Wilchar Construction Ltd. v. The Queen, 81 DTC 5318, [1981] CTC 415 (FCA)

Heald, J:—This is an appeal against that part only of the judgment of the Trial Division wherein it was held that the appellant .. is not entitled to exclude from its 1968 taxable income the sum of $227,171 being the net amount of holdbacks and progress claims for which architect’s certificates had not issued on or before July 31, 1978.”

In the Trial Division, the parties filed a statement of agreed facts, dated November 1, 1974, which reads as follows (see, AB p 318):

1. The parties agree that as of July 31, 1968, there was a total of $452,123 of accounts receivable of the Appellant for which architect’s certificates had to be issued before the Company was entitled to receive payment and for which such certificates had not been issued on or before July 31, 1968.

2. The parties further agree that the Appellant overstated certain accounts payable as of July 31, 1968 in a total amount of $57,426. In addition, the Appellant incorrectly treated as part of its costs incurred in 1968 a total of $167,526 in respect of work done for it by subcontractors for which architect’s certificates had to be issued before the Appellant was liable to make payment and for which such certificates had not been issued on or before July 31, 1968.

3. The net effect of these adjustments, if allowed, is to reduce the Appellant’s 1968 income by $227,171, which totally eliminates its taxable income for 1968 and results in a loss which is deductible in computing its taxable income for 1967.

Additionally, there was one witness at trial, namely, Robert Arthur Weavers, the official of the Department of National Revenue who conducted the investigations that led to the assessment in issue.

In its tax returns for the years 1962 to 1969 inclusive, the appellant consistently reported its income including holdbacks and uncertified progress claims” [1] which were outstanding at the end of the taxation year (July 31 in each of the above years) in the calculation of its income. For its 1970 and 1971 taxation years, the appellant excluded holdbacks but continued to include uncertified progress claims in its income calculations. On December 29, 1971, the Minister reassessed the appellant’s 1967 and 1968 returns, dealing therein with a number of items no longer in dispute between the parties. He did not, however, reassess in respect of the matter in issue in the Trial Division and in this Court because the Minister did not object to the appellant’s reporting of its holdbacks and uncertified progress claims as receivable and payable since experience in past years had demonstrated that this method had the effect of anticipating, rather than deferring tax liability. The matter was however raised by the appellant on March 5, 1972, when it filed notices of objection in respect of the 1967 and 1968 taxation years. It claimed, inter alia, to be entitled to deduct holdbacks which are contingently receivable, in the sum of $117,552 for 1967 and in the sum of $90,013 for 1968. The Minister took no action on these notices of objection and, on March 14, 1974, the appellant in its notice of appeal to the Tax Review Board reasserted that right.

At the hearing of the appeal, counsel for the appellant made three basic submissions which may be summarized as follows:

1. Accounts receivable contingently owing to a taxpayer do not constitute income for tax purposes. In support of this principle, counsel relies on the Co/ford and Guay decisions. MNR v John Colford Contracting Limited, [1960] Ex CR 433; [1960] CTC 174; 60 CTC 1131 ; affirmed by the Supreme Court of Canada [1962] SCR viii; [1962] CTC 546; 62 DTC 1338. See also J L Guay Ltée v MNR [1971] FC 237; [1971] CTC 686; 71 DTC 5423.

2. Neither generally accepted accounting principles nor the appellant’s consistent reporting of income on a legally incorrect basis can prevail over the legal principle set out in No 1 supra.

3. The appellant is not precluded by the doctrine of estoppel from insisting that it be assessed for its 1968 taxation year in accordance with principle No 1 supra.

I turn now to the first submission advanced by counsel for the appellant as summarized supra. The appellant submits that the Co/ford and Guay cases (supra) are authorities for the legal principle that, in order for an item of revenue to be receivable, it must be an amount for which all the necessary steps have been taken to establish the taxpayer’s right to take action to collect such amount, even if his right of action cannot be commenced until some future time and, that, accordingly, accounts receivable which are only contingently owing to the taxpayer do not constitute income for tax purposes. He submits further that the learned trial judge erred in law in holding that the method of reporting income for tax purposes approved in the Col- ford and Guay cases (supra) is permissive and not mandatory. Dealing with the Colford case in that case, the taxpayer was a sub-contractor who furnished and installed plumbing, heating, air conditioning and ventilation equipment. It received from the prime contractor monthly progress payments for either 85% or 90% of the work done, the remaining 15% or 10% as the case may be, was retained as a holdback.* [2] Final payment was made when the project was completed and the certificate of the architect or engineer specified in the particular contract was issued that the work was satisfactory. For the taxation year 1953, the taxpayer did not report progress payments of $80,000 actually received or holdbacks of $67,000 not yet received relating to three contracts not completed, a large one in Ontario and two smaller ones in Quebec. The Court decided first that the payments of $80,000 actually received in 1953 were properly taxable in 1953 under the Income Tax Act. It decided further that in the case of that portion of the holdbacks where architect’s or engineer’s certificates had been received in the taxation year 1953, that portion was properly taxable in 1953 as “amounts receivable” in 1953 within the meaning of paragraph 85B(1)(b) of the Income Tax Act, RSC 1952 c 148T [3] notwithstanding that they were not payable in that taxation year under the terms of the contract. However, in the case of the remaining portion of the holdback where the engineer or architect’s certificate did not issue until subsequent years, the Court held that this portion was not an “amount receivable” within said paragraph 85B(1)(b) supra.

In my view, it is important to note that in Co/ford (supra) it was the Minister who was seeking to include in the 1953 income “amounts receivable” which, in the view of the Court, were not “amounts receivable” because of the contingency factor above discussed. I agree with the learned trial judge that the Co/ford case (supra) is authority for the proposition that a taxpayer may exclude such amounts. But in the case at bar, the taxpayer did not exclude such amounts in any of its returns for the years 1962 to 1969 inclusive. I do not read the Colford case (supra) as deciding that in a factual situation like the present one where the taxpayer chose to include subject amounts in its 1968 taxation year, and the Minister agreed thereto, such a practice is prohibited by paragraph 85B(1)(b) of the Act. All that Co/ford (supra) is authority for, in my opinion, where the facts are as in this case, is that the Minister could not require the taxpayer to take subject amounts into income. As stated earlier herein, the method chosen by the appellant and accepted by the Minister had the effect of anticipating rather than deferring tax liability. I can find nothing in the Co/ford (supra) judgment nor in the provisions of the Act which prohibit the adoption of this method of anticipating tax liability. Paragraph 85B(1)(b) does not, in my view, prohibit such a method. All that section provides is that where an amount is, at law* [4] receivable, the taxpayer is required to include that amount. The section is silent with respect to other amounts. The item here in issue is such an other amount since it was only contingently receivable in the taxation year 1968.

As above stated, I have been unable to find any “other provisions” in the Act which prohibit the method used by the appellant in this case for the taxation years 1962 to 1969 inclusive. Accordingly,the computation of that profit is to be determined by generally accepted accounting principles (see Dominion Taxicab Association v MNR, [1954] SCR 82; [1954] CTC 34; 54 DTC 1020) which require that the method employed be consistent from year to year (see Ostine v Duple Motor Bodies, [1961] 2 All ER 167 at 175). In my opinion, these principles have been adhered to in this case.

The Guay decision referred to supra simply reaffirms the principle set out in Colford (supra) and does not, in my view, add to or extend that principle in any way. Whereas Colford (supra) deals with amounts receivable, Guay (supra) deals with amounts payable but the principle set out in both cases is, in my view, the same.

Turning now to the appellant’s second basic submission as set forth supra, since I do not agree that the appellant’s consistent reporting of income for the years 1962 to 1969 inclusive was on a “legally incorrect basis” it follows for the reasons stated supra that I do not accept this second submission since its validity is necessarily based on the correctness of the first Submission.

Dealing now with the appellant’s final submission to the effect that estoppel does not lie in this case, counsel relied heavily on four decisions of the Exchequer Court and the Trial Division. (See Western Smallware and Stationery Co v MNR [1972] FC 437; [1972] CTC 7; 72 DTC 6036; per Cattan- ach, J. Bert W Woon v MNR, [1951] Ex CR 18; [1950] CTC 263; 4 DTC 871; per Cameron, J. Ken Steeves Sales Limited v MNR, [1955] Ex CR 108; [1955] CTC 47; 55 DTC 1044; per Cameron, J. Godfrey G S Moulds v The Queen, [1977] 2 FC 487 [1977] CTC 126; 77 DTC 5094, per Marceau, J.) The basic principle enunciated in those decisions is succinctly stated in Phipson on Evidence, 8th Edition, p 667 as follows:

Estoppels of all kinds, however, are subject to one general rule: they cannot override the law of the land. Thus where a particular formality is required by statute, no estoppel will cure the defect.

