A gym that sells annual memberships in December, a funeral home taking prepaid arrangements, a software business billing a year ahead, a landscaper selling a season contract in March. Each has money in the bank for work not yet done, and each faces the same question about what year it belongs to.
Key Takeaway
Under subparagraph 12(1)(a)(i), an amount received in a year in the course of carrying on business on account of services not rendered or goods not delivered before year end must be included in income for that year. Paragraph 20(1)(m) permits a reserve deferring tax on that unearned amount. CRA's own bulletin records that a reserve deducted in one year must be added back in the immediately following year, with a new reserve established each year while conditions prevail. That rolling mechanic means a growing prepaid book defers indefinitely while a shrinking one produces taxable income with no matching cash. Critically, CRA has stated that the reserve applies only to amounts included under paragraph 12(1)(a) and not to amounts included under section 9, and has acknowledged it is not clear whether or how the quality-of-income test applies.
A Note On Currency
Everything here is stated as verified in August 2026 and requires confirmation before reliance, and the caution is unusually strong in this article.
Both principal CRA sources we rely on are archived. The interpretation bulletin on special reserves is dated 19 February 1988 and carries CRA's archived content notice[1]. The technical news item discussing the interaction between the relevant provisions is likewise archived[2].
Archived does not mean wrong. It means CRA is no longer maintaining the document, so it may not reflect subsequent legislative amendments or changes in administrative position.
We have not verified any statutory provision against the Act, and we have deliberately not stated the formula by which the reserve is computed, the conditions in the related subsections, or any limit on the deferral period, because we did not obtain them. Those are the operative details and they must come from current sources.
This is not tax advice. The central issue described here is one CRA itself has described as unclear, which is precisely the kind of question that requires advice on specific facts.
A Question Of When
The framing, because it differs from everything else in this series. This section is our own analysis.
Most tax disputes are about whether an amount is taxable, whether an expense is deductible, or how something should be characterised. The amount at stake is the tax on a figure that is either in or out.
Timing disputes are different. Nobody argues the money is not income. The question is which year it belongs to.
That sounds smaller and frequently is not, for three reasons.
A timing difference in the year it arises is a full cash cost. A business assessed on income it expected to report next year pays the tax now, and the offsetting relief arrives later or, in some structures, in a different entity or at a different rate.
Interest runs from the original due date. A timing error discovered several years later carries interest on the tax for the whole intervening period, even though the income was eventually reported.
And the cash position is the opposite of the tax position. The reason prepaid revenue exists is that the business needed money before it did the work, which usually means the money has been spent on the capacity to do it.
So the tax arrives on cash that is already in equipment, fit-out, inventory or wages.
Received, Not Earned
The inclusion rule, quoted from CRA's own bulletin.
It states that under the provisions of subparagraph 12(1)(a)(i), any amount that is received in a taxation year by a taxpayer in the course of carrying on business that is on account of services not rendered or goods not delivered before the end of the year, or that for any other reason may be regarded as not having been earned in the year or a previous year, must be included in computing the taxpayer's income from the business for the year[1].
Read the operative word carefully. The trigger is received.
That is a departure from how a business thinks about its own results, and this is our own emphasis.
Accounting practice records deferred revenue as a liability and recognises income as the service is delivered. The financial statements of a gym with a December membership drive show a large liability, not a large profit.
The tax provision starts from the opposite end. The amount is in income in the year received, and relief from that outcome must be claimed rather than assumed.
Note also the breadth of the closing words. The paragraph covers amounts on account of services not rendered or goods not delivered, and then adds anything that for any other reason may be regarded as not having been earned[1].
That final limb is a catch-all, which means a business cannot escape the inclusion by structuring a receipt as something other than a prepayment for identified services.
The Reserve
The relief, and the condition attached to it.
CRA's bulletin states that where an amount has been included in income in accordance with subparagraph 12(1)(a)(i), paragraph 20(1)(m) provides a deferment of taxation on such unearned income by permitting a taxpayer to deduct an amount in computing income from the business[1].
Its summary describes the mechanism generally: under specified conditions the Act provides special reserves enabling a taxpayer to deduct amounts included in income that, in very general terms, may be regarded either as unearned income or anticipated future liabilities[1].
Another CRA publication confirms the purpose, stating that the application of paragraphs 12(1)(a), 12(1)(e) and 20(1)(m) to prepaid income allows the deferral of the recognition of income to the period in which the services are rendered[2].
So the structure is inclusion followed by deduction, rather than exclusion.
Three consequences follow and they are ours.
The reserve is claimed, which means it can be missed. A business that never claimed it has been taxed on receipts rather than on earnings.
It is available only under specified conditions[1], which we have not set out, and which must be established rather than assumed.
And it operates on an amount already in income, which makes the question of how the amount got into income determinative. That is the subject of a later section and it is the most important thing in this article.
What It Is Worth In One Year
The magnitude, computed by us on a hypothetical operator at an assumed small business rate of 12.2 percent.
Take a fitness business that sells 500 annual memberships at $600 during a December campaign, with a 31 December year end.
It receives $300,000. Roughly one twelfth of the service period has elapsed by year end, so approximately $25,000 has been earned and $275,000 has not.
Without the reserve, the business is taxed on $300,000, giving tax of roughly $36,600.
With the reserve, it is taxed on approximately $25,000, giving roughly $3,050.
The difference in that year is about $33,550.
Now consider where the cash is. A December membership drive is normally funded into January and February operating costs, or into the equipment and fit-out that made the campaign possible.
A business assessed without the reserve is therefore paying tax of $36,600 on a year in which its actual earned revenue from those contracts was $25,000, using cash it has already committed.
That is why the reserve matters more to a prepaid business than a comparable deduction of the same size. It is not improving a margin; it is preventing a liquidity event.
The Rolling Mechanic
How the reserve behaves across years, which is where most of the misunderstanding lives.
CRA's bulletin states it precisely: although any such reserve amount deducted in one year must be added back to income in the immediately following year, a new reserve may be established, subject to certain limits, for each year so long as the specified conditions prevail[1].
So the reserve is not a permanent deferral. It is a one-year deferral, renewed annually.
The arithmetic that follows, and this is our own analysis, is simple and consequential.
In any year, the net effect on income is the prior year's reserve added back, less the current year's reserve claimed.
Where the current reserve exceeds the prior one, the net effect is a deduction. Where the prior reserve exceeds the current one, the net effect is an income inclusion.
The single number that determines the outcome is therefore the change in the unearned balance, not its size.
A business with a large but stable prepaid book has no net effect at all. A business with a small but rapidly changing one can have a substantial effect in either direction.
Most operators understand the reserve as sheltering their deferred revenue. It does not. It shelters the growth in their deferred revenue.
A Growing Book Defers
The favourable case, worked through on our own figures continuing the example above.
In year one the business has no prior reserve to add back and claims $275,000, giving a net deduction of $275,000 and a tax effect of roughly $33,550 in its favour.
In year two it adds back $275,000 and claims $340,000 on a larger book, giving a net deduction of $65,000 and a tax effect of roughly $7,930.
In year three the book is flat at $340,000. It adds back $340,000 and claims $340,000, and the net effect is nil.
That progression describes what most growing prepaid businesses experience, and it explains a common misreading.
The first year feels like a large benefit. The second feels like a smaller one. By the third, the reserve appears to have stopped working, and an owner may conclude that something has gone wrong.
Nothing has. The reserve is functioning exactly as designed. The deferral achieved in year one is still in place; it is simply no longer producing an incremental deduction.
The way to hold this correctly, and this is ours, is that the reserve permanently defers one year's worth of unearned revenue for as long as the balance is maintained, and produces an annual deduction only while the balance is rising.
A Shrinking Book Pays
The unfavourable case, which is the point of this article.
Continuing our own figures, suppose the fourth year sees the prepaid book fall from $340,000 to $180,000.
The business adds back $340,000 and claims $180,000. The net effect is an income inclusion of $160,000, with a tax effect of roughly $19,520.
If the fifth year sees the book fall further to $40,000, the net inclusion is $140,000 and the tax effect is roughly $17,080.
Note what has happened. In each of those years the business has taxable income arising purely from the movement in a balance, with no corresponding cash receipt.
The cash came in during earlier years, when the reserve deferred it. The tax arrives now.
That is the correct operation of the provision and it is entirely fair in principle. Income deferred must eventually be recognised.
The difficulty is when it happens, which is the subject of the next section.
Why That Lands In The Worst Year
The observation we consider most useful in this article. This section is our own analysis.
Ask what causes a prepaid book to shrink.
Sales fall. Members do not renew. A competitor opens nearby. A recession reduces discretionary spending. The business shortens contract terms to compete. It shifts to monthly billing because customers will no longer prepay. It winds down, or is sold, or closes a location.
Every one of those is a bad year, or at least a contracting one.
So the provision produces its largest income inclusion in the year the business is least able to fund it, and does so with no cash attached.
That is a structural feature rather than an accident, and it has three practical implications.
A prepaid business should forecast the reserve movement alongside its revenue forecast, because a declining sales projection carries a tax consequence that does not appear anywhere in a cash flow model built from revenue and costs.
A change in commercial model, from annual prepayment to monthly billing, is a tax event even though it looks like a pricing decision. It deliberately collapses the prepaid balance, and the collapse is taxable.
And a business planning a wind-down or a sale needs to know that the accumulated deferral crystallises. An owner who has enjoyed the deferral for a decade may meet the whole of it at once.
We would put this to any owner of a prepaid business as a single question: what is my taxable income in the year my deferred revenue balance goes to zero?
The Catch Nobody Expects
The technical point that determines whether any of the above is available, stated by CRA in unusually direct terms.
Its technical news publication says: paragraph 20(1)(m) allows a taxpayer to claim a reserve only with respect to amounts included in income under paragraph 12(1)(a). In other words, the paragraph 20(1)(m) reserve does not apply to amounts included in the income of a taxpayer under section 9[2].
Section 9 is the general provision computing income from a business as profit. Paragraph 12(1)(a) is the specific inclusion for unearned amounts quoted earlier.
Both bring an amount into income. Only one of them supports a reserve.
The consequence, and this is our own analysis, is severe and easy to miss.
If a prepayment is properly brought into income under section 9, as profit of the year, then the deferral discussed throughout this article is simply unavailable. The business is taxed on the receipt with no relief.
And nothing about the transaction announces which provision applies. The business receives the same money under the same contract either way.
The same publication frames the question directly, asking what the practical impact is of applying subsection 9(1) rather than paragraph 12(1)(a) to prepaid income, and answering that both bring amounts into income but only the latter supports a reserve[2].
That is the whole exposure in this area, and the next three sections address how the boundary is drawn.
The Quality Of Income Problem
The doctrine that draws the boundary, and it is not a comfortable one.
CRA's publication records that on the basis of court cases including Burrard Yarrows Corporation, Kenneth B.S. Robertson Ltd. and Ikea Limited, the Agency has on some occasions in the past applied subsection 9(1) to prepaid income described in subsection 12(1)(a) that, arguably, was free of conditions or restrictions upon its use by the recipient[2].
We report those case names as CRA cites them and have not read any of them.
The underlying idea, as we understand it from that description and offered as our own reading, is that an amount which the recipient holds absolutely, with no restriction on its use and no realistic prospect of having to return it, has the quality of income when received rather than being genuinely unearned.
On that view the money is not held pending performance. It is the taxpayer's own, and performance is simply an obligation it happens to have.
That is a coherent position and it has an uncomfortable implication for ordinary businesses.
Most Canadian prepaid arrangements are exactly like that. A gym that sells an annual membership does not segregate the money, does not hold it in trust, and is not restricted in using it. It banks it and spends it on operations.
So the fact pattern that attracts the doctrine is not an aggressive structure. It is the normal commercial arrangement, which is what makes the uncertainty described next so significant.
CRA's Own Admission
An unusually candid statement, and the reason we have flagged this so heavily.
The same publication says: it is not clear whether or how the quality-of-income test applies to unearned amounts described in paragraph 12(1)(a)[2].
That is the Agency describing its own position as unclear on the question that determines whether a substantial deferral is available.
Three observations, ours.
An administrator publicly acknowledging uncertainty is meaningful. It indicates the boundary has not been settled in a way that permits confident advice, and that outcomes may differ between files.
The statement appears in an archived document, so the position may have developed since. That cuts both ways: it may have been clarified, or the clarification may have gone in either direction.
And the uncertainty is asymmetric in effect. A business claiming the reserve on the assumption that paragraph 12(1)(a) applies is taking a position on an unclear point, and the downside of being wrong is the loss of the entire deferral rather than an adjustment at the margin.
That does not mean the reserve should not be claimed. It means the basis on which it is claimed should be considered and recorded, rather than assumed by default because the accounting treats the amount as deferred.
What The Courts Did
Two decisions CRA identifies, and what they did and did not decide.
The publication records that two recent cases at the time, the Blue Mountain Resorts Limited decision of the Tax Court of Canada and the Compagnie Meloche inc. decision of the Quebec Court of Appeal, applied paragraph 12(1)(a) rather than subsection 9(1) with respect to prepaid income that, arguably, had the quality of income. It adds that the courts did not expressly rule or comment on the quality-of-income issue[2].
On the first, it records that the Tax Court simply held that the case could be decided by reference to the statutory provisions at issue, being paragraphs 12(1)(a) and 20(1)(m)[2].
On the second, it records that the Quebec Court of Appeal held that the portion of the fees that related to services to be rendered was unearned when received by the taxpayer, and that a reserve under paragraph 20(1)(m) could be claimed in that respect[2].
We report those as CRA describes them, having read neither judgment.
The pattern is worth naming and this is our own reading.
Two courts reached taxpayer-favourable outcomes on facts where the doctrine might have applied, and neither addressed the doctrine. So the taxpayer results are encouraging and the reasoning does not settle the question.
A business relying on those outcomes is relying on cases that avoided the issue rather than resolving it, and this publication has previously observed, in its article on farm losses, that a favourable outcome resting on an unresolved point is a weaker foundation than it appears.
What That Means For A Business
Practical guidance in an area without a clear rule. This section is our own analysis.
Where the law is unsettled, the useful response is not to seek certainty that does not exist. It is to identify which facts bear on the question and to be able to demonstrate them.
On the description above, the doctrine turns on whether the amount is free of conditions or restrictions upon its use by the recipient[2].
Facts that bear on that include whether the customer has a right to a refund and on what terms; whether the contract makes the payment conditional on delivery; whether amounts are held separately or subject to any restriction; whether a regulator requires the funds to be held in trust; and what proportion of prepayments are historically refunded.
Two of those are within the business's control and both are worth considering deliberately.
A genuine and documented refund right is a real restriction on the amount, and businesses frequently have one in practice while their contracts are silent about it.
And in some sectors funds are required by provincial regulation to be held in trust, which is a restriction imposed by law rather than by choice. That is common in prepaid funeral and cemetery arrangements and in some travel and home warranty regimes.
A business in a trusted-funds sector should understand that its regulatory obligation may also be a relevant fact here, and one that points away from the doctrine.
The instruction is to have the basis for claiming the reserve documented once, by an advisor, rather than re-derived from the accounting each year.
Free Of Conditions
A short section on the risk of over-correcting, because the analysis above can be misapplied. This is our own view.
It would be a mistake to read this article as recommending that a business insert artificial restrictions into its contracts to support a tax position.
Refund rights are a commercial matter. Segregating funds has real cost and real consequences for working capital. A business that impairs its own operations to strengthen a tax argument has usually made a poor trade.
The better framing is that the commercial arrangement should be decided on commercial grounds, and then accurately documented, because the tax analysis depends on what the arrangement actually is.
Where a business genuinely honours refunds, its contracts should say so. Where a regulator requires trust treatment, the compliance with that requirement should be evidenced. Where a payment is genuinely conditional on delivery, the contract should reflect it.
Each of those is a case of the paperwork catching up with reality rather than reality being bent to the paperwork.
That distinction matters because a restriction inserted solely for tax purposes, which the business does not observe, is worse than no restriction at all.
Who This Actually Affects
The population, which is much wider than the fitness example used throughout. These are our own examples.
Any business taking money before delivering is potentially within the inclusion rule.
Memberships and subscriptions. Gyms, clubs, associations, software billed annually, maintenance plans, buying clubs.
Prepaid service packages. Training sessions sold in blocks, dental and cosmetic treatment plans, tutoring packages, therapy and coaching bundles, car wash and detailing plans.
Seasonal contracts. Landscaping and snow removal sold for a season in advance, pool maintenance, HVAC service agreements.
Deposits and retainers. Event and wedding deposits, construction deposits, professional retainers, custom manufacturing deposits.
Extended warranties and service contracts sold alongside goods.
Prepaid arrangements in regulated sectors, including funeral and cemetery services, travel, and home warranty programmes.
Tuition and course fees received before a term or programme begins.
Two of those categories deserve a note. Deposits vary enormously in character and some are not prepayments for services at all, so the analysis differs. And the regulated sectors frequently have their own statutory regimes governing prepaid funds, which sit alongside the tax provisions and which we have not addressed.
The Sales Tax Mismatch
A parallel timing question, flagged rather than answered. This section is our own and it is deliberately short.
Everything above concerns income tax. A prepaid business also has a sales tax timing question, and the two do not necessarily align.
We did not verify the sales tax rules governing when tax becomes payable on a prepayment, and we are not going to describe them, because a partial account of timing rules is worse than none.
What a business should understand is that the two systems ask different questions and may answer them differently.
The consequence, where they diverge, is a business remitting sales tax by reference to one date while recognising income by reference to another, on the same contract.
Three practical implications follow.
The two calculations should be prepared from the same underlying contract data, so that a reconciliation between them exists and can be explained.
A change in commercial terms affects both, and a business changing from annual to monthly billing should have both consequences modelled, as this series noted in a different context in its article on short-term rentals.
And where a business offers refunds, the sales tax treatment of a refunded prepayment is its own question, separate from the income tax treatment of the reversal.
Each of those should go to an advisor. The purpose of this section is only to record that the question exists.
The Reserve Is Not Unlimited
Boundaries we can identify from the sources without stating detail we did not verify.
CRA's bulletin refers to reserves being available under specified conditions, to a new reserve being established subject to certain limits, and lists a series of related provisions including subsections 20(6), (7), (8), (24) and (25) alongside the reserve paragraphs[1].
It also states that it deals only with reserves pertaining to transactions other than those involving returnable containers and the sale of real estate, each of which has its own bulletin[1].
We have not examined any of those provisions and do not state what they contain.
Three points a business should take from their existence, which are ours.
There are conditions, so the reserve is not automatic on any amount that happens to be unearned, and a business claiming it should know which conditions it satisfies.
There are limits, so the reserve may not shelter the full unearned balance in every case, and a computation that simply mirrors the accounting deferral may be wrong.
And there are related provisions addressing situations such as the transfer of an obligation on the sale of a business. An owner selling a business with a prepaid book should establish how the accumulated deferral is treated on the sale, because that is the moment the balance would otherwise crystallise.
That last point connects directly to the worst-year analysis above and is the single most valuable question for an owner contemplating an exit.
What The Auditor Actually Examines
The enquiry in practice. This section is our own analysis.
