The taxpayer received a lump-sum payment (the “Payment”) from a major supplier (“ACo”) in consideration for entering into a supplier loyalty agreement (the “Agreement”). Damages equal to the Payment plus interest are payable for breach during the first five years of the Agreement; and the damages amount is reduced on a pro rata basis over the remaining 10-year term. Can the taxpayer include the Payment in income on an amortized basis over the life of the Agreement consistently with its accounting treatment? CRA responded:
[T]he Payment appears to be in respect of a “restrictive covenant”… . This is because it appears to affect, in any way whatever, the acquisition or provision of property or services by the Taxpayer. Where this is the case, the amount in respect of the restrictive covenant is required to be brought into income when received or receivable pursuant to subsection 56.4(2)...unless a specific exception applies. ... [T]he accounting practice of deferring and amortizing such income would be inconsistent with the provisions of the Act and is specifically prohibited under paragraph 18(1)(e)... .