Dear Sirs:
This is in reply to your letter of October 17, 1990 wherein you requested our comments on the timing of the recognition of income of the holdback of a contractor. To illustrate your question, you have provided us with the following hypothetical situation.
- A contractor had been constructing a building for a limited partnership. The contract that would exist between the limited partnership and the contractor would contain a clause which would state that a 10% holdback would not be received by the contractor until condominium registration is received for the building. The contractor would be responsible for obtaining the condominium registration on behalf of the builder.
The building would be substantially completed and the engineer would issue the final certificate of job completion prior to the contractor's year end. (year 1)
The condominium registration would not be received until year 2.
Your query whether the holdback would have to be included in income of the contractor for that earlier year end or not until received?
Our Comments
As stated in paragraph 3 of the Interpretation Bulletin IT-92R2, the holdback must be included in the contractor's income on the day that is the later of:
(a) the day on which the architect or engineer issues the final certificate of job completion, and
(b) the day of expiration of the lien period as stipulated in the applicable provincial statute.
Therefore, in your example, if the lien period ends before the engineer issues the final certificate or after the issuance but also in year 1, then the holdback should be included in the contractor's income in year 1. If the lien period ends in year 2, then the holdback should be included in the contractor's income in year 2. In any event, paragraph 4 of IT-92R2 states that any amount actually received in the course of business by a contractor, including any amount which should have been approved for payment by the purchaser or by the architect or engineer before payment but was not, or which should have been withheld by the payer as a holdback but was not, must be included in the income of the contractor for the taxation year during which it was received. Thus, when the holdback is received upon registration of the condominium in year 2, the holdback must be included in income at that time even if the lien period has not yet expired.
We hope the above comments will be of assistance.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch