Supreme Court of Canada
Minister of National Revenue v. Atlantic Engine
Rebuilders Ltd.,  S.C.R. 477
The Minister of
National Revenue Appellant;
Rebuilders Limited Respondent
1966: December 9; 1967: May 23.
Present: Cartwright, Abbott, Martland,
Judson and Ritchie JJ.
ON APPEAL FROM THE EXCHEQUER COURT OF CANADA
Taxation—Income tax—Whether unredeemed
refundable deposits received from customers part of business income—Income Tax
Act, R.S.C. 1952, c. 148, ss. 12(1) (a), 85B.
The respondent company was in the business of
rebuilding automobile engines for sale to car dealers. The company required the
car dealers, on purchasing a rebuilt engine, to supply it with another
rebuildable engine as well as paying the invoice price. A dealer who did not
supply a rebuildable engine was required to pay a cash deposit, about three
times the market value of the used engine. This deposit was refundable when the
dealer supplied a rebuildable engine, which happened 96 per cent of the time.
The unredeemed deposits held by the respondent company at the end of 1958 were
added by the Minister to the respondent’s declared income for that year. The
Exchequer Court allowed the respondent’s appeal, and the Minister appealed to
and Judson JJ. dissenting): The appeal by the Minister should be
Cartwright, Martland and Ritchie JJ.: In stating what its profit was for the
year in question, the respondent could not truthfully have included these
unredeemed deposits. It knew that it might not be able to retain any part of
that sum and that the probabilities were that 96 per cent of it would be
returned to the depositors in the near future. The circumstance that the
company became the legal owner of the moneys deposited and that they did not
constitute a trust fund in its hands was irrelevant. There was no basis, having
regard to the realities of the situation, on which these deposits could
properly be treated as ordinary trading receipts of the respondent which it was
entitled to include in calculating its profits for the year. There was nothing
in the Income Tax Act requiring these deposits to be treated as profits
of the respondent.
Per Abbott and
Judson JJ., dissenting: The deposits were of an income nature arising in
the ordinary course of the respondent’s trading transactions. There was no
liability to refund until the rebuildable engine was actually delivered. The
probability that the taxpayer would be required to refund the greater portion
of the deposits does not permit their deduction. They would be deductible in
the year in which they were refunded. Furthermore the amount, shown as a
liability, was an amount transferred or credited to a reserve within the
provisions of s. 12(1) (e) of the Income Tax Act.
Revenu—Impôt sur le revenu—Dépôts reçus de
clients remboursables mais non rachetés font-ils partie du revenu de
l’entreprise—Loi de l’Impôt sur le Revenu, S.R.C. 1952, c. 148, arts. 12(1)(a),
Le commerce de la compagnie intimée
consistait dans la reconstruction de moteurs d’automobiles et leur vente à des
commerçants d’automobiles. La compagnie exigeait que les commerçants
fournissent, lorsqu’ils achetaient un moteur reconstruit, un autre moteur apte
à être reconstruit en plus de payer le prix de la facture. Un commerçant qui ne
pouvait pas fournir un moteur apte à être reconstruit était obligé de payer un
dépôt en argent, représentant à peu près trois fois la valeur marchande d’un
moteur usagé. Ce dépôt était remboursable lorsque le commerçant fournissait un
moteur apte à être reconstruit, ce qui se présentait dans 96 pour cent des
cas. Le Ministre a ajouté au revenu de la compagnie pour l’année 1958 le
montant des dépôts non rachetés qu’elle avait en mains à la fin de cette année.
La Cour de l’Echiquier a maintenu l’appel de la compagnie et le Ministre en
appela devant cette Cour.
du Ministre doit être rejeté, les Juges Abbott et Judson étant dissidents.
Cartwright, Martland et Ritchie: En déclarant quel était son profit pour
l’année en question, la compagnie intimée ne pouvait pas véridiquement inclure
ces dépôts non rachetés. Elle savait qu’elle pourrait ne pas être en mesure de
retenir aucune partie de cette somme et que les probabilités étaient que 96
pour cent de cette somme serait remis aux déposants. Le fait que la compagnie
était devenue le propriétaire légal des argents déposés et que ces argents ne
constituaient pas un fonds en fiducie entre ses mains n’avait aucune
pertinence. En face de la réalité de la situation, il n’y avait aucune base sur
laquelle ces dépôts pouvaient être considérés comme étant des reçus provenant
du commerce ordinaire de l’intimée et qu’elle avait droit d’inclure dans le
calcul de son profit pour l’année. Aucune disposition de la Loi de l’Impôt
sur le Revenu exige que ces dépôts soient traités comme étant des profits
entre les mains de l’intimée.
