Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
February 12, 1996
Audit Directorate Income Tax Rulings and Large Business Interpretations Directorate Audit Division Program Management Michel Lambert & Operations Section
Att: Mr. E.H. Gauthier Director General 7-952937
RECOGNITION OF INCOME FROM THE SALE OF CONDOMINIUMS
This is in reply to your memorandum dated November 7, 1995, requesting our opinion regarding the recognition of income from the sale of condominiums. More specifically, you request an opinion as to when the vendor of a condominium building should recognize income from the sale of the units. You are of the opinion that the vendor must recognize its revenue at the second closing date.
The Department's position on this issue was given at the 1987 annual conference of the Canadian Tax Foundation. The question and answer given at this conference is as follows:
It is common practice for condominium developers to allow purchasers to occupy condominium units prior to the registration of the building under the relevant condominium statute. This practice often involves two closings: one at the time the purchaser occupies the unit and another at the time of registration of the building. In the light of this practice, when does Revenue Canada consider that the developer is required to recognize the income arising from these sales?
Department's Position
Income should be reported in accordance with accepted commercial practice as used in computing income for financial statement purposes, provided that practice is legally permissible and not contrary to a specific provision in the Income Tax Act. We understand that the Canadian Institute of Public Real Estate Companies recommends that income be reported at the time of first closing. Therefore, in the absence of convincing arguments to the contrary, it is our view that income from the sale of the condominiums should be reported at the first closing.
On April 1, 1993, we opined to your Directorate (7-930708) that the Department's position, as stated in the 1987 Conference Report, should remain.
In a meeting in November 1995 with this Directorate, Mr. Bert Riverso indicated that your Directorate wishes to consider the second closing date as the moment of recognition of income.
We have reviewed the relevant tax cases on that point. As stated in the 1987 annual conference of the Canadian Tax Conference we are still of the opinion that income should be reported in accordance with accepted commercial practice as used in computing income for financial statement purposes, provided that practice is legally permissible and not contrary to a specific provision in the Income Tax Act. Income must reflect the truer picture1 of the taxpayer's revenue.
If the vendor does not have the right to receive the sale price before the second closing date, this amount does not have the legal caracteristics of revenue as stated in 141224 Canada Ltée v. the Queen.2 Therefore, this amount will not be taxable until it is legally receivable.
If the sale price is legally receivable on first closing, this amount will be considered income for tax purposes as at that date.
Considering 141224 Canada Ltée v. the Queen, we will take the necessary steps to publicly clarify our position in our Income Tax Technical News letter.
R.S. Biscaro
Director
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
ENDNOTES
1. See West Kootenay Power and Light co. v. Canada, 1992 DTC 6023 and Maritime Telegraph and Telephone Company Limited v. The Queen, 1991 DTC 5038 affirmed by the Federal Court of Appeal at 1992 DTC 6191.
2. 1995 DTC 385, Tax Court of Canada.