Outboard Marine Corp. of Canada Ltd. v. MNR, 90 DTC 1350, [1990] 1 CTC 2444 (TCC)

Brule, T.C.J.:— This appeal comes as a result of reassessments by Revenue Canada for the appellant's 1984 and 1985 taxation years in which there was not accepted by the Minister the treatment of duty drawback claimed by the appellant. The issue involved is when does the right to such a drawback arise such that it must be included in income.

The facts set out by the appellant in his notice of appeal were all admitted by the respondent. In order to present the facts involved they are as follows:

Statement of Allegations Of Fact:

1. The Appellant is a corporation incorporated under the laws of Canada and, during the years in question, carried on the business of manufacturing and distributing outboard motors, engines, lawnmowers and related parts and items.

2. In connection with the manufacture of its products, the Appellant imports into Canada certain parts which are incorporated into the finished products during the manufacturing process or are machined into finished parts. At the time of such importation, customs duty is imposed by Revenue Canada Customs and Excise, pursuant to the provisions of the Customs Act (Canada).

3. Some of the finished products and parts manufactured by the Appellant are sold to certain customers outside Canada.

4. The provisions of the Customs Act provide, upon certain conditions, for a rebate of customs duty to the Appellant with respect to those imported components subsequently exported or incorporated into finished products which are subsequently exported for sale outside Canada. Such rebate is commonly referred to as “duty drawback".

5. In order to be entitled to duty drawback, the Appellant is required to complete and file with Revenue Canada, Customs and Excise, detailed claim forms and other material including evidence of payment of tax on importation of the components, evidence of exportation of the finished goods and evidence of the components contained in such goods. During the period in question, such material was normally completed and filed by the Appellant on a periodic basis. Once the material is filed, Revenue Canada, Customs and Excise, will generally process the claim on an interim basis and make payment of 80% to 90% of the claim within 60 days of receipt of the claim. Payment of the balance is made after the audit of the claim is completed, generally three to four months after interim payment if no matters are disputed. Interest becomes payable by Revenue Canada with respect to duty drawback unpaid, commencing 90 days after the claim for such duty drawback is received by Revenue Canada.

6. During the 1984 taxation year, the Appellant recorded in income both for accounting and tax purposes:

(i) an amount of $4,837.87 for duty drawback relating to goods shipped during the year for which claims had been filed by the Appellant prior to the year end;

and

(ii) an estimated amount of $61,220.12 for duty drawback relating to goods shipped during the year for which claims had not been filed by the Appellant as at the year end.

7. During the 1985 taxation year, the Appellant recorded in income both for accounting and tax purposes:

(i) an amount of $2,674.92 for duty drawback relating to goods shipped during the year for which claims had been filed by the Appellant prior to the year end;

and

(ii) an estimated amount of $151,326.55 for duty drawback relating to goods shipped during the year for which claims had not been filed by the Appellant as at the year end.

8. The Respondent, by the Notice of Re-Assessment for the 1984 taxation year, did not adjust the amount of duty drawback included in income by the Appellant.

9. The Respondent, by the Notice of Re-Assessment for the 1985 taxation year, has added the amount of $79,927.30 to the 1985 income of the Appellant, being an amount determined by the Respondent, in addition to the amount reported by the Appellant, to represent duty drawback relating to goods shipped during the year for which claims had not been filed by the Appellant as at the year end.

Appellant's Position

Counsel for the appellant presented several arguments as to why the duty drawback should not take place at the earliest until the claim forms were filed, and certainly not when the goods were shipped as the Minister says.

The section of the Income Tax Act relied upon by the Minister is as follows:

Sec. 12(1)(b)

(1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:

(b) Amounts receivable in respect of services, etc., rendered.—any amount receivable by the taxpayer in respect of property sold or services rendered in the course of a business in the year, notwithstanding that the amount or any part thereof is not due until a subsequent year, unless the method adopted by the taxpayer for computing income from the business and accepted for the purpose of this Part does not require him to include any amount receivable in computing his income for a taxation year unless it has been received in the year, and for the purposes of this paragraph, an amount shall be deemed to have become receivable in respect of services rendered in the course of a business on the day that is the earlier of

(i) the day upon which the account in respect of services was rendered,

and

(ii) the day upon which the account in respect of those services would have been rendered had there been no undue delay in rendering the account in respect of the services;

The Court's attention was directed to this paragraph 12(1)(b) of the Income Tax Act and in particular to the words “in respect of”. In the present case the item under appeal is a duty drawback and an amount receivable by the taxpayer in respect of property exported.

Citing the case of Gene A. Nowegijick v. The Queen, [1983] 1 S.C.R. 29; [1983] C.T.C. 20, counsel pointed out that there is reference by Dickson, J. of the Supreme Court of Canada, as he then was, at page 25 as follows:

The words “in respect of” are, in my opinion, words of the widest possible scope. They import such means as “in relation to”, “with reference to" or “in connection with". The phrase “in respect of” is probably the widest of any expression intended to convey some connection between two related subject matters.

Following this there must be a determination of when the amount is receivable. First of all the amount involved must be ascertained or ascertainable. Counsel for the appellant conceded that the amount could have been ascertainable when the goods were shipped. Secondly it was alleged that the taxpayer must have an absolute and unconditional right to receive the amount of the duty drawback. In support of this proposition the Court was referred to:

Kenneth B.S. Robertson v. M.N.R., [1944] Ex. C.R. 170; [1944] C.T.C. 75; 2 D.T.C. 655;

M.N.R. v. Colford Contracting Co. Ltd., [1960] Ex. C.R. 433; [1960] C.T.C. 178; 60 D.T.C. 1131; affirmed [1962] S.C.R. viii; [1962] C.T.C. 546; 62 D.T.C. 1338; and

Sinnott News Co. Ltd. v. M.N.R., [1956] S.C.R. 433; [1956] C.T.C. 81; 56 D.T.C. 1047.

As well, reference was made to the Customs Act and its Regulations.

As a result of these authorities and the statutory provisions the appellant's counsel was of the opinion that the appeal should be allowed.

Minister's Position

The fact that in the evidence presented to the Court the appellant disclosed amounts of duty drawback indicated to the Minister’s counsel that such should have been included in income for the years reassessed. Only one amount had not been predetermined by the appellant. As a result for the years in question the amounts known should have been included for tax purposes.

Referring to the Robertson case, supra, cited by the appellant it was pointed out that moneys received were acknowledged but that reserves for unearned commissions were allowed and such reserves were not to be included as income in the year such amounts were received. This is different from the case at bar. As for the Co/ford case, supra, this was different because the Act as it then read, referred to amounts “receivable” in a subsequent year. The present section has this word changed to "due". In a situation such as the one before this Court the amount of the duty drawback is “due” to the appellant and should have been included in its income when ascertained.

The filing of the claim forms to obtain the duty drawback was said to be only a condition subsequent to obtaining the amounts and not a condition precedent. In support of this the Court was directed to the case of Commonwealth Construction Company Limited v. The Queen, [1984] C.T.C. 338; 84 D.T.C. 6420 at 342 (D.T.C. 6424) wherein Urie, J. of the Federal Court of Appeal referred to the trial judge quoting from a passage in Mertens, Law of Federal Income Taxation, Vol. 2, c. 12, page 132 in these terms:

Not every contingency prevents the accrual of income: the contingency must be real and substantial. A condition precedent to the creation of a legal right to demand payment effectively bars the accrual of income until the condition is fulfilled, but the possible occurrence of a condition subsequent to the creation of a liability is not grounds for postponing the accrual.

[Emphasis added.]

In the case of The Queen v. Donald Stanley Derbecker, [1984] C.T.C. 606; 84 D.T.C. 6549 the Federal Court of Appeal said that the words "due to him” as they appeared in section 40 of the Act in 1977 (and also appearing in the amended section 40) referred to the taxpayer's right to take a reserve and Hugessen, J. said at page 607 (D.T.C. 6549):

. . . the words "due to him” look only to the taxpayer's entitlement to enforce payment and not to whether or not he has actually done so.

Counsel said this is similar to the case at bar.

As to whether or not there was a legal right to claim the drawback when the goods were shipped the Court was told that the Regulations under the Customs Act set out that "the Minister shall authorize the payment" subject to the completion of forms and an audit. Counsel said these are clearly conditions subsequent and not impediments to the legal right to the duty drawback. It is incumbent therefore on the taxpayer to include the amount of the drawback in his taxation year in which the goods are shipped. A claim could be made immediately and there would then be a legal right.

Analysis

It is clear that when a legal right arises for amounts due to a taxpayer then such must be included in his income in that year under the provisions of paragraph 12(1)(b) of the Act. What then is the status of a duty drawback when the goods have been exported but the claim forms, the audit and the authorization of the Minister have not been completed?

Counsel for the Minister said these latter items were only conditions subsequent and not a contingency that is real and substantial as set out in the Commonwealth Construction case, supra. There was added that the appellant had a right to enforce payment as was found in the Derbecker case, supra. These two cases are somewhat different from the case at bar. In the Commonwealth Construction case the funds involved had already been received while in the Derbecker case the Court held that the taxpayer was entitled to enforce payment of a promissory note held by him and it was therefore "due to him”. In the present case the appellant company was only entitled to make a claim for payment after the goods had been exported. Further the amount subject to being claimed must be receivable in the year in question. To be receivable the amount first must be ascertained or ascertainable. Here there is no question that if the amount was not ascertained in the year the goods were exported it was at least ascertainable. Second the taxpayer must have an absolute and unconditional right to receive the amount in question.

