Citation: 2010 TCC 161
Date: 20100416
Docket: 2004-4446(IT)G
BETWEEN:
HERITAGE EDUCATION FUNDS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Lamarre J.
[1]
This is an appeal
against a reassessment made by the Minister of National Revenue (Minister)
for the appellant’s 1999 taxation year. In reassessing, the Minister adjusted the
appellant’s income by the addition of $11,842,789 in respect of an "enrolment
fees deduction disallowed" and the deduction of $651,353 in respect of
"reserves for doubtful debts allowed".
[2]
The appellant, Heritage
Education Funds Inc. (formerly known as Allianz Education Funds Inc. and, prior
to that, as Canadian American Financial Corp. (Canada) Limited (CAFC))
carried on business in Canada distributing units of the Heritage
Scholarship Trust Plan (Plan), a savings plan that qualifies as a registered
education savings plan (RESP) under the Income Tax Act (ITA).
In its return of income for the 1999 taxation year, the appellant reported net
income of $2,009,856. In computing its income from its business, the appellant
excluded enrolment fees earned but not received by it as at its December 31
year end ($11,842,789). The appellant had been reporting its enrolment fees in
this manner for a number of years prior to 1999. As a result, the closing
receivables balance at the end of 1998, i.e. all enrolment fees from sales made
in 1998 and before (the 1998 enrolment fees receivable), was included in income
for 1999. The 1998 enrolment fees receivable amount added to the appellant’s
income for 1999 was $13,442,628 (see Exhibit A‑3).
[3]
In adjusting the
appellant’s 1999 net income, the Minister included the enrolment fees earned
but not received for 1999 ($11,842,789) without adjusting or reducing that net income
through the exclusion of the amount of $13,442,628 that was included in income
by the appellant in 1999 but which had been earned in 1998 and prior years. As
a result, the Minister increased the appellant’s net income for 1999 from
$2,009,856 to $13,305,885 (Exhibit A-3).
[4]
In its financial
statements, the appellant reported income for 1999 of $225,731, which income
was computed on an accrual basis and included the 1999 enrolment fees receivable
of $11,842,789, but not the 1998 enrolment fees receivable of $13,442,628.
[5]
In the introduction to
its Notice of Appeal, the appellant states that the sole issue in this appeal
is whether the enrolment fees in question ($11,842,789) were required to be
included in computing the income of the appellant for its 1999 taxation year. Under
the heading "Issues to Be Decided", the appellant states the issue as
follows: "Was the Membership [Enrolment] Fee Revenue based on Possible
Future Deposits [deposits which had not been made by Plan Members as at
December 31, 1999] required to be included in computing the income of the appellant
in its 1999 taxation year?"
[6]
In its pleading, the
appellant answered this question in the negative, basing its contention on the
fact that the appellant had no legal entitlement to enrolment fees based on
such possible future deposits unless and until such deposits were in fact made
by the plan members. The appellant relied on sections 9 and 12 of the ITA.
[7]
In the Amended Reply,
the respondent states the issue as being whether the enrolment fees receivable
were properly included in computing the appellant’s income. The respondent
answered that question in the affirmative and submitted that the inclusion of
the enrolment fees receivable in computing the appellant’s income is consistent
with generally accepted accounting principles (GAAP) and provides a more
accurate picture of the appellant’s income.
Facts
[8]
The Plan was
established by the Heritage Scholarship Trust Foundation (the Foundation),
a non-profit corporation without share capital incorporated under the laws of Canada. The Foundation was responsible for the
administration of the Plan with respect to which the appellant provided
services to the Foundation. Those services included the distribution of units
of the Plan, pursuant to the terms of a Franchise Agreement, which provided for
the payment of enrolment (membership) fees to the appellant.
[9]
Persons who purchased
units in the Plan (called "Members" or "Subscribers") agreed
to be bound by the terms of a Scholarship Agreement entered into with the Foundation.
That Scholarship Agreement had to be filed along with a prospectus in
accordance with provincial securities law, more precisely in accordance with National
Policy Statement 15 (National Policy 15) (Exhibit A-1, Tab 1). The
prospectus (which had to clearly indicate the speculative nature of the
scholarship plan and the real cost of participation in the plan to the
subscriber) was part of the Scholarship Agreement. The 1998 and 1999 prospectuses
provided that a member had to subscribe for a minimum of two units in the Plan
and agree to make predetermined deposits with the depository [the bank
responsible for receiving deposits]. It also provided that a membership (enrolment)
fee of $100 per unit together with certain other amounts was to be deducted
from the deposits to cover the costs of administering the Plan. More
particularly, the prospectus indicate the following:
Membership Fee and other deductions
The Agreement authorizes the Depository to deduct the following
amounts from the Deposit and/or Savings as applicable:
(a)
A fee (the "Membership Fee") of
$100.00 per Unit is payable to the Distributor [Appellant] as follows:
(i)
the first $50 per Unit deposited; and
(ii)
the remainder of the Membership Fee is paid by
the deduction of 50% of subsequent Deposits until the total Membership Fee is
paid.
(b)
An annual depository fee per Agreement (the
“Depository Fee”)
of:
(i)
Single Deposit Method - $3.50 plus GST
(ii)
Annual Deposit Method -$6.50 plus GST
(iii)
Monthly Deposit Method - $9.50 plus GST
(See 1998 Prospectus, Exhibit A-1, Tab 2, page 9 and 1999
Prospectus, Exhibit A-1, Tab 3, page 10.)
[10]
In the Scholarship
Agreements, paragraph 2(a) states the following:
2. Deposits
(a)
the Member, by executing the [Scholarship]
Application agrees:
(i)
to enrol in the Plan;
(ii)
to make deposits with the Depository
("Deposits") to the account maintained by the Depository in
accordance with the Deposit method identified on the Application; and
(iii)
to subscribe for the number of Units in the Plan
identified in the Application.
(b)
The Member authorizes the Depository and the
Depository Trustee to deduct the following from Deposits or Savings, as
applicable;
(i)
the first $50 of Deposits for each Unit and 50%
of the subsequent Deposits until a Membership Fee of $100 per Unit is paid;
(ii)
the Depository fee, as outlined in the
Prospectus;
(iii)
group insurance premiums, if applicable
(iv)
an annual operating fee to constitute the
operating account used to pay future expenses of administration of the
Foundation. The annual amount is ½ of 1% of principal and interest on deposit,
calculated annually and deducted monthly from interest; and
(v)
additional individual charges for any special
services requested by a Member, as outlined in the Prospectus.
[See Exhibit A-1, Tabs 4 and 5.]
[11]
Mr. Onofrio Loduca, the
chief financial officer of the appellant testified at the hearing. He said that,
in fact, members had various options with respect to making deposits; they
could be made, in one payment or in monthly or annual payments, as set out in a
contribution schedule. Payments were thus made over a period of up to 3 years
typically, depending on the age of the child and how fast the member wanted to
accumulate interest in the Plan (Transcript, pages 91 and 92).
[12]
The prospectus and the
Scholarship Agreement also provided that a member could withdraw from the Plan
at any time during the 60-day period following the later of the date on which
the application was signed by the member and the date of the initial deposit
under the agreement upon giving written notice, which had to be received by the
Foundation’s head office within those 60 days. Upon such withdrawal, all deposits
made by the member were returned to the member, except for insurance premiums
and any interest earned on the deposits. Membership fees had to be returned to
the member.
[13]
After the 60-day period
referred to above, a member could still terminate his or her interest in the
Plan. Upon such withdrawal, all deposits were to be returned to the member less
the deductions made therefrom, including the membership fees, which were not
returned to the member (see 1998 Prospectus, Exhibit A-1, Tab 2, pages 9-10;
1999 Prospectus, Exhibit A-1, Tab 3, page 2; 1998 Scholarship Agreement,
Exhibit A-1, Tab 4, paragraphs 5(a) and (b); 1999 Scholarship Agreement, Exhibit
A-1, Tab 5, paragraphs 5(a) and (b)).
[14]
Furthermore, in the
event that a member failed to make a deposit when required, the Foundation
would provide notice to the member of such failure, normally within 30 days.
Failure by the member to remit the required deposit within 60 days following such
notice would result in the termination of the member’s interest in the Plan, in
which case the member could either elect within a three-year period to have his
or her interest in the Plan reinstated, or require the return of all savings,
without interest, less deductions already made (including the membership fees).
Upon failure by the member to make any election within the three-year period,
the savings would be transferred into the Enhancement Fund (a fund consisting
of the interest accruing on funds in the Scholarship Fund) (see 1998 and 1999 prospectuses,
Exhibit A-1 Tab 2, page 10, and Tab 3, page 11; 1998 and 1999 Scholarship
Agreements, Exhibit A-1, Tab 4, section 1 and paragraph 5 (c), and Tab 5,
paragraph
5(c)).
[15]
Mr. Loduca explained
that the deposit schedule agreed upon by a member had to be adhered to by the
member or his assignee in the event of the disability or the death of the
member (paragraph 4(a) of the Scholarship Agreements, Exhibit A-1, Tabs 4 and 5),
in order to get full value back for the nominee upon the maturity of the Plan (see
Transcript, pages 129-130).
[16]
Ms. Doreen Johnston, who,
as vice-president of administration and a director of the appellant during the
taxation year in question supervised the scholarship committee, also testified.
She explained that the deposit schedule set out due dates for contributions, since
all plans are designed to earn approximately the same amount of interest by their
maturity date. The predetermined schedule is in effect a forced savings program
for people who want to stay in the Plan, but there is no obligation to make contributions
if, for any reason, someone wishes to withdraw from the Plan (See Transcript,
pages 160-161.)
[17]
The Franchise Agreement
entered into between the Foundation and the appellant (see Exhibit A-1, Tab 6),
provided as follows with respect to the enrolment (membership) fees:
Rescission Right
6. If any subscriber to a scholarship agreement requests
that the Foundation terminate the agreement within 60 days after the Acceptance
of a scholarship agreement, then notwithstanding that the agreement may have
been executed by the Foundation, the Foundation shall have the right to
terminate the agreement and to cause to be returned to the subscriber all funds
deposited with the Depository in respect of that agreement. If the Foundation
exercises this right, then CAFC shall not be entitled to any payment whatsoever
in respect to the agreement and shall repay to the Foundation all funds
received by it in respect to the agreement, failing which the Foundation may
deduct the amount of these funds from other payments due from it to CAFC.
. . .
Foundation Payments to CAFC
8. (a) The Foundation shall pay to CAFC an amount
equal to the enrolment fees in respect of all scholarship agreements sold by
CAFC, as they fall due.
. . .
[18]
Mr. Loduca explained
that from a financial accounting perspective, the appellant included the $100
membership (enrolment) fee in income immediately while for income tax purposes
it only included in income those fees it collected from members’ deposits as
they were made by the members. The appellant took the approach that it did not
have legal entitlement to the membership fees until the deposits were actually
made by the members.
[19]
Mr. Loduca explained
that they took that approach because of the wording of paragraph 8(a) of the
Franchise Agreement, which says that the enrolment fees are to be paid to the
appellant "as they fall due", meaning when the deposits were received
by the Foundation (Transcript, p. 36). In cross-examination Mr. Loduca said that
the appellant interpreted "as they fall due" thus:
as the Foundation is able to receive those deposits [from the
Members] and membership fees and enrolment fees are withdrawn from those
deposits, that they are in a position to pass on those fees to the distributor.
[transcript page 82.]
[20]
Ms. Johnston also
testified that the Foundation’s right to receive membership fees only arose
when a contract was signed or on the date of the cheque, whichever was more recent.
She then elaborated by stating that the membership fee could only be deducted
from deposits, that until there were deposits no membership fees were paid and that
there was no way to compel a member to make a deposit. (Transcript, pages 169
and 173).
[21]
She interpreted “as
they fall due” as meaning that the payment to the appellant would not be made
until deposits were made and the membership fees deducted therefrom. She said
that if there were no deposits there were no enrolment fees and that the
appellant could not enforce payment because the regulations under which the
Foundation and the appellant operated only permitted the collection of fees if
deposits were made. (Transcript, pages 177 and 178.)
[22]
As a matter of fact,
the appellant never invoiced the Foundation and it never asked the Foundation
to pay funds or monies that had not been received from the members. Mr. Loduca did
acknowledge, however, that once a member’s application and Scholarship Agreement
was accepted by the Foundation, this automatically triggered the appellant’s
right to receive the $100 commission amount (Transcript, page 86). In the notes
to the appellant’s financial statements for the year ended December 31, 1999,
it is stated (at Note 1.(b)) that membership fees are earned by the appellant
as remuneration for its services in distributing the Plan. These fees are
recorded at the time of sale and are collected as deposits are made under the
Plan (Exhibit A‑1, Tab 7, page 4).
[23]
In fact, for the
purpose of reporting in its financial statements, the appellant kept a running
tally throughout the year of each unit sold and each sale accepted by the
Foundation. For accounting purposes, such as in the preparation of financial
statements, a predictive model was used in which the probability of receiving enrolment
fees over time was taken into account in the computation of income (enrolment
fees receivable also being treated as assets ‑ Exhibit A-1, Tab 7, balance
sheet, page 1), and adjustments were made through an allowance or a reserve for
fees that would not be collected over time (statement of retained earnings in
the financial statements, Exhibit A-1, Tab 7, page 2; Transcript, pages 9-10,
100 and 101). The historical average receivables becoming uncollectible was 5½
per cent (Transcript, page 99).
[24]
For tax purposes, in a
case where the appellant had to reimburse a membership fee to a member who
elected to withdraw from the Plan in the first 60 days, the appellant would
report that membership fee as having been received and make a deduction of the
same amount when it returned the money to the member. There was no contingent
deduction made for tax purposes (Transcript, pages 26-27).
[25]
Mr. Kenneth Daniel
Devine, who was the tax director for Allianz Life Insurance Co. and an officer
of the appellant, also testified. He said that he reviewed the appellant’s tax
returns. His testimony did not add much to the other witnesses’ testimony. He
acknowledged that the Franchise Agreement between the Foundation and the
appellant was intended to be a legally enforceable agreement but stated that the
appellant did not have entitlement to the commissions when the units were sold.
They were recorded as “cash received” (Transcript, pages. 212 and 213).
[26]
Furthermore, Mr. Loduca
acknowledged that expenses incurred by the appellant in connection with the
sale of the units sold in 1999 (Exhibit R-2) were deducted in the computation
of income for tax purposes. Approximately $15 or $16 million out of $18 million
in salaries and commissions was related to commissions paid to salespersons on
sales made in 1999 (Transcript, page 108).
[27]
The evidence also revealed
that the appellant entered into factoring agreements with its affiliated US parent
company, selling its accounts receivable (including the enrolment fee receivable)
to finance its operations. The parent company looked at the probability of collecting
these receivables in the future and discounted the purchase price by an
interest rate charge that included the risk in that regard (Transcript, pages
43, 122 and 123). The discount rate was determined after taking into account the
appellant’s historical doubtful debt experience, the historical average
collection period for membership fee receivables and the bank prime rate on the
date of the transaction (see note 4 to the financial statements, Exhibit A‑1,
Tab 7, page 7).
[28]
Under the documents
entitled Agreements – Sale of Accounts (the Factoring Agreements) filed as Exhibit
R-2, Tabs 4 and 5, the appellant sold to Allianz Life (its parent company)
present and future enrolment fees earned and to be earned by the appellant
through the sale of scholarship plans in the regular course of its business,
and Allianz Life was then to have the full risk and obligation with respect to
the collection of those fees. Mr. Loduca explained that the appellant was
passing the risk on to its parent company, ant that this risk was factored into
the discount rate at an estimated rate, which meant that the risk could actually
be greater or lower (Transcript, pages 120-121). Mr. Loduca stated
that in case of non-payment of the receivables, Allianz Life could not collect
any money from the Foundation because the Foundation, being a not-for-profit
incorporated entity, had neither money nor assets (Transcript, pages 125, 140).
[29]
Counsel for the
appellant read into evidence excerpts from the transcript of the examination
for discovery of Ms. Vanda Yantsis, an appeals officer with the Canada Revenue
Agency (CRA). She had testified at discovery that at the time she confirmed
the reassessment at issue she was of the view that the appellant did not have a
legal right to enforce payment. The respondent has since changed her mind and
is of the view that although the appellant did not have a legal right to sue
the members, it did have a legal right under the Franchise Agreement to enforce
payment of any amounts owing to it by the Foundation under the terms of that
agreement (Transcript, pp. 253 to 257).
Statutory
Provisions
[30]
ITA
SECTION 9
(1) Income.
Subject to this Part, a taxpayer’s income for a taxation year from a business
or property is the taxpayer’s profit from that business or property for the
year.
SECTION 12
(1) Income
inclusions. 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:
. . .
(1)(b) Amounts
receivable - 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
the taxpayer to include any amount receivable in computing the taxpayer’s
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 on
which the account in respect of the services was rendered, and
(ii) the day
on 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.
Appellant’s
Submissions
[31]
It was the appellant’s
submission that it did not have a clear legal and unconditional right to
collect or receive the enrolment fees. According to the appellant, the right to
those fees was dependent entirely on the occurrence of an uncertain event
outside its control, i.e. the right to receive those fees was based entirely on
the unilateral decision of members to continue making deposits. Counsel for the
appellant referred to the case of M.N.R. v. John Colford Contracting Co.
60 DTC 1131, (1960), 26 D.L.R. (2d) 15 (Ex. Ct. of Canada) in which Kearney J.
interpreted the expression “amount receivable” as follows at pages 1134 and
1135 DTC:
As "amount
receivable" or "receivable" is not defined in the Act, I think
one should endeavour to find its ordinary meaning in the field in which it is
employed. If recourse is had to a dictionary meaning, we find in the Shorter
Oxford, Third Edition, the word "receivable" defined as something
"capable of being received." This definition is so wide that it
contributes little towards a solution. It envisages a receivable as anything
that can he transmitted to anyone capable to receiving it. It might be said to
apply to a legacy bestowed in the will of a living testator, but nobody would
regard such a legacy as an amount receivable in the hands of a potential
legatee. 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. A second meaning, as mentioned by
Cameron J., is "to be received," and Eric L. Kohler, in A
Dictionary for Accountants, 1957 edition, p. 408, defines it as "collectible,
whether or not due." These two definitions, I think, connote entitlement.
This leads to
a consideration of whether, legally speaking, each of the holdbacks in the
instant case possessed the quality required to bring it within the meaning of a
receivable. Speaking of the quality required to constitute income, the learned
president of this Court stated in Robertson Ltd. v. Minister of National
Revenue, [1944] Ex. C.R. 170,182 [2 DTC 655, 660]:
Did such
amounts have, at the time of their receipt, or acquire, during the year of
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 has the quality of income. Is his
right to it absolute and under no restriction, contractual or otherwise, as to
its disposition, use or enjoyment? To put it in another way, can an amount in a
taxpayer's hands be regarded as an item of profit or gain from his business, as
long as he holds it subject to specific and unfulfilled conditions and his
right to retain it and apply it to his own use has not yet accrued, and may
never accrue?
[32]
The test in Colford
was adopted by the majority in the Supreme Court of Canada in Maple Leaf
Mills Limited v. The Minister of National Revenue, 76 DTC 6182. The majority
stated the following at page 6186:
. . . The right to receive this third element so as to reach the
plateau of the guaranteed minimum income never was a precarious one. At all
material times appellant had a clearly legal right to receive all the benefits
that together would bring its income to the guaranteed minimum. There is also
no doubt that the right of appellant to the amount of the debt resulting from
the deficiency in any given year was held by it unconditionally. That amount
was bound to accrue though not necessarily immediately. I accept without
question the test expressed by Kearney J. in The Minister of National
Revenue v. John Colford Contracting Company Limited [60 DTC 1131] (1960)
Ex. C.R. 433, at pages 440 and 441. An appeal to this Court from this judgment
was dismissed without written reasons [62 DTC 1338] (1962) S.C.R. viii.
