Dunblane Estates Ltd. v. MNR, 89 DTC 137, [1989] 1 CTC 2248 (TCC)

Kempo, T.CJ.: —

Issues

The appeals of Dunblane Estates Ltd. concern its 1982 and 1983 taxation years. The appellant owns and operates a private nursing home known as Como Lake Private Hospital which houses and whose employees provide full-time nursing care to some 88 patient-residents who are aged and/or almost totally disabled.

The core issue under appeal for the 1983 taxation year concerned the deductibility of year-end unused and accrued sick leave credits for its employees which the respondent had disallowed by application of the provisions of paragraphs 18(1)(a) and 18(1)(e) of the Income Tax Act (the "Act"). The respondent has pleaded also the provisions of subsection 78(3) of the Act.

The appellant has claimed, in the alternative, that the Minister cannot add back to its 1983 income more than it had deducted in that year which, in this case, was $32,099.

The 1982 taxation year was under appeal because the Minister had reduced the non-capital loss carry back to 1982 to nil.

Facts

Mr. Garry Bell gave evidence on behalf of the appellant whose fiscal year- end date for 1982 and 1983 was August 31. He has been the hospital administrator since the beginning of 1983 and, as he had explained, he literally ran all of its phases including its general administration, labour relations and financial matters. The operation was heavily labour intensive and derived its chief source of revenue from its patient-residents (20 per cent, now approximately one-third) and from the provincial government (80 per cent, now approximately two-thirds). The core number of employees has remained constant in the range of 65 to 68 persons, with additions being required from time to time for relief purposes. There were regular full-time employees as well as regular part-time ones, and it is because of the latter that the otherwise day and one-half per month sick time entitlement was instead calculated on an hourly basis.

All such employees were covered by collective agreements with the Hospital Employees' Union, Local 180. One contract period according to the pleadings was from April 1, 1980 to December 31, 1981 but, according to Mr. Bell, it had expired on March 31, 1982, Following its expiration, negotiations produced successive verbal and written draft agreements and, emanating from these events, a final written draft comprehensive agreement had been forwarded to the appellant under covering letter dated March 7, 1984 which referred to an earlier agreement of March 2, 1984 under which miscellaneous changes were made of a housekeeping nature. Following what Mr. Bell described as the union’s usual and expected signing delay practice, it was fully executed by them early in 1986 just prior to its expiration. The appellant had considered itself bound by its March 2, 1984 agreement respecting retroactive wage increases and, until then, had followed what was described as a usual practice to continue as though the previous and expired union agreement had remained in full force and effect.

The earlier agreement had called for a 156-day ceiling of sick-day accumulation credits, which translated to approximately 1,248 hours. Mr. Bell said that no employee had ever reached that amount at any time and that its occurrence, up to 1984, was extremely unlikely. This ceiling amount was removed in the 1982 to 1986 union agreement with no substitutions. The sick leave conditions and entitlements arising from both contracts were and remained essentially the same. Those that are material to the case at hand are taken from the 1982-1986 agreement (Exhibit A-1, unsigned) and they read as follows:

Exhibit A-1

6.01. For the first three (3) calendar months of continuous service with the Employer, an employee shall be a probationary employee.

6.02 During the three-month probationary period, an employee may be terminated. If it is shown on behalf of the employee that the termination was not for just and reasonable cause, the employee will be reinstated.

Upon completion of the probationary period, the initial date of employment shall be the anniversary date of the employee for the purpose of determining perquisites and seniority.

6.03 Any new employee who, within three (3) months previous to being hired by the Employer worked for another Employer where the Hospital Employees' Union, Local 180, is certified, shall be required to serve a probationary period in accordance with Section 6.01. Upon completion of the probationary period, the employee shall be credited with portable benefits as defined below.

(cc) Sick Leave

The employee shall be credited with any unused accumulation of sick leave from his/her previous employment, and shall be entitled to sick leave in accordance with the provision of Article XI, Section 11.05 to 11.17 inclusive.

9.22 Where an employee is sick during any period of vacation and can produce a medical certificate to cover the period in question, sick leave credits shall apply and the period of vacation displaced shall be rescheduled at a time mutually arranged between the employee and the supervisor. Such arrangement shall not displace any other employee's scheduled vacation.

