T-2429-75
The Queen (Plaintiff)
v.
Wilchar Construction Limited (Defendant)
Trial Division, Mahoney J.—Toronto, January 30;
Ottawa, February 5, 1979.
Income tax — Income calculation — Reserves — Plaintiff's
representative misunderstanding defendant's intentions until
after statement of agreed facts completed before Tax Review
Board hearing — Whether or not amounts and their nature
clearly established by statement of agreed facts and whether or
not their inclusion in defendant's taxable income contrary to
jurisprudence — Income Tax Act, R.S.C. 1952, c. 148, s. 4.
Defendant, a building contractor, seeks to exclude from its
taxable income for the year ending July 31, 1968, an amount of
$227,171. What defendant did, in fact, was set up two reserves
out of income: one for holdbacks contingently receivable and
the other for contingency maintenance and overbilling. Plain
tiff's representative had understood the defendant wanted to
alter its method of reporting holdbacks receivable and payable
to that adopted in defendant's 1970 and 1971 returns. He saw
little difficulty with respect to the former reserve as the hold-
backs reported and payable for 1968 were almost identical
amounts, and treated the latter one simply on the basis that it
was not permitted by the Act. At a meeting to complete the
statement of agreed facts three days before the Tax Review
Board hearing, plaintiff's representative learned that it was
defendant's intention to deduct the uncertified progress claims
as at the end of the 1968 tax year as distinct from seeking to set
up and deduct the maintenance and overbilling reserve. By
then, reassessment of defendant's 1969 return was statute
barred. Defendant urged the Court to accept the argument the
Tax Review Board accepted: that the amounts in issue and
their nature were clearly established by the statement of agreed
facts and that their inclusion in defendant's income was con
trary to jurisprudence.
Held, the action is allowed. The Colford and Guay cases, to
the extent they are germane to the issue in the case, apply to
uncertified progress claims. They are authority for the proposi
tion that a taxpayer may exclude such amounts in the calcula
tion of his income but are not authority for the proposition that
he must exclude them—i.e. that if the taxpayer does not
exclude them, the Minister is obliged to re-assess to exclude
them. In the absence of "other provisions" in the Act, the profit
must be computed in accordance with generally accepted
accounting principles. While there are at least two acceptable
methods of accounting for the amounts in issue, the defendant
has not discharged the onus on it of proving that the application
of different acceptable methods to successive fiscal periods
accords with generally accepted accounting principles. Finally,
the defendant is estopped from changing the basis upon which
the uncertified progress claims are to be treated in calculating
its profits for its 1968 taxation year.
Minister of National Revenue v. John Colford Contract
ing Co. Ltd. [1960] Ex.C.R. 433, considered. J. L. Guay
Ltée v. Minister of National Revenue [1971] F.C. 237,
considered.
ACTION.
COUNSEL:
N. Helfield for plaintiff.
W. Goodman, Q. C. and J. Clow for
defendant.
SOLICITORS:
Deputy Attorney General of Canada for
plaintiff.
Goodman & Carr, Toronto, for defendant.
The following are the reasons for judgment
rendered in English by
MAHONEY J.: At the opening of the trial, the
parties filed minutes of settlement which disposed
of all but one of the issues raised in the pleadings.
The defendant is, inter alia, a building contrac
tor. It seeks to exclude from its taxable income for
the year ended July 31, 1968, an amount of $227,-
171. That is the amount referred to in paragraph 3
of the statement of agreed facts. The full text of
the statement of agreed facts follows:
1. The parties agree that as of July 31, 1968, there was a total
of $452,123 of accounts receivable of the Appellant for which
architect's certificates had to be issued before the Company
was entitled to receive payment and for which such certificates
had not been issued on or before July 31, 1968.
2. The parties further agree that the Appellant overstated
certain accounts payable as of July 31, 1968 in a total amount
of $57,426. In addition, the Appellant incorrectly treated as
part of its costs incurred in 1968 a total of $167,526 in respect
of work done for it by subcontractors for which architect's
certificates had to be issued before the Appellant was liable to
make payment and for which such certificates had not been
issued on or before July 31, 1968.
3. The net effect of these adjustments, if allowed, is to reduce
the Appellant's 1968 income by $227,171, which totally elimi
nates its taxable income for 1968 and results in a loss which is
deductible in computing its taxable income for 1967.
The defendant rested its case in chief on the
agreed facts relying on M.N.R. v. John Colford
Contracting Co. Ltd.' and the corollary decision in
J. L. Guay Ltée v. M.N.R. 2 as authority for the
proposition that neither the $452,123 accounts
receivable nor the $224,952 accounts payable
ought to be taken into account in calculating the
defendant's income for its 1968 taxation year.
In addition to the agreed facts, I have the
uncontradicted evidence of Robert Arthur Weav
ers, an official of the Department of National
Revenue, who conducted the investigations that
led to the assessment in issue.
In filing its returns for its taxation years 1962
through 1969, inclusive, the defendant consistently
reported its income including holdbacks and
uncertified progress claims outstanding as at year
end in the calculation of its income. For its 1970
and 1971 taxation years, the defendant excluded
holdbacks from the calculation but continued to
include uncertified progress claims.
On December 29, 1971, notices of re-assessment
of the defendant's 1967 and 1968 returns were
issued. They dealt with a multitude of items no
longer disputed by the parties but not, of course,
with the matter remaining in issue. The Minister
did not object to the defendant's reporting of its
holdbacks and uncertified progress claims as
receivable and payable since, in the ordinary
course of events over a period of years, that prac
tice had the effect of anticipating, rather than
deferring, tax liability. The issue was first raised
by the defendant itself in notices of objection dated
March 15, 1972.
The defendant claimed the right, in the notices
of objection, to deduct "holdbacks contingently
receivable" in the sums of $117,552 as to 1967 and
$90,013 as to 1968. The Minister took no action
on the notices of objection and, on March 14,
1974, in a notice of appeal to the Tax Review
Board, the defendant asserted that right in the
following terms:
' [1960] Ex.C.R. 433; affirmed [1962] S.C.R. viii.
2 [1971] F.C. 237.
3. In computing its income for the 1967 taxation year, the
Appellant deducted holdbacks totalling ONE HUNDRED AND
SEVENTEEN THOUSAND FIVE HUNDRED AND FIFTY-TWO DOL
LARS ($117,552.00).
4. In computing its income for the 1968 taxation year, the
Appellant deducted holdbacks in the sum of NINETY THOU
SAND AND THIRTEEN DOLLARS ($90,013.00).
5. By Notices of Reassessment dated December 29, 1971, in
respect of the 1967 and 1968 taxation years, the Respondent
reassessed the Appellant and increased its declared income by
including the sums of ONE HUNDRED AND SEVENTEEN THOU
SAND FIVE HUNDRED AND FIFTY-TWO DOLLARS ($117,552.00)
and NINETY THOUSAND AND THIRTEEN DOLLARS
($90,013.00) which had previously been deducted as holdbacks.
The process by which the claimed deduction of
$117,552 for 1967 and $90,013 for 1968 became
the net claim of $227,171 for 1968 alone that was
ultimately in issue before the Tax Review Board,
and remains in issue here, is not in evidence.
What the defendant, in fact, did was set up two
reserves out of income: one for holdbacks contin-
gently receivable and the other for contingent
maintenance and overbilling. In his reply to the
notice of assessment, filed September 20, 1974, the
Minister denied the allegations contained in para
graphs 3, 4 and 5 of the notice of appeal and
disputed the propriety of the reserves. At that
point in time, the reserves, for the 1968 taxation
year only, mentioned in the reply amounted to
$57,428.29 for holdbacks and $50,985 for the
maintenance and overbilling contingencies.
Weavers had understood from the defendant
that it wanted to alter its method of reporting
holdbacks receivable and payable. The method he
understood is that in fact adopted by the defendant
for 1970 and 1971. He saw no particular problem
with effecting that change for the 1968 taxation
year since the total holdbacks reported as receiv
able and payable as at July 31, 1968, were practi
cally identical amounts: $57,428.39 receivable,
$57,425.82 payable. In the reply, the disallowance
of the holdback contingency reserve was dealt with
in the following terms:
12. The Respondent submits that in computing the Appellant's
income for the 1968 taxation year he properly disallowed as a
deduction the sum of $57,428.39 since the Appellant overstated
its expenses by that amount and as such was prohibited from
deduction by virtue of Section 3, 4 and 12(1)(a) of the Income
Tax Act.
The maintenance and overbilling contingency
reserve was, however, simply dealt with on the
basis of its not being permitted by the Act.
The parties' representatives met November 4,
1974. Weavers was present. The statement of
agreed facts was completed for the Tax Review
Board hearing which began November 7. It was at
that meeting that Weavers first learned of the
defendant's intention to seek to deduct the uncerti-
fied progress claims as at the end of its 1968 tax
year as distinct from seeking to set up and deduct
the maintenance and overbilling contingency
reserve. By then, re-assessment of the defendant's
1969 return was statute barred. That assessment is
not before me and I upheld the defendant's objec
tion to the admissibility of evidence on the hypo
thetical issue of the re-assessment that would ordi
narily have resulted from the changes the
defendant seeks, by this action, to make in its 1968
income.
The learned member of the Tax Review Board
accepted the argument which the defendant urges
me to accept, namely: that the amounts in issue
and their nature are clearly established by the
statement of agreed facts and their inclusion in the
calculation of the defendant's taxable income is
clearly contrary to the jurisprudence. The issue is
not, in my view, that simple.
While the Colford and Guay cases, to the extent
they are germane to the issue here, dealt only with
holdbacks as distinct from uncertified progress
claims, I accept that they apply equally to the
latter type of accounts receivable and payable in
this case. In my view they are authority for the
proposition that a taxpayer may exclude such
amounts in the calculation of his income under the
Income Tax Act. They are not authority for the
proposition that he must exclude them or, to put it
another way, that if the taxpayer does not exclude
them, the Minister is obliged to re-assess to
exclude them.
It is trite to say that the Income Tax Act creates
a self-assessing income tax system. A person liable
to tax is required to prepare and file a tax return
in which he calculates his income and the tax
payable in respect of it. He is obliged to make
those calculations in accordance with the require
ments of the Act and, by the assessment process,
the Minister is supposed to ensure that he does.
The Act, as it stood during the period in issue,
provided that a taxpayer's income for a taxation
year included his income for the year from all
businesses and that
4. Subject to the other provisions of this Part, income for a
taxation year from a business ... is the profit therefrom for the
year.
There are no "other provisions" that would have
prohibited the defendant from including the hold-
backs and uncertified progress claims, outstanding
at year end, in the calculation of its profit for the
year.
In the absence of such "other provisions", the
profit must be computed in accordance with gener
ally accepted accounting principles. I have no evi
dence as to what those principles are and probably
ought not take judicial notice of what I deem them
to be. Suffice it to say, while I lean to the conclu
sion, on the evidence, that there are probably at
least two acceptable methods of accounting for the
amounts in issue, the defendant has not discharged
the onus on it of proving that the application of
different acceptable methods to successive fiscal
periods accords with generally accepted account
ing principles.
The plaintiff also pleads that the defendant is, in
any event, now estopped from changing the basis
upon which the uncertified progress claims are to
be treated in the calculation of its profit for its
1968 taxation year. I agree.
The defendant reported, in its 1968 tax return,
income based on a profit calculation that included
the uncertified progress claims made by and upon
it. That was consistent with the way it had cal-
culated its profit since 1962 and would continue to
report it through 1971. In both its notices of
objection and notice of appeal to the Tax Review
Board, it referred to holdbacks "contingently
receivable" and "not legally receivable" in its 1967
and 1968 taxation years. It did not refer to the
uncertified progress claims.
The allegations of fact in paragraphs 3, 4 and 5
of the notice of appeal are not true. The defendant
had not deducted holdbacks totalling $117,552 and
$90,013 respectively in computing its 1967 and
1968 income nor, by the notices of re-assessment,
had the Minister increased the defendant's income
by those amounts. I considered it necessary to
make those findings and recited those paragraphs
because, in these proceedings, the defendant did
not find it necessary to repeat them, being content
to take as its points of departure the statement of
agreed facts and the decision of the Tax Review
Board.
The defendant did indicate a desire to change its
method of accounting in so far as holdbacks were
concerned when such a change could have been
effected for 1968 at a time when any consequential
adjustments of its 1969 income could have been
effected by re-assessment. It indicated its desire to
change its method of accounting for uncertified
progress claims for 1968 too late to permit re
assessment of its 1969 return. While evidence as to
magnitude of the disadvantage in dollars and cents
was not admitted, Weavers' evidence is that should
such a change for 1968 be permitted without a
complementary reassessment for 1969 there would
be a loss of tax revenue.
The defendant made representations as to its
1968 and 1969 profits by the consistent way it
calculated them. The plaintiff acted on those
representations in the assessment of the returns for
both years. If the defendant is permitted to change
its method of calculating its 1968 profit, thereby
denying the representations upon which the plain-
tiff acted, the plaintiff will be in the position of
having acted to her detriment.
In essence, what the defendant seeks is to
change its method of accounting for its profit to be
effective for its 1968 taxation year without apply
ing the same method to 1969. That is contrary to
reason and, in my view, also contrary to law.
The defendant's 1967 and 1968 returns will be
referred back to the Minister of National Revenue
for re-assessment in accordance with these reasons
and with the minutes of settlement filed herein.
The plaintiff is entitled to costs.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.