Citation: 2010TCC326
Date: 20100617
Docket: 2007-3352(IT)G
BETWEEN:
MICHAEL BRUCE REILLY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb, J.
[1]
The issue is this
appeal is whether the Appellant is entitled to deduct, in computing his income
for 2001, certain campaign expenses that were incurred in 1999 when the
Appellant was running for the office of mayor of Delta, British Columbia. While
the Appellant in his Notice of Appeal had raised the issue of whether he should
be allowed to claim certain other expenses in computing his income for 2001 and
2002, the only issue that was dealt with at the hearing was the amount claimed
for campaign expenses in 2001. During the hearing the amount that the Appellant
claimed that he was entitled to deduct was reduced from $33,185.34 to
$31,978.91.
[2]
The Appellant held
forty percent of the shares of United
Realty RCK & Associates Ltd. (“United Realty”). He provided his services to
United Realty as a self-employed real estate broker / developer / realtor. He
charged GST on his services and reported his commission income as
self-employment income. He also received directors’ fees from United Realty
that he reported as income from employment.
[3]
In 1999 the Appellant ran for the
office of mayor of Delta, British
Columbia. The following are excerpts
from the exchange between counsel for the Respondent and the Appellant in
relation to the reasons why he ran for mayor and his campaign promises:
Q Is it fair
to say that in '99 you felt fairly passionate about some issues that you wanted
to bring or to -- you felt passionate about some issues that you wanted to make
changes with, you wanted to bring to the attention of the City of Delta?
A You know, I
don't recall being passionate about any issues other than seizing an
opportunity to step in and develop a better profile for myself. But on the
issue side, I don't -- I can't say that I had any passionate issue that I
wanted to deal with, if that's what you're asking.
Q I'm curious
about the issue of protecting environmentally sensitive lands and the
protection of the environment. Isn't it fair to say you were passionate about
those issues at that time?
A No. In
fact, I wrote advertorial about talking about developing Burns Bog. I had been
approached by the owners of Burns Bog, which is a big controversial issue
here. It's 10,000 square -- 10,000 acres of land that there was a proposal for
hotels and casinos and all sorts of things on. And in fact I had people who
were senators come out to meet with me about it, and people from the casino
industry saying that, you know, they'd like me to consider after I finished my
run for mayor in helping them to develop the property if possible.
So I was really
was on the negative side of the environment in the advertising that I was
doing, which did not go over very well with the general public. But as a
developer you have to put forward that when you're a developer, yes, you have
to be sensitive to the environment but you also have to understand that
industry and jobs and housing and these other items have to be created. So if
you're saying I was an environmentalist and had a passion for it, no.
Absolutely not.
Q So you had
no passion for any of the issues that you were speaking about with your
electorate?
A No. It was
strictly business for me.
Q Well, I
suggest to you that your decision to run for the mayor of Delta did have a
personal element and it was a personal choice that you were making and not a
business choice.
A Well, you
can suggest that, and sure, I'd love to be mayor of a city. Basically the type
of business that I do is all about real estate and property development rights,
and considering that I've done some development I understand the process and I
could help others achieve their goal and benefit in a tax base for a community,
yes. From that side I would enjoy being mayor of the city of Vancouver
or some other place. It's a great job. In fact the salary is like $100,000 a
year, so it's a well paying job.
Q So when you
were campaigning to run for this position, weren't you speaking to the
electorate and promising them that you would bring their concerns to the
attention of the city should you be elected?
A You know, I
didn't make any promises to anybody other than if I was elected I would run the
city like a business the way I run my development and real estate companies.
Q But wasn't
it your primary goal to advance the concerns of the community of Delta in
running for mayor, not just running -- not just pushing the concerns of Mr.
Reilly, but pushing forward and advancing the concerns and the needs of a
community as a whole, the betterment of Delta as a whole?
A You know,
for the record, I was after the job of becoming mayor as another job being
basically the same as what I do in the real estate development. It would be a
three-year contract. I would earn income during that time. That was my only
interest. Not so much what you say about bringing the concerns of the citizens
to the community. I didn't listen very much to the citizens. I listened to
the businesses. That was my -- that was what I was intended to do.
Q So you were
most interested in receiving the good salary that was involved with getting the
position of the mayor.
A Yes.
