Two corporations (the "debtor" and the "creditor") that did not deal at arm's length reported their income using the accrual method. During the 1998 taxation year, the debtor undertook to pay another corporation with which it did not deal at arm’s length and which, like it, computed its income on an accrual basis, an amount which it claimed as a current expense. It made partial payments in 1998 and 1999 and, since then, the balance owing has remained unchanged. The creditor corporation included only the amounts collected in computing its income.
The Directorate indicated that the position in IT-109R, para. 12(a) has not been revised and continues to apply and that the purpose of this position was to exclude from the application of s. 78(1) situations where a creditor and a debtor, not dealing at arm's length, reported their income on an accrual basis. That was not the situation here where (like Redclay) there was an asymmetry between the deduction/net inclusion amounts reported, so that the provisions of s. 78(1)(a) would apply.