In order to enhance customer retention, a manufacturer agrees with its independent distributors to disburse $1,000,000 to them over two years if the distributors agree to follow a specified program of excellence over a period of eight years, and to pay damages if they fail to do so. Under Canadian accounting principles, a distributor must include the amounts received as revenue over the eight-year period. Should this treatment also be followed for s. 9 purposes? After discussing Canderel, CRA stated:
Ikea Ltd. v. The Queen [f.n. [1998] 1 S.C.R. 198]… confirmed the importance of the realization principle under which amounts received or realized by a taxpayer – free of conditions or restrictions as to their use – are taxable in the years in which they are realized subject to any contrary provision in the Income Tax Act or other rules of law.
…[I]f it is determined that the $1,000,000 that the manufacturing corporation is obligated to disburse over two years (the “sum”) was, for the distributor corporation, free of conditions or restrictions respecting its use from the commencement of the contract, the sum could be included in the income of the distributor corporation in such taxation year [of commencement] under the terms of subsection 9(1).
Furthermore, an examination of the relevant documentation and the applicable private law would be necessary in order to determine if the damages clause…constitutes by itself a condition restricting the use of the sum by the distributor corporation.