[33]
Applying this test to
the facts of this appeal, the appellant argued that it did not have a clear
legal and unconditional right to the unpaid enrolment fee revenue from possible
future deposits. According to the appellant, any rights it may have had were
precarious and the fees cannot be construed as being unconditionally
“collectible”, as having been “received” or as being “bound to accrue”. It
argued that its entitlement to receive and enforce payment of enrolment fees
only arose when a deposit was actually made by a member. The appellant relied
on National Policy 15, paragraphs 7, 9 and 10, which set out the right of
members to withdraw or to cease making deposits at any time, without incurring future
obligations. The appellant further relied on the express terms of the prospectus
and the Scholarship Agreements, which had to be in accordance with National
Policy 15. It relied as well on what it termed the only reasonable
interpretation of the Franchise Agreement and on the evidence given by Doreen
Johnston and Onofrio Loduca. As a result, the appellant contended, the
enrolment fees relating to possible future deposits were not receivable under
paragraph 12(1)(b) of the ITA and should not be included in the appellant’s
income for 1999. Indeed, according to the appellant, an amount which it had no
clear and unconditional right to collect or receive did not need to be included
in its income when the entitlement to that amount was entirely dependent upon
outside parties, i.e. the members, who were at complete liberty to make or not make
future deposits.
[34]
Furthermore, the
appellant argued, the Minister’s reporting method resulted in a grossly
inaccurate picture of its income for its 1999 taxation year insofar as it
failed to exclude enrolment fees relating to plans sold in 1998 and prior
taxation years.
Respondent’s
submissions
[35]
The respondent
submitted that $11.8 million in uncollected commissions was receivable in 1999
even though payment was not due until a subsequent year; hence those
commissions had to be included in income for the 1999 taxation year pursuant to
paragraph 12(1)(b) of the ITA.
[36]
In support of her
submissions, the respondent relied mainly on the terms of the Franchise
Agreement. The respondent argued that the appellant had a clear legal, though
not necessarily immediate, right to receive the enrolment fees once a Scholarship
Agreement had been sold, and that the Foundation incurred an obligation to pay
those fees upon acceptance of a new unit sale. According to the respondent, the
Foundation’s obligation to pay the appellant came into existence at that time irrespective
of whether payment of the fees was required immediately or in the future. That
obligation to pay did not come into existence at the time the members made
their deposits, as argued by the appellant. The respondent argued that her
submissions are supported by the following points:
·
the appellant described
the enrolment fee amounts as “receivables” for accounting purposes and reported
them as assets on its balance sheet;
·
the appellant sold
portions of the enrolment fees receivable to its parent company (Allianz). The
factoring of those receivables is irreconcilable with the appellant’s
assertions that it had no right to the amounts unless and until deposits were
made by members.
[37]
According to the
respondent, the appellant understood its entitlement to the full amount of its
enrolment fees to arise upon making a sale of units to a member. This is
reflected in the wording employed in various Factoring Agreements and in the
financial statements approved by the appellant and its parent company.
[38]
The preamble to the
Factoring Agreements stated that the appellant was selling to its parent
company accounts receivable which represented “present and future bona fide
enrolment fees earned and to be earned by the appellant through the sale of
scholarship plans in the regular course of its business”. Paragraph 3 of the
Factoring Agreements also stated that the purchase price for outstanding
accounts sold to the parent was to be payable to the appellant at the end of
the month in which said accounts became a receivable through the sale of one or
more scholarship plans (Exhibit R-2, Tabs 4 and 5).
[39]
In the respondent’s
view, this wording is evidence that the sale of a scholarship plan was the
event triggering the appellant’s entitlement to the enrolment fees under
paragraph 8(a) of the Franchise Agreement.
[40]
With respect to the
appellant’s obligation under paragraph 6 of the Franchise Agreement, in the
event of the termination of a subscriber’s Scholarship Agreement within 60
days, to refund the Foundation any amounts received from the Foundation, the
respondent is of the view that it is a condition subsequent (not a condition
precedent), the existence of which does not detract from the status of the
uncollected enrolment fees as receivables. The respondent referred to the
Federal Court of Appeal decision in Commonwealth Construction Co. v. The
Queen, 84 DTC 6420 at page 6424:
. . . the record discloses that the rights of the Appellant to the
amounts paid to it in 1974 and 1975 were "absolute and under no
restriction, contractual or otherwise, as to its disposition, use or enjoyment."
They were not held subject to any specific and unfulfilled conditions. Once the
conditions precedent imposed in the letter agreements between the parties, supra,
had been fulfilled, as they were, the right to receive the monies and to retain
them had accrued and was absolute. True, it might be necessary to return the
monies in whole or in part if the appeal were successful. But, as I see it,
that was a condition subsequent which did not affect the unrestricted right of
the Appellant to use them until such a requirement occurred. It did not, as I
see it, affect their quality as income upon receipt.
[Condition subsequent]
As to the difference in effect of a condition precedent from a
condition subsequent on the question of an accrual to income, the learned Trial
Judge relied on a quotation from Meteor Homes Ltd. v. Minister of National
Revenue, 61 DTC 1001 at 1007 & 1008 which substantiates the view which
I expressed supra:
. . . Mertens, Law of Federal Income Taxation, Vol. 2, c. 12, p.
127, considers "the problem of when items are . . . deductions to
the taxpayer on the accrual basis", and deals with it at p. 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 mine)
[41]
Finally, the respondent
is of the view that the appellant is precluded from asking this Court to remove
from income the receivables amount that it deducted in the prior taxation year
and which it brought into income in the year under appeal (the amount of
$13,442,628).
[42]
The respondent argued
that this argument should not be entertained by this Court as it was not raised
by the appellant in its pleading. The respondent referred to the case of Santoro
et al. v. The Queen, 2004 DTC 3684, 2004 TCC 764, in which Rip J., as he
then was, described the function of pleadings as follows at paragraphs 43 and
44:
[43] Messrs. Williston and Rolls7, describe the function of pleadings as fourfold:
1. To define with clarity and precision the question
in controversy between litigants.
2. To give a fair notice of the case which has to be
met so that the opposing party may direct his evidence to the issues disclosed
by them. A defendant is entitled to know what it is that the plaintiff asserts
against him; the plaintiff is entitled to know the nature of the defence raised
in answer to his claim.
3. To assist the court in its
investigation of the truth of the allegations made by the litigants.
4. To constitute a record of the issues involved in
the action so as to prevent future litigation upon the matter adjudicated
between the parties.
[44] The function of pleadings is to permit opposing parties to
know what they are required to meet at trial. Each party sets out the facts of
his or her case in a pleading so that their cases are well defined and the
proper evidence can be led. It is not open to a trial judge to make a finding
on a point not raised in the pleading and where no evidence has been
particularly directed to it.
7 The Law of Civil Procedure, Butterworth & Co. (Canada) Ltd., Toronto (1970), p. 637.
[43]
The respondent also
invoked subsections 169(2.1) and 165(1.11) of the ITA in stating that the
appellant, as a large corporation, could not amend its Notice of Appeal to seek
relief that was not identified in its Notice of Objection (reference was made
to the decision of the Federal Court of Appeal in The Queen v. Potash Corp.
of Saskatchewan Inc., 2004 DTC 6002, 2003 FCA 471).
Appellant’s rebuttal
[44]
With respect to this
latter argument, the appellant replied that it was not raising new issues or
seeking new forms of relief, that is, issues and relief not referred to in its
Notice of Objection. In arguing that the Minister’s method of computing income
presents a grossly misleading picture since that method does not remove from
the computation amounts in respect of plans sold prior to 1999, the appellant,
so it contends, is responding directly to the assumptions of fact in subparagraphs
10h) and j), and to an argument put forward in paragraph 17, of the Amended
Reply, which read as follows:
10.h) The inclusion of the Enrolment Fees Receivable in computing
the Appellant’s profit from its business provided an accurate picture of the
Appellant’s income.
. . .
10.j) The exclusion of the Enrolment Fees Receivable in
computing the Appellant’s profit from its business provided an inaccurate
picture of the Appellant’s income.
. . .
17. He submits
that the inclusion of the Enrolment Fees Receivable in computing the
Appellant’s income is consistent with GAAP and provides a more accurate picture
of the Appellant’s income.
[45]
The appellant only
adduced evidence to rebut the respondent’s assumptions of fact. With respect to
the “large corporation rule” relied upon by the respondent, the appellant
argued that this rule does not preclude a taxpayer from raising new facts or
new reasons to demolish the Minister’s assumptions and respond to the
Minister’s argument (reference was made to the decision of this Court in British
Columbia Transit v. Canada, [2006] G.S.T.C. 103, 2006 TCC 437, in which was
discussed the position adopted by the Federal Court of Appeal in the Potash decision,
referred to by the respondent).
Analysis
I.
Are the enrolment
fees earned but not yet received amounts receivable to be included in income
pursuant to paragraph 12(1)(b) of the ITA?
[46]
As stated in Colford,
amount receivable is not a term that is defined in the ITA. It was determined
in that case that an amount will be receivable if the recipient has a clear
legal, though not necessarily immediate, right to receive it.
[47]
The question in Colford
was whether the issuance of an architect’s certificate constituted a condition
precedent binding on the taxpayer corporation which prevented it from claiming
a holdback until the certificate was issued. In Ontario,
it has been held that a contractor has no legal right to the amount of a
holdback until the issuance of the certificate, and that no suit can properly be
commenced by the contractor before certification unless it is clear that the
certificate has been improperly withheld by the architect. The Exchequer Court stated that completion of the work and acceptance by
the architect were conditions precedent which had to be fulfilled before the
taxpayer was entitled to payment of the holdback. As a corollary, the Court
concluded that the holdback did not take on the quality of a receivable until
the work had been accepted by the architect.
[48]
Here, the question that
must be asked is whether the appellant became entitled to the enrolment fees at
the time the Scholarship Agreements were sold or only at the time the members
made their deposits. Can it be said that the payment by the members of the
deposits pursuant to the Scholarship Agreements constituted a condition
precedent binding on the appellant which prevented it from claiming the
enrolment fees until the deposits were made by the members? Did the appellant
have a legal right to the enrolment fees before the payment of the deposits,
and could the appellant have properly commenced a suit against the Foundation
before those deposits were actually made by the members?
[49]
The appellant’s entitlement
to receive enrolment fees in relation to the sale of Scholarship Agreements has
its source in the combination of the provincial regulation (National Policy
15), the prospectus, the Scholarship Agreements entered into between the
Foundation and the members, and the Franchise Agreement signed between the
Foundation and the appellant. All of these documents are to be looked at as a
whole, as they are interdependent and none of them would exist without the
others.
[50]
Hence, the Franchise
Agreement exists to give the appellant the authority and exclusive right to
sell Scholarship Agreements to be entered into between members and the
Foundation upon acceptance of those agreements by the latter, all in accordance
with a prospectus that must be in conformity with the provincial regulation.
[51]
The provincial
regulation (National Policy 15) requires that the prospectus filed with respect
to the sale of Scholarship Agreements must draw a very clear distinction
between the Foundation, which is a body without any profit motive, and the
distributor, who sells the Plan under a commission arrangement (here, the
appellant). National Policy 15 establishes a maximum fee (including commission)
for a plan and requires that the Plan grant the subscriber the right to
withdraw from the Plan without any cost to the subscriber within 60 days from
the execution of the contract, and that the subscriber not be obliged to pay any
fees in addition to those already paid if he or she wishes to withdraw from the
Plan after that 60-day period (Exhibit A-1, Tab 1).
[52]
The preamble to the
Franchise Agreement (Exhibit A-1, Tab 6) states that the appellant (CAFC) “desires
to assist the Foundation in promoting the objects of the Foundation by encouraging
persons to enter into scholarship agreements”.
[53]
The Franchise Agreement
goes on to state that the parties agree as follows:
Paragraph 2: “The Foundation grants to [the appellant] the
exclusive worldwide right to encourage persons to enter into Scholarship
Agreements with the Foundation.”
Paragraph 3: “[The appellant] shall use its best efforts to
promote the objects of the Foundation and the . . . Plan by encouraging persons
. . . to enter into scholarship agreements.”
Paragraph 6: “If any subscriber to a scholarship agreement
requests that the Foundation terminate the agreement within 60 days after the Acceptance
of a scholarship agreement, then . . . the Foundation shall have the right to
terminate the agreement and to cause to be returned to the subscriber all funds
deposited with the Depository in respect of that agreement. If the
Foundation exercises this right, then [the appellant] shall not be entitled to
any payment whatsoever in respect to the agreement and shall repay to the
Foundation all funds received by it in respect to the agreement, failing which
the Foundation may deduct the amount of these funds from other payments due
from it to [the appellant].”
Paragraph 8:
“(a) The Foundation shall pay to [the appellant] an amount equal to the
enrolment fees in respect of all Scholarship Agreements sold by [the appellant],
as they fall due.
