Supreme Court of Canada
General Electric Company v. The Minister of National Revenue,  S.C.R. 3
Canadian General Electric Company Appellant;
The Minister of National Revenue Respondent.
1961: June 7; 1961: October 23.
Present: Locke, Cartwright, Abbott, Martland and Ritchie JJ.
ON APPEAL FROM THE EXCHEQUER COURT OF CANADA.
Taxation—Assessment—Income tax—Foreign exchange
profits—Promissory notes payable in United States currency, paid off at a
saving—Proper method of computing profits—The Income Tax Act, 1948 (Can.), c. 52
[R.S.C. 1952, c.148, ss. 3,4]
The appellant borrowed funds from its parent United States
company to purchase needed supplies from it and other suppliers in the United
States, the indebtedness being evidenced by promissory notes payable in US.
funds. During the currency of these notes the Canadian dollar rose from a
discount to a premium over the U.S; dollar, and, as a result, the appellant was
able to pay off all the notes at a saving of $512,847.12. Some of the notes
aggregating $1,567,149.20 were paid off in 1951 at a saving of $81,774.44; the
balance aggregating 89,225,326.87 were paid off in 1952 at a saving of
$431,072.68. The latter amount, described as "foreign exchange profit on
notes payable", was added by the Minister to the appellant's declared
income for 1952. The appellant ontended that the profit should be computed on
an "accrual" basis, as in order to give a true picture of the
company's position, it was necessary, from an accounting point of view, to
revalue the amount of Canadian dollars necessary at each balance-sheet date to
pay off the outstanding notes. On this basis it submitted that the total amount
of $512,847.12 should be apportioned over three years as follows: $64,675.17
for 1950; $259,820.23 for 1951 and $188,351.72 for 1952. The Exchequer Court
having ruled in favour of the Minister, the appellant appealed to this Court.
Held (Abbott J. dissenting): The appeal should be
Per Locke J.: For the years 1950 and 1951 the Minister
had permitted the appellant to estimate its-costs of production by treating the
cost of its purchases, in respect of which the price was payable in American
exchange, at the rate then current. In the result, however, except to the
extent that some of the notes were paid prior to December 31, 1951, these
liabilities were discharged at a time when American exchange was at a discount
and, accordingly, the manufacturing profits of the company for 1950 and 1951
were understated for very considerable amounts in each year. The claim of the
Crown in this matter really amounted to an attempt to recover qua profit
on exchange substantially the amounts by which the appellant's costs were
overstated and its income accordingly understated for these years by adding
such amounts to its income for the year 1952. This could not be done.
Per Cartwright, Martland and Ritchie JJ.:
It was proper for the appellant to compute its profits, in relation to
the notes, in the manner which it adopted. There would be no "profit"
at all in respect of the notes
in the year 1952, save for the fact that their value had to be
estimated, under the "accrual" method of accounting, in 1950 in order
to determine the appellant's profit for that year. Being a matter of estimate,
the valuation of the liability should continue to be revised in each year
thereafter until the year of actual payment. If the "profit" for 1952
was to be the difference between an estimate and the amount of actual payment,
such profit in that year should be determined on the basis of the estimate at
the beginning of that financial year.
The decided authorities did not preclude the appellant from
adopting the "accrual" method—a method which, in relation to trade
liabilities payable in U.S. funds other than the notes, the Minister had never
challenged, but in which, according to the uncontradicted evidence, the
Minister had acquiesced, and which he had required. Eli Lilly & Co.
(Canada) Ltd. v. The Minister of National Revenue,  S.C.R. 745; Tip
Top Tailors Ltd. v. The Minister of National Revenue,  S.C.R. 703; Davies
v. The Shell Co. of China, Ltd. (1951), 32 Tax. Cas. 133; J. P.
Hall & Co. Ltd. v. Commissioners of Inland Revenue,  3 K.B. 152; Whimster
& Co. v. The Commissioners of Inland Revenue,  S.C. 20; The
Minister of National Revenue v. Consolidated Glass Ltd.,  S.C.R. 167;
Whiteworth Park Coal Co. Ltd. v. Inland Revenue Commissioners,  3
All E.R. 703; Gardner, Mountain & D'Ambrumenil, Ltd. v. Inland Revenue
Commissioners,  1 All E.R. 650, distinguished.
