Date: 20000724
Dockets: 97-950-IT-G, 97-951-IT-G,
97-952-IT-G
BETWEEN:
PCL CONSTRUCTION MANAGEMENT INC.,
PCL CONSTRUCTORS EASTERN INC., PCL CONSTRUCTORS
CANADA INC.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
BOWIE J.T.C.C.
[1]
These appeals are from assessments made for the taxation years
1993 and 1994 under Part I.3 of Division B of the Income Tax
Act (the Act), which imposes a capital tax on large
corporations. The Appellants are all subsidiaries of PCL
Construction Group Inc. All the appeals concern identical issues
in relation to the computation of capital under subsection
181.2(3) of the Act, and so they were heard together on
common evidence. At the beginning of the hearing, counsel for the
Appellant conceded that the appeal of PCL Construction Management
Inc. for the 1994 taxation year must be dismissed, as it is from
an assessment that no tax is payable.
[2]
Section 181.2, so far as it is relevant to the issue in these
appeals, reads:
181.2(2)The taxable capital of a corporation (other than a
financial institution) for a taxation year is the amount, if any,
by which its capital for the year exceeds its investment
allowance for the year.
181.2(3)The capital of a corporation (other than a financial
institution) for a taxation year is the amount, if any, by which
the total of
(a)
the amount of its capital stock (or, in the case of a corporation
incorporated without share capital, the amount of its
members' contributions), retained earnings, contributed
surplus and any other surpluses at the end of the year,
(b)
the amount of its reserves for the year, except to the extent
that they were deducted in computing its income for the year
under Part I,
(c)
the amount of all loans and advances to the corporation at the
end of the year,
(d)
the amount of all indebtedness of the corporation at the end of
the year represented by bonds, debentures, notes, mortgages,
bankers' acceptances or similar obligations,
(e)
the amount of any dividends declared but not paid by the
corporation before the end of the year,
(f)
the amount of all other indebtedness (other than any indebtedness
in respect of a lease) of the corporation at the end of the year
that has been outstanding for more than 365 days before the end
of the year, and
...
exceeds the total of [immaterial to this appeal]
[3]
The Appellants take issue with the inclusion by the Minister of
National Revenue (the Minister) of two items in the computation
of their capital for the years under appeal. The Minister now
concedes that one of these, described on the Appellants'
balance sheets as "Outstanding Cheques Less Related Bank
Balances", should not have been included, and that the
appeals must be allowed to that extent. The item which remains in
dispute appears on the Appellants' balance sheets as a
liability, described as "Unearned Revenues and Contract
Advances". For simplicity, I shall refer to it as "the
unearned amounts", which is the expression used in the
pleadings and in the evidence.
[4]
The Minister's initial position, as expressed in the Replies
to the Notices of Appeal filed in May 1997, is that the unearned
amounts are reserves, of which no portion is deductible in
computing the Appellants' incomes, and so they come within
paragraph 181.2(3)(b) of the Act. In July 1998
the Replies were amended to include the argument that the
unearned amounts "... gave rise to loans and advances
to the Appellant[s] at the end of each year under
appeal...", and thus fall within the definition of
capital. By a further amendment to the Replies made in January
1999, the Minister alleges that the unearned amounts come within
the words "... any other surpluses ...", as
that expression is used in paragraph 181.2(3)(a) of the
Act.
[5]
The Appellants' position is that the unearned amounts do not
fall within any part of subsection 181.2(3), and are therefore
not to be included in the computation of their capital for the
years in question.
[6]
The following facts were agreed upon by the parties in an agreed
statement of facts filed at the opening of the hearing:
1.
On December 1, 1995, PCL Civil Constructors (Canada) Inc.
("Civil") and PCL Constructors Eastern Inc.
("Eastern") amalgamated to form PCL Constructors
Eastern Inc.
2.
On November 1, 1995, PCL Constructors Pacific Inc.
("Pacific") and PCL Constructors Prairie Inc.
("Prairie") amalgamated to form PCL Constructors Canada
Inc.
3.
PCL Construction Management Inc. ("CMI"), Civil,
Eastern, Prairie and Pacific (collectively the
"Subcos") at all relevant times were corporations
engaged in the construction business and were resident in Canada
for purposes of the Income Tax Act (the
"Act").
4.
At all relevant times, the Subcos were wholly-owned subsidiaries
of PCL Construction Group Inc. ("PCL").
5.
Financial statements were prepared for the Subcos' fiscal
years ending October 31, 1993 and October 31, 1994. The
Subco's financial statements were consolidated into the PCL
consolidated financial statements for the fiscal years ending
October 31, 1993 and October 31, 1994. The PCL consolidated
financial statements for the fiscal years ending October 31, 1993
and October 31, 1994 were audited by Peat Marwick Thorne
Chartered Accountants and were prepared in accordance with
generally accepted accounting principles ("GAAP"). The
separate financial statements of PCL's subsidiaries,
including those of the Subcos, were prepared in accordance with
GAAP except for certain disclosure requirements not relevant for
purposes of these appeals.
6.
In accordance with GAAP, the Subcos prepared their 1993 and 1994
financial statements utilizing the percentage of completion basis
of accounting for construction contracts in which the ratio of
actual cost of work performed to date to current estimated total
contract costs is applied to the estimated net contract profit to
determine the amount of profit to be currently recognized.
7.
Amounts actually billed to customers by the Subcos were based on
the Subco's estimate of the percentage of work completed.
8.
The Subcos' 1993 and 1994 balance sheets included liability
items described as "Unearned revenues and contract
advances" of $10,761,229 in 1993 and $7,101,674 in 1994 for
CMI; $6,014 in 1993 and $6,433,831 in 1994 for Civil; $9,423,091
in 1993 and $11,784,536 in 1994 for Eastern; $4,349,555 in 1993
and $7,533,803 in 1994 for Pacific; and $1,973,921 in 1994 for
Prairie (the "Unearned Amounts"). The Unearned Amounts
represent the difference between the amounts actually billed to
customers by the Subcos and the billings recognized by the Subcos
for financial statement purposes utilizing the percentage of
completion method of accounting.
9.
The quantum of the Unearned Amounts is not an issue.
10.
The Minister of National Revenue (the "Minister")
reassessed the Subcos as follows:
(a)
CMI:
(i)
By Notice of Reassessment dated April 19, 1996, for its 1993
taxation year to, inter alia, assess gross Part 1.3 tax of
$7,754.94, which was offset by applying surtax credits of a
subsequent year;
(ii)
By Notice of Reassessment dated April 19, 1996 for its 1994
taxation year to assess gross Part I.3 tax of $3,294.79, which
was offset by current year surtax credits.
(b)
Civil - by Notices of Reassessment dated April 25, 1996,
for its 1993 and 1994 taxation years for Part I.3 tax of $873.31
in 1993 and $12,669.07 in 1994 on the basis that the capital of
Civil included the Unearned Amounts of Civil;
(c)
Eastern - by Notices of Reassessment dated May 6,
1996, for Part I.3 tax of $15,450.18 in 1993 and $20,507.07 in
1994 on the basis that the capital of Eastern included both the
Outstanding Cheques and the Unearned Amounts of Eastern;
(d)
Pacific - By Notices of Reassessment dated April 22,
1996, for its 1993 and 1994 taxation years, inter alia,
for Part I.3 tax of $10,972.70 in 1993 and $8,020 in 1994 on the
basis that the capital of Pacific included both the Outstanding
Cheques and the Unearned Amounts of Pacific;
(e)
Prairie - by Notice of Reassessment dated May 6, 1996, for
its 1994 taxation year for Part I.3 tax of $8,008.67 on the basis
that the capital of Prairie included both the Outstanding Cheques
and the Unearned Amounts of Prairie.
11.
Each Subco objected to the reassessments on a timely basis.
12.
The Minister confirmed the reassessments of the Subcos by
Notifications of Confirmation by the Minister as follows:
(a)
CMI - date November 29, 1996 (for the 1993 taxation year
only);
(b)
Eastern and Civil - dated November 29, 1996;
(c)
Pacific and Prairie - dated November 29, 1996.
[7]
There is no dispute between the parties as to the calculations
involved in the assessments; their disagreement is simply as to
whether the unearned amounts are properly included in capital. In
these reasons I shall ignore the amalgamations that took place in
1995. I shall refer to the Appellants and to their predecessor
companies simply as the Appellants.
