Q: In a lease-option, is the Option Money counted as income or a liability?

A: Any refundable portion of option money may be classified as a current liability - we call it "option reserve" in QuickBooks. As for the non-refundable portion, which the seller keeps regardless of whether the sale to the tenant is successful, the more conservative approach is to account for this as income when received. When received, we don't know if the income will eventually be earned as sale proceeds or forfeited as liquidated damages, hence the argument for counting it as a current liability rather than income. However, there is a clause in a CRA bulletin which may be interpreted to mean the money should be classed as income when received regardless of the fact you have not yet "earned" it. If you are audited and the auditor latches on to this particular clause, you will have no defense.