Supreme Court of Canada
Time Motors Limited v. Minister of National Revenue,
[1969] S.C.R. 501
Date: 1969-03-04
Time Motors Limited
Appellant;
and
The minister of
national Revenue Respondent.
1969: February 19; 1969: March 4.
Present: Fauteux, Abbott, Judson; Spence and
Pigeon JJ.
ON APPEAL FROM THE EXCHEQUER COURT OF CANADA
Taxation—Income tax—Deductions—Car dealer
issuing credit notes—Notes redeemable on later purchase of car before specified
date—Whether unredeemed notes current liabilities or contingent
account—Accounting principles—Income Tax Act, R.S.C. 1952, c. 148,
s. 12(1)(a), (e).
The appellant company was a used car dealer
and sometimes gave credit notes in partial payment of used cars acquired by it.
These notes were not transferable and could be applied by the holder within a
stated
[Page 502]
time to the purchase of a car of not less
than a specified value. In the appellant’s accounts, credit notes outstanding
were treated as current liabilities. If they were not redeemed, the amount at
expiration was removed from accounts payable and treated as a profit. The
Minister took the view that the outstanding credit notes were not existing
liabilities and should be disallowed under s. 12(1) (e) of the Income
Tax Act as being contingent. The Tax Appeal Board set aside the Minister’s
assessment, but this judgment was reversed by the Exchequer Court. The taxpayer
appealed to this Court.
Held: The
appeal should be allowed.
It was not possible to uphold the Minister’s
contention that the issuance of a credit note did not create any contract or
agreement giving rise to any liability or obligation because, in particular,
there was no agreement as to the price or the model of the car which could be
purchased by the customer on presenting the credit note. The note could not be
considered apart from the transaction out of which it arose. It was part of the
consideration for an executed contract, the purchase of a used car. It could
not be considered otherwise than as evidence of the conditions of the
appellant’s obligation to pay the balance of the purchase price. The customer
had an enforceable obligation for that balance. Even if the notes were to be
considered by themselves they could not be considered as unenforceable for
indefiniteness.
The wording of s. 12(1)(e) of the
Act clearly refers to accounting practice. This provision is to be construed by
reference to proper accounting practice in a business of the kind with which
one is concerned. The evidence showed that in the appellant’s accounts credit
notes were treated according to standard practice as current liabilities until
they were redeemed or expired.
Revenu—Impôt sur le
revenu—Déductions—Commerçant d’automobiles délivrant des notes de crédit—Notes
rachetables sur achat subséquent d’une automobile avant une certaine date—Les
notes non rachetées sont-elles des exigibilités ou des comptes de
prévoyance—Principes de comptabilité—Loi de l’impôt sur le revenu, S.R.C. 1952,
c. 148, art. 12(1)(a), (e).
La compagnie appelante faisait le commerce
d’automobiles usagées et, en paiement partiel d’automobiles usagées qu’elle
acquérait, donnait parfois des notes de crédit. Ces notes n’étaient pas
cessibles et pouvaient être affectées par le détenteur à l’achat d’une
automobile d’une valeur non moindre qu’un montant spécifié. Dans ses livres,
l’appelante a inscrit les notes dues comme étant des exigibilités. Si elles
n’étaient pas rachetées, le montant, à leur expiration, était retranché des
comptes payables et traité comme un profit. D’après le Ministre, les notes de
crédit dues n’étaient pas des dettes existantes et leur déduction n’était pas
permise en vertu de l’art. 12(1) (e) de la Loi de l’impôt sur le
revenu comme comptes de prévoyance. La Commission d’appel de l’impôt a mis
de côté la cotisation du Ministre, mais ce jugement a été infirmé par la Cour
de l’Échiquier. Le contribuable en appela à cette Cour.
Arrêt: L’appel
doit être accueilli.
[Page 503]
Il n’est pas possible de faire droit à la
prétention du Ministre que la délivrance d’une note de crédit ne créait pas un
contrat ou une convention engendrant une dette ou une obligation parce que,
entre autres, il n’y avait aucune entente concernant le prix ou le modèle de
l’automobile qui pouvait être achetée par le client sur présentation de la note
de crédit. On ne peut pas considérer la note indépendamment de la transaction
dont elle émane. Elle fait partie de la considération d’un contrat exécuté,
l’achat d’une automobile usagée. On ne peut pas la considérer autrement que
comme une preuve des conditions de l’obligation de l’appelante de payer le
solde du prix d’achat. Le client avait une créance valable pour ce solde. Même
si l’on considère les notes en elles-mêmes, on ne peut pas les déclarer
invalides pour cause d’indétermination.
Le texte de l’art. 12(1) (e) de
la Loi réfère clairement aux principes de comptabilité. Cette disposition doit
être interprétée en se rapportant à la pratique de comptabilité appropriée au
genre d’affaire en question. La preuve établit que l’appelante a inscrit les
notes de crédit dans ses livres selon la pratique normale comme des
exigibilités jusqu’à ce qu’elles soient rachetées ou expirées.
APPEL d’un jugement du Juge Gibson de la Cour
de l’Échiquier du Canada1, en matière d’impôt sur le revenu. Appel
accueilli.
APPEAL from a judgment of Gibson J. of
the Exchequer Court of Canada, in an
income tax matter. Appeal allowed.
John Hopwood, for the appellant.
G.W. Ainslie, Q.C., for the respondent.
The judgment of the Court was delivered by
PIGEON J.:—Appellant is a used car dealer also
selling new cars to a limited extent. Credit notes are sometimes given in
partial payment of used cars acquired for resale. In such case, the cash
payment and the amount of the credit note are stated in the bill of sale. The
note is signed by both parties and the conditions are set forth on its face.