Abbott et Judson, dissidents: Les dépôts étaient de la nature d’un
revenu survenant dans le cours ordinaire des transactions commerciales de
l’intimée. Il n’y a aucune obligation de les retourner tant qu’un moteur apte à
être reconstruit ne soit actuellement délivré. La probabilité que le
contribuable serait obligé de retourner la majeure portion de ces dépôts ne
permet pas leur déduction. Ils étaient déductibles dans l’année où ils avaient
été retournés. De plus, le montant, tel qu’entré comme étant un passif, était
un montant transféré ou crédité à une réserve dans le sens de dispositions de
l’art. 12(1) (e) de la Loi de l’Impôt sur le Revenu.
APPEL d’un jugement du Juge Thurlow de la
Cour de l’Échiquier du Canada, en matière d’impôt sur le revenu. Appel rejeté, les Juges Abbott
et Judson étant dissidents.
APPEAL from a judgment of Thurlow J. of the
Exchequer Court of Canada, in an
income tax matter. Appeal dismissed, Abbott and Judson JJ. dissenting.
G.W. Ainslie, for the appellant.
George B. Cooper, for the respondent.
The judgment of Cartwright, Martland and Ritchie
JJ. was delivered by
CARTWRIGHT J.:—This is an appeal from a judgment2
of Thurlow J. pronounced on August 17, 1964, allowing the appeal of the
respondent from a re-assessment of income tax for the year 1958 in respect of a
sum of $38,213, representing the balance of amounts known in the respondent’s
business as “core deposits”, which the appellant in making the re‑assessments
included in the computation of the respondent’s income.
The relevant facts are fully set out in the
reasons of Thurlow J. and are sufficiently summarized in those of my brother
Judson; it is unnecessary to repeat them.
I have reached the conclusion that the appeal
Section 4 of the Income Tax Act provides
that, subject to the other provisions of Part I of the Act, income for a
taxation year from a business is the profit therefrom for the year.
In Sun Insurance Office v. Clark, a case in which the question for decision
was the amount of the profits arising from the appellant’s business, Earl
Loreburn L.C. spoke at page 454 of “the only rule of law that I know of,
namely, that the true gains are to be ascertained as nearly as it can be done”.
In Dominion Taxicab Association v. Minister
of National Revenue, it was
said in. the judgment of the majority of the Court:
It is well settled that in considering
whether a particular transaction brings a party within the terms of the Income
Tax Act its substance rather than its form is to be regarded.
The question of substance in this case appears
to me to be whether in stating what its profit was for the year the
respondent could truthfully have included the
sum in question. To me there seems to be only one answer, that it could not. It
knew that it might not be able to retain any part of that sum and that the
probabilities were that 96 per cent of it must be returned to the depositors in
the near future. The circumstance that the respondent became the legal owner of
the moneys deposited with it and that they did not constitute a trust fund in
its hands appears to me to be irrelevant; the same may be said of moneys
deposited by a customer in a Bank which form part of the Bank’s assets but not
of its profits. To treat these deposits as if they were ordinary trading
receipts of the respondent would be to disregard all the realities of the
The grounds upon which Thurlow J. based his decision
appear to me to be supported by the reasoning of the majority in this Court in Dominion
Taxicab Association v. Minister of National Revenue, supra, at p. 85,
where it is stated that as each deposit was received by the Association and
became a part of its assets there arose a corresponding contingent liability
equal in amount. This was one of the grounds on which it was held that the
deposits formed no part of the profits of the Association. Since that decision
there has been no substantial change in the wording of the sections of the
Income Tax Act on which the appellant relies.
What appears to me to be decisive is the fact
that there is no basis, having regard to the realities of the situation, on
which these deposits can properly be treated as ordinary trading receipts of
the respondent which it was entitled to include in calculating its profits for
Of course it would be within the power of
Parliament to enact that a receipt which could not on any principle of sound
accounting be regarded as forming part of a company’s profit should none the
less be treated as profit for the purposes of taxation; but to bring about such
a result clear and intractable words would be necessary. In my opinion, nothing
in the Income Tax Act requires these deposits to be treated as profits
of the respondent.
The result brought about by the judgment of
Thurlow J. is that in the year in question the respondent will be taxed on its
true profit for that year. If in the following year, as seems probable, as to a
small portion of the said sum of $38,213, the respondent ceases to be under
return it to the depositor or depositors, such
portion will form part of the profit in that year and once again the respondent
will be taxed on its true profit. I do not think that such a result should be
I would dismiss the appeal with costs.
The judgment of Abbott and Judson JJ. was
JUDSON J. (dissenting):—The Minister, in
assessing the respondent’s income for its 1958 taxation year, included in
income the sum of $38,213 shown on its balance sheet as a current liability
entitled “Customers’ Deposits”. The Exchequer Court allowed an appeal from this assessment and
the Minister appeals now to this Court.
The company was in the business of rebuilding
Ford engines. It sold these to Ford dealers, but in order to stay in business,
it needed a regular supply of rebuildable engines. Therefore, when it sold an
engine to a dealer, it required that dealer to supply it with another
rebuildable engine of the same model. If the dealer did not supply the
rebuildable engine, he had to pay a deposit to be held by the company until he
did supply such an engine. When he did, he got his deposit back. It is these
unredeemed deposits held by the company to the amount of $38,213 which the
Minister has assessed for income. The amount of the deposit was usually about
three times the market value of the old used engine. It was deliberately set at
this high figure in order to ensure that an old engine would be delivered as
soon as possible.