Per Abbott J., dissenting: In 1952 the appellant
was able to purchase or otherwise acquire for $9,032,382.61 Canadian, the
$9,225,326.87 U.S. required to discharge the liability of $9,461,455.29
Canadian, which it had claimed and been allowed as a deduction from gross
income in arriving at its trading profits in the two previous years. It thus
realized in that year a gain of $431,072.68 Canadian which on the principle
laid down in Eli Lilly & Co. (Canada) Ltd. v. The Minister of National
Revenue, supra, and Tip Top Tailors Ltd. v. The Minister of National
Revenue, supra, must be taken into the computation of profit and loss for
tax purposes. This exchange gain must be taken into account in 1952, the year
in which it became a reality.
APPEAL from a judgment of the Exchequer Court of Canada, dismissing an appeal from an
assessment under the Income Tax Act, 1948 (Can.), c. 52 and the Income
Tax Act, R.S.C. 1952, c. 148. Appeal allowed, Abbott
L. Phillips, Q.C., P. F. Vineberg, Q.C., and A.
D. McAlpine, for the appellant.
D. S. Maxwell and G. W. Ainslie, for
the difference between the amount in Canadian dollars required to satisfy the
liability for the notes, as estimated in the company's accounts on December 31,
1951, and that expended for that purpose in 1952 was income within the meaning
of the Income Tax Act is, in
my opinion, settled by the decision of this Court in Eli
Lilly v. The Minister of National Revenue.
That decision does not, however, touch the question as to whether the
difference between the amount required to discharge these obligations at the
time the notes were given arid the amount which it would have been necessary to
pay for that purpose on December 31, 1951, was also income.
I have read with care the evidence of the chartered
accountants in this matter. It does not require expert evidence to demonstrate
that, for the purpose of preparing a proper balance sheet and profit and loss
statement for any manufacturing company, it is necessary to estimate throughout
the year its costs of materials, raw or finished, purchased from other sources
and used in manufacturing its products. A company such as the appellant is
required annually to submit to its shareholders a statement as to its affairs
at the end of its financial year. In a case such as the present, where the notes
were payable in American exchange and the rate was fluctuating, it was
necessary for the company to estimate its costs in accordance with the
fluctuation of the rate from time to time during the year and to estimate the
amount of the company's liability upon the notes at the rate current at the end
of the fiscal year.
It is contended on behalf of the Minister that the fact that
in the years 1950 and 1951 the amount necessary to discharge the notes given
during these years was less at the end of the calendar year than that required
to discharge them at the time they were given did not result in a taxable
profit during those years. I agree with this contention and the contrary is not
decided in Lilly's case. While the tax returns of the company for the
years 1950 and 1951 showed these amounts as profit and treated them as capital
gains and while the Crown contended as to the year 1950 that such so-called
gains were part of the company's income, these circumstances do not affect the
right of the Crown to take the stand that there was no such profit in these
However, accepting this as being correct, the position of
the Crown is not assisted. Except to the extent that some of the notes were
paid prior to December 31, 1951, the position was that though, of necessity,
the liability in Canadian dollars for the purchases was estimated, neither
profit nor gain was realized by reason of the variation of the exchange
rate. The Minister permitted the appellant to estimate its
costs of production by treating the cost of its purchases, in respect of which
the price was payable in American exchange, at the rate then current. In the
result, however, these liabilities, with the exceptions noted, were discharged
at a time when American exchange was at a discount and, accordingly, the
manufacturing profits of the company for the years 1950 and 1951 were
understated for very considerable amounts in each year.
In respect of this the Minister might, in my opinion, have
made reassessments in respect of the years 1950 and 1951, when it was
discovered that these amounts which might be described as exchange costs had
not in fact been expended. There is no suggestion of any impropriety on the
part of the taxpayer in this case but if, in the result, its costs were found to
have been overstated in its returns for the years 1950 and 1951, the Minister
might have made such a reassessment under the provisions of s. 42(4) of the Income
Tax Act. The claim of the Crown in the present matter really amounts to an
attempt to recover qua profit on exchange substantially the amounts by
which the appellant's costs were overstated and its income accordingly
understated for these years by adding such amounts to its income for the year
1952. This may not be done, in my opinion.
I have had the advantage of reading and I agree with the
opinion of my brother Martland to be delivered in this case and with the
disposition to be made of it which is proposed.
The judgment of Cartwright, Martland and Ritchie JJ. was
facts involved in this appeal, which are not in dispute, have been fully and
completely stated in the judgment of the Exchequer Court and are here restated.
By a re-assessment dated August 6, 1957, the respondent
added to the declared income of the appellant for its taxation year ending
December 31, 1952, the sum of $431,072.68, described as "foreign exchange
profit on notes payable". In its original notice of appeal, to the
Exchequer Court, the appellant took the position that, to the extent that any
such profits were made in that year, they were profits on capital rather than
on revenue account and, therefore, not
taxable. By amendments to the notice of appeal the appellant
admitted that to the extent that it made "foreign exchange profits on
notes payable" in 1952, such profits are of a revenue nature and are to be
taken into consideration in computing its taxable income. The only dispute has
to do: with the quantum of such profits in 1952.
