Supreme Steel Ltd. v. The Queen, 96 DTC 1430, [1996] 3 CTC 2152 (TCC)

Sobier J.T.C.C.: — The Appellant appeals from the assessment of the Minister of National Revenue (the “Minister”) for its taxation year ended June 30, 1991, whereby the Minister disallowed a deduction in respect of holdbacks and billings invoiced to Husky Oil Operations Ltd. (“HOOL”) totalling $1,279,020. These holdbacks were with respect to six invoices rendered by the Appellant to HOOL as follows:

DATE/INVOICE NO./AMOUNT

March 25, 1991: 038: $ 90,00g [1]

April 30, 1991: 048: $ 296,400

April 30, 1991: 049: $ 330,600

May 30, 1991: 061: $ 387,600

May 30, 1991: 062: $ 174,420

$1,279,020

(sometimes hereinafter referred to as the “holdbacks”).

The Appellant was a subcontractor of HOOL’s, pursuant to an agreement (the “Agreement”) dated March 26, 1990, between the Appellant and HOOL, with respect to a project in Lloydminster, Saskatchewan, known as the Bi-Provincial Upgrader (the “Project”).

The issue in this appeal is whether the Minister was correct in including the holdbacks as income in the Appellant’s 1991 taxation year because they became receivables prior to June 30, 1991. [2] The cheques for the invoices were received after June 30, 1991, but were with respect to invoices rendered prior to that date.

The Appellant calculated its income on the progress billing method. While the Appellant may have billed using this method, the General Conditions to the Agreement stated in part as follows:

5.01 The Contractor shall submit to the Husky Representative, on or before the fifth (5th) day of each calendar month, an estimate showing the value of the Work and the Extra Work, if any, for which the Contractor claims to be entitled to be paid in respect to that part of the Work and the Extra Work, if any, performed during the preceding calendar month. The estimate shall be presented on a “Contractor’s Progress Payment” form approved by the Husky Representative. All items set out on the Contractor’s Progress Payment form shall be segregated and coded by such statement as Husky may require. Such Contractor’s Progress Payment form shall be accompanied by copies of all invoices and other documents as may be requested by the Husky Representative from time to time, verifying the estimate of the value of the Work and Extra Work, if any, to allow ready evaluation by the Husky Representative. The progress payments to be made to the Contractor shall be calculated on the basis of such estimates after having been checked and approved by the Husky Representative; provided however, the Husky Representative may refer to, but shall not be bound by, such estimates in calculating the progress payments payable pursuant to the Contract Documents. The Husky Representative shall approve such estimates within seven (7) days of receipt thereof unless written notice has been issued by the Husky Representative setting out the reasons for his withholding such approval.

5.03 Within thirty (30) days from the date of final approval of such estimates by the Husky Representative, and subject to the terms and conditions contained in the Contract Documents, and subject to the provisions of the Builder’s Lien Act, Husky will pay or cause to be paid to the Contractor those sums Owing pursuant to the approved estimates less such sums as are required to be withheld by the Builder’s Lien Act.

In summary, in order for the Appellant to be entitled to payment of the holdbacks, a representative of HOOL must have approved the invoices representing the progress payments. The approval converted the invoices into accounts receivable.

The Appellant’s President gave evidence that in determining its income at its year end and dealing with progress payments, the Appellant’s auditors sent out requests for information on the Appellant’s letterhead asking the customers to confirm the dates, numbers and amounts of invoices sent to the customers. [3] The customers were asked to verify the information or correct any discrepancies. In addition, the customers were to indicate, by checking the appropriate box, whether or not the invoices indicated in the request had been approved for payment prior to June 30, 1991 and, if approved, the date of such approval.

Two such requests, dated July 8, 1991, were sent to HOOL. One request was with respect to two invoices and was returned showing that approval had been given prior to June 30, 1991, but not indicating the date of approval. The second request, which was with respect to 16 invoices, including the five referred to above, was returned showing that none of the invoices had been approved for payment on or before June 30, 1991. Both requests were signed on behalf of HOOL by one Denis J. Gareau, Project Accountant, and it was not disputed that he had authority to sign the requests. On the strength of this, the Appellant did not include the amounts of the holdbacks in its income for its year ended June 30, 1991, since the Appellant believed that they had not yet become receivable, not having been approved.

However, evidence was given by HOOL’s present supervisor of accounts payable, who did not occupy that position when the request was returned, showing the system used by HOOL dealing with the payment of accounts payable in connection with the Project and that such system was in effect at the material times.

She led the Court through the payment approval process beginning when the invoices were received and stamped on receipt, and then a blank stamp affixed to be used by the person who would eventually approve the payments. Later other stamps indicated that the invoices had been logged in. These were dated. After being initially stamped, the invoices were sent to Lloydminster for approval by the Project engineers. Once approved, the invoices were returned and cover sheets were prepared after which the cheques would be issued. The cover sheets are made and dated after approval has been given by the Project engineers in Lloydminster.