(b)
[The appellant] agrees that it will render all necessary assistance to the
Foundation to enable the Foundation to administer the Plan. In consideration of
[the appellant’s] assistance, the Foundation shall pay to [the appellant], or as [the
appellant] may direct, the full amount of
the annual fee deposited in the Operating Account with the Scholarship Trustee
and the full amount of any Depository Fees received by the Foundation in
respect of Scholarship Agreements entered into after the date hereof and prior
to the date of termination.”
[54]
The Franchise Agreement is drafted
in a way that respects the provincial regulation’s objectives, giving leeway to
subscribers, not forcing them either to participate or to stay in the Plan.
[55]
However, the provisions of the
Franchise Agreement dealing with the remuneration of the appellant for the sale
of Scholarship Agreements are drafted, in my view, in such a fashion that the
appellant may claim that it is entitled to that remuneration from the moment a scholarship
agreement is sold. I say so for the following reasons.
[56]
First, paragraph 6 of the
Franchise Agreement states that if the Foundation exercises its rescission right
where a subscriber withdraws from the Plan within the first 60 days, “then [the
appellant] shall not be entitled to any payment whatsoever”, meaning in my view
that, a contrario, the appellant is entitled to that payment if the
subscriber does not exercise his or her right to withdraw from the Plan.
[57]
Second, paragraph 8 states that
the Foundation is to pay to the appellant, not “the enrolment fees”, but an “amount
equal to the enrolment fees” in respect of all scholarship agreements sold.
Comparing this with the provision regarding the remuneration to be paid to the
appellant for its assistance in administering the Plan, we see that under
paragraph 8b) the Foundation is to pay “the full amount of the annual fee
deposited in the Operating Account . . . and the full amount of any
Depository Fees received by the Foundation in respect of scholarship
agreements”. Paragraph 8(b) does not say “an amount equal to”, it speaks rather
of “the full amount of the annual fee deposited” and “the full amount of
any Depository Fees received”.
[58]
In my view, the Franchise
Agreement was worded in such a way that the administration fees were to be paid
when they were deposited or when the Foundation received them, something which
was not specified for the enrolment fees. Paragraph 8(a) instead uses the phrase
“an amount equal to the enrolment fees in respect of all scholarship agreements
sold”.
[59]
The fact that the Foundation was
to pay the enrolment fees as they fell due does not mean that the appellant was
entitled to receive them only upon receipt of those fees by the Foundation. An
amount equal to the enrolment fees was payable by the Foundation as soon as Scholarship
Agreements were sold, but that amount did not have to be paid until the
enrolment fees fell due.
[60]
In my view, the payment of the
deposits by members did not constitute a condition precedent binding on the
appellant that prevented it from claiming the amount equal to the enrolment fees
until the deposits were made. The appellant had a legal right to an amount
equal to the enrolment fees as soon as the Scholarship Agreements were sold. As
stated by the Supreme Court of Canada in the Maple Leaf Mills case, for
an amount to become receivable in any taxation year, two conditions must coexist:
(1) a right to receive compensation; (2) a binding agreement between the
parties (76 DTC 6182 at page 6186).
[61]
As Mertens said in the
excerpt from Law of Federal Income Taxation quoted in the passage from
the Meteor Homes decision cited by the Federal Court of Appeal in Commonwealth
Construction supra, at page 6424, not every contingency prevents the
accrual of income. The possible occurrence of a condition subsequent to the
creation of a liability is not grounds for postponing the accrual (ibid.).
Applying the principle adopted by the Federal Court of Appeal in Commonwealth
Construction, I find from the record that the right of the appellant to an
amount equal to the enrolment fees was subject to no restriction even though it
might have been necessary to return the enrolment fee money if the subscriber
withdrew from the plan during the first 60 days, and even though the appellant might never receive
the enrolment fee in the event that the subscriber did not make the deposits. The fact that subscribers could opt out of the Plan constitutes
in my view a condition subsequent which did not prevent the accrual of income
in the year the Scholarship Agreements were sold by the appellant.
[62]
This conclusion is, in my view, not
contradicted by the testimony of either Mr. Loduca or Ms. Johnston. Mr.
Loduca acknowledged in his testimony that it was the sale of the Scholarship
Agreements that triggered the right to receive enrolment fees. Ms. Johnston
testified that the Foundation’s entitlement to the enrolment fees arose at the
time a contract was signed or upon the signature of the cheque,
whichever was more recent, and that the Foundation could not compel a member to
make a payment. In her testimony regarding her interpretation of the Franchise
agreement, she referred to the time at which the enrolment fees became payable
to the appellant, not the time at which the appellant became entitled to them.
[63]
That the appellant was to be paid
when the deposits fell due does not alter the fact that its right to receive the
amount came into being as soon as the Scholarship Agreement was signed and not
when the Foundation was required to pay (see The Queen v. Derbecker, 84
DTC 6549 (FCA)). Nor does the possibility that the subscriber might cancel the plan
mean that the appellant’s entitlement was uncertain or conditional (see The
Queen v. La Capitale, Compagnie d’Assurance Générale, 98 DTC 6428 at page
6430).
[64]
I also agree with the respondent
that the sale by the appellant of its accounts receivable to its parent company
and the fact that it recorded those accounts receivable as assets in its
financial statements are also an indication that the appellant did consider
that it was entitled to receive the enrolment fees in the year they were
earned, that is, the year in which the agreements were sold.
[65]
This conclusion accords with the
principles governing the interpretation of commercial contracts as reproduced
in this Court’s decision in Costco Wholesale Canada Ltd. v. Canada, [2009]
G. S. T.C. 38, 2009 TCC 134:
17. In
answering this question, and in interpreting these contracts, the parties
agreed that the principles of contractual interpretation to be relied upon are
well summarized by the Ontario Court of Appeal in 3869130 Canada Inc. v.
I.C.B. Distribution Inc.:
31 ...
Broadly stated
... a commercial contract is to be interpreted,
(a) as a
whole, in a manner that gives meaning to all of its terms and avoids an
interpretation that would render one or more of its terms ineffective;
(b) by determining
the intention of the parties in accordance with the language they have used in
the written document and based upon the "cardinal presumption" that
they have intended what they have said;
(c) with
regard to objective evidence of the factual matrix underlying the negotiation
of the contract, but without reference to the subjective intention of the
parties; and (to the extent there is any ambiguity in the contract),
(d) in a
fashion that accords with sound commercial principles and good business sense,
and that avoids a commercial absurdity.
[66]
Finally, the fact that the
Foundation was a non-profit corporation and did not have any assets does not
affect my conclusion. Indeed, National Policy 15 provided that sufficient funds
must be set aside in trust to pay the costs of administering the trust funds held
by the Depository, and the Scholarship Agreements provide that the Depository
is authorized to constitute an operating account to be used to pay future
expenses of administration of the Foundation (paragraph 2(b)(iv).