11.05 The following sick leave provisions may be varied by mutual agreement between the Union and the Employer in the event further U.I.C. premium reductions for eligible sick leave plans are attainable under the Unemployment Insurance Act. Sick leave credits with pay shall be granted on the basis of one and a half (1'/2) days per month.

11.06 Upon completion of the three (3) months probationary period, employees shall have sick leave benefits paid retroactive to their starting date to the extent of the accumulated sick leave credits earned up to the date of return from illness.

11.07 Sick leave with pay is only payable because of sickness. Where a pattern of consistent or frequent absence from work is developing, employees who are absent from duty because of sickness may be required to prove sickness. Failure to meet this requirement can be cause for disciplinary action. Repeated failure to meet this requirement can lead to dismissal. The Employer shall pay any amounts paid by the employee to a medical doctor to prove sickness. Employees must notify the Employer as promptly as possible of any absence from duty because of sickness and employees must notify the Employer prior to their return.

11.08 Sick leave pay shall be paid for the one day or less not covered by the Workers' Compensation Act when the employee has accumulated sick leave credits.

11.09 An employee shall be granted reasonable injury on duty leave with pay if it is determined by the Provincial Workers' Compensation Board that he/she is unable to perform his/her duties and the employee agrees to pay the Employer any amount received by him/her for loss of wages in settlement of any claim he/she may have in respect of such compensable injury or accident.

When an employee is granted sick leave with pay and injury-on-duty leave is subsequently approved for the same period, it shall be considered, for the purpose of the record of sick leave credits, that the employee was not granted sick leave with pay.

11.10 Employees qualifying for Workers' Compensation coverage shall not have their employment terminated during the compensable period.

11.11 Sick leave pay shall be computed on the basis of scheduled work days and all claims will be paid on this basis.

11.12 Sick leave payments will be made according to actual time off.

11.13 An employee must apply for sick leave pay to cover periods of actual time lost from work owing to sickness or accident.

Where medical and/or dental appointments cannot be scheduled outside the employees' working hours, sick leave with pay shall be granted. Except in emergencies the employee will give as much advance notice as possible.

11.14 Employees with more than (1) year's service who are off because of sickness or accident shall, at the expiration of paid sick benefits, be continued on the payroll under the heading of Leave of Absence Without Pay for a period of not less than one (1) month plus an additional one (1) month for each additional three (3) years of service, or portion thereof, beyond the first year of service.

Further Leave of Absence Without Pay shall be granted upon written request provided that the request is reasonable. The Employer may require the employee to prove sickness or incapacity and provide a medical opinion as to the expected date of return to work. The Employer's decision for further Leave of Absence Without Pay shall be in writing.

If no written report is received by the Employer by the end of the Leave of Absence Without Pay explaining the Employee's condition, the employee's services shall be terminated.

Employees with less than one (1) year's service who are off because of sickness or accident shall be continued on the payroll under the heading of "Leave of Absence Without Pay" for the period of seven (7) work days. Further Leave of Absence periods of seven (7) work days without pay may be granted upon written request. These written requests shall be acknowledged in writing. If no written report is received by the Employer within the seven (7) work days from such an employee explaining his/her condition, he/she shall be removed from the payroll.

11.15 The employer will inform all employees at least once each year of the sick leave credits accumulated and will make the information available to an employee on request.

11.16 All sick leave credits are cancelled when an employee terminates his/her employment except when an employee transfers to another health care institution in accordance with Article VI, Section 6.03, and except as provided in Section 11.17 below.

Cash Pay-Out of Unused Sick Leave Credits

11.17 Upon termination which shall not include a discharge for cause, regular full- time and regular part-time employees shall be paid in cash an amount equivalent to fifty percent (50%) of unused sick leave credits calculated at the employee's rate of pay on termination. Employees may use accumulated sick leave credits for the purpose of necessary attendance in the home of an employee resulting from an illness or accident to the employee's spouse, infant children, or other dependents in the home.

The Employer shall be entitled to satisfactory proof that the employee's attendance in the home was necessary.

Sick leave credits used for this purpose may be re-accumulated in the calendar year in which they are taken. With the permission of the Employer, which shall not be unreasonably withheld, an employee may borrow up to five (5) sick leave days for the purpose of this clause.

11.42 A part-time employee shall receive the same perquisites, on a proportionate basis, as granted a full-time employee, including:

(c) Sick Leave

Entitled to sick leave credits as set out in Section 11.05 or a proportionate amount depending on time worked. All sick leave credits will be paid in conformity with Article XI.

14.01 This Agreement shall be in effect from January 1, until March 31, 1986 and shall continue automatically from year to year thereafter unless either Party notifies the other in writing within the four-month period prior to the expiration date that it desires to amend or terminate this Agreement.

Retroactivity

14.02 Employees will receive a lump sum payment in the amount of $50.00 per month for each of the seven months January to July, 1982. Each full-time employee will be entitled to retroactivity only to the extent that he/she was on staff during the seven-month period aforesaid. With respect to part-time employees, the $50.00 per month in the form of a lump sum payment will be proportionate to time worked. As for casual employees, the proportion of lump sum payment will be on a cents-per-hour worked basis.

The payment of the above lump sum amount shall be made in the next pay period following March 2, 1984.

Payment of the retroactive wage increase effective August 1, 1982, shall be made in three payments over April and May 1984. The last of these three payments shall be paid no later than the last pay day in May 1984.

In summary then, and pursuant to their written request, an employee could claim against his/her accrued and unused sick leave credits at any time while employed provided they had been ill, that a family illness made home attendance necessary, on termination of employment or on transfer to another health care institution. Apparently the latter event had not happened, the choice being resignation with the requested cash pay-out, if any, in hand.

No termination for cause, which could eliminate all remaining accrued entitlements, had ever successfully transpired. Rather, because of the costs and uncertainties associated with compulsory arbitrations, settlements followed by resignations were negotiated which inevitably had included the 50 per cent cash pay-outs of the sick leave accrued.

If the employee wanted to gain the benefit of a sick leave credit, a written claim form had to be submitted. The employer, appellant, could not unilaterally compel the employee to take the benefit and it was paid or credited in the accounts following receipt of the claim. Mr. Bell had set up detailed records, starting January 1, 1983, to verify each employee's accrual credit. A sample of this record keeping was introduced as Exhibit A-3. The name of each employee and their earned accrued balance forward entitlement, after subtraction for any time used, was entered every second month for the first part of the year and then quarterly thereafter. According to a sick leave accrual general ledger which had been kept, and introduced as Exhibit A-6, following two February 28, 1983 composite entries, monthly postings had been entered as to sick leave earned and as to those paid out commencing on March 31, 1983.

On August 31, 1983, an estimated year-end adjusting figure of $13,326 was entered to reflect anticipated retroactive wage increases back to January 1, 1982. This was said to have been a catch-up type of adjustment because any pay-out of sick leave entitlements would have to be calculated on the then current rate of pay. Mr. Bell conceded that at the 1983 year-end the exact time or times that any sick leave entitlements claimed in the future would not then be known, nor would the exact future amount payable be known because the then wage rate would also be unknown. He was uncertain if any amount would be payable in the event of the death of an employee.

Mr. Bell had prepared, for purposes of this litigation, a summary of sick leave accruals and payments. The information in Exhibit A-4, Schedules A to E, is material and is therefore reproduced herewith, but in chronological order as to date:

Exhibit A-4

Schedule E

Estimate of Summary of Sick Leave For The Twelve Months To August 31 , 1982 Schedule C

Sick Leave Fund (General Ledger Balance)		84,871.50
August 31/81
Estimate of Additions (Accruals) to Fund
Total 1982 Audited Worker's Compensation Payroll
Including Vacation and Sick Leave Paid	$1,075,400.00
Accrual at 6.9% for twelve months		74,203.00
		159,074.50
Estimate of Payments from Fund		47,838.50
Sick Leave Fund (General Ledger Balance)
August 31/82		111,236.00
Estimated Payout as a Percentage of Accrual		64
Schedule D
For the Six Months of February 28 , 1983
Sick Leave Fund (General Ledger Balance)		111,236.00
August 31/82
Estimate of Additions (Accruals) to Fund
Total 1982 Audited Worker's Compensation Payroll
Including Vacation and Sick Leave Paid	$1,075,400.00
Accrual at 6.9% for twelve months	74,203.00
Accrual at 6.9% for six months		37,101.00
		148,337.00
Estimate of Payments from Fund		27,121.00
Sick Leave Fund (General Ledger Balance)
February 28/83		121,216.00
Estimated Payout as a Percentage of Accrual		73

For Six Months to August 31 , 1983

Sick Leave Fund (General Ledger Balance)

February 28/83	121,216.00
Additions (Accruals) to Fund
March 1/83 to August 31/83	35,757.89
Payments from Fund
March 1/83 to August 31/83	26,964.85
Net Increase in Fund	8,793.04
Special Year End Accrual to Gross Up Account
To Reflect Increases Retroactive to
January 1 , 1982	13,326 00
Sick Leave Fund (General Ledger Balance)
August 31/83	143,335.04
Payout as a Percentage of Accrual	75

Schedule B

For Seven Months to March 31 , 1984

Sick Leave Fund (General Ledger Balance)

It is to be noted that Schedules D and C together make up the 1983 fiscal year and that its reporting differences were due to a change of accounting methods occasioned by Mr. Bell’s monthly posting system as previously mentioned that is shown in the general ledger, Exhibit A-6. Schedule B was for a seven-month period because of a change of fiscal year-end to 31 March which could have tended to inflate the real average percentage pay-out.

As to the make-up of these schedules, Mr. Bell said that by the time he had assumed full responsibility of the hospital's affairs on January 1, 1983, he had already attempted to bring the sick leave record keeping matters in order and that the August 31, 1981 closing balance of $84, 871 on Schedule E was taken as an audited amount from the general ledger and that he had assumed its accuracy. Further, with respect to the "estimates" shown in Schedules E and D, he said that they had been based on the Workers' Compensation Payroll which was extremely good as to accuracy, and that the 6.9 per cent was merely a mathematical calculation premised on the normal amount of hours variance as to an exact preciseness would have been miniscule.

Accordingly, it would appear that Mr. Bell’s record entries up to February 28, 1983 had been premised on an assumed opening balance and on the estimates as shown and explained and that it was only as of January of 1983 that detailed record keeping, as previously described and identified in Exhibit A-3, had been implemented.

When taken with the information provided in letter form marked Exhibit A-5, and the summary contained in Exhibit A-4, the following summation of the sick leave accruals and payments is evident:

This confirms that, notwithstanding an average 75 per cent pay-out rate calculated on an annual accrued/pay-out basis, the accrued liability was increasing.

Mr. Bell testified that after the 1983 year-end 22 people, or approximately one-third of the appellant's labour force, had terminated their employment and had either fully used up their entitlements or had been paid out sick leave at 50 per cent accumulated to termination. In the latter situation, the remaining 50 per cent would have been added back into income for the year of the pay-out. The thrust of his testimony was that none of the accruals would escape tax because all of the earned/accrued sick leave entitlements would have been paid out as a certainty, but that only the time itself was uncertain. He acknowledged that with an average 75 per cent pay-out the appellant may never have had to pay out the 25 per cent remaining balance, but that in any event it would in due course have to be brought back into income.

The parties by their counsel have admitted that for the purposes of this appeal, the recording of sick leave credits on an accrued basis in the August 31, 1982 and August 31, 1983 financial statements of the appellant was in accordance with generally accepted accounting principles.

In the reassessment for the 1983 taxation year as confirmed by the respondent's auditor, Mr. Ranjit Cambo, who is a chartered accountant and who had audited or examined the appellant's records, the amount of $143,335 had been added to the appellant's income for that year on the basis and premise that that sum had represented a contingent liability, the deduction of which was prohibited by paragraph 18(1 )(e) of the Act. Apparently the reason for the add-back being in that particular amount was due to the appellant's accounting methodology as taken from their 1982 year-end financial statement which he assumed had continued through to the 1983 year- end.

In the appellant’s balance sheet for its 1982 year, its stated current liability was analyzed by Mr. Cambo (Exhibit R-3) and it was shown to have included a sick leave accrual amount. By his analysis of the adjusting entries (Exhibit R-5) which had corresponded to an August 31, 1982 journal entry “J E A" shown on the Exhibit A-6 sick leave general ledger, the 1981 year-end amount had been debited or removed from the sick leave accrual statement which effectively had increased annual income by that amount. Concurrently the 1982 year-end amount was then credited to sick leave accruals which effectively reduced the income for the year by that amount. The netted-out amount would represent the actual deduction that had been expensed for the 1982 year.

Assuming that the same methodology had been utilized and would apply for the 1983 year-end, Mr. Cambo therefore disallowed the entire 1983 year- end sick leave fund balance of $143,335, which had purportedly reduced income by that amount, and he added it back to income. He admitted that, for the 1983 year, he had not analyzed two large mid-year adjusting entries, that is the two February 28, 1983 composite entries earlier referred to, and that each could have been a composite entry with the netting out amount only having been credited to payroll expense. As mentioned earlier, Mr. Bell had initiated a monthly posting system commencing January 1, 1983 in the sick leave general ledger account and, except for the retroactive wage adjustment entry, no composite 1983 year-end adjustment appears on the sick leave general ledger as had been done in the previous years.

Mr. Cambo also stated that vacation pay accruals had been allowed because of certainty of amount and pay-out in a short-time period, that the $143,335 itself had not created a new liability and that even if composite adjustments had been employed in 1983, the netted-out amount and the net expensed amount should have been the same. Mr. Bell had testified that the $143,335 amount was in the liability shown on the 1983 balance sheet; but he was uncertain as to whether it had been netted-out in the expense statement.

Analysis

The essential issue here involves the determination of whether the amount of the 1983 year-end sick leave accrual by the appellant was a liability or expense incurred under paragraph 18(1)(a) of the Act and whether its deductibility would be precluded by application of paragraph 18(1)(e) thereof because that liability was contingent in nature. The other issues raised were subsidiary in nature and will be dealt with later.

The issues taken in this case are essentially those that had been advanced in the case of Samuel F. Investments Ltd. v. M.N.R., [1988] 1 C.T.C. 2181; 88 D.T.C. 1106. In considering whether the declared bonus was a liability that was contingent in nature Associate Chief Judge Christie, at page 2184 (D.T.C. 1108), said:

My understanding is that a liability to make a payment is contingent if the terms of its creation include uncertainty in respect of any of these three things: (1) whether the payment will be made; (2) the amount payable; or (3) the time by which payment shall be made. If there is certainty regarding the three matters just enumerated and time of payment is deferred it will still be a real liability, but in the nature of a future obligation.

He went on to note, analyze and consider the authorities relied upon, the bulk of which have been raised in the case at bar: these include Winter et al. v. Inland Revenue Commissioners, [1961] 3 All E.R. 855; [1963] A.C. 235 which principles had been approved and adopted into Canadian law in the cases of Cummings v. The Queen,[1981] C.T.C. 285; 81 D.T.C. 5207 (F.C.A.), Harlequin Enterprises Ltd. v. The Queen, [1974] C.T.C. 838; 74 D.T.C. 6634 (F.C.T.D.); [1977] C.T.C. 208; 77 D.T.C. 5164 (F.C.A.) and Mandel v. The Queen, [1978] 1 F.C. 560; [1978] C.T.C. 780; 78 D.T.C. 6518 (F.C.A.); [1980] S.C.R. 318; [1980] C.T.C. 130; 80 D.T.C. 6148.

An examination of the above case law, and of those mentioned hereafter, indicates that the facts of the case must be examined very carefully as they are usually the ultimate decisive factor in each case. For consideration in this case are the following matters:

(1) The genesis and obligation to pay sick leave entitlements arose out of a union contract which had formally expired by 1982 but which had been continued according to practice and perhaps under the terms of the expired one, which was not in evidence. Negotiations of concern here had centred around pay rates, the substance of the sick leave entitlements being left essentially untouched which were continued in their old form in the 1982-1986 signed agreement.

(2) The employee must apply or make a claim for sick leave pay to cover periods of actual time lost from work.

(3) The employee must have been sick or their attendance must have been necessary in the home due to a family illness or accident.

(4) All sick leave credits were cancelled when an employee terminated his/ her employment except on a transfer and except where such termination was not for cause, and in its place arose an entitlement to a 50% cash equivalency on the unused sick leave credits, calculated at the then current pay rate.

(5) The invocation of termination for cause was not a realistic course to be taken by this appellant.

(6) Liability to pay on the death of an employee was uncertain.

(7) There were no time limits or ceiling amounts.

(8) The precise time for payment and its precise amount were unknown at year-end.

In the case of TNT Canada Inc. v. The Queen, [1988] 2 C.T.C. 91; 88 D.T.C. 6334 (F.C.T.D.) Mr. Justice Cullen said that, should it be concluded that the obligation in question was an expense under the provision of paragraph 18(1)(a) of the Act under the well-known principles of Royal Trust Co. v. M.N.R., [1956-60] Ex. C.R. 70; [1957] C.T.C. 32; 57 D.T.C. 1055, he must still deal with its alleged contingency and he too examined all of the authorities previously outlined. At page 96 (D.T.C. 6337) he said:

. . . what must be determined here is whether "the thing”, i.e. the liability to pay . . . was "contingent", in other words dependent upon an event which may or may not occur.

In the case at hand "the thing” was indeed dependent upon a claim being advanced, and it was this factor that contributed to the disallowance in Harlequin Enterprises, supra, and in Sears Canada Inc. v. The Queen, [1986] 2 C.T.C. 80 at 86; 86 D.T.C. 6304 (F.C.T.D.) at 6308.

In The Queen v. Burnco Industries Ltd., [1984] C.T.C. 337; 84 D.T.C. 6348 (F.C.A.) it was said [at page 337]:

. . . an expense, Within the meaning of paragraph 18(1)(a) of the Income Tax Act, is an obligation to pay a sum of money. An expense cannot be said to be incurred by a taxpayer who is under no obligation to pay money to anyone. . . . [A]n obligation to do something which may in the future entail the necessity of paying money is not an expense.

In Meteor Homes Ltd. v. M.N.R., [1960] C.T.C. 419; 61 D.T.C. 1001 (Ex. Ct.) a sales tax, while calculated and recorded in the taxpayer's books as an ordinary liability, was not paid pending the outcome of a case before the courts in which the validity of the Act imposing the tax was being constitutionally challenged. This was seen by the Court as a condition subsequent. At page 430 (D.T.C. 1008) Mr. Justice Kearney noted in an extract from Mertens, Law of Federal Income Taxation, and I am paraphrasing here, that the possible occurrence of a condition subsequent to the creation of a liability would not be grounds for postponing the accrual. He had also noted an opinion expressed in an accounting dictionary respecting events that may be probable as distinct from those being possible. At page 433 (D.T.C. 1009) and in respect of a contingent reserve, he went on to say that "the post hoc contingency of the Quebec Retail Sales Tax Act being declared unconstitutional was too remote to bring it within the purview of S. 12 (1)(e)." That provision is now paragraph 18(1)(e) of the Act.

In Northern and Central Gas Corporation Ltd. v. The Queen, [1985] 1 C.T.C. 192; 85 D.T.C. 5144 (F.C.T.D.); [1987] 2 C.T.C. 241; 87 D.T.C. 5439 at 5150 Madame Justice Reed noted that there was no doubt that the taxpayer would be required to refund the subject inventory gain to its customers after its year-end. But, she said, it could not be an expense for tax purposes, rather it was a reserve for a contingent liability:

The fact that the amount of the liability was ascertainable and that the probability of it not becoming payable was very small (almost infinitesimally small) does not affect the nature of the liability . . . .

In Cummings v. The Queen, supra, the Court noted that the subsequent payment of the obligation was at best an indicator that the taxpayer had been reasonably sure the liability was certain, but that it did not operate so as to change the nature or character of the liability. The cases of J.L. Guay Ltée v. M.N.R., [1971] F.C. 234; [1971] C.T.C. 686; 71 D.T.C. 5423; [1972] F.C. 1441; [1973] C.T.C. 506; 73 D.T.C. 5373; [1975] C.T.C. 97; 75 D.T.C. 5094 also noted concerning the lack of certainty that the amounts there in question would have been paid in full.

In any event, Lakehead Newsprint Ltd. v. M.N.R., [1986] 1 C.T.C. 2442; 86 D. T.C. 1353 (T.C.C.) is authority for a disallowance of the adjustment made by the appellant concerning retroactive wage increases which in itself, in my view, underscores the reality of the uncertainty at year-end as to the amount of the future liability. That amount was premised on the rate of pay extant at the time a claim would be advanced in the future.

Returning to the facts of this case, unless there had been a time limit, like that of accrued vacation pay, the appellant was unable to fix a limit on the problem of ascertaining the timing of its future obligation, and this problem of uncertainty of its obligation had increased with each new accounting period. In this respect, the comment of Mr. Justice Urie in Harlequin Enterprises Ltd. v. the Queen, [1977] 2 F.C. 579; [1977] C.T.C. 208; 77 D.T.C. 5164 (F.C.A.) at page 212 (D.T.C. 5166) reads:

I agree that the provision for returns is contingent, because in any fiscal period, although it was known from experience that there would be returns, the number and actual value thereof could not be fully known until all returns on sales made within that fiscal period had actually been received which might not be until some considerable period of time had elapsed after the end of the fiscal period.

While a distinction may be drawn between contingencies which affect liability itself and those which affect only the quantum of that liability, any meaningful distinction tends to become blurred as the number and complexities of contingencies increase. The reality here is that there is and will be an ever recurring need for the appellant to have to make adjustments to the accrual account. Some of the obvious ones deal with retroactive pay increases and amounts to be taken back into income when and if the various circumstances as described do arise, all of which tends to negate and diminish the alleged certainty. And the position that none of the amounts would ultimately escape taxation would not, in my view, operate to change the nature or character of the liability.

Therefore, and for the reasons given, even if the sick leave accrual account could be seen as falling within the paragraph 18(1)(a) provisions on a prima facie basis within the meaning of the Royal Trust Co., supra, principles, its deductiblity would be precluded under the provisions of paragraph 18(1)(e) of the Act.

Having arrived at this conclusion there is no need to consider the applicability and effect of subsection 78(3) of the Act dealing with unpaid amounts, as raised by counsel for the Minister.

The subsidiary matters raised by the appellant in its notice of appeal dated November 20, 1987, read thusly:

17. In the alternative that the Minister erred in including in computing the income of the Appellant for the 1983 taxation year the amount owing in respect of sick leave at the end of that year, namely $143,335 but the Minister should have included only the increase in the amount payable for the 1983 taxation year, namely $32,099 on the grounds that this was the only amount deducted in computing income for that year.

18. The Appellant submits that the Minister erred in reducing the non-capital loss carry-back to 1982 to nil.

The allegation and relief asked for arising out of the loss carry-back to 1982 was consequential upon the Minister's assessment in this case and on the outcome of the central issue in the 1983 appeal. However, even if what is about to be considered argumentatively includes the appellant’s 1982 year- end situation, no remedy is possible if it would require an addition to the appellant's 1982 income with a corresponding increase in tax liability which, by the authorities, I am precluded from doing: see Louis J. Harris v. M.N.R., [1965] Ex. C.R. 653; [1964] C.T.C. 562; 64 D.T.C. 5332 (Ex. Ct.) at 5337, [1966] S.C.R. 489; [1966] C.T.C. 226; 66 D.T.C. 5189 (S.C.C.), Cohen v. M.N.R., [1988] 2 C.T.C. 2021; 88 D.T.C. 1404 (T.C.C.) at 1406, Scarrow Shoes Ltd. v. M.N.R., [1988] 2 C.T.C. 2027; 88 D.T.C. 1402 (T.C.C.) at 1404, and Serena Hewett- Carlson v. M.N.R., [1989] 1 C.T.C. 2065; 89 D.T.C. 4.

The appellant's counsel noted that the adding back of the $143,335 to the 1983 income effectually denied the accruals of the prior years and that the Minister had no power to do this excepting through reassessment of each and every taxation year if not then statute-barred.

The further submission was made that this case was not one of reserves attracting the fiscal requirement of adding the prior year's reserve back into the calculation of the current year's reserve amount, but rather it was one of a current liability measured on a net basis [1] and deducted currently, however, treated as an accrual because only its payment was postponed.