[8]
Mr. Duane Sommerfeld, Corporate Manager of Finance and Accounting
for the group, described in his evidence the percentage
completion method of accounting as it is applied by these
Appellants. The construction contracts which the Appellants
undertake are of such a size and nature that their completion
requires a long period of time. Typically, they would not be
completed within one fiscal period. Contract prices are
established by tender, and payment is made periodically
throughout the life of the contracts by means of progress
billings. Where contracts are completed during one fiscal period,
all the income arising out of the contract is considered to be
earned in that fiscal period. However, where the work on a
contract is carried out over more than one fiscal period, there
is a need for a method of recognizing profit as it is earned
throughout the life of the contract. The percentage completion
method of accounting fills that need. By that method, at least in
theory, the contractor recognizes and brings into income during
each fiscal period the amount of profit that relates to the work
done under the contract during that period.
[9]
In the case of these Appellants, the amount of profit to be
recognized and brought into income each year for financial
statement purposes was determined by what is called the
cost-to-cost method. By this method, the costs incurred by the
contractor for each of its contracts during each fiscal period
are compared to the estimated total costs to complete that
contract, thereby establishing the percentage of completion for
the period. This percentage is then applied to the total profit
which it is estimated will be realized on the whole contract, to
establish the profit to be recognized for that contract for the
fiscal period in question. The calculations for succeeding fiscal
periods are based on estimates of total cost and total profit
that have been revised as a result of experience to date.
[10]
Throughout the life of each project, progress billings are issued
by the Appellants to the project owners, who pay them after
certification by the architect. These billings are based upon the
percentage of completion of the projects, as estimated by the
Appellants' foremen and supervisors through inspection of the
work. Unlike billings for contracts under which one invoice is
sent after completion of all the work, neither the sending of an
invoice to the owner, nor the certification and payment of it,
has the effect of establishing that an amount has been earned as
revenue. Revenue, and hence profit, are only recognized by the
process I have described, at the end of each period.
[11] It is
inherent in the percentage completion method of accounting that
the progress billings issued during any period may exceed the sum
of the costs incurred and the profit considered to have been
earned during the same period. This may occur for one of several
reasons. The bid may have been structured in such a way as to
ensure a higher than average degree of profitability in the early
phases of the work. Another cause may be what was referred to in
the evidence as aggressive billing, whereby the contractor bills
the owner on the basis of generous estimates of the degree of
completion. For present purposes, it is sufficient to know that
at the end of each of the 1993 and 1994 fiscal periods, the
Appellants had invoiced the owners of their ongoing construction
projects for amounts which, in the aggregate, exceeded the
aggregate of the costs incurred and the profit recognized in
connection with those projects up to those dates. The difference
comprises the unearned amounts, and at year end they are shown on
the balance sheet as a liability, under the rubric "Unearned
revenues and contract advances". As will become clear later,
it is important to note that although this amount is based upon
invoices delivered to customers before year end, not all of these
invoices had been paid by the end of the period.
[12] The
Appellants called Mr. Kenneth Sutley to give opinion evidence as
to whether, under generally accepted accounting principles
(GAAP), the unearned amounts which appear on the liability side
of the balance sheets of the Appellants constitute reserves,
provisions, allowances, loans or advances for accounting
purposes. In response to the second amendment to the Replies, he
was also asked to give an opinion as to whether they are
surpluses. The Respondent called Professor Leonard Eckel, who was
asked to answer the following question:
PCL has recorded an account entitled unearned revenues and
contract advances as a liability on its balance sheet, and the
account clearly relates to PCL's construction operations.
What is the nature of such an account, why and how do debit and
credit balances in such an account come into existence, and how
are they accounted for?
[13] Both of
these witnesses are highly qualified to opine on matters
pertaining to accounting principles in general, and GAAP in
particular. Mr. Sutley holds the degrees MBA and PhD from the
University of Chicago. Mr. Eckel earned the same degrees from the
University of Michigan. Both have been chartered accountants for
more than twenty years. Mr. Sutley has taught at the University
of Alberta, and since 1993 has been in practice as an accountant
and as a consultant. Professor Eckel's career has been
more academically oriented. From 1966 to 1981 he taught at
McMaster University. Since 1981 he has been a Professor of
Accounting at the University of Waterloo. There is little to
choose between their qualifications. Both, I believe, genuinely
attempted to assist the Court, as is the role of an expert
witness.
[14] In giving
his opinion, Mr. Sutley referred to the Handbook of the Canadian
Institute of Chartered Accountants (CICA), and to the CICA
publication Terminology for Accountants. In his opinion, the item
"Unearned Revenue and Contract Advances" (that is, the
unearned amounts) does not constitute reserves, provisions,
allowances, loans or surpluses for accounting purposes. As to
whether they constitute advances, he said in the written
statement of his evidence:
5.
In my opinion the line item described as "Unearned Revenue
and Contract Advances" taken as a whole does not constitute
advances for accounting purposes under generally accepted
accounting principles, but certain individual contracts within
the total may constitute advances for accounting purposes under
generally accepted accounting principles. Refer to Section 5.
[15] I do not
propose to review in detail all his evidence with respect to the
suggestion that the unearned amounts might be provisions,
allowances or loans. As to provisions and allowances, he relies
on Terminology for Accountants. That work does not define a loan,
but Mr. Sutley referred to several dictionaries, all of which
define a loan as requiring that there be both an amount lent to
another party, and an obligation on that other party to make
repayment. More important, this is the conclusion reached by
Christie A.C.J. in A.C. Simmonds & Sons Limited v.
M.N.R.[1] I
consider this aspect of Mr. Sutley's opinion to be
unassailable. I did not understand counsel for the Respondent to
seriously contest this part of his evidence.
[16] As to the
definition of a reserve, Mr. Sutley had this to say:
Reserve
The CICA publication, Terminology for
Accountants, defines a reserve as follows:
1.
An amount which, though not required to meet a liability or
contingency known or admitted or a decline in value which has
already occurred, has been appropriated from retained earnings or
other surplus, at the discretion of management or pursuant to the
requirements of a statute, the instrument of incorporation or
by-laws of a company or a trust indenture, or other agreement,
for a specific or general purpose such as a future decline in
inventory values, general contingencies, future plant extension
and redemption of stock or bonds.
2.
Under income tax legislation, the term has several special
meanings.
The second definition is not relevant to my opinion under
generally accepted accounting principles.
Section 3260 of the CICA Handbook, "Reserves",
recommends that:
1.
The use of the term "reserve" should be limited to [the
same definition as given in 1. above]. (para 3260.01)
2.
Reserves should not be set up or increased by charges made in
arriving at net income for the period. (para 3260.02)
3.
Reserves should be shown as part of shareholders' equity.
(para. 3260.04)
...
For the Unearned Amounts to constitute reserves for accounting
purposes, they would have to fall within the definition of a
reserve in Section 4. An appropriation of retained earnings
reduces unappropriated retained earnings and increases
appropriated retained earnings. Furthermore, as required by
Section 3400 of the CICA Handbook, reserves are reported as part
of shareholders' equity.
As described in Section 3, the Unearned Amounts arise from the
application of the percentage of completion method of recognizing
revenue. They are not an appropriation of retained earnings or
surplus as contemplated by the CICA and were reported as a
liability.
Conclusion - The line item on the liability side of the
balance sheet entitled "Unearned Revenues and Contract
Advances" does not constitute reserves for accounting
purposes under generally accepted accounting principles.
This conclusion was not challenged by counsel for the
Respondent either. Nor did Professor Eckel offer any different
opinion.
[17] Mr.
Sutley's evidence as to the question whether the unearned
amounts constitute advances divides into two parts. According to
Terminology for Accountants, a payment received on account of,
but before completion of, a contract, or before delivery of goods
or services, is an advance for accounting purposes. An essential
element, in his opinion, however, is that the payment must have
been received. Mr. Sutley concludes his analysis of the
problem in respect of the word advance in this way:
The liability reported on the balance sheet under GAAP is an
aggregate of individual contracts which will fall into three
categories:
a)
The "textbook" contract where revenue recognized to
date exceeds billings to date. For this type of contract the
excess does not represent unearned revenues and therefore cannot
constitute advances.
b)
An "unearned revenue-accounts receivable" contract
where billings to date exceed revenue recognized to date but the
excess amount remains in accounts receivable because it has not
been received from by the customer as of the balance sheet date.
For this type of contract the excess represents unearned revenue
but not advances because cash has not been received in excess of
revenue earned.
c)
An "unearned revenue-advances" contract where billings
to date exceed revenue recognized to date and in addition at
least a portion of the excess amount has been paid by the
customer. For this type of contract the portion paid by the
customer constitutes advances. The amount of the advances can be
determined as the amount by which the unearned revenue liability
exceeds the amount outstanding in accounts receivable for the
contract.
The above shows that advances on individual contracts may
exist in the aggregate liability reported on the balance sheet.
But is that sufficient to justify a conclusion that the aggregate
liability constitutes advances? In my opinion, the answer is no.
In my mind one cannot simply look at the balance sheet and
characterize the entire Unearned Amounts as advances. Doing so
ignores the complex interactions needed to produce advances and
the nature of the liability as an aggregate of three types of
contracts only one of which constitutes advances. While a portion
of the aggregate may constitute advances we cannot be certain
that it contains any. In my view under these circumstances one
should not conclude that the aggregate constitutes advances.
Conclusion
In my opinion the line item described as "Unearned
Revenue and Contract Advances" taken as a whole does not
constitute advances for accounting purposes under generally
accepted accounting principles, but on a contract-by-contract
basis a portion of the total may constitute advances for
accounting purposes under generally accepted accounting
principles.
Using Contract-by Contract Information
Pacific and Prairie provided me with the attached schedules
showing, on a contract-by-contract basis, the amount included in
the unearned revenue liability (first two columns) and the amount
included in accounts receivable (last three columns). This
information is used to identify the "unearned
revenues-advances" type of contracts and to compute the
amount of advances at the balance sheet date on a
contract-by-contract basis according to c) above.
The computed advances are indicated by a negative balance in
the last column, labelled "Net Balance". The total of
all those contracts with negative balances is also shown on the
schedule.
Based on these schedules, on a contract-by-contract basis,
$1,691,295 for 1993 and $1,419,681 for 1994 for Pacific and
$302,599 for 1994 for Prairie constitute advances for accounting
purposes.
[18] Professor
Eckel, no doubt because of the way in which his instructions were
framed, took a different approach in his evidence. Much of his
evidence was directed to a description of the way in which the
percentage of completion method of revenue recognition works.
Unlike Mr. Sutley, he did not deal specifically with each of
the elements of the definition of capital found in subsection
181.2(3). His written statement of evidence deals with the nature
of the unearned amounts, as opposed to the computation of them,
in the following two passages:
Contract advances
Conceptually, an "advance" includes amounts received
or receivable before the firm has completed the work that would
entitle the firm to the funds. Essentially, the amount is a
payment in advance for work to be performed at a later date.
Because the work has not been performed, the advance is not taken
to the income statement as revenue, but instead is carried on the
balance sheet as a liability in accordance with GAAP. This
liability interpretation is intuitively reasonable: since the
work has not been performed, the firm is "liable" to
the customer for performance, which presumably would entail
effort and costs, or refund of the amount received. When the work
has been performed, the advance amount will be taken off the
balance sheet and recognized as revenue in the income statement.
Conceptually, an advance results from the receipt of an asset to
which the contractor has no right in terms of costs incurred or
contract performance.
The measurement of the amount of the advance may be difficult.
If a total amount is received and some part of that total
amount relates to work that has not yet been performed, then the
determination of the advance amount would require the measurement
of the degree to which the work has actually been performed.
An advance is a liability.
and
So what does this "excess" or "unearned
revenue" mean? What can be said of the "unearned
revenues and contract advances" reported by PCL and capital
employed?
Our analysis has shown us that his "unearned" amount
can be defined only as "the excess of billings over the
costs and profit recognised in accordance with GAAP and the POC
method".
When the firm has experienced an increase in net assets that
is in the nature of income, that increase in net assets must be
recognised in accordance with GAAP. When that increase in net
assets is related to the performance of a long-term contract, it
can be recorded as an advance, or earned revenue, or unearned
revenue.
· If it
is an advance, then it is a liability and eligible to be included
in capital employed.
If the billing includes an advance, the advance should be
separated from the remainder of the billing. That will leave the
net billing as either earned or unearned revenue.
· To
the extent that the net billing is earned revenue, it will be
taken to revenue in the income statement and to net income, and
then to retained earnings. Retained earnings is part of owners
equity and part of capital employed.
· What
remains of the billings is unearned revenue; it is equal
to the net billing remaining after the earned revenue was taken
to the income statement, income, and retained earnings. As
discussed above, the unearned revenue is a liability. As such, it
is eligible to be included as part of capital employed.
It is important to note, however, that the discussion which
leads to the latter conclusion is preceded by this statement on
page 13:
For purposes of discussion, let us assume both that the
estimated revenue under %-of-completion is in accordance with
GAAP, and that the customer has paid the billing.
(emphasis added)
[19] The first
of these assumptions is correct; the second is correct only as to
some, not all, of the Appellants' contracts at the year ends
in question. The major fallacy in Professor Eckel's evidence
lies in the last two sentences, and in this assumption. He does
not address the specifics of the definition of capital found in
subsection 181.2(3), but assumes that if it is a liability then
it must be "eligible to be included as part of capital
...". This ignores that capital is defined by
aggregating the items enumerated in paragraphs 181.2(3)(a)
to (g). Paragraphs (c), (d), (e) and
(f) bring in specific kinds of indebtedness; but for the
purposes of Part I.3 of the Act indebtedness is only
to be included in capital if it can be brought within the
specific words of those paragraphs. The only one within which the
amounts in issue here could conceivably come, on the evidence,
is
(c) the amount of all loans and advances to the
corporation at the end of the year,
[20] There is,
therefore, no disagreement between Mr. Sutley and
Professor Eckel as to this; the unearned amounts are
liabilities. Professor Eckel would include it all in capital,
simply because it is a liability. Perhaps this results from his
wrong assumption "that the customers have paid the
billing". Or it may be because he takes the broad view of
"capital" which was urged upon me by counsel for the
Respondent. This broad view has gained some acceptance in the
United States, under legislation similar in purpose to, but
different in structure from, Part I.3 of the Act: see
United North & South Development Co. v. Heath;[2] Central Power
& Light Co. v. Bullock.[3]
[21] However,
these cases do not arise under legislation which specifies in
detail, as does Part I.3, the liabilities that are to be included
in the computation of capital. Parliament has described
meticulously in subsection 181.2(3) which elements of the balance
sheet, and in particular which liabilities, are to be included as
part of capital. The unearned amounts do not meet the description
of the included liabilities, except to the extent that they are
"advances". I find nothing in Professor Eckel's
evidence to support the view that the unearned amounts which
remain unpaid at the end of the period should be considered
advances. I accept Mr. Sutley's opinion, which is
clearly reasoned and based on the authoritative CICA
publications, that the unearned amounts may only be characterized
as advances after the billings giving rise to them have been
paid, and the amounts have therefore been received. This view is
also consistent with the decisions of the Federal Court of Appeal
in Oerlikon Aérospatiale Inc. v. The Queen[4] and the Ontario
Court of Appeal in TransCanada Pipelines Ltd. v. Ontario
(Minister of Revenue).[5]
[22] Counsel
for the Crown argued that the unearned amounts should, on a broad
view of the word surplus, be included in capital under paragraph
181.2(3)(a) as "other surpluses". Support for
this is said to be found in Upper Lakes Shipping Ltd. v.
Ontario (Minister of Revenue).[6] In that case Potts J. held
that the entire amount of a government grant should have been
included in the corporation's paid-up capital for purposes of
the Corporations Tax Act, R.S.O. 1980 c. 97 in the year in
which it was received. The definition of paid-up capital in
that Act includes, by paragraph 53(1)(b)
"earned, capital and any other surplus". He reached his
conclusion on the basis that the phrase should be given a broad,
non-technical meaning. This judgment was reversed on appeal. The
Ontario Court of Appeal held that although GAAP is not definitive
for purposes of the statute, nevertheless
...the plain and ordinary meaning of these words should
be taken from the language accountants speak, not that of persons
who are not involved with corporate balance sheets. The tax
assessors know accounting language, as do the accountants who
certify the corporation's financial statements.[7]
Counsel for the Crown submitted that since the judgment of the
Supreme Court of Canada in Canderel Limited v. The
Queen,[8] the
judgment of Potts J. is to be preferred to that of the Court of
Appeal. However, I see nothing in Canderel, a case
concerned with the computation of income, that might have led the
Court of Appeal to a different conclusion as to the
interpretation of a provision which defines and taxes corporate
capital.
[23] I note
too that in subsection 181(3) of the Act, Parliament has
directed the use of a balance sheet prepared in accordance with
GAAP to determine carrying values and other amounts.