While the facts in the Robertson case, supra, are not similar to the case at bar, the Exchequer Court did set out a test for determining income during a year. At pages 90-91 (D.T.C. 660 and 661) of the case, Thorson, J. said:

. . .the question remains whether all of the amounts received by the appellant during any year were received as income or became such during the year. Did such amounts have, at the time of their receipt, or acquire, during the year their receipt, the quality of income, to use the phrase of Mr. Justice Brandeis in Brown v. Helvering [(1934) 291 U.S. 193]. In my judgment, the language used by him, to which I have already referred, lays down an important test as to whether an amount received by a taxpayer had the quality of income. In his right to it absolute and under no restriction, contractual or otherwise, as to its disposition, use or enjoyment?

[Emphasis added.]

The Robertson case and the passage above were cited in the Colford Contracting case, supra, wherein Kearney, J. of the Exchequer Court set out at page 187 (D.T.C. 1135) the following:

In the absence of a statutory definition to the contrary, I think it is not enough that the so-called recipient have a precarious right to receive the amount in question,

but he must have a clearly legal, though not necessarily immediate, right to receive it.

[Emphasis added.]

Further on the same page quoting certain Ontario cases the learned judge said:

In Ontario it has been held that the contractor has no legal right to the amount of the holdback until the issuance of the certificate, and no suit can be properly commenced by him before certification unless it is clear that the certificate has been improperly withheld by the architect.

This case was affirmed by the Supreme Court of Canada at [1962] C.T.C. 546; 62 D.T.C. 1338.

In the Sinnott News Co., Ltd. case, supra, the Court suggested that the appellant could not succeed in an action to recover balances shown in their accounts until certain conditions were met.

The conditions in the present case involve those set out in the Customs Act and the Regulations to that Act. Basically they are outlined in paragraph 5 of the allegations of fact, supra.

Paragraph 12(1)(b) of the Act refers to amounts “receivable” notwithstanding that they might not be “due” until a subsequent year.

In the CCH Canadian Tax Reports a comment is made in paragraph 4266 found at page 4040 as follows:

While the distinction between "due" and “receivable” is by no means clearly established either in practice or in law, it appears that where used in the Act the word “receivable” is intended to describe an amount owing but in respect of which the creditor is not at once able to enforce payment; an amount is "due" when not only is it established to be owing, but when an action will lie at once for its collection.

It was held in Gerald Hamilton v. M.N.R., 67 D.T.C. 696, upheld in the Exchequer Court 69 D.T.C. 5286 and in the Supreme Court of Canada, 72 D.T.C. 6004 that receivability of an amount does not exist until every element of contingency is removed. In that case it was the Minister who was pleading this position and the Court agreed.

As to one of the possible contingencies the Regulations to the Customs Act sets out that the Minister “shall authorize" the payment of a drawback whereas the Customs Act subsection 82(1) suggests that the Minister "may" grant a drawback. In The Queen v. Stevenson Construction Co. Ltd., [1979] C.T.C. 86; 79 D.T.C. 5044, the Court held that the power to make a refund was a discretionary power. At page 93 (D.T.C. 5050) Le Dain, J. of the Federal Court of Appeal when considering subsection 44(2) of the Excise Tax Act and the question of a refund said:

In my opinion the words “may”, "grant" and "as the case may require” together point strongly to the conclusion that the power to make a refund is a discretionary power and not upon fulfillment of the conditions specified in the section.

It would follow therefore that the discretionary words used in the Act would be paramount to the mandatory provisions of the Regulations.

Dealing with a cause of action for a drawback claimed the Court suggested in The Clarkson Company Limited v. The Queen, [1979] C.T.C. 96; 79 D.T.C. 5150, at page 111 (D.T.C. 5160):

. . . a time may arrive, after claims for drawback are made and before payment thereof, when a legal right thereto comes into existence . . .

This suggests that no legal right arises before a claim is made. Once made and the Minister does not act on the claim then presumably the claimant may sue for the amount in question.

After the exportation of the goods involved the taxpayer has a right to make a claim but this is different to a right to receive the amount involved. To obtain such a right certain conditions must be met and until there are completed (as set out in the Facts above) the taxpayer does not have an absolute right to be paid. He must be entitled at a particular time to the amount and the soonest this can arise is after a claim in proper form is made. Based on previous jurisprudence this is a condition precedent to obtaining the amount involved.

In the present case while the appellant company may have made a claim after each article was exported such was not feasible. Each year there were thousands of items involved and the only practical way to deal with the claims was to group them together and verify the dates of shipment and the amounts involved. This took considerable time. It was a business judgment and a practical arrangement for the appellant. To make separate claims for each item exported would have inundated the Revenue Canada Office. The appellant suffered to some extent by not having his drawback as soon as the goods were shipped and from the evidence the delay in making a claim was not for any tax benefit but for expediency and good business management.

In any event until the claim was made there was no right to the drawback and the claims were made well within the statutory limits, no precise requirement being present other than such be within a two year period of the goods being exported.

As a result this appeal is allowed with costs and the matter is referred back to the Minister for reconsideration and reassessment.

Appeal allowed.