9 July 2004 External T.I. 2004-0069261E5 - Income of Contractors

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether "the construction of a building, road, dam, bridge or similar structure" as described in paragraph 1 of IT-92R2 can be considered to include the construction of electrical power substations and transmission lines.

Position: Question of fact.

Reasons: The construction of electrical power substations and transmission lines would not likely fall within the scope of the administrative position in IT-92R2, on the basis that they are not structures which are similar to a building, road, dam or bridge.

XXXXXXXXXX
2004-006926
Kathryn McCarthy, CA
July 9, 2004

Dear XXXXXXXXXX,

Re: Income of Contractors

We are writing in response to your letter of March 30, 2004, concerning the above-noted issue.

You indicated that your client, a Canadian corporation ("Canco"), is a contractor which constructs electrical power substations and transmission lines in circumstances such that the title to the property vests in Canco's client as the work progresses. You inquired whether Interpretation Bulletin IT-92R2, Income of contractors, applies to Canco. In particular, you question whether "the construction of a building, road, dam, bridge or similar structure" as described in paragraph 1 of IT-92R2 can be considered to include the construction of electrical power substations and transmission lines. If so, you are of the view that Canco can use the "completion method" to report income on its fixed total price construction contracts that are to be completed within two years.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments.

A taxpayer's income (or loss) from a business or property is computed under the rules set out in subdivision b of Division B of the Income Tax Act (the Act). In this regard, subsection 9(1) requires a taxpayer to report income when the amounts are earned. In addition, paragraph 12(1)(b) requires a taxpayer to include in income for the year any amount that becomes receivable in respect of services rendered in the course of a business in the year, even when the amount or any part thereof is not due until a subsequent year. As noted in paragraph 12 of IT-92R2, however, in computing the business income of a contractor "where [the] contracts may reasonably be expected to be completed within two years from the date of their commencement, for the convenience of both the taxpayer and the [Agency] an alternative method commonly called the "completion method" of reporting contract revenue may be adopted, namely to take the whole revenue (including holdbacks) from each contract into income of the year in which the work thereon is physically completed."

In our view, the construction of electrical power substations and transmission lines would not likely fall within the scope of the administrative position in IT-92R2, on the basis that they are not structures which are similar to a building, road, dam or bridge.

The publications described herein are available on our website at www.cra-arc.gc.ca. We trust our comments will be of assistance to you.

Yours truly,

Randy Hewlett, B. Comm.

for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch