Maritime Telegraph and Telephone Company v. Her Majesty The Queen, 91 DTC 5038, [1991] 1 CTC 28 (FCTD), aff'd 92 DTC 6191 (FCA)

Reed, J.:—The main issue in this case is the proper interpretation of an amendment made to paragraph 12(1)(b) of the Income Tax Act, S.C. 1980-81-82-83, c. 140, subsection 4(1) and whether that amendment is relevant to the plaintiff's situation. That amendment became effective as of the 1983 taxation year. The relevant parts of paragraph 12 as amended state:

12. (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) 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 the 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;

(2) Paragraphs (1)(a) and (b) are enacted for greater certainty and shall not be construed as implying that any amount not referred to therein is not to be included in computing income from a business for a taxation year whether it is received or receivable in the year or not.

[Amendment emphasized.]

There is little dispute concerning the facts. The plaintiff provides telephone and other telecommunication services to customers throughout Nova Scotia. It bills its clients for local and long distance charges on a monthly basis. In order to organize the billing of its customers, efficiently, it places them into nine separate billing groups. Each group is billed at a different time of the month (approximately 3 days apart—each bill corresponds to services rendered up to the date of billing). In other words, a customer pays for services after they have been provided by the company. After a customer is billed that customer has 30 days within which to pay the bill before an interest charge becomes payable.

The plaintiff accounts for its income on an accrual not a cash basis. Until 1984, the plaintiff accounted for its income for tax purposes on the basis of what is called the " earned method”. That is, at year end, estimates were made with respect to the amount of revenue earned by the company as of that date even though some customers had not yet been billed for those amounts. The plaintiff prepared its financial statements in this way, for the purpose of reporting to shareholders and for the purposes of review by the regulatory agency to which it reported (the Nova Scotia Board of Commissioners of Public Utilities).

As of the 1984 taxation year, the plaintiff changed its method of accounting for tax purposes. It adopted a "billed method" of reporting income. That is, it accounted for income at year end only if it had billed a customer for the amount in question. It retained the "earned method" for its general financial statements and for regulatory agency reporting purposes. The change to the “billed method" in 1984, for tax purposes, was made on the advice of the plaintiff's accountants who relied on the amendments which had recently been made to paragraph 12(1)(b).

It is clear from the evidence that both methods of accounting are in accordance with generally accepted accounting principles (GAAP). At the same time, while there is some evidence that the billed method is used by some utility companies, there was no evidence that any large Canadian telephone company uses the billed method for its general financial statements. Also, it is fair to conclude that the earned method accords a "truer" picture of the company's income for the year in question than does the billed method. The plaintiff is engaged in providing a continuing service which by its very nature results in revenue accruing daily.

The plaintiff, itself, has for many years used the earned method for the purpose of reporting to shareholders and to the regulatory agency to which it reports, and it still does. Also, Mr. Yale's evidence was that the trend, generally, in the utilities industry is toward adopting the earned method. The matching of income to the year in which it is actually earned is more accurate. The Canadian Institute of Chartered Accountants Handbook states:

08 In the case of rendering of services and long-term contracts, performance should be determined using either the percentage of completion method or the completed contract method, whichever relates the revenue to the work accomplished. Such performance should be regarded as having been achieved when reasonable assurance exists regarding the measurement of the consideration that will be derived from rendering the service or performing the long-term contract. [Oct. 1986]

13 Revenue from service transactions and long-term contracts is usually recognized as the service or contract activity is performed, using either the percentage of completion method or the completed contract method.

.14 The percentage of completion method is used when performance consists of the execution of more than one act, and revenue would be recognized proportionately by reference to the performance of each act. Revenue recognized under this method would be determined on a rational and consistent basis such as on the basis of sales value, associated costs, extent of progress, or number of acts. For practical purposes, when services are provided by an indeterminate number of acts over a specific period of time, revenue would be recognized on a straight line basis over the period unless there is evidence that some other method better reflects the pattern of performance.

.15 The completed contract method would only be appropriate when performance consists of the execution of a single act or when the enterprise cannot reasonably estimate the extent of progress toward completion.

[Emphasis added.]

There is little doubt that the amount earned but not yet billed during what has been referred to in evidence as"the stub end" of the taxation year can be ascertained with a considerable degree of accuracy. It is not necessary to refer to the detailed evidence in this regard. It is sufficient to note that the plaintiff has been reporting on this basis for years, both for tax purposes and otherwise.

It is trite law that a taxpayer may use a different method of accounting for tax purposes than it does for its financial statements, if the Income Tax Act allows. It is trite law that if the Income Tax Act allows a taxpayer a more favourable method of reporting than it might adopt for other purposes, the taxpayer is entitled to take advantage of this. The taxpayer's position is that the amendment of 1983 allowed, if not required, it to account for tax purposes in accordance with the billed method.

Counsel for the defendant responds on two grounds: (1) the amounts in question do not fall within paragraph 12(1)(b) at all because they are not "receivables"—they have not been billed; and (2) even if they are receivables the amendment to paragraph 12(1)(b) should not be interpreted so as to have the effect claimed. It was not intended by the amendment to allow a taxpayer to deduct from income amounts properly belonging therein in computing its profits for the year. In addition, it is argued that subsection 12(2) provides that paragraph 12(1) (b) is not to be interpreted so as to allow a taxpayer to leave out- of-income amounts which properly belong therein.

I think counsel for the defendant's arguments are correct. I do not think the unbilled but earned revenues are “receivable” in the sense governed by paragraph 12(1)(b). It seems to me that that paragraph refers to amounts which have been billed as is the case with "accounts receivable". The paragraph is particularly applicable to businesses who deal in the sale of goods or the sale of services when those services are performed at a discrete time or times. The business in which the plaintiff engages is not of this nature. The service it provides to its customers is a continuous one and its profit therefrom is earned on a continuous basis. Subsection 9(1) of the Income Tax Act provides:

Subject to this part, a taxpayer's income for a taxation year from a business or property is his profit therefrom for the year.

It is well settled in the jurisprudence that the computation of a taxpayer's profit for the year is to be determined in accordance with ordinary commercial principles and practices. In addition, the method of accounting for tax purposes should be that which best reflects the taxpayer's true income position for the year unless the Income Tax Act dictates otherwise. See Ken Steeves Sales Ltd. v. M.N.R., [1955] C.T.C. 47; 55 D.T.C. 1044 (Ex. Ct); M.N.R. v. Publishers Guild of Canada Ltd., [1957] C.T.C. 1; 57 D.T.C. 1017 (Ex. Ct) at 17 and 24 (D.T.C. 1026 and 1030); Associated Investors of Canada Ltd. v. M.N.R., [1967] C.T.C. 138; 67 D.T.C. 5096 (Ex. Ct) especially at page 143 (D.T.C. 5098-99).

I have no doubt, that the usual practice in the taxpayer's “industry” is to account for income on an earned basis. This method is used both for financial reporting to shareholders and for regulatory agency purposes. It is clear why this is so. The method gives a truer picture of the taxpayer's income for the year than is the case with other methods. As noted, the income which is earned by the taxpayer, virtually on a daily basis, is not of a conditional or contingent type although there may be calculation adjustments required depending on the nature of the customer contract. The taxpayer's income does not have the conditional quality, for example, of construction hold backs; see M.N.R. v. Colford Contracting Co., [1960] C.T.C. 178; 60 D.T.C. 1131 (Ex. Ct.) and Newfoundland Light and Power Co. v. The Queen, [1986] 2 C.T.C. 235; 86 D.T.C. 6373 (F.C.T.D.).

The earned but unbilled revenues of the taxpayer at year end are brought into income pursuant to subsection 9(1) of the Act and there is no need to rely upon paragraph 12(1)(b) for this purpose. They were being accounted for by the taxpayer under subsection 9(1) prior to 1984 and they should equally be accounted for, pursuant to that subsection, after that date. The accounting principle which requires consistency in reporting from year to year, to ensure that an accurate picture of the taxpayer's financial position is portrayed is applicable here. (See Canada v. Cyprus Anvil Mining Corporation, [1990] 1 C.T.C. 153; 90 D.T.C. 6063 (F.C.A.).) The 1984 amendment was not intended to allow or require taxpayers to change their method of accounting for profit from the earned to the billed method and thereby accomplish a significant deferral of taxes. It seems clear the amendment's purpose was entirely the opposite. It was intended to require taxpayers who report on a billed method, when there is undue delay in billing, to account for the income which has not yet been billed.

I find little assistance for present purposes in the jurisprudence which has dealt with the term "receivable", for example, Ken Steeves Sales Ltd. v. M.N.R., supra, at 53 (D.T.C. 1049) and M.N.R. v. Colford Contracting Co., supra, especially at 186 (D.T.C. 1135). Lastly, it is my view that subsection 12(2) is pertinent. That subsection makes it very clear that paragraph 12(1)(b) is not to be construed as implying that amounts not referred to therein are "not to be included in computing income". It seems to me the taxpayer's argument in the present case would require one to ignore that directive.

For the reasons given the plaintiff's claim will be dismissed.

Appeal dismissed.