Principal Issues: [TaxInterpretations translation] 1) Is the completion method as indicated in paragraph 12 of Interpretation Bulletin IT-92R2 applicable to contracts other than construction contracts?
2) Can contractors use the completion method for all their business contracts or can they use it only for construction contracts covered by that Interpretation Bulletin?
3) Can that method be applied to taxpayers carrying out water or sewer work or renovating buildings?
Position: 1) No.
2) Contractors can only use the completion method for construction contracts.
3) No.
Reasons: 1) and 2) Wording of paragraph 1 of IT-92R2.
3) A renovation contract is not a construction contract for the purposes of IT-92R2. An aqueduct or sewer is not a structure similar to a building, a road, a dam or a bridge.
XXXXXXXXXX 2011-040402 I. Landry, M. Fisc. November 21, 2011
Dear Mr. XXXXXXXXXX,
Subject: Income of contractors
This is in response to your e-mail of April 21, 2011, in which you requested clarification as to the completion method set out in Interpretation Bulletin IT-92R2, Income of Contractors ("IT-92R2"). We apologize for the delay in responding to your request.
Specifically, you wish to know whether the completion method as referred to in paragraph 12 of Interpretation Bulletin IT-92R2 may apply to contracts other than construction contracts. You also wish to know if contractors can use the completion method for all contracts in their business or if they can use it only for construction contracts covered by that Interpretation Bulletin. Finally, you wish to know if that method can be applied to taxpayers performing work on water supply and sewage systems or renovations of buildings.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Our Comments
As explained in Information Circular 70-6R5 - Advance Income Tax Rulings, it is not the practice of this Directorate to comment on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involves specific taxpayers and one or more transactions, you should submit all relevant facts and documents to the appropriate Tax Services Office for their opinion. However, we are able to offer the following general comments that may be helpful to you.
Subsection 9(1) requires a taxpayer to declare income as soon as it is earned. Under paragraph 12(1)(b), a taxpayer must include in computing the taxpayer’s income for a taxation year any amount that becomes receivable for services rendered in that taxation year, even where the amount, or a portion thereof, is due only in a subsequent taxation year. However, as stated in Interpretation Bulletin IT-92R2, any prime contractor or subcontractor who is engaged in the construction of a building, road, dam, bridge or similar structure, in circumstances such that title thereto vests in a person other than the prime contractor or the subcontractor as it is constructed, is entitled to use the completion method if certain conditions are satisfied.
However, we are of the opinion that contractors engaged in contracts other than construction contracts covered by Interpretation Bulletin IT-92R2 cannot avail themselves of the completion method. Where contractors perform both construction contracts covered by Interpretation Bulletin IT-92R2 and other contracts not covered by Interpretation Bulletin IT-92R2, they may use the completion method described in paragraph 12 of IT-92R2 only in respect of construction contracts covered by Interpretation Bulletin IT-92R2. Any other contract not covered by Interpretation Bulletin IT-92R2 must instead be accounted for on a regular accrual basis pursuant to subsection 9(1) and paragraph 12(1)(b).
We are of the view that the renovation of a building is not a construction activity for the purposes of Interpretation Bulletin IT-92R2. We are also of the view that the construction of aqueducts or sewers is not covered by the completion method since they are not structures similar to a building, a road, a dam or a bridge. Contracts for renovations of buildings or work on water supply and sewage systems cannot therefore be accounted for using the method described in paragraph 12 of IT-92R2.
Best regards,
Michel Lambert CA, M.Fisc.
for the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch