Citation: 2008TCC106
Date: 20080225
Dockets: 2006-1596(IT)G
2006-1597(IT)G
2006-1605(IT)G
BETWEEN:
CDSL CANADA LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND BETWEEN:
GROUPE CGI INC./CGI
GROUP INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND BETWEEN:
CGI
INFORMATION SYSTEMS AND MANAGEMENT
CONSULTANTS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Rip, A.C.J.
[1] These
appeals by three taxpayers were heard together. CDSL Canada Limited ("CDSL")
is appealing its tax assessment for the 1998 taxation year. Groupe CGI Inc./CGI Group Inc. ("CGI")
is appealing its tax assessment for the 1998 taxation year and the determination
of a loss relating to its 1999 taxation year. CGI Information Systems and
Management Consultants Inc. ("Systems") is appealing its tax
assessments for the 1998 and 1999 taxation years.
[2] The Respondent
acknowledges that the Appellants derive their income from a business that is
not an adventure or concern in the nature of trade. In addition, she admits
that the Appellants' work in progress is inventory within the meaning of
paragraph 10(5)(a) of the Income Tax Act ("the Act").
Nevertheless, in assessing the Appellants for the taxation years in issue, the
Minister of National Revenue ("the Minister") was of the opinion that
the method specified in subsection 10(1) of the Act cannot be
applied to value the Appellants' work in progress for their respective taxation
years concerned. The Minister submits that the Appellants should value their
work in progress at its fair market value for the taxation years in issue
because this method provides a more accurate picture of their profit in
accordance with subsection 9(1) of the Act.
[3] The Appellants
argue that the issue to be determined is whether subsection 10(1) of the Act
applies to value their work in progress for the years in issue. They submit
that all the conditions for the application of subsection 10(1) are met,
namely that they derive their income from a business that is not an adventure
or concern in the nature of trade and their work in progress is inventory
within the meaning of paragraph 10(5)(a) of the Act. They
further submit that the fact that they recorded their work at fair market value
in their financial statements does not in any way prevent them from using the
method set out in subsection 10(1) for purposes of calculating their net
income for tax purposes.
[4] The Respondent
submits that what must be determined is whether the Appellants may use
section 10 of the Act to value their work in progress to establish
their net income for tax purposes, or whether they should instead determine
their profit under subsection 9(1) of the Act. The Respondent
submits that the method used by the Appellants to value their work in progress
for the purpose of determining their accounting net income, one which is
consistent with generally accepted accounting principles (GAAP), provides the
most accurate picture of their profit for the taxation years in issue and
should be used to value their work in progress in order to determine their net
income for tax purposes, pursuant to subsection 9(1) of the Act.
[5] Before
making his oral submissions, counsel for the Appellants reviewed the financial
statements for accounting purposes and the income tax returns of one of the
taxpayers in order to explain the differences between them.
[6] The
parties are in agreement on the following facts:
a. The Appellants, Systems, CGI and CDSL,
are companies that carry on consulting businesses in the field of computer
technology.
b. For Systems' fiscal years ending on
September 30, 1998 and September 30, 1999, the work in progress reported on its financial
statements for purposes of calculating its accounting net income was
$11,859,544 and $19,376,028 respectively, namely its fair market value.
c. For CGI's fiscal years ending on September 30, 1998 and September 30, 1999, the work in progress reported on its
financial statements for purposes of calculating its accounting net income was
$4,253,967 and $858,356 respectively, namely its fair market value.
d. For CDSL's fiscal year ending on September 30, 1998, the work in progress reported on its financial statements for
purposes of calculating its accounting net income was $1,693,060, namely its
fair market value.
e. For accounting purposes, the Appellants
accounted for their work in progress on a fiscal-year basis, which takes into
account the portion of the profit for work completed but not yet billed. The
method used by the Appellants, known as the percentage-of-completion method, is
consistent with generally accepted accounting principles.
