In a February 16, 2016 Technical Interpretation (2015-0618601E5, Posadovsky, T.), CRA commented on the treatment of proceeds received under a loyalty contract with a major supplier. The taxpayer received a substantial lump sum payment for entering the contract. If the contract was breached within 5 years, the entire payment would be repaid. If the contract was breached in the 10 subsequent years, damages payable would be prorated based on the remaining number of years.

CRA opined that the payment was for a restrictive covenant (Subsection 56.4(1)), as the agreement “appears to affect, in any way whatever, the acquisition or provision of property or services”, so the payment would be income when received or receivable (Subsection 56.4(2)). In the event the contract was not a restrictive covenant, CRA indicated it would be an inducement payment (Paragraph 12(1)(x)) taxed on the same basis.

CRA noted that there is no provision for a reserve related to either form of income, therefore, the income could not be deferred for income tax purposes (Paragraph 18(1)(e)) despite the fact that, for accounting purposes, it would be reported as revenue over the term of the contract. 

For further information see VTN Monthly Tax Update Seminar, Issue No. 416