On the surface, paragraph 12(1)(x) of the Income Tax Act suggests that only amounts of assistance received, such as a municipal government grant, would be included in income. However, the received basis as set out in paragraph 12(1)(x) generally applies if there are no other provisions of the Income Tax Act that apply for purposes of determining taxable income. Where subsection 9(1) of the Income Tax Act already requires the inclusion of the grant in taxable income, paragraph 12(1)(x) will not be applicable. Based on case law, a taxpayer's profit from the business or property under subsection 9(1) should be calculated using “well accepted principles of business”. This usually means following generally accepted accounting principles (GAAP) and specifically, ASPE unless it can be argued that “well accepted principles of business” differs from GAAP/ASPE. Given that the terms of a TIG will vary by municipality (and other factors), the facts and circumstances of each TIG will need to be considered to determine the most appropriate treatment for tax purposes.
Where the TIG is treated as a reduction in the cost of a capital asset (i.e. land), the TIG should have no tax impact until the asset is sold. In addition for capital assets, the tax treatment should not create a negative cash impact.
In situations where the TIG is on account of inventory and the developer is able to apply the grant to development charges (and therefore receive the grant at the development stage), there is also no cash impact.
In many situations, a TIG will be paid over 10 years to a developer. Therefore, if the development is sold out in the first few years after the TIG is triggered and causes the recognition of income before 10 years has passed, there will likely be a negative cash flow impact. In such a case, income tax would generally be payable on the grant even though the cash has not been received. Most of the TIGs we have seen exceed $1 million and many times the project profit does not exceed the grant amount, thereby creating a cash flow problem.
To minimize the negative cash flow, we should consider if there are any reserves available. As discussed previously, an allowance for doubtful collections would not be available. However, there may be an argument to claim a reserve for tax purposes for amounts not collected related to real property sold. If it is possible to claim such a reserve, it may help reduce the negative cash flow under certain circumstances, but not in all situations.
A possible solution is to sell the TIG. The TIGs are legally transferrable and there appears to be a market for the sale of the future cash flow since the payer is a municipality. Of course the income stream will be discounted, and there may be tax consequences on the sale.