f. For its fiscal years ending on
September 30, 1998 and September 30, 1999, the cost of Systems' work in progress was $7,234,328
and $11,819,377 respectively.
g. For its fiscal years ending on
September 30, 1998 and September 30, 1999, the cost of CGI's work in progress was $2,594,920
and $523,597 respectively.
h. For the fiscal year ended on September 30, 1998, the cost of CDSL's work in progress was $1,032,767.
i. In order to calculate their net income for tax
purposes for their respective fiscal years in issue, the Appellants valued
their work in progress at the lower of cost or market value at the end of the
fiscal year, in accordance with the method set out in subsection 10(1) of
the Income Tax Act, R.S.C. 1985, (5th Supp.), c.1. This method has the
effect of deferring for one year the payment of tax by the Appellants on the "profit"
portion of their work in progress.
j. On January 5, 2005, the Respondent
sent notices of reassessment to Systems relating to its 1998 and 1999 taxation
years.
k. On May 19, 2005, the Respondent sent notices of reassessment to CGI relating to its
1998 and 1999 taxation years.
l. On June 21, 2004, the Respondent sent notices of reassessment to CDSL relating to its
1998 taxation year.
m. In his reassessment relating to Systems' 1998
taxation year, the Minister added an amount of $4,625,226 in computing the company's
income. This amount represents the difference between the fair market value
($11,859,554) and the cost ($7,234,328) of Systems' work in progress for its
1998 taxation year.
n. In his reassessment relating to CGI's 1998
taxation year, the Respondent added an amount of $1,659,047 in computing the
company's income. This amount represents the difference between the fair market
value ($4,253,967) and the cost ($2,594,920) of CGI's work in progress for its
1998 taxation year.
o. In his reassessment relating to CDSL's 1998
taxation year, the Respondent added an amount of $660,293 in computing the
company's income. This amount represents the difference between the fair market
value ($1,693,060) and the cost ($1,032,767) of CDSL's work in progress for its
1998 taxation year.
p. In his reassessment relating to Systems' 1999
taxation year, the Respondent added an amount of $2,931,425 in computing the
company's income. This amount represents the difference between the net
adjustment under the heading of work in progress for 1999 ($7,556,651) and the
net adjustment under the heading of work in progress for 1998 ($4,625,226).
q. In his reassessment relating to CGI's 1999
taxation year, the Respondent added an amount of $334,759 in computing the
company's income. This amount represents the difference between the fair market
value ($858,356) and the cost ($523,597) of CGI's work in progress for its 1999 taxation year. This
reassessment indicated that no tax was payable as a result of this adjustment.
r. Systems filed notices of objection to the
reassessments relating to its 1998 and 1999 taxation years, which were confirmed
by the Respondent on March 29, 2006 and March 30, 2006
respectively.
s. On August 26, 2005, the Respondent
sent a notice of determination/redetermination of a loss to CGI relating to
its 1999 taxation year, which took into account the addition of an amount of
$334,759 in computing the company's income for the 1999 taxation year. However,
the Respondent deducted from CGI's income, for its 1999 taxation year, the
amount of $1,659,047 that it had added to its income for its 1998 taxation
year.
t. CGI filed notices of objection to the reassessment
relating to its 1998 taxation year and to the notice of
determination/redetermination of a loss relating to its 1999 taxation year,
which were confirmed by the Respondent on April 12, 2006 and March 21, 2006
respectively.
u. CDSL filed a notice of objection to the notice
of reassessment relating to its 1998 taxation year, which was confirmed by the Respondent
on April 11, 2006.
[7] The following
provisions of the Act are relevant:
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SECTION 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.
…
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ARTICLE 9 :
(1)
Sous réserve des autres dispositions de la présente partie, le revenu qu'un
contribuable tire d'une entreprise ou d'un bien pour une année d'imposition
est le bénéfice qu'il en tire pour cette année.