The appellant is a corporation, having its head office at
Toronto, most of its shares being owned by the General Electric Company of
Schenectady, New York. It is engaged in the business of manufacturing and
selling electrical machinery and supplies of all sorts and purchases
substantial quantities of needed supplies from General Electric, as well as
from other suppliers in the United States. In 1950, the appellant had borrowed
very substantial amounts from its Canadian bankers in the form of overdrafts.
In August of that year, General Electric offered to make U.S. funds available
to the appellant at a rate substantially lower than that paid to the
appellant's Canadian bankers. The initial arrangement was that General Electric
would defer payment of accounts for goods purchased from it by the appellant,
carrying them on open account and at an interest rate of 2 per cent. Within a
few weeks, however, General Electric required that any such indebtedness should
be evidenced by promissory notes of the appellant payable to General Electric
and all in U.S. currency.
These arrangements were duly carried out (the appellant,
however, as before, continuing to pay cash for a portion of its purchases from
General Electric) and some 25 notes were issued between August 20, 1950, and
May 20, 1952. All of these notes were in respect of goods or services supplied
by General Electric to the appellant except for one dated May 9, 1952, for
$500,000 in U.S. funds supplied by General Electric to the appellant and used
by the latter for the purchase of goods in the United States. Thirteen of these
notes, issued in 1950, were payable on or before December 31, 1951. Five notes
were issued in 1951, of which three were payable on or before June 30, 1952,
and two were payable on or before December 31, 1952. Seven notes were issued in
1952, payable on or before June 30, 1953. All of the notes issued in 1950,
which had not been paid in 1951, were replaced by a new note dated December 31,
1951, payable on or before June 30, 1953.
During the currency of these notes the premium on U.S. funds
over the Canadian dollar was sharply reduced, and, in 1952, the Canadian dollar
was at a premium over such U.S. funds. The appellant was able to pay off all
the notes at a saving, on a comparison between the cost of payment, in Canadian
dollars, as between the dates of issuance and the dates of actual payment, of
$512,847.12. Five of the notes issued in 1950, and aggregating $1,567,149.20,
were paid off in 1951 at a saving of $81,774.44; the remaining notes, issued in
1950, 1951 and 1952 and aggregating $9,225,326.87, were paid off in 1952 at a
saving of $431,072.68. It is the latter amount, which was added to the
appellant's declared income, which is now in dispute.
It is submitted on behalf of the appellant that the total
amount of $512,847.12 should be apportioned over three years as follows:
In order to understand this contention, it is necessary to
state what the appellant did in relation to its liability on the notes in
question. At the time that each note was given, there was set up in the
appellant's books not only the liability for the face value of the note, but a
further item under "foreign exchange" of an amount in Canadian funds
which, together with the face amount of the indebtedness, would be necessary to
pay the note in U.S. funds. That, of course, was based on the premium from time
to time of the U.S. dollar over the Canadian dollar. It is not disputed that
such entries were correct, the total of the two amounts truly representing the
appellant's then liability for the goods purchased. As shown by the schedule
attached to the notice of appeal, the amounts so set up for "foreign
exchange" in 1950 totalled $300,573.15. The exchange rate in that year had
varied from a high of 10½ per cent to a low of just less than 4 per cent. On
December 31, 1950, the exchange rate was 6 per cent and the appellant on that
date (which was the end of its fiscal year) revalued the amount of the
"foreign exchange" premium which it would have had to provide if it
had paid the existing notes in full at that date, namely, at the then rate of
exchange of 6 per cent—a total of $235,897.98. The difference of $64,675.17 between
the total amounts it had originally set up to meet the exchange
premium ($300,573.15) and that fixed for the year end
($235,897.98) was considered to be "profit" for that year, although
no payments were made on the notes in that year. In its income tax return for
the year 1950, this "profit" of $64,675.17 was disclosed, but as it
was claimed by the appellant to be a gain on account of capital, it was not
taken into income. The Minister added it to the declared income, but an appeal
to the Income Tax Appeal Board was allowed. From that decision the Minister
lodged an appeal which was later abandoned.
The second schedule to the notice of appeal sets forth the
computation of the appellant in respect of the "profit" in question
for 1951. The item of $235,897.98 set up by revaluation on December 31, 1950,
as the amount necessary to pay the exchange on the outstanding notes on that
date was carried forward to the beginning of 1951 and to it was added the
amount of foreign exchange premium necessary to pay all the new notes issued in
1951 at the rate of exchange prevailing when each note was given, the total of
both sums aggregating; $404,793.26. From that aggregate, there was deducted (a)
the actual exchange premiums paid on the notes which were redeemed in that year,
and (b) the total of the revalued amounts of exchange necessary to pay the
outstanding notes at December 31, 1951, at the then current rate of 1¼ per cent—a
total of $144,973.03. The difference of $259,820.23 was considered to be
"profit" for the taxation year 1951. In its return for that year, the
appellant showed that amount as exchange profit on notes, but claimed it to be
a gain on capital account.
Schedule 3 to the notice of appeal relates to the year 1952
in which further notes were issued, and these, together with all outstanding
notes, were paid in full before December 31, 1952. The Canadian dollar
throughout the year was at a premium. Accordingly, from the "credit"
in exchange on the new notes issued in that year totalling $68,789.34, there
was deducted the "debit" established by revaluation of the notes
unpaid on December 31, 1951, namely, $62,196.80, leaving a balance of $6,592.54.
That amount was deducted from $194,944.26, the amount of the actual benefits
accruing to the appellant upon payment of its several notes in 1952, due to the
premium on the Canadian dollar. It is contended that the difference of
$188,351.72 is "profit" for 1952 relating to "exchange on the
notes". In its income tax return for that
year, the appellant attached Schedule 28 thereto with the
same particulars as in Schedule 3 of the notice of appeal. In computing its
taxable income, however, the full amount of $188,351.72 was deducted from net
income, the appellant then being of the opinion that such "profit"
was not on revenue account. It is now conceded, however, that whatever profit
was made in 1952, upon payment of the notes, was a profit on revenue account.
It is admitted that the appellant, had it so desired, could
at all relevant times have paid the notes (which admittedly were curernt
liabilities) in full by having recourse to the line of credit which it had with
its Canadian bankers.
The expert accountants, who gave evidence for the appellant,
were all in agreement that the "accrual" system was the only suitable
one for the appellant company and that, from an accounting point of view, it
was proper and necessary, in order to give a true picture of the company's position,
to revalue the amount of Canadian dollars necessary at each balance-sheet date
to pay off the outstanding notes.
The Court below decided in favour of the respondent. Its
decision may be briefly summarized in the following quotation from the reasons
It will be seen, therefore, that the issue is one of amount
only, the appellant's main contention being that the profit on exchange in 1952
was $188,351.72 and not $431,072.68, the amount added by the Minister.
In my view, the broad issue to be determined here is
this—"When did this profit arise?" That question, as I have
suggested, is one of law, to be answered by a consideration of the Act and the
relevant decisions of the Courts. By s. 3 of the 1948 Income Tax Act, "The
income of a taxpayer for a taxation year … is his income from all sources … (and)
includes income for the year from all … businesses." Then, by s. 4,
"Income for a taxation year from a business … is the profit therefrom for
The problem will, I think, be made clearer if a specific
example is considered. Certain of the notes issued to General Electric in 1950
were wholly unpaid until 1952. Notwithstanding this fact, the appellant on
December 31, 1950, and on December 31, 1951, in relation to these notes
revalued downwards on its books the amount of Canadian dollars necessary on
those dates to pay the premium then in effect on U.S. exchange. In 1951,
nothing else was done in connection with these liabilities. The question,
therefore, is whether in these circumstances a trader who in one year has
incurred a debt in foreign currency and has left it wholly unpaid throughout
the following year, is taxable under The Income Tax Act by reason of the
single fact that its liability in terms of Canadian currency has decreased during
that subsequent year as the result of the change downwards in exchange rates.
After most careful consideration of the arguments of counsel
and of the authorities cited in support of their submissions, I have come to
the conclusion that the appeal on this point is not well founded and must be
dismissed. I do so for the reason that the profits in
question, in my opinion, were neither made nor ascertained by the mere
revaluation downwards on December 31, 1950 and December 31, 1951 on the books
of the company, of the amount of the premium in Canadian dollars necessary to
pay the outstanding notes, but that such profits were made only upon actual
payment of the several notes.
From that judgment the appellant has appealed. Its position
in the present appeal was stated by its counsel as follows:
The only difference between the parties and the subject of
the present litigation is whether a "calculated profit" of $431,072.68
on a combination of the "cash" and "accrual" methods of
computing income is attributable to 1952 as income of the appellant for that
year, which is the only one of the three years now under assessment and appeal,
or whether the appellant's attribution of "income" to 1950, 1951 and
1952 on the "accrual" method of computing income as reflected in the
appellant's financial statements and income tax returns is correct.
The appellant's accrual treatment of all its current
obligations in U.S. currency (including the accounts payable in question
represented by notes) was accepted throughout as reported but the current
liabilities evidenced by notes were singled out for different treatment only in
the re-assessment made in 1957 for the appellant's 1952 taxation year. The
appellant had treated all foreign currency payables and receivables, and
foreign currency bank accounts in the same way and took into its profit and
loss statement any income or loss resulting from a change in the rate of
exchange from that which was originally recorded.
Under the belief, acknowledged later to be mistaken, that
the issue of the notes changed the character of the liability, the appellant
for the 1952 year excluded the "gain" on the notes. The mistaken
belief has been subsequently corrected and the appellant concedes that the
issue of the notes did not in any way change the liability from an ordinary
trade account payable for goods purchased the same as other trade accounts
payable, so that the exclusion of the "gain" from income for income
tax purposes is no longer justified. It is the appellant's submission that the
gain should be treated in exactly the same way as the gain on the other foreign
currency payables, receivables, and bank accounts.
The respondent contends that a taxable profit is not
realized and does not arise by the mere revaluation in a trader's account of
the cost in Canadian dollars, at any given time, of paying off an indebtedness
payable in a foreign currency. A profit arising in this way would be an
unrealized profit. In the present case the profit was only realized on actual
payment of the notes and that profit consisted of the difference in the amount
of Canadian dollars which would have been required to pay the notes at the time
of their issuance and the amount actually required when the notes were paid. No
notes were paid off in 1950. Some were paid in 1951 and
the balance were paid in 1952 and accordingly the respondent
contends that the profit on exchange should be apportioned to the years in
which the notes were actually paid, as follows:
The relevant sections of the Income Tax Act are ss. 3 and 4, which provide as follows:
3. The income of a taxpayer for a taxation year for the
purposes of this Part is his income for the year from all sources inside or
outside Canada and, without restricting the generality of the foregoing,
includes income for the year from all
(b) property, and
(c) offices and
4. Subject to the other provisions of this Part, income for
a taxation year from a business or property is the profit therefrom for the
The problem to be determined is as to what was the
appellant's profit from its business in the year 1952. The judgment-appealed
from has held that, in computing its profit for that year, the appellant must
take into account the "profit" resulting from the fact that in that
year it was able to discharge notes, payable in U.S. funds, for a lesser number
of Canadian dollars than would have been required to pay them at the time of
their issuance, on the ground that the "profit" was realized by such
payment. The appellant was not, in law, for income tax purposes, entitled to
compute its "profits", in respect of the notes, in the years 1950 to
1952 inclusive in the way in which, under its system of accounting, it had
In considering the validity of this conclusion, reference
may first be made to some general principles which have been stated regarding
the meaning of the word "profit" and the method of its determination.
Viscount Maugham, in Lowry (Inspector of Taxes) v.
Consolidated African Selection Trust, Limited, said:
It is well settled that profits and gains must be
ascertained on ordinary commercial principles, and this fact must not be
In this Court, in Dominion Taxicab Association v. The
Minister of National Revenue,
Cartwright J. said:
The expression "profit" is not defined in the Act.
It has not a technical meaning and whether or not the sum in question
constitutes profit must be determined on ordinary commercial principles unless
the provisions of the Income Tax Act require a departure from such
I do not understand the judgment appealed from to hold, nor
did the respondent contend, that the method adopted by the appellant in
computing its profits in the year 1952 was in contravention of any of the
provisions of the Income Tax Act itself. What was held was that, on the
basis of the decided cases, the appellant had realized a taxable
"profit" of $431,072.68 in that year.
This raises the question as to what was the nature of the
"profit" which the appellant has thus realized. Clearly, it consists
of the difference in amount as between an actual expenditure of Canadian
dollars and an estimated valuation of the cost of payment in those funds. The
sole issue is as to whether, in computing taxable income for the year 1952,
that valuation must necessarily be the one which was first made, when the note
was issued, or whether the revised valuation, as of the beginning of the year
1952, is the one which should be used.
Taking as an example a note issued by the appellant to its
parent company in 1950 and paid in 1952, the legal position is that a debt,
payable in U.S. dollars, incurred in 1950, was paid off in 1952 in U.S.
dollars. Thus far there can be no question of a "profit" in 1952. Had
the appellant operated on a "cash" system of accounting there would merely
have been an expenditure taken into account in that year. The
"profit" which the respondent says the appellant realized in 1952 can
only be said to arise because of the fact that the appellant, under its
"accrual" method of accounting, included the note as a liability in
computing its profit for the year 1950. In setting up that liability in 1950
the appellant had to estimate the value of the note in terms of Canadian
dollars. An estimate was made at the time the note was issued, but further
estimates were made at the end of each month and also at the end of the
financial year, December 31, 1950. The estimate for that date was made on the
basis of the rate of exchange existing at that time. In my view, as it was a
matter of estimation, that was the best date in 1950 on which to value the
liability for the purpose of computing profit for that year. It seems to me
that there is no special significance attaching to the rate of exchange
existing on the date on which the note was issued, because there was no
likelihood that the note would be paid on that date.
In 1951, at the commencement of the year; the appellant's
estimate of the liability as of the end of 1950 was carried forward. At the end
of each subsequent month it was revised in accordance with the then existing
exchange rate and again an estimate was made at the year end. During that year
there had been a decline in the premium payable on the U.S. dollar, so that by
the year end the cost to the company of paying off the U.S. obligation had
declined. The liability which had been taken into account in computing profit
for the year 1950 was now less than it had been in that year. In order properly
to show the appellant's position in the year 1951 it was necessary for it to
make this revision of estimate and thereby it disclosed a "profit",
which was really a reduction of the liability, as previously taken into account
in 1950. The appellant's position, under the "accrual" method of
accounting, had improved. It was only because of the application of that
method, in the first place, that the liability had been taken into account in
terms of Canadian dollars in 1950.
In my opinion it was proper for the appellant to do this.
Its profit or loss during the 1951 accounting period had to be ascertained by a
comparison of its position at the beginning and. at the end of that period,
based upon estimates of value and the accrual of debits and credits.
Furthermore it should be noted that all of the 1950 notes, not paid in 1951,
were due and payable by December 31, 1951. So far as the notes issued in 1951
are concerned, for the reasons already stated, I feel that the proper date on
which to estimate their value in that year was at the end of the financial year
on December 31, 1951.
In 1952 the notes were paid off and our problem is as to the
"profit" which accrued in that year. In my view, the
"profit" from its business, in 1952, in relation to the notes, should
be the amount by which, in terms of Canadian dollars, the cost of payment was
reduced in that year. This represented the difference between the estimate of
the cost of payment as of the beginning of the year 1952 and the actual cost of
payment in that year.
To summarize my view it is that there would be no
"profit" at all in respect of the notes in the year 1952, save for the
fact that their value had to be estimated, under the "accrual" method
of accounting, in 1950 in order to determine mine the appellant's profit for
that year. Being a matter
of estimate, the valuation of the liability should continue
to be revised in each year thereafter until the year of actual payment. If the
"profit" for 1952 is to be the difference between an estimate and the
amount of actual payment, such profit in that year should be determined on the
basis: of the estimate at the beginning of that financial year.
It is now necessary to consider whether this conclusion is
contrary to the principles established by the decided cases. There does not
appear to be any decision which actually deals with this point, but reliance
was placed, in the Court below, on the views expressed in a number of
Some reliance was placed upon the decisions of this Court in
Eli Lilly & Co. (Canada) Limited v. The Minister of National Revenue, and Tip Top Tailors
Limited v. The Minister of National Revenue.
However, in both those cases, as the judgment below points out, the
question before the Court was as to whether certain profits resulting to the
taxpayer from fluctuations in the foreign exchange rate constituted capital
gains or taxable income. The point in issue now was never considered and,
because of that fact, I do not think that either case is of any real assistance
in determining, the issue in the present appeal. Similarly, I do not think that
cases such as Davies v. The Shell Company of China, Ltd., which involved like
issues, can aid materially in the present case.
Reference was made to J. P. Hall & Co. Ltd. v.
Commissioners of Inland Revenue.
In that case, the company had contracted, in March 1914, to supply electric
motors with control gear between July 1, 1914, and September 30, 1915, payment
to be made one month after delivery. In April 1914 it placed sub-contracts for
the control gear, but, owing to the war, deliveries of control gear by the
company to its purchaser were delayed and were, in fact, made between August
1914, and July 1916. Initially, the company, in its accounts, had credited the
sale price of the control gear as and when it was delivered. Subsequently,
however, it contended that, for the purposes of excess profits duty, the profit
from the purchase and sale of control gear should be
treated as arising in the accounting period in which the
contracts were made. It was held, contrary to the company's contention, that
the receipts in question were receipts of the accounting period in which the
deliveries of control gear were actually made.
In that case the accounts in question were not yet
receivable in the year in which the taxpayer sought to take them into income.
