Principal Issues: [TaxInterpretations translation] (1) Would a reserve for return of goods as described in the facts be available by virtue of the Income Tax Act?
(2) Does the content of Interpretation Bulletin IT-215R still represent the CRA's current position?
(3) If so, could a reserve for returns be available as described in paragraph 13 of IT-215R?
(4) In the event that a reserve for the return of goods is available, what are the conditions to be satisfied in order to take advantage of such a reserve?
Position: (1) No.
(2) Although Interpretation Bulletin IT-215R has been archived, the comments in paragraph 13 of that bulletin still reflect the CRA's current position.
(3) Yes, if all the criteria are satisfied.
(4) The goods must be on consignment or sold under a "true" return of unsold goods clause, whereby ownership of the goods does not pass to the buyer and there is no obligation to pay for the goods until the goods are sold or until a certain period of time has elapsed.
Reasons: Interpretation of the Act, previous ITRD positions and relevant jurisprudence.
XXXXXXXXXX 2009-032939 Pierre-Luc Meunier May 4, 2010
Dear Sir,
Subject: Reserve for return of unsold goods
This is in response to your letter of June 19, 2009, in which you requested our opinion regarding eligibility for a reserve for the return of unsold goods in a particular situation. We apologize for the delay in responding to your request.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
Your request described the following situation:
1. Corporation X's main area of business is book publishing.
2. Corporation X signs book sales contracts with its customers.
3. The contracts include a clause allowing for the return of books not sold by the customers.
4. Customers have the option of returning, to Corporation X, books that have not been sold within 12 months of signing the contract.
5. The books are not on consignment with the customers.
6. Revenues from the sale of books are recorded by Corporation X upon delivery of the goods to the customer.
7. At the end of the fiscal year, Corporation X establishes for accounting purposes a reserve for the return of goods not sold by its customers.
8. This reserve is established by Corporation X based on its expertise and an analysis of historical market and client data.
In relation to the above situation, you asked the following four questions:
1. Would a reserve for returns, in a situation like the one described above, be available by virtue of the Act?
2. Does Interpretation Bulletin IT-215R still represent the CRA's current position?
3. If so, could a reserve for return of goods be available as discussed in paragraph 13 of IT-215R?
4. In the event that a reserve for returns is available, what are the conditions to be satisfied to take advantage of such a reserve?
Our Comments
It appears to us that the situation described in your letter and summarized below could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more transactions, you should submit all relevant facts and documents to the appropriate Tax Services Office for its opinion. However, we are able to offer the following general comments that you may find useful.
According to our understanding of the facts, the transfer of title to the books takes place at the time of their delivery to the customers. Corporation X must therefore, at that time, include in computing its income from a business the profit from the sale under subsection 9(1).
Paragraph 18(1)(e) stipulates inter alia that in computing a taxpayer's income from a business, no deduction may be made in respect of a reserve, a contingent liability or amount or a sinking fund except as expressly permitted by Part I of the Act.
We agree that a reserve under paragraph 20(1)(m) is not permitted in this situation. No other provision in Part I of the Act otherwise allows for a reserve in such a situation.
With respect to Interpretation Bulletin IT-215R, Reserves, contingent accounts and sinking funds (Archived), we can confirm that the comments in paragraph 13 of that Bulletin continue to reflect the CRA's current position.
This paragraph first states that where goods are sold otherwise than on consignment or under a clause providing for the return of unsold goods, a reserve for such a return is not permissible under paragraph 18(1)(e), even if the customer has a contractual right to return unsold goods.
In this case, we are of the view that a clause permitting the return of goods not sold by customers is not a clause contemplated by paragraph 13 of Interpretation Bulletin IT-215R where title passes to the purchaser upon delivery, well before the expiry of the time limit for the return of goods (endnote 1).
A "true" clause providing for the return of unsold goods is a clause under which ownership of the goods does not pass to the buyer and under which there is no obligation to pay for the goods until the goods are sold or until a certain period of time has elapsed.
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. Thus, where the taxpayer still reports income at the time of delivery of the goods, the CRA considers that the taxpayer can claim a reasonable deduction for goods that are returned after the end of the taxpayer's taxation year.
Best regards,
François Bordeleau, LL.B.
Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate.
ENDNOTES
1 See Harlequin Enterprise v. R., [1977] 2 F.C. 579 and Technical Interpretation 2002-0129813.