[...]
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SECTION 10:
(1) For the purpose
of computing a taxpayer's income for a taxation year from a business that is
not an adventure or concern in the nature of trade, property described in an
inventory shall be valued at the end of the year at the cost at which the
taxpayer acquired the property or its fair market value at the end of the
year, whichever is lower, or in a prescribed manner.
…
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ARTICLE 10 :
(1) Pour le calcul du revenu d'un
contribuable pour une année d'imposition tiré d'une entreprise qui n'est pas
un projet comportant un risque ou une affaire de caractère commercial, les
biens figurant à l'inventaire sont évalués à la fin de l'année soit à leur
coût d'acquisition pour le contribuable ou, si elle est inférieure, à leur
juste valeur marchande à la fin de l'année, soit selon les modalités
réglementaires.
[...]
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(2) Notwithstanding subsection (1), for the purpose
of computing income for a taxation year from a business, the inventory at the
commencement of the year shall be valued at the same amount as the amount at
which it was valued at the end of the preceding taxation year for the purpose
of computing income for that preceding year.
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(2) Malgré le paragraphe (1), pour le calcul du revenu tiré
d'une entreprise au cours d'une année d'imposition, les biens figurant à un
inventaire au début de l'année sont évalués au même montant que celui auquel
ils ont été évalués à la fin de l'année d'imposition précédente pour le
calcul du revenu de cette année précédente.
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(2.1) Where property described in an inventory of a
taxpayer's business that is not an adventure or concern in the nature of
trade is valued at the end of a taxation year in accordance with a method
permitted under this section, that method shall, subject to
subsection (6), be used in the valuation of property described in the
inventory at the end of the following taxation year for the purpose of
computing the taxpayer's income from the business unless the taxpayer, with
the concurrence of the Minister and on any terms and conditions that are
specified by the Minister, adopts another method permitted under this
section.
…
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(2.1) La méthode, permise par le présent article selon laquelle
les biens figurant à l'inventaire d'une entreprise d'un contribuable qui
n'est pas un projet comportant un risque ou une affaire de caractère
commercial sont évalués à la fin d'une année d'imposition doit servir, sous
réserve du paragraphe (6), à évaluer les biens qui figurent à cet
inventaire à la fin de l'année d'imposition subséquente pour le calcul du
revenu que le contribuable tire de cette entreprise, sauf si celui-ci, avec
l'accord du ministre et aux conditions précisées par ce dernier, adopte une
autre méthode permise par le présent article.
[...]
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(5) Without
restricting the generality of this section,
(a) property (other than capital property) of a taxpayer that
is advertising or packaging material, parts or supplies or work in progress
of a business that is a profession is, for greater certainty, inventory of
the taxpayer;
...
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(5) Sans préjudice de la portée générale du présent article:
a) il demeure entendu
que les biens (autres que les immobilisations) d'un contribuable qui sont des
travaux en cours d'une entreprise qui est une profession libérale, du
matériel de publicité ou d'emballage, des pièces ou des fournitures doivent
figurer parmi les éléments portés à son inventaire;
[...]
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SECTION 34:
In computing the
income of a taxpayer for a taxation year from a business that is the
professional practice of an accountant, dentist, lawyer, medical doctor,
veterinarian or chiropractor, the following rules apply:
(a) where the taxpayer so elects in the taxpayer's return of
income under this Part for the year, there shall not be included any amount
in respect of work in progress at the end of the year; and
(b) where the taxpayer has made an election under this
section, paragraph (a) shall apply in computing the taxpayer's
income from the business for all subsequent taxation years unless the
taxpayer, with the concurrence of the Minister and on such terms and
conditions as are specified by the Minister, revokes the election to have
that paragraph apply.