The deferred revenue balance at each year end, reconciled to the reserve claimed, since a mismatch between the accounting deferral and the tax reserve is the obvious starting point.
The movement in that balance year over year, which determines the net income effect and is where an unclaimed add-back would show.
Whether the prior year's reserve was added back, which the mechanic requires and which is easy to omit where the computation is prepared afresh each year.
The contracts, tested for refund rights, conditionality and any restriction on use of the funds.
The basis on which amounts entered income, which is the section 9 against paragraph 12(1)(a) question.
Whether the reserve computation reflects the statutory conditions and limits rather than simply mirroring the accounting.
Treatment on any sale, wind-down or restructuring where a prepaid book moved or ended.
The third item is worth isolating because it is a common mechanical error. A business that claims a reserve each year without adding back the previous one has a cumulative understatement that grows every year and is arithmetically obvious once the balances are laid side by side.
What Records Survive
A continuity schedule of the reserve, showing for each year the opening reserve added back, the closing reserve claimed, and the net effect on income.
A reconciliation between accounting deferred revenue and the tax reserve, with any difference explained.
The contract terms, particularly refund rights and any conditionality, retained in the form actually used with customers in each period.
Evidence of refunds actually given, since a right honoured in practice is stronger evidence than one merely stated.
Evidence of any trust or segregation obligation and of compliance with it, where a regulator imposes one.
A documented position on the basis for the reserve, prepared once with an advisor, addressing why the amount falls under paragraph 12(1)(a).
Records of any change in commercial model, with the date it took effect, since a shift away from prepayment collapses the balance.
What To Do
Check that a reserve has actually been claimed. The inclusion is automatic and the relief is not, so a business that never claimed it has been taxed on receipts rather than earnings.
Check that the prior year's reserve was added back. The mechanic requires it, and omitting it produces a cumulative error that compounds annually.
Understand that the reserve shelters growth, not balance. A flat prepaid book produces no net deduction, and that is the provision working correctly rather than failing.
Forecast the reserve movement alongside revenue. A declining sales projection carries a tax consequence that appears nowhere in an ordinary cash flow model.
Answer the question directly: what is my taxable income in the year my deferred balance reaches zero. For a wind-down, a sale or a shift to monthly billing, that is the number that matters.
Treat a change from prepayment to monthly billing as a tax event. It deliberately collapses the balance, and the collapse is taxable.
Document why paragraph 12(1)(a) applies to your receipts. CRA has stated the reserve is unavailable for amounts included under section 9, and has acknowledged the boundary is unclear.
Make your contracts describe what you actually do. Refund rights honoured in practice but absent from the paperwork are evidence you are not using.
Do not insert artificial restrictions for tax reasons. A restriction the business does not observe is worse than none.
Ask about the sale before you sell. Related provisions address the transfer of an obligation on a sale of business, and that is the moment an accumulated deferral would otherwise crystallise.
The Limits Of This Analysis
Several caveats matter, and they are unusually significant here. This is not tax advice; the central issue is one CRA has itself described as unclear, which is precisely the kind of question requiring advice on specific facts. Everything is stated as verified in August 2026 and requires confirmation. Both principal CRA sources are archived: the interpretation bulletin is dated 19 February 1988 and the technical news item is likewise archived, so neither may reflect subsequent legislative amendments or changes in administrative position. We have not verified any statutory provision against the Act. We have deliberately not stated the formula by which the reserve is computed, the specified conditions on which it depends, the limits referred to in CRA's bulletin, the content of the related subsections listed there, or any maximum deferral period, because we did not obtain them; a computation that mirrors accounting deferral may be wrong for that reason. The quality-of-income doctrine is described from CRA's own summary and our reading of it, and we have not read Burrard Yarrows Corporation, Kenneth B.S. Robertson Ltd., Ikea Limited, Blue Mountain Resorts Limited or Compagnie Meloche inc. We have deliberately not described the sales tax timing rules applicable to prepayments, having not verified them, and note only that the question exists and may not align with the income tax answer. All arithmetic is our own, applies an assumed rate to hypothetical figures, and is illustrative only; the rolling reserve illustration assumes a simple annual pattern and takes no account of the conditions and limits noted above. The worst-year analysis, the observations on changes in commercial model, the population list, the evidentiary discussion and the audit examination structure are our own analysis. This article does not address paragraph 12(1)(e), reserves on the sale of real estate or returnable containers, provincial statutory regimes governing prepaid funds in regulated sectors, gift cards and stored value, or the treatment of amounts that are genuinely deposits rather than prepayments for services.