181(1) For the purposes of this Part,
...
181(3) For the purposes of determining
the carrying value of a corporation's assets or any other
amount under this Part in respect of a corporation's capital,
investment allowance, taxable capital or taxable capital employed
in Canada for a taxation year or in respect of a partnership in
which a corporation has an interest,
(a) the
equity and consolidation methods of accounting shall not be used;
and
(b)
subject to paragraph (a) and except as otherwise provided in this
Part, the amounts reflected in the balance sheet
(i)
presented to the shareholders of the corporation (in the case of
a corporation that is neither an insurance corporation to which
subparagraph (ii) applies nor a bank) or the members of the
partnership, as the case may be, or, where such a balance sheet
was not prepared in accordance with generally accepted accounting
principles or no such balance sheet was prepared, the amounts
that would be reflected if such a balance sheet had been prepared
in accordance with generally accepted accounting principles,
or
...
shall be used.
Subject to specific direction to the contrary elsewhere in
Part I.3 of the Act[9], GAAP applies to determine "amounts". That
seems a strong indication that if not GAAP then at least
"the language accountants speak" must govern the
characterization of amounts for the purposes of this Part. I am
not persuaded that these unearned amounts would, even on a broad
view, be properly described as surplus. Both experts agree that
they are liabilities.
[24] The
remaining question is whether it is permissible to look behind
the balance sheet to divide the unearned amounts into that which
had been received by year end and therefore should, on the
evidence of the Appellants' own expert, be considered
advances and so included in capital, and that which remained
receivable, and therefore is not to be included. This point was
scarcely addressed in argument.
[25] I see no
reasonable alternative to doing so. Certainly, on the evidence of
Mr. Sutley, which I accept, it is only by doing so that the
assessor could achieve an accurate result. Does subsection 181(3)
preclude this approach? I do not believe it does. So far as they
are relevant to this issue the words of the subsection are:
For the purpose[s] of determining ... any ... amount
under this Part in respect of a corporation's capital
... the amounts reflected in the balance sheet ...
prepared in accordance with GAAP ... shall be used.
The use of the words "reflected in the balance
sheet" indicates a clear intention on the part of the
drafter to leave it open to consider the components of a balance
sheet item where some, but not all, of those components fall
within the statutory definition of capital. This is such a case.
The intention that GAAP should prevail in fixing quantum would be
frustrated if the item "Unearned Revenues and Contract
Advances" could only be excluded or included in its
entirety. If that were the legislative intent then parliament
would have used the expression "appearing on the balance
sheet". The unearned amounts which are advances do not
appear on the Appellants' balance sheets, but they are
reflected in them as an identifiable component of the amounts
which do appear there.
[26] The
appeal of PCL Construction Management Inc for the 1994 taxation
year will be dismissed. The other appeals will be allowed, and
the assessments referred back to the Minister for reconsideration
and reassessment to delete from the computations of capital the
amounts relating to outstanding cheques which were conceded by
the Crown at trial, and to delete the portions of the unearned
amounts in each case which had not been received at the pertinent
year end.
[27] Counsel,
if they cannot agree as to the disposition of costs, may arrange
through the Registrar's Office to make written submissions.
Counsel for the Appellants is requested to prepare draft
judgments for my signature, subject to approval as to form and
content by counsel for the Respondent.
Signed at Ottawa, Canada, this 24th day of July, 2000.
"E.A. Bowie"
J.T.C.C.
COURT FILE
NO.:
97-950(IT)G, 97-951(IT)G and 97-952(IT)G
STYLE OF
CAUSE:
PCL Construction Management Inc.,
PCL Constructors Eastern Inc.,
PCL Constructors Canada Inc. and
Her Majesty the Queen
PLACE OF
HEARING:
Edmonton, Alberta
DATE OF
HEARING:
March 8 and 9, 1999
REASONS FOR JUDGMENT BY: The
Honourable Judge E.A. Bowie
DATE OF
JUDGMENT:
...
APPEARANCES:
Counsel for the Appellant: Cheryl A. Gibson
Counsel for the
Respondent:
James Yaskowich and Rhonda Nahorniak
COUNSEL OF RECORD:
For the
Appellant:
Name:
Cheryl A. Gibson
Firm:
Cruickshank Karvellas
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
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