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ARTICLE 34 :
Les règles suivantes s'appliquent au calcul du revenu d'un
contribuable pour une année d'imposition tiré d'une entreprise qui consiste
en l'exercice de la profession de comptable, de dentiste, d'avocat, de
médecin, de vétérinaire ou de chiropraticien :
a) aucun montant
n'est inclus pour le travail en cours à la fin de l'année, si le contribuable
en fait le choix dans sa déclaration de revenu produite en vertu de la
présente partie pour l'année;
b) l'alinéa a)
s'applique au calcul du revenu du contribuable tiré de l'entreprise pour les
années d'imposition ultérieures, si celui-ci a fait le choix prévu au présent
article, à moins qu'il ne le révoque en ce qui concerne l'application de cet
alinéa avec l'accord du ministre et aux conditions fixées par ce dernier.
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[8] It
was suggested that the only issue before me is to determine whether
section 10 of the Act overrides subsection 9(1). Subsection 9(1)
of the Act is subject to the other provisions of Part I of the Act.
Subsection 9(1) explains that a taxpayer's income from a business or
property is the taxpayer's profit from that business or property.
Section 10 determines how property described in an inventory of a business
that is not an adventure or concern in the nature of trade must be valued in computing
a taxpayer's income from that business. The other provisions of Part I of
the Act specify, for example, what categories of revenue and expenses
are to be included and excluded in the calculation of income. This is not a
case of one provision of the Act overriding another. I do not think it
is necessary to raise the issue as to whether subsection 9(1) or
section 10 must prevail. In Canada v. Cyprus Anvil Mining Corp., Urie J. did not think "that it can be said that
subsection 10(1) is a specific provision overriding the general one,
section 9." These two provisions must be read together.
[9] A
taxpayer carrying on a business must determine the profit of the business under
section 9. With respect to section 10, Major J. stated in Friesen
v. Canada:
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The plain reading of this section is that it is a
mandatory provision requiring a taxpayer who computes income from a business
to value the inventory at the lower of cost or market value or as permitted
by regulation. Thus, prima facie, the taxpayer must meet two requirements in
order to use this section: the venture at issue must be a
"business" and the property in question must be "inventory".
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D'après le sens ordinaire de cet article, il
s'agit d'une disposition impérative qui oblige le contribuable, lors du
calcul de son retenu tiré d'une entreprise, à évaluer les biens figurant dans
l'inventaire au moindre de leur coût et de leur valeur marchande, ou d'une
autre façon permise par les règlements. Par conséquent, le contribuable doit,
à première vue, satisfaire à deux exigences pour pouvoir recourir à cet
article: le projet en cause doit être une « entreprise » et la
propriété en question doit être un « bien figurant dans un
inventaire ».
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[10] These
two requirements are met in these appeals and section 10 therefore applies
in this case. The Respondent does not contest that the Appellants meet the
criteria for the application of section 10, but rather their
interpretation of it which would have the effect of exempting the Appellants
from declaring any income with respect to their work in progress.
[11] As I
indicated at the outset, subsection 9(1) is a general provision under
which the income from a business is its profit, whereas section 10 refers
more directly to the valuation of the inventory of a business. There is no
definition of the word "profit" in the Act. It is the
responsibility of the courts to specify its content.
[12] Iacobucci
J. analysed the general principles for determining profit in Canderel Ltée
v. Canada. At paragraph 23, he summarized the
principles from his analysis:
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(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, ..., Associated Investors,
....
(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 GAAP, 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.
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(1) La détermination du bénéfice est une
question de droit.
(2) Le bénéfice tiré d'une entreprise pour une
année d'imposition est déterminé en déduisant des revenus tirés de
l'entreprise pour l'année en question les dépenses engagées pour gagner ces revenus :
M.N.R. c. Irwin, [...], Associated Investors, [...].
(3) Dans la détermination du bénéfice,
l'objectif est d'obtenir une image fidèle du bénéfice du contribuable pour
l'année visée.
(4) Dans la détermination du bénéfice, le
contribuable est libre d'adopter toute méthode qui n'est pas incompatible
avec:
a) les
dispositions de la Loi de l'impôt sur le revenu;
b) les
principes dégagés de la jurisprudence ou les « règles de droit »
établis;
c) les
principes commerciaux reconnus.
(5) Les principes commerciaux reconnus,
notamment ceux codifiés formellement dans les PCGR, ne sont pas des règles de
droit mais des outils d'interprétation. Dans la mesure où ils peuvent
influencer le calcul du revenu, ils ne le feront qu'au cas par cas, selon les
faits relatifs à la situation financière du contribuable.
(6) En cas de nouvelle cotisation, une fois
que le contribuable a prouvé qu'il a donné une image fidèle de son revenu
pour l'année, image qui est compatible avec la Loi, la jurisprudence et les
principes commerciaux reconnus, il incombe alors au ministre de prouver que
le chiffre fourni ne donne pas une image fidèle ou qu'une autre méthode de
calcul fournirait une image plus fidèle.
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[13] Thus,
the method selected by a taxpayer to determine his profit must give an "accurate
picture" of the financial situation of his business.
[14] For a
business with inventory, it is certainly necessary to consider the inventory in
computing profit. In Friesen v. Canada, Major J. explained how inventory is to be
considered in this calculation:
21 Reduced to its simplest terms, the income or
profit from the sale of a single item of inventory by a sales business is the
ordinary tracing formula calculated by subtracting the purchase cost of the
item from the proceeds of sale. This is the basic formula which applies to
the calculation of profit before the value of inventory is taken into
account, as is made clear by Abbott J. in Minister of National
Revenue v. Irwin, [1964] S.C.R. 662, at pp. 664-65:
The law
is clear therefore that for income tax purposes gross profit, in the case of
a business which consists of acquiring property and reselling it, is the
excess of sale price over cost, subject only to any modification effected by
the "cost or market, whichever is lower" rule.
Thus, for any particular item:
Income = Profit = Sale Price - Purchase Cost.
. . .
42 In calculating profit under s. 9 of the Income
Tax Act, a business calculates its gross profit and then subtracts allowable
operating and non-operating expenses. Under well-accepted principles of
business and accounting practice gross profit for a business involved in sale
is calculated according to the following formula:
Gross Profit = Proceeds of Sale - Cost of Sale
and:
Cost of Sale =
(Value of Inventory at beginning of year + Cost of Inventory acquisitions) -
Value of Inventory at end of year.
Thus for a business involved in
sales:
Gross Profit = Proceeds of Sale -
[(Value of Inventory at beginning of year + Cost of Inventory acquisitions) -
Value of Inventory at end of year].
43 This formula was originally designed for
companies with significant inventories at a time when computer technology did
not allow the specific cost of each item to be easily traced on an individual
basis. The formula allowed a business to calculate gross profit on the basis
of a single inventory valuation each year rather than keeping detailed
ongoing records. It is rather an anachronism in an age where most businesses
with significant inventories carefully track both the cost and sale price of
each item by means of computer technology. A moment of thought, however, will
lead to the conclusion that this formula is merely a convenient shorthand for
a two-step process which recognizes profit as the excess of sale proceeds
over value for inventory sold in the year and the change in the value of
inventory still on hand at the end of the year. Thus the formula could
equally be expressed as:
Gross Profit = (Proceeds of Sale - Value of Inventory Sold) + Change in Value of Unsold Inventory.
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21 Réduit à sa plus simple expression, le revenu ou le
bénéfice tiré de la vente d'un seul article d'inventaire par une entreprise
commerciale est, selon la formule d'identification ordinaire, calculé en
soustrayant le coût de son acquisition du produit de sa vente. C'est la
formule de base qui s'applique au calcul du bénéfice avant que n'entre en
ligne de compte la valeur des biens figurant dans un inventaire, comme l'a
clairement affirmé le juge Abbott dans l'arrêt Minister of National
Revenue c. Irwin, [1964] R.C.S. 662, aux pp. 664 et 665 :
[traduction]
D'après la loi, il est donc clair qu'aux fins de l'impôt sur le revenu, dans
le cas d'une entreprise consacrée à acquérir des biens et à les revendre, le
bénéfice brut s'établit selon l'excédent du prix de vente sur le coût, sous
réserve uniquement de toute modification due à la règle du * moindre du coût et de la valeur
marchande +.
Par
conséquent, pour tout article particulier :
Revenu
= bénéfice = prix de vente - coût d'acquisition.
[...]
42 Pour calculer son bénéfice en vertu de l'art. 9 de la Loi
de l'impôt sur le revenu, une entreprise calcule d'abord son bénéfice brut,
puis en soustrait ses frais d'exploitation et autres frais déductibles. En
vertu des principes reconnus de la pratique des affaires et de la pratique
comptable, le bénéfice brut d'une entreprise de vente est calculé selon la
formule suivante:
bénéfice brut = produit des ventes - coût des
ventes
coût des ventes = (valeur des biens figurant dans
l'inventaire au début de l'année + coût des acquisitions) - valeur des biens
figurant dans l'inventaire à la fin de l'année.
Par conséquent, pour une entreprise de vente:
bénéfice brut = produit des ventes - [(valeur des
biens figurant dans l'inventaire au début de l'année + coût des acquisitions)
- valeur des biens figurant dans l'inventaire à la fin de l'année].
43 Cette formule a été conçue à l'origine pour des sociétés
qui comptaient un inventaire important à une époque où l'informatique ne
permettait pas d'identifier facilement le coût précis de chaque article. La
formule permettait aux entreprises de calculer leur bénéfice brut en fonction
d'une seule évaluation des biens figurant dans l'inventaire chaque année au
lieu de tenir des registres permanents détaillés. C'est plutôt un
anachronisme à une époque où la plupart des entreprises qui comptent un
inventaire important suivent de près à la fois le coût et le prix de vente de
chaque article grâce à l'informatique. Un moment de réflexion amène toutefois
à conclure que cette formule n'est qu'un abrégé pratique d'un processus à
deux étapes qui reconnaît le bénéfice comme l'excédent du produit des ventes
sur la valeur des biens figurant dans l'inventaire qui ont été vendus durant
l'année et la variation de la valeur des biens figurant dans l'inventaire qui
sont encore détenus à la fin de l'année. Par conséquent, la formule pourrait
également être la suivante:
bénéfice brut = (produit des ventes - valeur des
biens figurant dans l'inventaire qui ont été vendus) + variation de la
valeur des biens invendus figurant dans l'inventaire.
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[15] In
adapting this formula to a service business, we can say that to determine the
income of a business with inventory, the cost of sales (the cost related to the
services provided) must be deducted from the sales of the business.
[16] In the
present case, considering that services cannot be "kept", the opening
and closing inventory is zero. Only the cost of the services provided (at the
lower of the cost and fair market value) during the year is at issue.
[17] Determining
the amount of the inventory is therefore a stage in the process required to
establish the income of a business rather than another way of determining the
income. Section 10 merely specifies how that inventory is to be valued.
Under section 10, the inventory must be accounted for at the lower of its
fair market value and its cost, but section 1801 of the Income Tax
Regulations allows the use of fair market value at all times. Whichever method is
selected, subsection 10(2.1) means that unless the approval of the
Minister is obtained, a taxpayer must use the same method from year to year. In
addition, subsection 10(2) specifies that the amount of the inventory at
the commencement of the year must be the same as the amount at the end of the
preceding year.