As Lord Sterndale said, at p. 155, in answer to the contention that the profit
on the transaction was ascertained and made on the completion of the contract:
"It seems to me the simple answer is it was neither ascertained nor made
at that time."
In that case the debts which the taxpayer sought to take
into account were not yet receivable. The issue was different from that which
arises here, where the liability is, admittedly, a current liability, taken
into account at an estimated figure, and where the question is as to the
propriety of subsequent revisions of that estimate in determining profits.
The Court below found an analogy between the present case
and two cases in which the taxpayer had sought to take into account future
anticipated losses as actual losses in a taxation year.
In Whimster & Co. v. The Commissioners of Inland
shipping company sought to include, as a loss in a particular year, an
allowance in respect of losses which it anticipated in future years, by reason
of a depression in the shipping business which had already set in. It was held
in that case that this was not a proper deduction in the period in question,
because the loss had not actually been incurred in that period.
In The Minister of National Revenue v. Consolidated Glass
this Court, the issue was as to whether a reduction in the value of shares
owned by the company, which it still retained, could be taken into account in
computing its undistributed income in accordance with s. 73A(1)(a) of
the Income Tax Act, 1948, the company having elected to be assessed and
to pay tax under s. 95A of that Act as enacted in 1950. This Court
decided that it could not be taken into account.
With respect, in my opinion, these cases are distinguishable
from the present case because the situation here is not one which involves a
question of anticipated future profits or losses. In the year 1951, when the
appellant revised the estimate of the cost of repaying its notes, it was not
doing so with a view to making an allowance in respect of anticipated profits
or losses of this kind in the future. It was revising its estimate of the
amount of a liability which it had actually incurred and taken into account in
1950. That liability had, in fact, reduced by the end of the year 1951, with the
result that, so far as that year's operations were concerned, its profit for
the year had increased by that amount.
The respondent cited in argument, among other authorities, Whitworth
Park Coal Co. Ltd. v. Inland Revenue Commissioners, and Gardner, Mountain
& D'Ambrumenil, Ltd. v. Inland Revenue Commissioners.
The first of these dealt with the question of the years in
which certain income payments, payable to the company, should be assessed. The
payments arose by virtue of the statutory provisions relating to the transfer
of assets from the company to the National Coal Board under the Coal
Industry Nationalisation Act, 1946. The issue was as to whether they were
assessable in the years in which they were actually paid, or whether they
should be assessed in those years in respect of which the payments became due.
The House of Lords held that they were assessable in the years in which the
payments were actually made, but it is clear that the important element in that
case was that the company had to be treated as a non-trader.
Viscount Simonds, at p. 713, says:
The word "income" appears to me to be the crucial
word, and it is not easy to say what it means. The word is not defined in the Act,
and I do not think that it can be defined. There are two different currents
of authority. It appears to me to be quite settled that, in computing a
trader's income, account must be taken of trading debts which have not yet been
received by the trader. The price of goods sold or services rendered is
included in the year's profit and loss account although that price has not yet been
paid. One reason may be that the price has already been earned and that it
would give a false picture to put the cost of producing the goods or rendering
the services into his accounts as an outgoing but to put nothing against that
until the price has been paid. Good accounting practice may require
some exceptions, I do not know, but the general principle
has long been recognised. And if in the end the price is not paid it can be
written off in a subsequent year as a bad debt.
But the position of an ordinary individual who has no trade
or profession is quite different. He does not make up a profit and loss
account. Sums paid to him are his income, perhaps subject to some deductions,
and it would be a great hardship to require him to pay tax on sums owing to him
but of which he cannot yet obtain payment.
He later goes on to say:
I certainly think that it would be wrong to hold now for the
first time that a non-trader to whom money is owing but who has not yet
received it must bring it into his income tax return and pay tax on it And for
this purpose I think that the company must be treated as a non-trader, because
the Butterley case ((1956) 2 All E.R. 197) makes it clear that these
payments are not trading receipts.
In Gardner, Mountain & D'Ambrumenil, Ltd. v. Inland
Revenue Commissioners the House of Lords reaffirmed the doctrine of the
relation back of trading receipts. The appellants were a firm of underwriting
agents who, under their contract of service, were entitled to commission in
respect of policies underwritten by them in any year, although the amount
thereof could not be quantified or paid to them until two years after the close
of the relevant year. It was held that the commission was earned in the year in
which the policies were underwritten and must appear in the company's accounts
as a trading receipt for such year; the assessment based on the original
accounts for that year had accordingly to be re-opened so as to bring in the
finally ascertained sum.
