Does deferred revenue assumed in an asset purchase need its own tax election?

The rule

Section 20(24) provides: “Where an amount is included under paragraph 12(1)(a) in computing a taxpayer’s income for a taxation year in respect of an undertaking to which that paragraph applies and the taxpayer paid a reasonable amount in a particular taxation year to another person as consideration for the assumption by that other person of the taxpayer’s obligations in respect of the undertaking, if the taxpayer and the other person jointly so elect, (a) the payment may be deducted in computing the taxpayer’s income for the particular year.” The income this reserve and election work against sits at s.12(1)(a): amounts received “on account of services not rendered or goods not delivered before the end of the year.”

When this changes

Without the s.20(24) payment and joint election, the seller keeps the income inclusion from having collected the prepayments and gets no offsetting deduction for the value it gave up in the price reduction, while the buyer gets no cost base for the obligations it assumed. Restructure the deal so the price reduction is instead paid as an actual payment for the assumed obligations, with the election filed on time, and both problems disappear.

Where This Plays Out in the Case Files

See it decided in the deferred-revenue case file, the professional-practice-WIP file and the section-22-election case file.

Sources

• • Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) — s.20(24) (amounts paid for undertaking future obligations) and s.12(1)(a) (services, etc., to be rendered — the income inclusion the reserve and election work against).
• • Treadstone Law — assumed versus excluded liabilities in an Ontario asset purchase — how assumed obligations are defined and carved out; covers the contractual allocation, not the tax election that should accompany it.
• • Treadstone Law — allocating purchase price on a business sale (Ontario tax) — adjacent: why the allocation and the cost base it creates matter after closing.