Principles Relating To Timing Of Deduction Of Current Expenditures And Income Receipts: Analysis Of Canderal, Toronto College Park, And Ikea Cases

In the cases of Canderel, Toronto College Park, and Ikea, (1998) the Supreme Court of Canada outlined the principles relating to the timing of the deduction of current expenditures, the timing of the inclusion of income receipts, and the determination of whether tenant inducement payments are on account of capital or income.”

Analysis of the Cases

In the current trilogy of cases relating to timing namely “Canderal Ltd v Canada”, “Toronto College Park v Canada” and “Ikea Ltd v Canada” the Canadian supreme court laid down the principles which administers the time of identification of receipts and time of deducting the income expenditure. In “Ikea Ltd v Canada”, the court conversed whether the payments related to lease inducement received by the taxpayer would be classified under the income or capital account.

In each of the cases “Canderal Ltd v Canada” and “Toronto College Park v Canada”, a marketable rental premises were constructed by the taxpayer and provided the tenant with the inducement payment to the potential tenant as the way of inducing them to enter in leases (Ctf.ca, 2018). Respectively in the above mentioned cases, the taxpayer deducted the “Tenant Inducement Payment” (TIP) in the year in which they were paid. The Revenue Canada undertook the decision that the taxpayer is not permitted to claim deduction for the Tenant Inducement Payment (TIP) during the year of payment, rather the deduction of each TIP must be amortized till the life of lease to which it is associated.

The actual circumstances in the case of “IKEA Ltd v Canada” was the opposite to that made in “Canderal Ltd v Canada” and “Toronto College Park v Canada”. The taxpayer was the lessee that had received the TIP from the property-owner (Lexum, 2018). The main issue in the case of Ikea was that whether the receipt will be regarded as the non-taxable capital receipt or the taxable income receipt. The second issue that arose narrates to the timing of identifying the income given the receipt were income.

Prior to hearing the cases by the Supreme Court of Canada, the taxation community were anticipating that a vibrant and concrete jurisdictive guideline would be given by the courts regarding the timing of issues. The decision of the court in Ikea did the same. Unluckily, the principles laid down by the court pronounced that Canderal and Toronto College Park is very much understandable from the abstract with neither the tax practitioner nor the court of law would find them easy to implement in practice (Edgar et al., 2015). Rather, the decision of the court in the above stated issues have introduced additional legal process. In both the Toronto College Park and Canderel, the issue that surrounded the case was the timing of the deduction by the taxpayer relating to the spending that was occurred and the present obligation to pay. In none of the case there was an issue whether the disputed expenses will be regarded as capital or income in nature.

The Realization Principle

The Canadian Supreme Court has described certain number of principles in the Trilogy which would be tremendously pertinent in the future legal process. The right place of starting the analysis relating to the decision made by the court is to take account of court’s statement of “Realization Principle” in Ikea. In the later part of analysis, the simplicity of the statement is created by the court in understanding the deductibility of the present expenditure (Lexum, 2018). The principle of realisation given by the court is that once the taxpayer is entitled to the sum which is not subjected to any conditions with the sum must be considered as income under the “section 9 of the Act”. The principle should be applied irrespective of any general accepted accounting principle.

There are some tax practitioners that have expressed their concerns regarding the decision made in Ikea would encourage revenue Canada in using the statement of court relating to realization principles as the basis of re-assessing the taxpayers and considering the amount of income under the “section 9” which was earlier included under “paragraph 12 (1)(a)” (Li et al., 2014). The amount that was included under “section 9” is not subjected to any reserve nonetheless the amount included under the “paragraph 12 (1)(a)” might be subjected to reserve in relation to “paragraph 20 (1) (m)”.

As Ikea stands for the proposal that “section 9” takes account the amount of income which is not subjected to limitations because “paragraph 12 (1) (a)” presumes that sum in question are not earned or received based on the condition that there might be a repayment (Lexum, 2018). Even though Revenue Canada is capable of including some amounts under section 9 which was earlier included under the “paragraph 12 (1)(a)”, there was no change of law in this respect however it merely restated the law which was certainly existent.

The logical background recognized by the Canada Court in “Canderel v Canada” requires an understanding of the well-established business principles. The court of law did not embrace the GAAP and even stated that GAAP is simply another tool to help readers in determining what profits are during any particular situations (Miller & Oats, 2016). The tax adviser while providing advice and the litigator while preparing the case is left to understand when the law court would refuse to stray from the GAAP principles and when the court of law would hold the GAAP is not determinative.     