Counsel for the Minister submitted that the need for the addition back to income of $143,335 arose because that was simply a reversal of what the appellant had done, it was the way the appellant had handled its entries in 1982 as well as in 1983 and further that the sick leave accrual account, not being in the nature of a reserve that would attract the subsection 12(1) rules, was irrelevant to the situation.

Both counsel relied on Sears Canada Inc. v. The Queen, supra, as support for their respective positions. Counsel for the appellant submitted that that case and the case of Dominion of Canada General Insurance Co. v. The Queen, [1986] 1 C.T.C. 423; 86 D.T.C. 6154 (F.C.A.) had dealt only with reserve amounts attracting specific reserve provisions, that the case at bar was not one of reserves and that no reserve-type fiscal provisions are involved at all.

In Sears Canada, supra, the taxpayer's accounting methodology as described on page 82 (D.T.C. 6306), appears to be identical to the situation of this appellant. It read:

In its accounting entries each year, the plaintiff in effect added into income the amount which it had deducted at the end of the previous taxation year as a reserve in respect of goods or services it reasonably anticipated it would have to deliver or render after the end of that taxation year, and deducted from income a new reserve in respect of goods or services it reasonably anticipated would have to be delivered or rendered after the end of the new taxation year. However, the actual accounting entries made were in an abbreviated form. Rather than adding the previous year's reserve into income and deducting the current year's reserve, one entry was made, namely, the deduction from income of the difference between the previous and current years' reserves.

The principal issue therein was clearly defined as concerning deduction of reserves under paragraph 20(1)(m) of the Act which in turn had attracted those amounts described in paragraph 12(1)(c). The following is extracted from page 6310 of the decision:

Counsel for the plaintiff argued that if it should transpire that the deduction of these reserves was disallowed then $2,000,000 of the $2,650,000 deducted by the plaintiff as a reserve at the end of its 1975 taxation year should not have to be added back into income at the beginning of the 1976 taxation year because the end result of what the plaintiff did by its accounting methodology was to deduct as a reserve only $650,000. Counsel for the defendant contends that it is the fact of what was done and not its effect that must govern and that in consequence the full amount must be brought back into income in 1976 and she cites in support of this submission the case of Dominion of Canada General Insurance Company v. The Queen, 84 D.T.C. 6197 (F.C.T.D.). Unless I misapprehend the matter, the plaintiff's argument brings into question the methodology and validity of the 1975 assessment, which is not under appeal. Consequently, the assessment for that year must be deemed valid and binding. In my opinion, it is therefore irrelevant whether the deduction of the reserve in 1975 was correctly calculated or not. The plaintiff's argument for the exclusion of $2,000,000 from its income in the 1976 taxation year must therefore fail.

I find it difficult to transpose that situation, which was clearly dealing with reserves in its gross or net form, to the matter at hand. Similarly, the facts of Dominion of Canada General Insurance Company, supra, specifically involved a matter of reserves and specific fiscal provisions concerning amounts deducted or deductible in a previous year which was not under appeal. In interpreting the applicable provision, the Court came to the conclusion that the legality of the deductions taken was irrelevant.

The jurisprudence therefore has established that accounting methodology is not determinative, that the genesis of the Minister's justification and power to add back to income amounts that had exceeded the netted amount arose in the Income Tax Act itself, and that the Courts had been called upon to interpret those provisions and their effect. No such fiscal provisions are available to the Minister in the case at hand, and no statutory interpretative principals are called for or required here.

Conclusion

Accordingly, the appellant has shown that the Minister had erred in adding back the amount of $143,335 into its income in respect of sick leave accruals at the end of the 1983 year. The appeal for the 1983 taxation year is therefore to be allowed in part, and the matter referred back to the Minister of National Revenue for reconsideration and reassessment in that only $32,099 is to be added back into income on the basis that this was the only amount sought to be expensed pursuant to paragraph 18(1 )(a) of the Act and that its deductibility from income is precluded by paragraph 18(1)(e) of the Act.

The appeal respecting the appellant's 1982 taxation year is also to be allowed, in part, so far as the appellant's liability for tax for that year is consequentially affected by the Minister's reassessment of the appellant's 1983 taxation year and any non-capital loss carry-back amount to 1982 that may ultimately ensue therefrom.

The appellant will have its costs on a party-to-party basis.

Appeal allowed in part.