[4]
It appears that the
Appellant was not passionate about any issue except increasing his own profile
and earning the salary of mayor. He also did not listen to the citizens of
Delta and did not appear to have much interest in their concerns. It will
probably not be a surprise that he was not successful in his bid to become
mayor.
[5]
The Appellant’s
argument was that he incurred the campaign expenses to increase his profile and
to increase his income as a real estate broker / developer / realtor. He stated
that his advertisements not only dealt with his bid to become mayor but also
identified his business background and the services that he offered. The
campaign expenditures were incurred in 1999. United Realty paid the
expenditures on his behalf in 1999. The arrangement was that the Appellant
would reimburse United Realty and he did so in 2001. The first issue raised by
the Respondent is that since the expenditures were incurred in 1999 they could
not be deducted by the Appellant in 2001.
[6]
The Appellant’s
position is that he was entitled to determine his income on a cash basis and
since he did not reimburse United Realty until 2001, then he is entitled to
deduct this amount in 2001. In this case the Appellant was not employed
by United Realty as a commission salesperson. He claimed, and it was not disputed
by the Respondent, that he carried on his realtor / broker / developer activities
(in relation to which he was claiming the campaign expenses as a deduction) as
an independent contractor. As a result how the Appellant is to compute his
income from his activities as a realtor / broker / developer is to be
determined pursuant to section 9 of the Income Tax Act (the “Act”)
(and the other applicable sections of the Act) and not sections 5, 6 and
8 of the Act.
[7]
Section 5 (which applies
to employees) provides that remuneration received in the year is
to be included in income. Paragraph 8(1)(f) of the Act (which applies to
persons who are “employed in the year in connection with the selling of
property or negotiating of contracts for the taxpayer's employer”) refers to
amounts expended. Therefore employees would use the cash basis of
accounting to compute their income from employment. However the Appellant was
not “employed in the year in connection with the selling of property or negotiating
of contracts for [his] employer” and therefore paragraph 8(1)(f) of the Act
does not apply to the Appellant. He was carrying on business and he was
claiming that the advertising costs were deductible in computing income from
this business.
[8]
Subsection 9(1) of the Act,
which is applicable to the Appellant in determining his income from his
business, simply provides that:
9. (1) 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.
[9]
In Ken Steeves Sales
Ltd. v. The Queen, [1955] Ex. C.R. 108, 55 DTC 1044, [1955] C.T.C. 47,
Justice Cameron stated as follows:
For these reasons I must reach the conclusion that the “Cash
Receipts and Expenditure” method purported to have been used by the appellant
in this case is a method which is not permissible under the Act. I say that
because of the fact that it excludes as an item of income all receivables,
which in my opinion form a necessary part of any trader's profit and loss
statement. Such a method is incomplete and misleading and one which fails
entirely to show the true state of a taxpayer's position or to reflect his true
profit or loss. . . .
[10]
In Freeway
Properties Inc. v. The Queen, [1985] 1 C.T.C. 222, 85 DTC 5183,
Justice Addy of the Federal Court – Trial Division stated that:
18 Section 9 of the Income Tax Act
indeed states that profit must be accounted for in accordance with normal
business practices unless the Act otherwise provides. Several cases were relied
upon by counsel for Freeway including Ken Steeves Sales Ltd v Minister
of National Revenue, [1955] C.T.C. 47, 55 D.T.C. 1044, Industrial
Mortgage and Trust Co v Minister of National Revenue, [1958] C.T.C.
106, 58 D.T.C. 6185, to emphasize the importance of relying on normal business
practices. I find no difficulty in concluding and indeed it was admitted by the
Crown, that Freeway was justified in accounting for its operations on an
accrual as opposed to a cash basis. It was in fact obliged to do so.
[11]
In The Fundamentals
of Income Tax Law by Vern Krishna (Carswell, 2009) it is stated at page 164
that:
In contrast with the requirement of cash basis accounting for
employment income, business and property income is usually required to be reported
on an accrual basis. The Act does not specifically stipulate a particular
method for calculating business or property income. Section 9 says only that a
taxpayer’s income from a business or property is his or her profit
therefrom. The term “profit”, however, has been judicially interpreted to mean
profit calculated in accordance with commercial practice, and commercial
practice favours accrual accounting for most businesses. Hence, the accrual
method is mandated indirectly through the requirement to adhere to generally
accepted accounting principles.
(emphasis was in original text)
[12]
In Canderel Ltd.
v. The Queen, [1998] 1 S.C.R. 147, 98 DTC 6100, [1998] 2 C.T.C. 35,
Justice Iacobucci of the Supreme Court of Canada stated that:
V. Analysis
(1) General principles of profit computation
28 In the relatively recent case of Symes,
supra, this Court considered the general principles which govern the
computation of profit for income tax purposes. However, because some of the
principles enunciated in Symes may have been misinterpreted, I propose
to review these general principles in order to resolve the issue in this appeal
and to clarify the critical issue of profit computation for the purposes of the
Income Tax Act.
(a) The interpretive framework
29 It is appropriate to begin the
consideration of profit with s. 9(1) of the Act, which defines a taxpayer's
income for a taxation year from a business or property source as “his profit
therefrom for the year.” Significantly, “profit” is not defined in s. 9(1) or
anywhere else in the Act. It seems to me that this approach was a deliberate
legislative choice, particularly given that the Act contains exhaustive
definitions of numerous other concepts and terms with which it deals. This
choice reflects the reality that no single definition can adequately apply to
the millions of different taxpayers bound by the Act. Under our self-assessment
system, each taxpayer must be able to compute his or her income in such a way
as to constitute an accurate picture of his or her income situation, subject,
of course, to express provisions in the Act which require specific treatment of
certain types of expenses or receipts.
30 What, then, is the true nature of
“profit” for tax purposes? While the concept has been variously expressed,
perhaps the clearest and most concise articulation of the term is to be found
in the oft-quoted decision of this Court in Irwin v. Minister of
National Revenue, [1964] S.C.R. 662 (S.C.C.) , at p. 664, where profit in a
year was taken to consist of “the difference between the receipts from the
trade or business during such year ... and the expenditure laid out to earn
those receipt.” (emphasis in original) This definition was echoed by Jackett P.
in Associated Investors of Canada Ltd. v. Minister of National
Revenue, [1967] 2 Ex. C.R. 96 (Can. Ex. Ct.), where he stated at p. 102:
Ordinary commercial principles dictate, according to the decisions,
that the annual profit from a business must be ascertained by setting against
the revenues from the business for the year, the expenses incurred in earning
such revenues.
31 Accepting this fundamental
definition, in Symes, supra, at pp. 722-23, the majority made the
following observations about the computation of profit:
...the “profit” concept in s. 9(1) is inherently a net concept which
presupposes business expense deductions. It is now generally accepted that it
is s. 9(1) which authorizes the deduction of business expenses; the provisions
of s. 18(1) are limiting provisions only....
Under s. 9(1), deductibility is ordinarily considered as it was by
Thorson P. in Royal Trust, [Royal Trust Co. v. Minister of
National Revenue, 57 D.T.C. 1055 (Ex. Ct.)] (at p. 1059):
...the first approach to the question whether a particular
disbursement or expense was deductible for income tax purpose was to ascertain
whether its deduction was consistent with ordinary principles of commercial
trading or well accepted principles of business ... practice ...
(Emphasis added.)
Thus, in a deductibility analysis, one's first recourse is to s.
9(1), a section which embodies, as the trial judge suggested, a form of
“business test” for taxable profit.
This is a test which has been variously phrased. As the trial judge
rightly noted, the determination of profit under s. 9(1) is a question of law: Neonex
International Ltd. v. The Queen.... Perhaps for this reason, and as Neonex
itself impliedly suggests, courts have been reluctant to posit a s. 9(1)
test based upon “generally accepted accounting principles” (G.A.A.P.).... Any
reference to G.A.A.P. connotes a degree of control by professional accountants
which is inconsistent with a legal test for “profit” under s. 9(1).
Further, whereas an accountant questioning the propriety of a deduction may be
motivated by a desire to present an appropriately conservative picture of
current profitability, the Act is motivated by a different purpose: the
raising of public revenues. For these reasons, it is more appropriate in
considering the s. 9(1) business test to speak of “well accepted principles of
business (or accounting) practice” or “well accepted principles of commercial
trading”. [Emphasis in original.]
32 The great difficulty which seems to
have plagued the courts in the assessment of profit for income tax purposes
bespeaks the need for as much clarity as possible in formulating a legal test
therefor. The starting proposition, of course, must be that the determination
of profit under s. 9(1) is a question of law, not of fact. Its legal
determinants are two in number: first, any express provision of the Income
Tax Act which dictates some specific treatment to be given to particular
types of expenditures or receipts, including the general limitation expressed
in s. 18(1)(a), and second, established rules of law resulting from judicial
interpretation over the years of these various provisions.
33 Beyond these parameters, any further
tools of analysis which may provide assistance in reaching a determination of
profit are just that: interpretive aids, and no more. Into this category fall
the “well-accepted principles of business (or accounting) practice” which were
mentioned in Symes, also referred to as “ordinary commercial principles”
or “well-accepted principles of commercial trading”, among other terms. A
formal codification of these principles is to be found in the “generally
accepted accounting principles” (“G.A.A.P.”) developed by the accounting
profession for use in the preparation of financial statements. These principles
are accepted by the accounting profession as yielding accurate financial
information about the subject of the statements, and become “generally
accepted” either by actually being followed in a number of cases, by finding
support in pronouncements of professional bodies, by finding support in the writings
of academics and others, or by more than one of these methods: see Peter W.
Hogg and Joanne E. Magee, Principles of Canadian Income Tax Law (2nd ed. 1997),
at pp. 180-81. What must be remembered, however, is that these are non-legal
tools and as such are external to the legal determination of profit, whereas
the provisions of the Act and other established rules of law form its very
foundation.
34 That is not to minimize the key role
played by such well-accepted business principles (as I shall hereafter refer to
them) in the profit-computation process. In Friesen v. R., [1995]
3 S.C.R. 103 (S.C.C.), in dissent, Major J. made the following observation at
p. 127, with which the majority did not disagree:
The Act does not define “profit” nor does it provide any specific
rules for the computation of profit. Tax jurisprudence has established that the
determination of profit under s. 9(1) is a question of law to be determined
according to the business test of “well-accepted principles of business (or accounting)
practice” or “well-accepted principles of commercial trading” except where
these are inconsistent with the specific provisions of the Income Tax Act....
35 I think this statement aptly
describes the proper relationship between tax law and business principles. In
the absence of a statutory definition of profit, it would be unwise for the law
to eschew the valuable guidance offered by well-established business
principles. Indeed, these principles will, more often than not, constitute the
very basis of the determination of profit. However, well-accepted business
principles are not rules of law and thus a given principle may not be
applicable to every case. More importantly, these principles must necessarily
take a subordinate position relative to the legal rules which govern.
36 The reason for this is simple:
generally speaking, well-accepted business principles will have their roots in
the methodology of financial accounting, which, as was expressed in Symes,
is motivated by factors fundamentally different from taxation. Moreover,
financial accounting is usually concerned with providing a comparative picture
of profit from year to year, and therefore strives for methodological
consistency for the benefit of the audience for whom the financial statements
are prepared: shareholders, investors, lenders, regulators, etc. Tax
computation, on the other hand, is solely concerned with achieving an accurate
picture of income for each individual taxation year for the benefit of the
taxpayer and the tax collector. Depending on the taxpayer's commercial activity
during a particular year, the methodology used to calculate profit for tax
purposes may be substantially different from that employed in the previous
year, which in turn may be different from that which was employed the year
before. Therefore, while financial accounting may, as a matter of fact,
constitute an accurate determinant of profit for some purposes, its application
to the legal question of profit is inherently limited. Caution must be exercised
when applying accounting principles to legal questions.
37 I do not wish to be taken, however,
as minimizing the role of G.A.A.P. in the determination of profit for income
tax purposes. Some have inferred from my reasons in Symes an intention
that G.A.A.P. are to be rejected entirely: see, for example, Hogg and Magee,
supra, at pp. 185-87. This is not what I intended. In fact, the better view is
that G.A.A.P. will generally form the very foundation of the “well-accepted
business principles” applicable in computing profit. It is important, however,
for the courts to avoid delegating the criteria for the legal test of profit to
the accounting profession, and therefore a distinction must be maintained. That
is, while G.A.A.P. may more often than not parallel the well-accepted business
principles recognized by the law, there may be occasions on which they will
differ, and on such occasions the latter must prevail: see, for example, Friedberg
v. R., supra.