[18] For
taxation purposes, the Appellants used this method, but they also took a
deduction (reserve) against their profit in order to defer the inclusion of
profit relating to the work in progress. They took this reserve at
line 235 (Other Tax Reserves) of Schedule 13 (Continuity of Reserves)
of their T2 Return (Corporation Income Tax Return). This amount was then
transferred to line 413 (Tax Reserves Claimed in Current Year from Schedule
13) of Schedule 1 - (Net Income (Loss) for Income Tax Purposes) of their
T2 Return. They reversed this reserve the following year (line 230 of
Schedule 13 and line 125 of Schedule 1) in order to claim a new one. The
effect of this practice is to defer by one year the inclusion of the profit
related to work in progress. Instead of reporting their income on the basis of
earned income, they instead chose to be taxed on the basis of their billed
income. This is clearly the problem since nothing in the Act allows such
a reserve to be deducted.
[19] Nothing
in section 10 provides that the profits from work in progress must be
excluded. Section 10 does not create such an entitlement. Major and Iacobucci JJ. were in agreement
that "the valuation scheme in subsection 10(1) does not provide an
automatic deduction from income nor does it mandate that any taxpayer with
inventory can deduct any loss on fair market value arising therefrom."
[20] According
to Major J., "subsection 10(1) mandates how the valuation procedure
must take place when ordinary commercial and accounting principles establish
that the value of inventory is relevant to the computation of business income
in a taxation year."
[21] Section 10
therefore only specifies how to value inventory. Only when the fair market value
of the property is lower than its cost does section 10 indirectly
authorize the taking of a loss before the actual disposition of the inventoried
property. At paragraph 60 of Friesen, supra, Major J. states that
the aim of subsection 10(1) is "to prevent businesses from
artificially inflating the value of inventory by continuing to hold it at cost
when the market value of that inventory has already fallen below cost."
This result is consistent with the accounting principle of prudence.
[22] Thus,
the purpose of section 10 is merely to determine how to account for inventory
in the calculation of income referred to in subsection 9(1) and it does
not mean that profits from work in progress should be disregarded. Again, this
section deals only with the manner in which to account for inventory for tax
purposes. A different conclusion would make section 34 meaningless.
Considering that it is well settled that Parliament does not speak for nothing,
such a conclusion should not be accepted lightly.
[23] Section 34 offers certain professionals the
choice of excluding amounts relating to their work in progress from the
calculation of their income. Subsection 10(5) provides specifically that
the work in progress of a business that is a profession is inventory. Section 10
therefore applies whenever section 34 applies. If, as the Appellants
claim, section 10 allowed the exclusion of the profit portion of work in
progress from the calculation of income, section 34 would be meaningless.
[24] However,
this is not how section 10 should be interpreted. Looking at the
legislative history of section 34, it should be noted that the former
section 34 provided specifically that paragraph 12(1)(b) did
not apply when section 34 applied. It would appear that this amendment was
made to eliminate the redundancy that existed between the two provisions.
[25] Paragraph 12(1)(b)
has since been amended and now appears to apply only when a taxpayer wishes to
use fiscal-year accounting. Nonetheless, it has been decided that
paragraph 12(1)(b) together with subsection 12(2) cannot limit the
application of section 9 and that receivables should continue to be
included in the income of a taxpayer's business when the taxpayer uses fiscal-year
accounting.
[26] As
mentioned in Canderel, supra, the use of GAAP is acceptable
whenever the Act does not provide otherwise and their use would not thwart
the clear application of the provisions of the Act. The provisions of
the Act, for example section 34, sometimes obscure the principle of
obtaining an accurate picture of the taxpayer's business. Nevertheless, there
are instances, such as the case at bar, where the GAAP dictate the same result
as the provisions of the Act.
[27] I find
that the method of computing income used in the Appellants' financial
statements provides a more accurate picture of the Appellants' profits for the
years at issue.
[28] The
appeals are dismissed with costs.
Signed at Ottawa, Canada, this
25th day of February 2008.
"Gerald J. Rip"
Associate Chief Judge
Rip
Translation certified
true
on this 10th day of
April 2008.
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