Since in my view, the method of reporting chosen herein by the appellant, and accepted by the respondent is not contrary to law, for the reasons set forth herein, the legal principle enunciated in Phipson (supra) and in the four cases set forth supra and relied on by the appellant do not have any relevance to the situation in the case at bar.

Having concluded that there is no legal bar to estoppel, the only remaining question to consider is whether, on the facts of this case, the necessary elements of estoppel have been established. In this regard, it is my opinion that the learned trial judge was correct in holding that the appellant was estopped from changing the basis upon which the uncertified progress claims are to be treated in the calculation of its profit for its 1968 taxation year. The essential elements of an estoppel have often been stated as follows:

(1) a representation intended to induce a course of conduct on the part of the person to whom the representation is made;

(2) an act resulting from the representation by the person to whom the representation was made; and

(3) detriment to such person as a consequence of the act. (See Greenwood v Martins Bank, [1933] AC 51.)

the learned trial judge stated the essential facts on this issue as follows (see AB pp 323 and 325):

The Defendant reported, in its 1968 tax return, income based on a profit calculation that included the uncertified progress claims made by and upon it. That was consistent with the way it had calculated its profit since 1962 and would continue to report it through 1971. In both its Notices of Objection and Notice of Appeal to the Tax Review Board it referred to holdbacks “contingently receivable” and “not legally receivable” in its 1967 and 1968 taxation years. It did not refer to the uncertified progress claims.

The allegations of fact in paragraphs 3, 4 and 5 of the Notice of Appeal are not true. The Defendant had not deducted holdbacks totalling $117, 552 and $90.013 respectively in computing its 1967 and 1968 income nor, by the Notices of Reassessment, had the Minister increased the Defendant’s income by those amounts. I considered it necessary to make those findings and recited those paragraphs because, in these procedings (sic), the Defendant did not find it necessary to repeat them, being content to take as its points of departure the Statement of Agreed Facts and the decision of the Tax Review Board.

The Defendant did indicate a desire to change its method of accounting insofar as holdbacks were concerned when such a change could have been effected for 1968 at a time when any cosequental (sic) adjustments of its 1969 income could have been effected by reassessment. It indicated its desire to change its method of accounting for uncertified progress claims for 1968 too late to permit reassessment of its 1969 return. While evidence as to magnitude of the disadvantage in dollars and cents was not admitted, Weavers’ evidence is that should such a change for 1968 be permitted without a complementary reassessment for 1969 there would be a loss of tax revenue.

The Defendant made representations as to its 1968 and 1969 profits by the consistent way it calculated them. The Plaintiff acted on those representations in the assessment of the returns for both years. If the Defendant is permitted to change its method of calculating its 1968 profit, thereby denying the representations upon which the Plaintiff acted, the Plaintiff will be in the position of having acted to her detriment.

In essence, what the Defendant seeks is to change its method of accounting for its profit to be effective for its 1968 taxation year without applying the same method to 1969. That is contrary to reason and, in my view, also contrary to law.

In my view, the findings of fact and the inferences which he drew therefrom as stated by the learned trial judge were reasonably open to him on the evidence before him. Given that factual situation, he did not err in law, in my view, in deciding that estoppel had been established. The appellant submitted, however, that on the evidence adduced, it was clear that the respondent was aware or should have been aware, before the right to reassess in respect of the 1969 taxation year was statute-barred, that the appellant wished to change its method of reporting the uncertified progress claims. I do not agree that the evidence, either oral or documentary, establishes such a factual situation. It is clear from the documentary evidence, that while the appellant raised this matter on March 15, 1972 In its notices of objection with respect to holdbacks contingently receivable, it did not raise the matter of uncertified progress claims until it filed its amended notice of appeal with the Tax Review Board in November of 1974. Counsel for both parties agreed that the right to reassess in respect of the taxation year 1969 became statute-barred during the summer months of 1974 and before either the amended notice of appeal was filed or the agreed statement of facts executed. The significance of these dates is that the original representation by the appellant inducing the course of conduct entered into by the respondent was not altered until it was too late for the respondent to prevent the resultant prejudice and loss of revenue. I have also read the oral evidence of the witness Weavers in full and, as a result, I am satisfied that he did not understand from any of his discussions with the representatives of the appellant that, at any time prior to November 1, 1974, the appellant intended to request or did request a change in its method of reporting uncertified progress Claims.

For all of the above reasons, I would dismiss the appeal with costs.