-incorporated subsidiary of BCI ("BCI Subco"), BCI Subco lends the money on a non-interest bearing basis to BCI, BCI lends the same funds on an interest-bearing basis (1 basis point lower than the dividend rate on the preferred shares) to Bell Subco, which pays off the day-light loan. BCI is paid for the loan by the parent of Bell making a capital contribution to a second newly incorporated subsidiary of BCI, with that subsidiary then being wound-up into BCI.
Ruling given that no inclusion in the income of the second subsidiary of BCI under s. 9 or 12(1)(x) in respect of the contribution of capital to it (and that no such inclusion in the income of BCI Subco in respect of periodic contributions of capital to it in order for it to fund dividend payments on the preferred shares).
26 July 2001 T.I. 2001-008329 -
A Quebec sales tax input tax refund is included in income under s. 12(1)(x) when received.
25 May 2001 Memorandum 2001-008500
The receipt in Westcoast Energy Inc. v. The Queen, 91 DTC 5334 (FCTD), affirmed 92 DTC 6253 (FCA) would not be considered to be a "refund, contribution, allowance or assistance" for purposes of s. 12(1)(x) of the Act.
2001 Ruling 2000-003987
Cash receipts of a partnership for assuming contingent liabilities (respecting unfunded supplemental pension and other retirement benefit liabilities) on a purchase transaction were included in income under s. 12(1)(x).
18 September 2000 T.I. 2000-002946 -
Where a Canadian parent is reimbursed by its foreign subsidiary for the difference between the exercise price and the fair market value of shares in the parent's capital stock issued by it on the exercise by employees of the foreign subsidiary of their employee stock options, that amount will be added to the stated capital of its shares and will not be considered to be received by it "in the course of earning income from business or property". Accordingly, s. 12(1)(x) will not apply.
15 November 1999 T.I. 5-992458
A corporation that has received prepaid rent with respect to a building leased by it to another Canadian corporation then transfers the building to a related corporation for proceeds of disposition that are lowered to reflect the assumption by the transferee of the obligations with respect to prepaid rent. No s. 20(24) election is made. In RC's view, the excess of the (unfettered) fair market value of the property over the purchase price will be included in the transferor's income pursuant to s. 9(1) or (12(1)(x).
7 July 1999 T.I. 982411 [ITC received when deducted]
A provincial investment tax credit is considered to be "received" by the taxpayer at the time it is deducted. Similarly, an investment tax credit that is not deducted in a year because of insufficient tax payable will not reduce capital cost in that year and may be treated as assistance received in future years for inclusion under s. 12(1)(x) or to reduce capital cost under s. 13(7.1).
5 February 1998 T.I. 972953 [loan repayable out of revenues]
Respecting a loan that is repayable out of projected revenues, the Directorate stated that "a loan would be a forgivable loan to the extent that the lender is committed to forgive the loan if certain conditions are met by the borrower. Part of such conditions, in our opinion, could be the earning of insufficient film revenue to meet the repayment of the loan."
1997 Ruling 970769 [benefit on redemption not an inducement]
The redemption of shares for a nominal amount pursuant to their terms would not constitute an inducement for purposes of s. 12(1)(x) as any inducement would have to be received at the time the shares are issued or the terms otherwise established.
29 October 1996 T.I. 5-962632
S.12(1)(x) could apply to the receipt by a corporation of a premium for granting an option to require it to issue bonds, depending on the particular facts and circumstances.
11 January 1996 T.I. 952684 (C.T.O. "Alberta Government Assistance - Small Business Equity")
A grant made pursuant to the initial Small Business Equity Corporations Act (Alberta) to a taxpayer for the purchase of venture capital corporation shares represents a prescribed amount.
1 February 1994 T.I. 933226 [investor rebate inclusion under s. 12(2.1)]
Where the manager of a mutual fund trust rebates a portion of the management fee earned by it directly to investors who have invested substantial amounts in the trust, the rebate will be included in the income of the trust.
1994 A.P.F.F. Round Table, Q. 41
"There may be constructive receipt by a taxpayer when an amount is entered as a credit to his account or, as in Everett's Truck Stop Ltd., that is paid by the supplier on behalf of the taxpayer. A tax reduction is also considered an amount received as assistance from a government."
94 CPTJ - Q. 1
The Alberta royalty tax credit is not included in a taxpayer's income under s. 12(1)(x).
2 December 1993 T.I. 932103 (C.T.O. "Taxation of GST and other Rebates")
The Ontario Farm Tax Rebate (entailing a rebate of 75% of property taxes paid on eligible farm land and out-buildings by eligible owners) is required to be included in income under s. 12(1)(x) to the extent it is not applied to reduce the expense for taxes otherwise deductible in the year. Other property tax rebates and fuel tax rebates received in the course of earning income from a business or property would be treated in a similar manner.
5 November 1993 T.I. 932008
Respecting guarantees by the Province of Saskatchewan of loans made to farmers where the Province did not waive its subrogation rights, the Directorate stated that provided the loans were not forgivable loans and:
"Upon the honouring of a guarantee the amount paid by the Province becomes unconditionally repayable to the Province, the granting or the honouring of a guarantee under this program would generally not, in and by themselves, give rise to an amount which would constitute a [farm support payment]. For these purposes, a loan would generally be a forgivable loan to the extent that the lender is committed to forgive the loan if certain conditions are met by the borrower."
27 October 1993 T.I. 931992 [inclusion re forgivable loan at time of advance]
A loan from the Agricultural Credit Corporation of Saskatchewan generally would be regarded as a forgivable loan and, therefore, as assistance "to the extent that the lender is committed to forgive the loan if certain conditions are met by the borrower. In our view, an income inclusion under paragraph 12(1)(x) of the Act with regard to a forgivable loan arises at the time the loan is granted."
26 February 1993 T.I. (Tax Window, No. 29, p.17, ¶2440)
A reimbursement or other assistance received in respect of eligible capital property cannot be applied to offset the cost amount of that property and, instead, must be included in income.
10 February 1993 T.I. 921720C (See also 13 January 1993 T.I. 923304)
Amounts paid to Atlantic hog farmers were repayable, except that "if certain conditions subsequent are met they may be forgiven". The Directorate commented that "it is the Department's general position that where the conditions for repayment of a government loan are so remote that forgiveness of the debt is the usual result, the amount should pursuant to paragraph 12(1)(x) of the Act be included in income, as a forgivable loan even where the loan is not formally described as a forgivable loan", and indicated that no T-Slips would be required in respect of the payments.
8 February 1993 Memorandum (Tax Window, No. 29, p.18, ¶2437)
Credits under the Quebec Mining and Duties Act do not fall within the ambit of s. 12(1)(x).
December 1992 B.C. Tax Executives Institute Round Table, Q.13 (October 1993 Access Letter, p. 481)
It is a question of fact whether a lease cancellation payment received by a tenant would be excluded from the application of s. 12.1(x) by s. 12(1)(x)(viii). The taxation of tenant inducements is currently being reviewed.
"Farm Support Payments: A Paper by the Rulings Directorate addressed to Agriculture Canada - 1992" (September 1993 Access Letter, p. 426).
7 November 1992 Memorandum (Tax Window, No. 27, P. 21, ¶2354, October 1993 Access Letter, p. 478)
Ontario's super allowance for scientific research and current cost adjustment is not considered to be government assistance, incentives or tax credits for the purposes of any of ss.13(7.1), 127(9), 12(1)(x), 37(1)(d) and 53(2)(k).
12 October 1992 T.I. 922359 (September 1993 Access Letter, p. 406, ¶C9-283)
Where an amount is included in income under s. 9, s. 12(1)(x) will not apply and, therefore, the election under s. 13(7.4) will not be available.
