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.
APFF-1995
Question 2
Method used to account for purchases
A corporation records all its purchases under accounts payable, even though it may not have received the invoice from its supplier for a specific purchase (it does however have the receiving copy and the delivery slip). The transaction is reversed for accounting and tax purposes only when the account becomes legally extinguished. Does the Department feel that this treatment is appropriate?
Answer by the Department of Revenue
As stated in paragraph 15(e) of Interpretation Bulletin IT-109R2, dated April 23, 1993, in order for an expense that remains unpaid at the end of a taxation year to be deductible under the Income Tax Act (the “Act”), it must constitute a genuine liability of the taxpayer. If such an unpaid amount does not constitute a genuine liability, no deduction is allowed under paragraph 18(1)(e) of the Act. For a genuine liability to exist, there must be an enforceable claim by the creditor. As indicated in paragraph 9 of Interpretation Bulletin IT-215R, dated January 12, 1981, more generally, an amount which is due and payable at the end of a taxation year, can only constitute an allowable deduction in the year in which it becomes ascertained and unconditional.
The issue of whether there is an enforceable claim or a genuine liability is a question of fact, but a legal or contractual liability could still exist if the corporation has not received an invoice for the purchases. Unpaid amounts could be based on the clear and unconditional liability that exists in some other document or under a law, for example.
When the unpaid account becomes legally unpaid, assuming that there is an arm’s-length relationship between the supplier and the company and that the unpaid amount constituted a genuine liability of the company, the Department would accept the tax treatment adopted by the corporation, that is, inclusion of the unpaid account in income in the taxation year in which the debt became legally extinguished.