Therefore, while the Foundation had no assets, the operating fund existed
precisely for the purpose of paying the expenses, including, in my view, the enrolment
fees earned that were to be paid when they fell due.
[67]
I therefore conclude that the
enrolment fees had to be reported in income on an accrual basis in the year
they were earned, which is not necessarily the year they fell due or the year
they were paid.
II. Did the inclusion
of the enrolment fees receivable in computing the appellant’s income for the
1999 taxation year provide a more accurate picture of the appellant’s income?
[68]
The short answer is that if the
Minister was right in including the enrolment fees receivable in income in the
year they were earned, he ought to have excluded the enrolment fees earned in
prior years in order to present an accurate picture of the appellant’s income
in 1999. Evidence supporting this is that, in its financial statements, the
appellant adopted the predictive method that is recognized by the Minister, and
it reported income before taxes in the amount of $225,731 in 1999. If the
appellant had used the same method for income tax purposes, making the appropriate
adjustments, its net income would have been $514,610 (as I will explain later
on) instead of the $2,009,856 reported by the appellant (arrived at by taking
out the enrolment fees earned in 1999 and including the enrolment fees earned
prior to 1999).
[69]
The Minister, in adopting the
predictive method without taking out the enrolment fees earned in prior years, arrived
at an income figure of $13,305,885. This is clearly not an accurate picture of
the appellant’s income for 1999.
[70]
In Canderel Limited v The Queen,
98 DTC 6100, the Supreme Court of Canada said at page 6110:
(1) The determination of profit is
a question of law.
(2) The profit of a business for a
taxation year is to be determined by setting against the revenues from the
business for that year the expenses incurred in earning said income: M.N.R.
v. Irwin, supra, Associated Investors, supra.
(3) In seeking to ascertain
profit, the goal is to obtain an accurate picture of the taxpayer's profit for
the given year.
(4) In ascertaining profit, the
taxpayer is free to adopt any method which is not inconsistent with
(a) the provisions of the Income Tax
Act;
(b) established case law principles or
rules of law; and
(c) well-accepted business principles.
(5) Well-accepted business principles, which include
but are not limited to the formal codification found in G.A.A.P., are not rules
of law but interpretive aids. To the extent that they may influence the
calculation of income, they will do so only on a case-by-case basis, depending
on the facts of the taxpayer's financial situation.
(6) On reassessment, once the taxpayer has shown that
he has provided an accurate picture of income for the year, which is consistent
with the Act, the case law, and well-accepted business principles, the onus
shifts to the Minister to show either that the figure provided does not
represent an accurate picture, or that another method of computation would
provide a more accurate picture.
[71]
In my view, the appellant has
shown that the financial statements prepared using the predictive method, and
relied upon by the Minister in including in income the enrolment fees earned in
1999 but not yet received, provided an accurate picture of income for 1999. As
I said earlier, the income before taxes reported in the financial statements is
$225,731.
[72]
For income tax purposes, if
adjustments are made without deducting the enrolment fees earned in 1999
($11,842,789), the income reported should be around $410,017, as can be seen
from Exhibit A-3. The first column of Exhibit A‑3 shows the before‑tax
income reported in the financial statements ($225,731). The first item in the
second column is the after‑tax income shown in the financial statements
($75,245). I take into account the fact that the amount of $75,245 does not
include the amount of $13,442,628 (the enrolment fees earned prior to 1999), but
does include the amount of $11,842,789 (the enrolment fees earned in 1999 but
not received in 1999). Thus, if we add all the adjustments in the second column
(with the exception of the $13,442,628 that should not have been included for
1999 as it represents enrolment fees earned prior to 1999) to the net income of
$75,245 and do not deduct the $11,842,789, we arrive at an income of $410,017.
If we add to that the amount of $104,593 (shown as the second to last item of
the third column) representing convention expenses disallowed and not at issue
before me, the income to be reported should be $514,610.
[73]
The Minister determined the
appellant’s income for tax purposes to be $13,305,885 (see Exhibit A-3, third
column).
[74]
In my view, on a balance of
probabilities the amount of $514,610 provides an accurate picture of the
appellant’s income for the 1999 taxation year. As a matter of fact, except for those
with respect to the enrolment fees, the Minister has accepted all the
adjustments to income shown in Exhibit A‑3. As we know, the appellant chose
to report its income without including enrolment fees earned but not yet received
from subscribers, which resulted in its reporting income for tax purposes of
$2,009,856. Thus, the appellant has already penalized itself by reporting that
amount of income instead of $514,610.
[75]
The figures referred to above show
without any doubt that the income amount assessed by the Minister does not present
an accurate picture of the appellant’s income for 1999. There is a huge
difference between the amount that should have been reported in the first
instance ($514,610) or even the income actually reported by the appellant ($2,009,856)
and the income assessed by the Minister ($13,305,885).
[76]
The respondent contented that the
appellant was precluded from arguing that the enrolment fees earned prior to
1999 should be subtracted from income because that point was not raised in its
pleading. The respondent relied on an excerpt from The Law of Civil
Procedure by Williston and Rolls, cited with approval by Rip J. of this
Court in Santoro, in stressing the importance of pleadings. The function
of pleadings was therein described as fourfold:
1.
to define with clarity and
precision the question in controversy between litigants;
2.
to give a fair notice of the case
which has to be met so that the opposing party may direct his evidence to the
issues disclosed by them;
3.
to assist the Court in its
investigation of the truth of the allegations made by the litigants;
4.
to constitute a record of the
issues involved in the action so as to prevent future litigation upon the
matter adjudicated between the parties.
[77]
It is true that the appellant’s
argument on objecting to the reassessment was that the enrolment fees earned in
1999 should not be included in income as it had no entitlement to those fees. However,
the appellant relied on sections 9 and 12 of the ITA in asking this Court to
vacate the reassessment under appeal.
[78]
Moreover, the respondent herself,
in her Amended Reply to the Notice of Appeal, opened the door to an argument
that income should be calculated in such a manner as to provide an accurate
picture of the appellant’s income.
[79]
In the end, I must decide whether to
confirm the reassessment or not. In this particular case, the method of
computing income is the basis for reassessment. The determination of profit pursuant
to section 9 of the ITA is a question of law. In computing the reassessed income,
the Minister, deliberately or not, did not exclude from income the enrolment
fees earned prior to 1999.
[80]
In the circumstances, I find it somewhat
dishonest to argue that the assessment should be confirmed on the basis that
the appellant did not specifically raise the issue that the enrolment fees
earned prior to 1999 should be subtracted from income. In my view, it is
implicit that if the appellant failed to convince the Court that it was right
in excluding from its income for 1999 the enrolment fees earned in that same
year, then, for the purpose of the computation of profit, the enrolment fees
earned prior to 1999 should be excluded.