Well-Established Commercial Principles

The court of law portrayed itself as very capable of describing a very simple and straightforward principle relating to the realisation of income. It is very much unfortunate that it does not offer a simple rule relating to the deductibility of the present expenditure (Lexum, 2018). Prior to the decision made in the court of Appeal in the case of Canderel and Toronto College Park, the law was such that the taxpayer can claim deduction for the expenditure during the year in which the expenses were occurred but does not has the option of amortising the deduction of the expenditure if it generated the benefit in the following year of taxation. Even though it is difficult to justify the options of granting the option of amortizing the present expenditure, the rule must be such that the current expenditure should be deductible during the year in which they are occurred.

Luckily, the court of law has turned down the matching principle as the rule of law. However, the court of law returned to the law that existed prior to the court of Appeal decision in the Canderel and Toronto College Park. The law associated to the time of deducting the current expenditure has changed. In the majority of the cases, current expenditure would be considered deductible during the year in which it is occurred (Li et al., 2017). Nevertheless, the court awkwardly left the possibility in some of the situations that the taxpayer would be required to match the present expenses against the revenue streams. The tax advisers view the decision made by the court in Canderal and Toronto College Park as a victory for the taxpayers. Furthermore, it appears that the taxpayer does not has right of matching the current expenditure unless it can reflect that matching provides a better picture of the income.

In determining the test for ascertaining the income, the law court has introduced the doctrine of truer picture or the more accurate picture in the realm of deductibility where it was not once implemented before. Cases under the truer picture have dealt with the issues related to timing where it was not clear during the year in which certain sum of income fitted (Lexum, 2018). The court did not deal with the timing of issues relating to the amortization or principles of matching. In the current study, the decision made in Canderel and Toronto College Park would encourage litigation rather than settling the same.

As the test is an evidentiary, the law cannot could not provide any guidance as to what necessary facts should be considered relevant for the future litigation. However, tax practitioners have not thought that facts stated under Canderel and Toronto College Park must be relevant method in ascertaining the timing of deduction for the current expenditure (Edgar et al., 2015). For instance, in Canderel case reference to the fact was made that Canderal was regarded as the successful firm that paid TIP because it was the manner in which market functioned.

Conclusion:

The trilogy related to the timing of cases provides no concise conclusion relating to the tax treatment for TIP. The Supreme Court of Canada completely turned down the appeal of Federal Court as the attempt of raising the matching principle to the rule of law. On the other hand, the court of law did not state the simpler test for deduction of current expenditure and did explain in the user-friendly form to the trial courts that it should be applied to ascertain when the current expenses are allowed for deductions. Furthermore, it is ill-fated that the court did failed to deal completely with the description of the repayment of the expenditure. The tax legislation members can undertake some ease in the understanding that there would be an additional case of this type to contest in future.

References:  

Canderel Ltd. v. Canada - SCC Cases (Lexum). (2018). Retrieved from https://scc-csc.lexum.com/scc-csc/scc-csc/en/item/1590/index.do?r=AAAAAQAIY2FuZGVyZWwB

Ctf.ca. (2018). Retrieved from https://www.ctf.ca/ctfweb/Documents/PDF/1998ctj/1998CTJ5_Carr.pdf

Edgar, T., O'Brien, M., & Cockfield, A. J. (2015). Materials on Canadian Income Tax. Carswell.

Ikea Ltd. v. Canada - SCC Cases (Lexum). (2018). Retrieved from https://scc-csc.lexum.com/scc-csc/scc-csc/en/item/1592/index.do?r=AAAAAQAIY2FuZGVyZWwB

Li, J., Cockfield, A., & Wilkie, J. S. (2014). International taxation in Canada: principles and practices. LexisNexis Canada.

Li, J., Magee, J.E. and Wilkie, J.S., 2017. Principles of Canadian Income Tax Law. Thomson Reuters.

Miller, A., & Oats, L. (2016). Principles of international taxation. Bloomsbury Publishing.

Toronto College Park Ltd. v. Canada - SCC Cases (Lexum). (2018). Retrieved from https://scc-csc.lexum.com/scc-csc/scc-csc/en/item/1591/index.do?r=AAAAAQAIY2FuZGVyZWwB