Hadler Turkey Farms Inc. v. The Queen, 86 DTC 6013, [1986] 1 CTC 81 (FCTD)

The Associate Chief Justice:—This appeal from a judgment of the Tax Review Board dated March 6, 1981, dismissing the plaintiff's appeal in respect of its 1973, 1974 and 1975 taxation years, came on for hearing at London, Ontario, on June 3, 1985.

The facts are not in dispute. The plaintiff is a farming corporation carrying on business from Glencoe, Ontario. By notices of reassessment dated June 17, 1977, the Minister reassessed the plaintiff for its 1973, 1974 and 1975 taxation years. During those years, the plaintiff determined its income and taxable income using the accrual method of accounting. On receipt of the reassessments, it sought to elect under section 28 of the Income Tax Act, R.S.C. 1952 as amended by S.C. 1970-71-72, c. 63, to determine its income and taxable income using the cash method of accounting (the result being nil taxable income for all three years). The Minister took the position that the election under section 28 is not available to the plaintiff, and the Tax Review Board agreed.

The first question to be dealt with is whether the reassessment by the Minister creates an ongoing process and thereby keeps the matter open in such a way as to give the taxpayer all options that were available at the time of filing the initial returns. Not surprisingly, this point has been dealt with before and I consider myself bound by the unequivocal language of the Supreme Court of Canada in Montreal Trust Co. (Lodestar Drilling Co. Ltd.)

V. M.N.R., [1962] C.T.C. 418; 62 D.T.C. 1242. In that portion of his dissenting reasons concurred in by the majority of the Court, Judson, J. states:

When the Minister re-assessed in April 1955, he had before him only the original return and the first amended return. He was under no compulsion to act on the second amended return filed after the notice of re-assessment. Both the Income Tax Appeal Board and the Exchequer Court have so held. The mere fact of a re-assessment in 1955 does not open the matter of taxability at large and compel the Minister to re-assess in accordance with an amended return made out of time . .. Under this legislation, if a taxpayer wishes to carry back business losses, he must file his amended return within the statutory time limit. Otherwise the Minister cannot be compelled to accept the amended return. [Emphasis added.]

Accordingly, I must conclude that the reassessments by the Minister in 1977 do not open the entire question of taxability for the plaintiff's 1973, 1974 and 1975 taxation years. It is, therefore, not open to the plaintiff to file new or amended returns on the basis of the reassessments.

The issue then becomes whether, given the absence of any time period specified in section 28, the taxpayer is entitled to exercise the option to file on the cash basis, at any time.

28.(1) For the purpose of computing the income of a taxpayer for a taxation year from a farming business, the income from the business for that year may, if the taxpayer so elects, be computed in accordance with a method (in this section referred to as the “cash” method) whereby the income therefrom for that year shall be deemed to be an amount equal to the aggregate of

(a) all amounts that

(i) were received in the year, or are deemed by this Act to have been

received in the year, in the course of carrying on the business, and

(ii) were in payment of or on account of an amount that would, if the income from the business were not computed in accordance with the cash method, be included in computing income therefrom for that or any other year, and

(b) such amount, if any, as may be specified by the taxpayer in respect of the business in his return of income under this Part for the year, not exceeding the fair market value at the end of the year of livestock (other than animals included in his basic herd within the meaning assigned by section 29) owned by him at that time in connection with the business

minus the aggregate of

(c) all amounts that

(i) were paid in the year, or are deemed by this Act to have been paid in the year, in the course of carrying on the business, and

(ii) were in payment of or on account of an amount that would, if the income from the business were not computed in accordance with the cash method, be deductible in computing income therefrom for that or any other year, and

(d) the amount, if any, specified by the taxpayer in respect of the business in accordance with paragraph (b) in his return of income under this Part filed for the immediately preceding taxation years;

and minus any deductions for the year permitted by paragraphs 20(1)(a) and (b)*. [1]

The income tax system is based on annual self-assessment.

150. (1) A return of the income for each taxation year in the case of a corporation and for each taxation year for which a tax is payable in the case of an individual shall, without notice or demand therefor, be filed with the Minister in prescribed form and containing prescribed information.

Once a return is filed, it is the Minister’s responsibility to examine it, and to assess the tax for the year, any interest or penalties that may be payable and any refund to which the taxpayer is entitled (section 152). Here, the plaintiff filed returns for the 1973, 1974 and 1975 taxation years in which it calculated income and taxable income using the accrual method of accounting. In my view, it is consistent with the specific language of section 28 and with the general scheme of the Act to interpret section 28 as giving to this taxpayer the open-ended option to switch from the accrual method to the cash method. The timing of the exercise of the option remains in the hands of the taxpayer without the necessity of the Minister’s approval. I would, however, consider it redundant were the section to specify a particular time at which the election can be made since, obviously, it can only be made with the filing of the return. It also seems to me to be entirely consistent with the intent of the section and the intent of the Act that once a taxpayer files his return on the accrual basis, the cash option no longer exists for that taxation year.

Finally, it seems equally consistent that once the taxpayer elects to file a return on a cash basis under subsection 28(1), he must continue to do so and can only return to the accrual method with the consent of the Minister, as set out in subsection 28(3):

28. (3) Where a taxpayer has filed a return of income under this Part for a taxation year wherein his income for that year from a farming or fishing business has been computed in accordance with the cash method, income from the business for each subsequent taxation year shall, subject to the other provisions of this Part, be computed in accordance with that method unless the taxpayer, with the concurrence of the Minister and upon such terms and conditions as are specified by the Minister, adopts some other method.

I, therefore, conclude that Hadley Turkey Farms, in filing its original returns for the 1973, 1974 and 1975 taxation years, lost any option to elect to report income on a cash basis for those taxation years. On the basis of the decision of the Supreme Court of Canada in Montreal Trust Co. (Lodestar Driling Co. Ltd.) v. M.N.R., the reassessments issued by the Minister in 1977 do not resurrect that option to elect to report on a cash basis. The Minister's reassessment is, therefore, correct and the appeal must fail. The action is dismissed with costs.

Appeal dismissed.