The present case involves liabilities on notes which were
properly taken into account in the years in which they were made. Neither the
amount of the liabilities in this case, nor the amount of the receipts in that
case, could, at the time they arose, be finally determined. But there has been
no suggestion by the respondent in the present case that the final
determination of liability should be taken into account in the years in which
the notes were issued. Had that been done in 1950 and 1951, the appellant's
income in those years would have been increased, but its income in 1952 would
have been even less than the appellant itself has admitted.
With respect, I do not reach the conclusion that the decided
authorities precluded the appellant from computing its "profits", in
relation to the notes, in the manner which it adopted—a method which, in
relation to trade liabilities
payable in U.S. funds other, than the notes, the respondent
has never challenged, but in which, according to the uncontradicted evidence,
the respondent had acquiesced, and which he had required.
In my opinion the appeal should be allowed and the
respondent's assessment for the year 1952 should be adjusted to eliminate the
respondent's inclusion in income of the amount of $431,072.68 and to include in
income the amount of $188,351.72. The appellant should have the costs of this
appeal and its costs in the Exchequer Court.
Abbott J. (dissenting):—The
facts—which are not in dispute—are fully stated in the reasons of the learned
trial judge and in those to be delivered by my brother Martland. I am in
agreement with the reasons and conclusions of the learned trial judge and there
is little I can usefully add to them.
During the period between August 25, 1950, and May 20, 1952,
appellant issued to its parent company, notes as evidence of indebtedness, in
the amount of 10,792,476.07 United States dollars. All these liabilities were
incurred for stock in trade or services. During the taxation year 1951
appellant made payments on account of its U.S. dollar indebtedness amounting to
$1,567,149.20 U.S., leaving a balance owing of $9,225,326.87 U.S. Since
appellant maintains its accounts in Canadian dollars, a Canadian dollar
equivalent of that amount, namely $9,461,455.29, had been taken into the
trading accounts of appellant as a trading liability in the respective years in
which the liabilities were incurred, and claimed and allowed a trading expense
in determining taxable income for those years.
In 1952 appellant was able to purchase or otherwise acquire
for $9,032,382.61 Canadian, the $9,225,326.87 U.S. required to discharge the
liability of $9,461,455.29 Canadian, which it had claimed and been allowed as a
deduction from gross income in arriving at its trading profits in the two
previous years. It thus realized in that year a gain of $431,072.68 Canadian
which on the principle laid down by this Court in the Eli Lilly &
Company case and the Tip Top Tailors case must be taken into the
computation of profit and loss for tax purposes. Put in another way, appellant
had received goods and services worth $9,461,455.29 Canadian, which, by
deferring payment until the exchange rate had moved substantially in its
favour, it was able to acquire
for $9,032,382.61 Canadian with a resulting profit of
$431,072.68. I agree with the learned trial judge that this exchange gain must
be taken into account in 1962, the year in which it became a reality.
The $9,461,455.21 Canadian, claimed as an expense in the
respective years in which the U.S. dollar liabilities were incurred, could not
be claimed as an expense in any other year, and the fallacy inherent in
appellant's submission is clearly pointed out by the learned trial judge in the
Let it be assumed that goods were purchased in the United
States at a time when U.S. funds were at a premium of only 3 per cent, that
notes similar to those above-mentioned were given in payment and that such
notes were still outstanding at the end of the following year, by which date
the premium on U.S. funds had risen to 10 per cent. In my view, the taxpayer in
such circumstances could not then successfully claim a deduction of an
additional 7 per cent as a further cost of goods purchased for the reason that
such an expense had not actually been incurred and was a mere estimate of
Particularly in the absence of a fixed exchange rate, a
liability incurred by a Canadian debtor in terms of a foreign currency must
always contain a contingent element and what the appellant did, in reality, in
revaluing its ILS. dollar liability at the end of each fiscal period, was
merely (1) to state from time to time in its balance sheet, a revised estimate
of the Canadian dollar equivalent of what it owed to its parent company in U.S.
dollars and (2) to write down the amount of that indebtedness as originally
entered in its books and treat the resulting "gain" as a capital
profit, apportioned over three years. The fact that appellant used the accrual
system of accounting in calculating its trading profits for each year had no
relevance to this purely bookkeeping operation. No doubt the entries made by
appellant in its books were proper from an accounting standpoint in order to
present from time to time, as accurate a balance sheet as possible, but in my
opinion they had no bearing upon the appellant's liability for income tax.
I would dismiss the appeal with costs.
Appeal allowed with costs, Abbott J. dissenting.
Solicitors for the appellant: Borden, Elliot, Kelley
& Palmer, Toronto.
Solicitor for the respondent: A. A. McGrory,