These are that:
1. It is not transferable;
2. It is valid only within a stated delay,
usually between one and two years;
3. It is good only for the purchase of a car of
not less than a stated value.
[Page 504]
Sometimes the credit note would be good for the
purchase of a new car but generally it was good for the purchase of any used
car owned by the appellant of not less than a specified value. The price of the
cars offered for sale was posted but, of course, bargaining was not excluded.
In appellant’s accounts credit notes outstanding were treated as current
liabilities. If they were not redeemed, the amount at expiration was removed
from accounts payable and treated as a profit.
In 1965, the Minister took the view that the
outstanding credit notes were not existing liabilities and should be disallowed
for tax purposes as being contingent. On that basis, reassessments were issued
whereby additional tax was levied for appellant’s 1961, 1962 and 1963 taxation
years disallowing $4,415, $9,870 and $1,615 in those years respectively. By
judgment dated December 23, 1966, signed by Maurice Boisvert, the Tax Appeal
Board allowed the taxpayer’s appeal. This judgment was reversed by Gibson J. on
further appeal to the Exchequer Court (March
13, 1968).
On the appeal to this Court, counsel for the
Minister contended that when appellant issued each credit note there was not,
in fact, created any contract or agreement which would give rise to any
liability or obligation because, in particular, there was no agreement as to
the price or the model of car which could be purchased by the customer upon
presentment of the credit note. This contention cannot be upheld. The credit
note should not be considered apart from the transaction out of which it
arises. It is part of the consideration for an executed contract, the purchase
of a used car. Under that contract, appellant became obliged to pay a stated
sum of money, a part only of that sum was paid in cash, the balance remaining
due was stipulated payable in merchandise of a stated kind. While the contract
is spelled out in two separate documents, the bill of sale and the credit note,
the latter cannot be considered otherwise than as evidence of the conditions of
the obligation to pay the balance of the purchase price. That obligation must
be considered as subsisting until satisfied or expired. No special reason was
advanced, no authority was cited to support the contention that the credit note
should be considered otherwise.
[Page 505]
The fact that the merchandise to be obtained by
virtue of a credit note was not specified does not mean that appellant’s
customer had no enforceable obligation for the balance due. He could select any
of the cars offered for sale coming within the general description in his
credit note and require delivery by tendering the note and cash to make up the
posted price. Appellant could not have evaded this obligation by posting
inflated prices. This would have been a fraud against which the credit note
holder would have been entitled to a remedy.
Even if the credit notes were to be considered
by themselves they could not be considered as unenforceable for indefiniteness.
It should be noted that Viscount Dunedin’s dictum in May & Butcher v.
The King (Feb.
22, 1929):
To be a good contract there must be a
concluded bargain, and a concluded contract is one which settles everything
that is necessary to be settled and leaves nothing to be settled by agreement
between the parties.
was explained in a later decision of the
House of Lords, Hillas & Co. v. Arcos Ltd.. Reversing a judgment of the Court
of Appeal based on it Lord Wright said (at pp. 507-508):
When the learned lord justice speaks of
essential terms not being precisely determined, i.e. by express terms of the
contract, he is, I venture with respect to think, wrong in deducing as a matter
of law that they must, therefore, be determined by a subsequent contract; he is
ignoring, as it seems to me, the legal implication in contracts of what is
reasonable, which runs throughout the whole of modern English law in relation
to business contracts. To take only one instance, in Hoadly v. McLaine, Tindal
C.J. (after quoting older authority), said (10 Bing. at p. 487):
‘What is implied by law is as strong to
bind the parties as if it were under their hand. This is a contract in which
the parties are silent as to price, and therefore leave it to the law to
ascertain what the commodity contracted for is reasonably worth.’
That decision was relied on by Estey J. in Dawson
v. Helicopter Exploration Co. Ltd.
Respondent’s second contention is that because
appellant’s obligation was conditional it should not, until the condition was
realized, be treated for purposes of income tax as a current liability but as
an amount properly to be
[Page 506]
entered in a contingent account. As a result,
the deduction would be prohibited by s. 12(1)(e) of the Income
Tax Act:
12(1) In computing income, no deduction
shall be made in respect of
(e) an amount transferred or
credited to a reserve, contingent account or sinking fund except as expressly
permitted by this Part,
The wording of that provision clearly refers to
accounting practice. The only expression applicable to the present case is not
“contingent liability” but “contingent account”. This means that the provision
is to be construed by reference to proper accounting practice in a business of
the kind with which one is concerned. In the present case, the only evidence of
accounting practice is that of appellant’s auditor, a chartered accountant. His
testimony shows that in appellant’s accounts credit notes are treated according
to standard practice as current liabilities until they are redeemed or expired.
They are not classed as contingent liabilities. When asked why he considered
the obligation under a credit note as current liability and the obligation
under a warranty as contingent, he said:
… the credit note, while it is a liability,
is also an existing obligation today. A warranty may be a liability in the
future. It may be determinable in the future but isn’t an existing obligation
until the future. At least, this is my interpretation of the difference.
With respect, Gibson J. was in error in holding
that whether or not appellant’s financial statements were drawn up according to
generally accepted accounting principles could be disregarded. On the contrary,
the wording of the relevant provision of the Income Tax Act implies that
this is the essential question.
The appeal should be allowed and the judgment of
the Exchequer Court set aside, with costs both in this Court and in the Court
below; and it should be ordered that the reassessments of the taxation years
1961, 1962 and 1963 be referred back to the Minister of National Revenue for
reassessments and adjustments in accordance with these reasons.
Appeal allowed with costs.
Solicitors for the appellant: Hopwood
& Molyneux, Calgary.
Solicitor for the respondent: D.S.
Maxwell, Ottawa.