31 August 1992 T.I. 5-921279
Payments made by a non-resident corporation to a related corporation to indemnify it for potential penalties and interest relating to income and withholding tax obligations as well as Canadian income tax liabilities would be included in the Canadian corporation's income under s. 12(1)(x). However, the Canadian corporation could elect under s. 12(2.2) to eliminate any adverse impact. Further, there potentially might be no inclusion under s. 12(1)(x) if the indemnity payment was funded by a contribution to capital or a purchase of shares having regard to the exception for payments made in respect of the acquisition by the payor of an interest in the taxpayer.
30 November 1991 Round Table (4M0462), Q. 8.2 - Subscription to Preferred Shares by a Government Body (C.T.O. September 1994)
Where an investment by a government body in shares that pay no dividends does not represent an ordinary business investment, RC generally is of the view that the difference between the fair market value of the shares and the amount subscribed may constitute government assistance for purposes of ss.13(7.1), 127(11.1), 127(9) and 53(2)(k). If none of these provisions applies, s. 12(1)(x) may apply.
30 November 1991 Round Table (4M0462), Q. 8.1 - Acquisition of a Business (C.T.O. September 1994)
"A payment as an inducement covered by subparagraph 12(1)(x)(i) to 12(1)(x)(iii) that is received as part of the acquisition of a business will be considered to be an amount coming from the business in question because there is a cause-and-effect relationship between the payment and the business. The Department is therefore of the opinion that the amount will, for the purposes of paragraph 12(1)(x), be received in the course of earning income from a business or property."
91 C.R. - Q.19
It is a question of fact whether a contribution of capital by a shareholder to a corporation to fund the acquisition of a capital asset can reasonably be considered to be made for the purpose of acquiring an interest described in s. 12(1)(x)(viii).
1 August 1991 T.I. (Tax Window, No. 7, p. 18, ¶1382)
The Nova Scotia research and development tax credit (which is a deduction in computing provincial income tax) is government assistance, whereas the Ontario research and development super allowance (which is a deduction in computing taxable income for provincial income tax purposes) is not.
26 July 1991 T.I. (Tax Window, No. 7, p. 2, ¶1376)
No general conclusion has been reached as to whether s. 12(1)(x) may apply to include a premium in the income of the issuer of commercial paper.
20 March 1991 T.I. (Tax Window, No. 1, p. 2, ¶1158)
FST inventory rebates received pursuant to s. 120 of the Excise Tax Act are considered to be assistance in respect of the cost of property or an outlay or expense and, accordingly, must be included in income.
17 January 1991 Memorandum 7-90326 -
The interest component of damages received by a limited partnership in respect of interest assessments of its partners as a result of the failure of a principal business corporation to fully renounce amounts under a flow through share agreement to the partnership constituted amounts described in s. 12(1)(x)(iv), given the expansion of that provision to include "outlays" in addition to "expenses" (meaning deductible expenses). However, s. 12(2.2) would provide relief.
17 January 1991 Memorandum (Tax Window, No. 1, p. 4, ¶1150)
As a result of the amendments to s. 12(1)(x)(iv) effective 1 January 1990 all damages received after that date are included in s. 12(1)(x)(iv), including damages received on capital account which are not related to the loss of capital property.
14 December 1990 T.I. (Tax Window, Prelim. No. 2, p. 23, ¶1056)
Most grants received under the Ontario Fast Start Program will be taxable under s. 12(1)(x).
30 November 1990 T.I. (Tax Window, Prelim. No. 2, p. 17, ¶1067)
A government loan under which the corporation must commence repayment on the earlier of 2004 and the time at which cumulative sales levels have been reached, with the amount of repayment being based on the volume of annual sales and continuing until the loan is completely repaid, is a forgivable loan for purposes of s. 12(1)(x) because the loan is not unconditionally repayable.
4 October 1990 T.I. (Tax Window, Prelim. No. 1, p. 6, ¶1023)
Where a tenant inducement payment is required to be included in income under s. 9 in accordance with GAAP, s. 12(1)(x) has no application, and no election may be made under s. 13(7.4) or s. 53(2.1).
