Accounting Principles

Commentary

It is well accepted that generally accepted accounting principles, or other accepted business practices, may be accorded significant weight in the determination of a taxpayer's income in the absence of specific statutory guidance to the contrary. These authorities are discussed under Section 9. On this page, we refer to authorities on the potential relevance (or lack thereof) of accounting principles in the interpretation of other statutory provisions.

Sometimes, a statutory provision may be dealing with the recognition or measurement of what essentially is an accounting concept. In these situations, substantial weight likely will be given to the application of generally accepted accounting principles to the facts in question. Examples include the deduction of an allowance for doubtful or bad debts (Coppley Noyes), the determination of the various accounting measures upon which capital tax is computed (Canfor) and the allocation of income between two jurisdictions (British Yukon). However, even in the interpretation of statutory provisions such as these, it is likely, in view of what the courts have stated in describing the potential relevance of generally accepted accounting principles in the determination of profit under Section 9 (see Canderel), that the application of a statutory provision to any particular set of facts is ultimately a question of law and that expert evidence as to accounting practices or principles cannot be determinative.

It is likely that significantly less weight will be given to accounting principles or practices where the measurement or determination in question can be made by applying principles that already have been developed in an extensive line of jurisprudence. Two examples are the determination whether an expenditure is on income or a capital account (MHL Holdings and International Nickel, Cf. Stearns Catalytic and Edmonton Plaza) and the determination of the cost of an asset (Consumers' Gas). Taxpayers generally have been unsuccessful in arguing that substantial weight should be given to the recognition of an amount as a liability for accounting purposes in seeking to establish that an expense that has been incurred for income tax purpose. Not only is there significant jurisprudence on when a cost or expenses is incurred (for the purposes of ss.20(1)(a), 18(1)(a) and 18(1)(e)) but also the accounting tests used in determining whether a liability should be recognized on a balance sheet appear to be quite different from the income tax tests. See TNT, Sears, Cummings, Lipper and Foothills.

Cases

Romar v. Canada, 2010 DTC 5076 [at 6816], 2009 FCA 48

Two Ontario partnerships of which the taxpayers were members paid for research to be carried out on their behalf by a Brazilian research corporation, in part, by issuing notes to the research corporation denominated in Brazilian currency and payable in annual installments commencing seven years hence.

The amount of the expenditures made by the partnerships should be determined, in light of generally accepted accounting principles on the basis of substantially discounting the value of the notes given that the interest rates borne by the notes were substantially lower than prevailing Brazilian interest rates (which, in turn, reflected high rates of inflation).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 37 - Subsection 37(2) 101

Coppley Noyes & Randall Ltd. v. The Queen, 91 DTC 5291 (FCTD), varied on appeal 93 DTC 5196, 5508 (FCA).

Before going on to affirm the deductibility under s. 20(1)(l) of an allowance for doubtful accounts which the taxpayer had taken for tax and financial statement purposes, Reed J. stated (p. 5297):

"... in determining a reserve for doubtful debts, the principal factors that are used for the preparation line.gifl statements, as governed by the generally accepted accounting principles approved by the Canadian Institute of Chartered Accountants, are applicable, unless: (1) the Income Tax Act expressly requires otherwise or (2) the Income Tax Act implicitly requires otherwise."

The Queen v. Foothills Pipe Lines (Yukon) Ltd., 90 DTC 6160 (FCA)

Because it was a question of law whether the taxpayer's obligation to effectively repay special charges which it had made to shippers in certain events was a liability, the evidence of experts on this issue was not conclusive.

Stearns Catalytic Ltd. v. The Queen, 90 DTC 6286 (FCTD)

Considerable weight was given to accounting evidence, to the effect that a stock of spare parts constituted fixed assets for accounting purposes rather than inventory, in determining that such parts constituted capital property for income tax purposes.

Macmillan Bloedel Ltd. v. The Queen, 90 DTC 6219 (FCTD)

Expert accounting evidence was found to be relevant to the application of s. 20(1)(e).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e) loss on forward contract to lock in Canadian dollar cost of U.S.-dollar borrowing was issue expense 185
Tax Topics - Income Tax Act - Section 4 - Subsection 4(1) - Paragraph 4(1)(a) 37
Tax Topics - Income Tax Regulations - Regulation 700 - Subsection 700(1) 116

MHL Holdings Ltd. v. The Queen, 88 DTC 6292, [1988] 2 CTC 42 (FCTD)

After citing the Metropolitan Properties case for the proposition that GAAP "should normally be applied in tax cases unless of course there is a clear departure from them under income tax rules" (p. 6295), Joyal J. went on to note, with respect to considering whether an expenditure was made by the taxpayer on capital account, that the accounting treatment of the expenditures (which generally was to capitalize them) was not determinative of the issue before him.

TNT Canada Inc. v. The Queen, 88 DTC 6334, [1988] 2 CTC 91 (FCTD)

Before finding that the deduction of cargo claims was prohibited by s. 18(1)(e), Cullen J. stated (p. 6338) that "the case law is clear on the point that the fact of acceptability in accounting does not in itself make the expenditure in question a proper deduction for tax purposes".

Edmonton Plaza Hotel (1980) Ltd. v. The Queen, 87 DTC 5371, [1987] 2 CTC 153 (FCTD)

Jerome A.C.J. indicated (at p. 5375) that he had no reason to depart from the treatment of an expenditure accorded to it in the taxpayer's financial statements, which was to treat the expenditure as part of the capital cost of an extension to the taxpayer's hotel (which was a capital property).

The Queen v. Consumers' Gas Co. Ltd., 87 DTC 5008, [1987] 1 CTC 79 (FCA)

Accounting principles for depreciable assets were found to have no particular relevance to the determination of the effect of reimbursements received by a taxpayer on the cost of his assets for tax purposes.

Sears Canada Inc. v. The Queen, 86 DTC 6304, [1986] 2 CTC 80 (FCTD), aff'd 89 DTC 5039 (FCA)

An obligation of the taxpayer to make future repairs pursuant to maintenance agreements was found to be a contingent liability notwithstanding accounting evidence to the contrary.

The Queen v. Terra Mining & Exploration Ltd. (N.P.L.), 84 DTC 6185, [1984] CTC 176 (FCTD)

Before finding that both ss.20(1)(c) and 12(1)(c) "require accounting in conformity with ordinary commercial practices and/or generally accepted accounting principles" (p. 6188) Reed J. stated (p. 6186): "A distinction must be made between a requirement that income for tax purposes be accounted for generally in conformity with accounting principles and a requirement that the taxpayer's treatment of his financial statements and his tax returns be identical."

Cummings v. The Queen, 81 DTC 5207, [1981] CTC 285 (FCA)

In refusing to follow accounting evidence that a deduction for a future lease pick-up payment in the amount of $500,000 was a fixed liability instead of a contingent liability, Heald J. stated (p. 5214):

"The fact of the acceptability in accounting practice of dealing with a particular item in a particular manner, cannot, by itself, make that practice a proper deduction for income tax purposes. Notwithstanding the evidence of accounting practice, the fact remains that, on the facts here present, the deduction is prohibited by subsection 12(1)(e) of the Act."

Lipper v. The Queen, 79 DTC 5246, [1979] CTC 316 (FCTD)

Addy J. found that the financial statements of a film promoter which had sold a film to a limited partnership failed to reflect reality and economics substance in showing the unpaid purchase price for the film as a debt owing to it.

British Yukon Railway Co. v. The Queen, 77 DTC 5176, [1977] CTC 256 (FCTD)

Before going on to prefer the taxpayer's method (a formula developed by its accountants) for allocating income of a cross-border railway venture between Canada and the U.S. to that of the Minister, Dubé J. stated (at p. 5178):

"Where the Income Tax Act does not provide a particular system of accounting, the validity of a formula depends on whether or not it tells the truth about the taxpayer's income."

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 406 64

Meteor Homes Ltd. v. MNR, 61 DTC 1001, [1960] CTC 419 (Ex. Ct.)

Before finding that the deduction of sales tax liabilities of the taxpayer was not prohibited by s. 12(1)(e) of the pre-1972 Act, Kearney J. stated (p. 1006):

"I think [the auditor's] evidence establishes that the appellant by showing the sales tax in its books of account as an ordinary liability was conforming to usual commercial and good accounting practice, and such practice must prevail unless there are statutory provisions to the contrary."

International Nickel Co. of Canada Ltd. v. MNR, 71 DTC 5332 (FCTD)

Before finding that scientific research expenditures of the taxpayer were non-deductible capital expenditures notwithstanding that they were deducted currently for financial statement purposes, Cattanach J. stated (p. 5348):

"It is quite understandable that a commercial enterprise in its books of account for its own purposes will treat certain classes of expenditures as revenue expenditures which are, in reality, for income tax purposes capital expenditures and conversely many items treated in the accounts of business as capital receipts are for income tax purposes taxable as income."

B.C. Electric Railway Co. Ltd. v. MNR, 57 DTC 1034, [1957] CTC 120 (Ex Ct), aff'd 58 DTC 1022, [1958] CTC 21 (SCC)

Evidence as to accounting practice could not prevail over the prohibition in s. 12(1)(b) of the pre-1972 Act against the deduction expenditures.

See Also

Barrick Gold Corporation v. The Queen, 2017 TCC 18

character of hedging gain was a legal question not affected by accounting

In finding that the treatment for accounting purposes of a gain realized by the taxpayer from closing out hedges was not relevant to whether the gain was a profit from the taxpayer’s gold production business, Paris J stated (at para.44):

The test for whether income earned by a taxpayer falls within the definition of gross resource profits is a legal test and has been decided in 3850625... . Thus there is no need to resort to accounting principles to assist in the required determination and it is immaterial how the profit earned on the Forward Contracts was required to be treated for financial statement purposes.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 1204 - Subsection 1204(1) - Paragraph 1204(1)(b) - Subparagraph 1204(1)(b)(ii) hedging of price of gold to be produced occurred as part of gold production business 429

Ford Credit Canada Limited v. The Queen, 2006 DTC 3424, 2006 TCC 441

Before going on to find that s. 181(3) required retractable preferred shares in the capital of the taxpayer to be treated as debt for large corporation capital tax purposes, Bowman C.J. stated that even though the preferred shares were as a matter of economic substance similar to debt, in the absence of s 181(3), the accounting treatment of the preferred shares as debt would not be allowed to prevail over the legal meaning of the words equity and debt in the Act.

Royal Trustco v. The Queen, 2001 DTC 52 (TCC)

Sarchuk T.C.J. indicated (at p. 64) that:

"The interpretation of the undefined terms 'tangible property' and 'reflected' in accordance with their accounting meanings accords with Parliament's use of accounting-based concepts throughout the entire scheme of Part I.3 of the Act."

Canfor Ltd. v. Minister of Finance for BC, [1976] CTC 429 (BCSC), aff'd [1977] CTC 616 (SCC), rev'g [1977] CTC 269 (BCCA)

Before considering various terms in the Corporation Capital Tax Act (BC), Fulton J. stated (pp. 431-432):

"that where a word or expression used in a taxing statute is not expressly defined or interpreted in that statute, then if that word or expression has an accepted meaning or application in accordance with ordinary commercial or accounting principles, that meaning or application is to be given to the word or expression in applying the statute."

Administrative Policy

23 November 2016 Internal T.I. 2015-0618511I7 - Thin Capitalization - Retained Earnings

consistency between unconsoidated and consolidated financials

A Canadian subsidiary, which prepared its consolidated financial statements in accordance with IFRS, also prepared its unconsolidated financial statements for its tax return purposes using IFRS, but applied IFRS 9 (re fair value accounting) in those statements but not in its consolidated statements. The effect was to boost its equity amount for thin cap purposes by the increase in the fair market value of its investment in subsidiaries (with that increment estimated to equal their net income for the relevant years).

In rejecting this approach, the Directorate stated:

[C]onsistency between the consolidated financial statements and unconsolidated financial statements… is expected… [in order] to avoid the use of financial statements as a tax planning tool…. [T]he Taxpayer should not be able to adopt IFRS 9 in the unconsolidated financial statements… until the time the Taxpayer adopts the same standard in its consolidated financial statements.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(5) - Equity Amount - Paragraph (a) - Subparagraph (a)(i) unconsolidated balance sheet must reflect the same accounting standards applied in the consolidated financials 295