38 Moreover, there will, of course, be
situations in which G.A.A.P. will offer various acceptable options in the
preparation of financial statements, and the taxpayer will be free, for
financial accounting purposes, to adopt whichever option best suits his
financial objectives at the given time. In such cases, G.A.A.P. will surely not
be determinative as to the method by which an accurate picture of profit may be
obtained for taxation purposes, though it may still be useful as a guide to the
various acceptable methods of computation, one of which may yield the
appropriate result for taxation.
39 A good example of the relationship
among the provisions of the Act, the principles developed in the case law, and
G.A.A.P. or well-accepted business principles can be found s. 18(9) of the Act,
which requires the amortization of certain prepaid expenses over the periods of
time to which they relate. It is possible, although I express no specific
opinion on this matter, that some of these expenses could be treated otherwise
for the purposes of G.A.A.P. or business practice; perhaps they might be
deducted entirely in the year incurred, or even capitalized. However, this
possibility is negated for tax purposes by their specific legislative
treatment.
[13]
Michael Granof, in the
text Financial Accounting: Principles and Issues (Prentice-Hall, Inc.
1977), stated at page 104 that:
Central to modern-day accounting is the notion that revenues and
expenses should be reported on an accrual basis. The effects of transactions
and other financial events on the assets and liabilities of an enterprise
should be accorded accounting recognition at the time that they have their
primary economic impact, not necessarily when cash is received or disbursed.
Revenues should be assigned to that period in which they are earned.
Revenues are said to be realized at that point when they are earned.
Costs are charged as expenses in the period in which they provide their
expected services in an effort to generate revenues.
(emphasis was in original text)
[14]
Donald E. Kieso et al.
in the text Intermediate Accounting (seventh Canadian edition, John
Wiley & Sons Canada, Ltd., 2005) stated that:
Most companies use the accrual basis of accounting: they
recognize revenue when it is earned and recognize expenses in the period
incurred, without regard to the time of receipt or payment of cash. Some small
enterprises and the average individual taxpayer, however, use a strict or
modified cash basis approach. Under the strict cash basis of accounting,
revenue is recorded only when the cash is received and expenses are reported
only when the cash is paid. The determination of income on the cash basis rests
upon the collection of revenue and the payment of expenses, and the revenue recognition
and matching principles are ignored. Consequently, cash basis financial
statements do not conform with generally accepted accounting principles.
(emphasis was in original text)
[15]
It does not seem to me
that the decision of the Supreme Court of Canada in Canderel should be
interpreted to permit taxpayers to choose whether they report their income on
an accrual basis or a cash basis. As noted by Justice Iacobucci
“[well-established business principles] will, more often than not, constitute
the very basis of the determination of profit”. Since it is clear that the
well-established business principle is that revenues and expenses are to be
determined on an accrual basis and not a cash basis and that “cash basis
financial statements do not conform with generally accepted accounting
principles”, it seems to me that only those persons who are granted permission
under the Act to determine their income on a cash basis may do so.
Section 28 of the Act grants such permission to persons who are carrying
on a farming or a fishing business. Sections 5, 6 and 8 of the Act provide
that employees will determine their income on a cash basis. However, there is
no provision of the Act that allows the Appellant, who is not an
employee in relation to the services that he is providing as a realtor / broker
/ developer, to determine his income on a cash basis.
[16]
As a result, if the
amounts claimed for advertising in relation to his campaign expenses are
deductible at all, they are deductible in computing his income for 1999 (which
is the year in which they were incurred) and not in 2001. Since the only issue
in this case is whether such amounts were deductible in 2001, the Appellant
cannot succeed. The Respondent had raised other issues related to whether the
expenditures were incurred for the purpose of earning income or whether they
were personal expenditures as well as the issue of whether the expenditures
were incurred on account of capital. Since the amounts are not deductible in
determining the income of the Appellant in 2001 in any event, these additional
issues will not be addressed.
[17]
As a result the
Appellant’s appeals from the reassessments made under the Act for the
2001 and 2002 taxation years are dismissed, with costs.
Signed at Ottawa, Canada, this 17th day of June, 2010.
“Wyman W. Webb”
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