[81]
The respondent cannot claim that
she was caught by surprise, or that she was not given fair notice of the case
which had to be met. The question in controversy was the method to be used to
compute income. It was certainly open to the appellant for the purpose of rebutting
the allegation that its income as reassessed provided an accurate picture of its
profit for the 1999 taxation year, to raise the fact that the enrolment fees
earned prior to 1999 were not subtracted from income by the Minister.
[82]
To draw a parallel with the situation
in Argus Holdings Limited v. The Queen, 2000 DTC 6681 (FCA), it would be
a gross distortion of the appellant’s income picture if the enrolment fees
earned prior to 1999 were to be included in income for that year, for that
income does not represent profit for the 1999 taxation year but is profit for
prior years. Accordingly, an accurate picture of income would not be provided if
both the enrolment fees earned in 1999 and those earned prior to 1999 were
taxed in the appellant’s 1999 taxation year.
[83]
Furthermore, the fact that, unless
the reassessment is upheld, the appellant may escape taxation on the amount
that was not included in income in prior years due to the method adopted by the
appellant in reporting income for tax purposes is not relevant. It cannot be
used as a justification for a reassessment that the Minister does not have the
power to make under the ITA (see Trom Electric Co. Ltd. v. The Queen,
2005 DTC 62, 2004 TCC 727).
[84]
Finally, with respect to the
respondent’s argument that, pursuant to subsections 169(2.1) and 165(1.11) of
the ITA, the appellant, being a large corporation, could not raise a new issue,
that is, one not raised in its Notice of Objection, the appellant replies that
it is not raising a new issue, but is only bringing forward new facts or new
reasons to demolish the Minister’s assumptions and respond to the Minister’s
argument.
[85]
In British Columbia Transit v.
Canada, [2006] G.S.T.C. 103, 2006 TCC 437, C. Miller J. of this Court,
commenting on the Potash case relied upon by the respondent, stated the
following:
39 In the
case before me, the Respondent has identified BC Transit's failure as failing
to provide any facts respecting the property tax and sublease payments, and
failing to provide any reasons as to the "nominal consideration"
issue in the Notice of Objection. It did not argue that there have been any
failures with respect to the issue or to the relief sought.
40 I do not
find the Respondent's argument persuasive. The Potash case was not about
the lack of facts or reasons: it was about not allowing an increase in the
amount at issue. There is no change to the amount at issue before me from what
was set out in the Notice of Objection, nor has the issue changed. The issue
has always been the entitlement to the ITCs. The Respondent is correct that the
property tax was not raised as part of the facts or reasons, but I find this is
not fatal.
41 In the Potash
case, the Court quoted comments from Mr. R.M. Beith, an official from
Department of Finance, made at the 1994 Canadian Tax Foundation Conference:
One of the
reasons for the legislation is to identify disputed issues much sooner so that
a taxation year's ultimate tax liability can be determined in a timely way.
Owing to
the complexity of the law and the number of issues, for many years a number of
large corporations have had some of their taxation years left open through
outstanding notices of objection or appeals, so that they have been able to
raise new issues based on emerging interpretations and the outcome of court
decisions challenged by other taxpayers.
Recently,
a particular problem was identified by the auditor general and the Public
Accounts Committee. A case dealing with the calculation of the "resource
allowance" which was decided against the department, resulted in claims
not only based on the particular facts decided by the court but in respect of a
new issue concerning the calculation of the "resource allowance".
These claims, both directly and indirectly from the court decision, involved
significant amounts of tax and interests [sic].
In
summary, it is essential that revenues be more predictable and therefore that
potential liabilities be identified and resolved within a more reasonable time.
42 This
emphasizes that it is the issue and quantum that is of significance to the
Minister, not the facts and reasons that the Respondent points to as the
failure. It would prohibitively handcuff the large corporation to read these
provisions as limiting the large corporation to only those facts identified at
the Notice of Objection stage. That does not appear to be the thrust of the
section as supported by Mr. Beith, nor the interpretation of this section by
the Federal Court of Appeal in Potash. The very words of section 306.1
itself refer only to the issues and the relief. Interestingly, at the 1994 Tax
Conference Mr. Beith went on to say this about paragraph 165(1.11)(c)
(Income Tax Act equivalent to paragraph 301(1.2)(c)):
This
requirement is no different from what the law currently requires from all
taxpayers. In addition, in contrast to the requirements with respect to issue
and quantum, additional facts and reasons can be raised in appeals.
This is
certainly a sensible point of view, and one which I adopt. I find BC Transit is
not in breach of subsection 301(1.2) and, therefore, section 306.1 is not
invoked. BC Transit is free to argue that property tax and sublease payments
are facts that go to the consideration for the lease.
[86]
In the present case, the Minister
reassessed the appellant’s income at $13,305,885. If the appellant had reported
income on an accrual basis for income tax purposes, as it did for accounting
purposes, its income should have been around $514,610. The appellant reported
income of $2,009,856. It is not asking to reduce its income to $514,610. It is
only asking to have vacated the reassessment, which shows an income of
$13,305,885. I do not find to be fatal the fact that the appellant did not
mention specifically in its pleadings that the enrolment fees earned prior to
1999 were not subtracted by the Minister in reassessing the appellant’s income
for 1999. As I said before, it is implicit in this case, and it can be inferred
from the pleadings, that the appellant did not accept the income amount computed
by the Minister. The facts brought forward by the appellant proved on a balance
of probabilities that the income as reassessed by the Minister does not present
an accurate picture of the appellant’s income for the 1999 taxation year.
[87]
For the foregoing reasons, the appeal against the reassessment dated
August 27, 2004 in respect of the appellant’s 1999 taxation year made by
the Minister under the ITA is allowed and the reassessment is referred back to
the Minister for reconsideration and reassessment on the basis that the revised
taxable income of $13,305,885 is not representative of the appellant’s profit
for that year. The net income of $2,009,856 reported by the appellant shall be
restored with the addition, however, of an amount of $104,593 representing convention expenses that were disallowed and whose disallowance was not
challenged by the appellant in this appeal. The deduction of $3,076 for
charitable donations allowed by the Minister is not at issue. The
additional permissive deductions, being the increased deduction in respect of
prior years’ losses carried forward and the increased capital cost allowance
granted by the Minister in order to reduce the overall tax liability resulting
from the reassessment under appeal (as referred to in paragraph 5 of the Notice
of Appeal), shall be reversed as requested in subparagraph 36(b) of the Notice
of Appeal.
[88]
At the request of the parties,
representations on costs shall be made to the Court either in writing or orally,
as the parties wish, within 30 days of the date of the amended judgment.
Signed at Ottawa, Canada, this 16th
day of April 2010.
"Lucie Lamarre"
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