Frequently Asked Questions
We received the money but have not done the work. Is it taxable now?
Why did the reserve stop helping us?
What happens when our prepaid balance falls?
Is the reserve always available?
Did the courts settle this?
We are switching to monthly billing. Any tax consequence?
References
- Canada Revenue Agency. Interpretation Bulletin IT-154R, Special Reserves, 19 February 1988, on the Act providing special reserves under specified conditions enabling a taxpayer to deduct amounts included in income that may be regarded as unearned income or anticipated future liabilities; on any such reserve deducted in one year having to be added back to income in the immediately following year, with a new reserve able to be established subject to certain limits for each year so long as the specified conditions prevail; on subparagraph 12(1)(a)(i) requiring inclusion of any amount received in a taxation year in the course of carrying on business on account of services not rendered or goods not delivered before the end of the year, or that for any other reason may be regarded as not having been earned in the year or a previous year; on paragraph 20(1)(m) providing a deferment of taxation on such unearned income; on the bulletin's references to paragraphs 20(1)(m), (m.1), (m.2) and (n) and subsections 20(6), (7), (8), (24) and (25) among others; and on the bulletin dealing only with reserves pertaining to transactions other than returnable containers and the sale of real estate. Note: a CRA primary publication carrying the Agency's archived content notice; it may not reflect subsequent legislative amendments or changes in administrative position. canada.ca — IT-154R
- Canada Revenue Agency. Income Tax Technical News No. 30, on it not being clear whether or how the quality-of-income test applies to unearned amounts described in paragraph 12(1)(a); on the Agency having on some occasions in the past applied subsection 9(1) to prepaid income described in subsection 12(1)(a) that arguably was free of conditions or restrictions upon its use by the recipient, on the basis of court cases such as Burrard Yarrows Corporation, Kenneth B.S. Robertson Ltd. and Ikea Limited; on two decisions, Blue Mountain Resorts Limited in the Tax Court of Canada and Compagnie Meloche inc. in the Quebec Court of Appeal, having applied paragraph 12(1)(a) rather than subsection 9(1) to prepaid income that arguably had the quality of income, without the courts expressly ruling or commenting on the quality-of-income issue; on the Tax Court in Blue Mountain Resorts Limited holding simply that the case could be decided by reference to paragraphs 12(1)(a) and 20(1)(m); on the Quebec Court of Appeal in Compagnie Meloche inc. holding that the portion of fees relating to services to be rendered was unearned when received and that a reserve under paragraph 20(1)(m) could be claimed; on both subsection 9(1) and paragraph 12(1)(a) having the effect of bringing amounts into income while paragraph 20(1)(m) allows a reserve only with respect to amounts included under paragraph 12(1)(a), so that the reserve does not apply to amounts included under section 9; and on the application of paragraphs 12(1)(a), 12(1)(e) and 20(1)(m) allowing deferral of the recognition of income to the period in which services are rendered. Note: a CRA primary publication, archived; we have read none of the judgments named. canada.ca — ITTN No. 30
This article is provided for general informational purposes and is not tax advice. Both CRA sources relied on are archived and may not reflect subsequent amendments or changes in administrative position. The authors have deliberately not stated the reserve computation, its specified conditions, its limits, the content of the related subsections, or the sales tax timing rules, having been unable to verify them. CRA has itself described a determinative point in this area as unclear. All arithmetic is the authors' own and is illustrative only.