Other details of the arrangement between the
company and its customers were that the engine on a visual inspection had to be
rebuildable. If parts of the engine were missing or if there were defects which
were visual or apparent on inspection, the deposit was not refunded in full but
was reduced. If the engine on a visual inspection was not rebuildable, the
dealer only got the scrap value of the engine as a credit.
The company did not keep these deposits separate
from other monies received by it from its sale of rebuilt engines. There is no
question here of any trust attaching to the deposit monies. It was argued
before the Tax Appeal Board
in another case that there was such a trust.
This was rejected and no appeal was ever taken from this decision. Western
Engine Works Limited v. Minister of National Revenue, In my opinion, this case was correctly
The learned trial judge in setting aside the
assessment held that the company was entitled to a deduction in respect of its
liability to refund the deposits, that this liability was not a contingent
liability, and that the amount necessary to provide for their retirement was
not a reserve, contingent amount, or sinking fund within the prohibition of
s. 12(1) (e) of the Income Tax Act. The liability, he said,
was not one that arose on delivery of the engine but existed from the time of
receipt of the deposit. It became due and payable when the engine was actually
The evidence seems to show that in most cases
only a short time elapsed between the payment of the deposit and its redemption
by the delivery of a rebuildable engine. It also shows that about 96 per cent
of the deposits were redeemed.
The judgment of the Exchequer Court is obviously
founded upon the finding that the deposits were of an income nature arising in
the ordinary course of the company’s trading transactions. With this, I agree.
In this Court, the Crown has two points in its
appeal based on ss. 12(1) (a) and 12(1) (e) of the Act,
(1) that the amounts necessary to provide for
the retirement of these liabilities which at the end of the year had “not
become due or recoverable by the dealer” were neither outlays or expenses made
or incurred during the year (s. 12(1)(a)), and
(2) that such amounts would be in respect of a
reserve or contingent account and, as such, prohibited by S.12(1)(e).
Sections 12(1)(a) and 12(1)(e)
12. (1) In computing income, no deduction
shall be made in respect of
(a) an outlay or expense except to
the extent that it was made or incurred by the taxpayer for the purpose of
gaining or producing income from property or a business of the taxpayer,
(e) an amount transferred or
credited to a reserve, contingent account or sinking fund except as expressly
permitted by this Part.
The Minister’s position is that unless there is
an express provision in the Act, the taxpayer is prohibited by these paragraphs
from making these deductions. He says there are no such other provisions.
It is obvious that there was no outlay or
expense made until the deposit was refunded. But the judgment under appeal
holds that the outlay or expense was incurred when the deposit was made because
the liability to refund was immediate and not contingent. In this I think there
is error. There was no liability to refund until the rebuildable engine was
actually delivered. The taxpayer was not definitely committed in the year of
income to make this disbursement or outlay or expense until the rebuildable
engine was delivered. And even then, as I have pointed out above, there were
several potential adjustments to be made depending on the state of the
rebuildable engine as disclosed by a visual inspection.
The probability, in this case 96 per cent, that
the taxpayer would be required to refund the greater portion of the deposits
does not permit their deduction. They are deductible in the year in which they
I also think that the company fails under
s. 12(1) (e). This amount, shown as a liability, is an amount
transferred or credited to a reserve. It may be good commercial or accountancy
practice to make provision for these liabilities but this is subject to the
express provisions of the Act and the Act does make an express provision here.
The main argument of the taxpayer in this case
was directed to the nature of the receipt. He argued that the consideration for
the sale of a rebuilt engine is the catalogue price plus the delivery of a
rebuildable engine of the same model, and that the deposit is a refundable
deposit which at the time of its receipt is not the absolute property of the
respondent. I cannot accept this submission. No one else had any property
interest in the deposit except the taxpayer. It became part of his funds. It
was not a trust. Its receipt merely gave rise to an obligation to repay when
something further was done by the person who made the deposit. There was no
immediate liability to repay. These deposits are chargeable against income for
the year when they are refunded.
I do not think that s. 85B requires any
consideration for the determination of this appeal.
Nor do I think that Dominion Taxicab
Association v. Minister of National Revenue
governs this case. The word “deposit” is one of highly variable meaning. Its
mere use in a contract determines nothing without an analysis of the rights and
obligations created. In the Taxicab case it was the price of membership in the
Association. It was transferable and interest bearing under certain
conditions., The conclusion in this Court was that it did not become the absolute
property of the Association. Rand J. held that it was a contribution to the
capital of the Association and not an income receipt. On both grounds the
present case is distinguishable.
The appeal should be allowed with costs and the
assessment of the Minister for the 1958 taxation year restored.
Appeal dismissed with costs, ABBOTT and JUDSON JJ.
Solicitor for the appellant: E.A.
Solicitors for the respondent: Friel
& Cooper, Moncton.