Based upon the flow of the invoices through the system, it was demonstrated that either the approvals were made prior to June 30, 1991 (Invoice 038, 048 and 049) as shown by the dates on the approvals themselves or prior to that date, because of the dates shown by various other stamps and the dates of the cover sheets (the remaining invoices). None of these dates indicate any action taken with respect to approvals of the invoices after June 30, 1991. Cheques might have been issued after that date but the documents generated by HOOL showed approval of all the progress payment invoices prior to June 30, 1991.

That there is a conflict between the requests dated July 8, 1991 and signed by Mr. Gareau and the internal paper work of HOOL is self-evident.

The Appellant invites the Court to choose the information supplied in the request letter. How else, argues the Appellant, is it to determine whether approvals have or have not been given, except from information supplied by HOOL and its other customers?

On the other hand, we must look at the Agreement in order to determine when the Appellant is entitled to payment, because that is determinative of the issue. The Agreement states that there must be approval by HOOL prior to HOOL becoming liable to pay the invoices. It is the approval which triggers liability not approval and communication of that approval which renders HOOL liable to the Appellant.

Although Interpretation Bulletins of Revenue Canada are not binding upon this Court, the Appellant relies on IT-92R2, which states in part as follows:

General Rules - Income

3. Construction contracts normally provide for a contractor to render, from time to time, progress billings as work on a project proceeds. Such contracts also normally entitle the contractor to be paid therefore, usually after the purchaser or the purchaser’s architect or engineer has agreed that the part of the work covered by the progress billings has been satisfactorily completed. The terms of a construction contract may also require the purchaser to withhold a percentage from the payment of each progress billing pending satisfactory completion of the entire job. In some provinces this withholding, or holdback as it is com- monly known, is mandatory by virtue of a provincial Mechanic's Lien Act or Construction Lien Act. The amount of a progress billing, less the holdback if any, becomes receivable and must be included in the contractor’s income at the time when the purchaser or the purchaser’s architect or engineer approves the progress bill for payments. The aggregate of the holdbacks becomes receivable and must be included in the contractor’s income on the day that is the later of

(a) the day on which the architect or engineer issues the final certificate of job completion, and

(b) the day of expiration of the lien period as stipulated in the applicable provincial statute.

Again, the Interpretation Bulletin tells us that the progress payments become receivable and must be included in the contractor’s income at the time when the purchaser’s engineer approves the progress invoices for payment. It should be noted that it is the time when the payor becomes liable to the contractor, which determines when the contractor must include the progress payment in its income, not the date which someone claims that the payor becomes liable. Similarly, the progress payment is approved on the date of its approval, notwithstanding a statement by someone to the contrary, even if the statement causes hardship on the payee, through no fault on its part.

Dealing with the question at hand, the case of Minister of National Revenue v. J. Coif ord Contracting Co. (sub nom. John Colford Contracting Co. Ltd. v. Minister of National Revenue), [1960] C.T.C. 178, 60 D.T.C. 1131 (Ex. Ct.) upheld without reasons by the Supreme Court of Canada in Minister of National Revenue v. John Colford Construction Co., [1962] C.T.C. 546, 62 D.T.C. 1338 is of assistance. The issue in that case was also timing of when progress payments must be taken into income. There, architects’ certificates were required in order to render the invoices accounts receivable. Mr. Justice Kearny stated at page 189 (D.T.C. 1136):

Although it does not add that such completion and acceptance by the architect are conditions precedent which must be fulfilled before the taxpayer is entitled to final payment of the holdback, in my opinion, under the jurisprudence such meaning is to be implied. As a corollary, I consider that the holdback does not, as far as the taxpayer is concerned, take on the quality of a receivable until the work has been accepted by the architect. This does not, however, dispose of the issue in regard to the contract under consideration.

At page 191 (D.T.C. 1137), he states:

It is not the date on which he obtains knowledge of the existence of the certificate but the date of its execution which governs.

On the evidence, I find that notwithstanding the contents of Mr. Gareau’s endorsement of the July 8, 1991 request letter, the approval of the payment of the invoices in question were given prior to June 30, 1991. I am at a loss to understand why, if Mr. Gareau was aware of the documents which were presented at the hearing of this appeal, he could have possibly said that they had not been approved on or before June 30, 1991. The documents leave no doubt in my mind of pre-June 30, 1991 approval.

While I regret that in this instance, the apparent error of Mr. Gareau has been costly to the Appellant, I am bound by the evidence of the approvalmaking process and documents, which show approval prior to June 30, 1991. The amounts were therefore receivable in the June 30, 1991 taxation year and should have been included in the Appellant’s income for that year.

For these reasons, the appeal is dismissed with costs.

Appeal was dismissed.