19 September 1990 Memorandum ACC 96248
"Where any possibility of forgiveness is inherent in the terms and conditions of a loan agreement, paragraph 12(1)(x) applies to the principal amount of the forgivable loan, to the extent that it does not reduce the cost of depreciable property, pursuant to subsection 13(7.1) ... . It is a question of fact, in any given set of circumstances, whether or not a loan can be considered to be unconditionally repayable. In a particular case, the provision under a loan agreement to make repayments on condition that a specified level of sales is achieved or to make only a limited number of repayments after which any unpaid balance will be forgiven, in our opinion, would indicate that the loan is not unconditionally repayable."
90 C.P.T.J. - Q.14
Even prior to the replacement in s. 12(1)(x)(iv) of "expense" by "outlay or expense", s. 12(1)(x)(iv) was not limited to reimbursements of deductible costs, as the provision referred to "expenses" rather than to "expenses deductible in computing the taxpayer's income for tax purposes".
11 May 1990 Memorandum (October 1990 Access Letter, ¶1494)
The one-time transitional credit for small businesses provided under s. 346 of the Excise Tax Act will be taxable under s. 12(1)(x).
30 May 1990 T.I. (October 1990 Access Letter, ¶1459)
Where an amount of assistance falls within both ss.12(1)(x) and 37(1)(b), the latter will prevail.
5 February 1990 T.I. (July 1990 Access Letter, ¶1318)
Where a Canadian parent makes a contribution of capital to its wholly-owned subsidiary corporation to fund capital expenditures on SR&ED, the amount received by the subsidiary will not be treated as "non-government assistance" for purposes of s. 37(1)(d).
5 January 1990 T.I. (June 1990 Access Letter, ¶1252)
Instead of requiring the inclusion in income of payments which grape farmers received from the Department of Agriculture to remove grapes from production by destroying the grapevines or removing the post and wires relating thereto, RC may be prepared to treat such payments as reducing the adjusted cost base of the related assets, or as being (partial) proceeds of disposition.
3 January 1990 T.I. (June 1990 Access Letter, ¶1253)
Amounts of government assistance which decrease the cost of property pursuant to s. 53(2)(k) do not have to be included in the taxpayer's income by virtue of s. 12(1)(x)(vi).
89 C.M.TC - "Leasing Costs" - "Application of Paragraph 12(1)(x) of the Act to the Tenant"
s. 12(1)(x) is not generally applicable to interest-free loans provided that the loan is unconditionally repayable. "It is possible that GAAR could apply to certain abusive transactions involving interest-free loans and the landlord's restriction on the purposes for which the tenant may actually use the loan proceeds."
If a lease cancellation payment by the landlord results in an acquisition of the tenant's interest, s. 12(1)(x) does not apply.
88 C.R. - Q.16
Where a limited partner receives a cash flow grant from the developer if the cash flow received by him from the partnership is insufficient to service debt incurred by him to acquire his partnership interest, the partnership will be deemed to receive an inducement pursuant to s. 12(2.1).
88 C.R. - Q.46
Where an interest-free loan is provided to an investor in a real estate project which is forgivable to the extent that a guaranteed cash flow amount has not been realized by the investor, the amount of such loan will be included in the recipient's income at the time the loan is granted. If the amount that ultimately is forgiven is less, then s. 20(1)(hh) will provide a deduction to the extent of the repayment by the taxpayer.
87 C.R. - Q.17
S.12(1)(x) will not have application solely by virtue of a loan provided as an inducement being made at lower than a commercial rate of interest, or by virtue of a loan having limited recourse.
86 C.R. - Q.8
Minor adjustments to an agreement in writing entered into before May 23, 1985 should not cause an inducement received after May 22, 1985 to be subject to s. 12(1)(x).
86 C.R. - Q.9
A tax credit is "received" for purposes of s. 12(1)(x) when the tax instalments required to be made by the taxpayer are reduced, and otherwise at the time the tax refund is issued; Quebec R&D wage credit is a s. 12(1)(x)(iii) inducement.
86 C.R. - Q.10
The B.C. venture capital tax credit is not included in income.