Date: 19991102
Ottawa, Ontario, November 2, 1999
Before: Pinard J.
Docket: T-1741-90
IN RE the Income Tax Act
BETWEEN:
KENNETH WOLOFSKY,
Plaintiff,
AND:
HER MAJESTY THE QUEEN,
Defendant.
Docket: T-1746-90
IN RE the Income Tax Act
BETWEEN:
SYDNEY WOLOFSKY,
Plaintiff,
AND:
HER MAJESTY THE QUEEN,
Defendant.
Docket: T-1747-90
IN RE the Income Tax Act
BETWEEN:
PETER WOLOFSKY,
Plaintiff,
AND:
HER MAJESTY THE QUEEN,
Defendant.
JUDGMENT
The action of each of the plaintiffs is dismissed. Costs, consisting of those for a single action, are awarded to the defendant.
Certified true translation
Bernard Olivier, LL. B.
Date: 19991102
Docket: T-1741-90
IN RE the Income Tax Act
BETWEEN:
KENNETH WOLOFSKY,
Plaintiff,
AND:
HER MAJESTY THE QUEEN,
Defendant.
Docket: T-1746-90
IN RE the Income Tax Act
BETWEEN:
SYDNEY WOLOFSKY,
Plaintiff,
AND:
HER MAJESTY THE QUEEN,
Defendant.
Docket: T-1747-90
IN RE the Income Tax Act
BETWEEN:
PETER WOLOFSKY,
Plaintiff,
AND:
HER MAJESTY THE QUEEN,
Defendant.
REASONS FOR JUDGMENT
PINARD J.
[1] These are appeals from a decision by Judge Lamarre Proulx of the Tax Court of Canada on February 16, 1990, dismissing the appeal of each of the plaintiffs from a reassessment previously made by the Minister of National Revenue ("the Minister") for their 1971 taxation year. By consent, these three appeals were heard jointly and must be decided on the same evidence.
[2] On July 28, 1975 the Minister issued a notice of reassessment for the 1971 taxation year of each of the plaintiffs. Following the issuing of these assessments, the plaintiffs filed a notice of objection in due form within the prescribed deadline. As the Minister dismissed these notices of objection, the plaintiffs appealed the matter to the Tax Court of Canada. These appeals to the Tax Court of Canada were dismissed by the aforesaid judgment of February 16, 1990: hence the instant appeals de novo.
[3] The issue here is the application of s. 85B of the Income Tax Act, R.S.C. 1952, c. 148, as amended and applicable in 1971 ("the Act"), and in particular s. 85B(1)(b ) and (d). Section 85B(1) reads as follows:
| 85B. (1) In computing the income of a taxpayer for a taxation year,
(a) every amount received in the year in the course of a business
| (i) that is on account of services not rendered or goods not delivered before the end of the year or that, for any other reason, may be regarded as not having been earned in the year or a previous year, or |
| (ii) under an arrangement or understanding that it is repayable in whole or in part on the return or resale to the taxpayer of articles in or by means of which goods were delivered to a customer, |
shall be included;
(b) every amount receivable in respect of property sold or services rendered in the course of the business in the year shall be included notwithstanding that the amount is not receivable until a subsequent year unless the method adopted by the taxpayer for computing income from the business and accepted for the purpose of this Part does not require him to include any amount receivable in computing his income for a taxation year unless it has been received in the year;
|
85B. (1) Dans le calcul du revenu d'un contribuable pour une année d'imposition,
a) tout montant reçu pendant l'année dans le cours d'une entreprise
| (i) qui est au titre de services non rendus ou de marchandises non livrées avant la fin de l'année, ou qui, pour toute autre raison, peut être considéré comme n'ayant pas été gagné dans l'année ou une année antérieure, ou |
| (ii) qui, en vertu d'un arrangement ou d'une entente, est remboursable en totalité ou en partie sur remise ou revente au contribuable d'articles dans lesquels, ou au moyen desquels, des marchandises ont été livrées à un client, |
doit être inclus;
b) tout montant recevable à l'égard de biens vendus ou de services rendus dans le cours de l'entreprise pendant l"année doit être inclus, nonobstant le fait que le montant n'est pas recevable avant une année subséquente, à moins que la méthode adoptée par le contribuable pour le calcul du revenu provenant de l'entreprise et acceptée aux fins de la présente Partie ne l"astreigne pas à inclure, dans le calcul de son revenu, pour une année d'imposition, un montant recevable, sauf s'il a été reçu dans l'année;
|
| (c) subject to subsection (3), where amounts of a class described in subparagraph (i) or (ii) of paragraph (a) has been included in computing the taxpayer's income from a business for the year or a previous year, there may be deducted a reasonable amount as a reserve in respect of
| (i) goods that it is reasonably anticipated will have to be delivered after the end of the year, |
| (ii) services that it is reasonably anticipated will have to be rendered after the end of the year, |
| (iii) periods for which rent or other amounts for the possession or use of land or chattels have been paid in advance, or |
| (iv) repayments under arrangements or understandings of the class described in subparagraph (ii) of paragraph (a) that it is reasonably anticipated will have to be made after the end of the year on the return or resale to the taxpayer of articles other than bottles; |
|
|
| c) sous réserve du paragraphe (3), lorsque des montants d'une catégorie décrite au sous-alinéa (i) ou (ii) de l'alinéa a) ont été inclus dans le calcul du revenu du contribuable, provenant d'une entreprise, pour l'année ou une année antérieure, il peut être déduit un montant raisonnable comme réserve à l'égard
| (i) de marchandises qui, selon ce qui est raisonnablement prévu, devront être livrées après la fin de l'année, |
| (ii) de services qui, selon ce qui est raisonnablement prévu, devront être rendus après la fin de l'année, |
| (iii) de périodes pour lesquelles le loyer ou d'autres montants, visant la possession ou l'utilisation d'un terrain ou de biens meubles, ont été payés d'avance, ou |
| (iv) de remboursements aux termes d'arrangements ou d'ententes de la catégorie décrite au sous-alinéa (ii) de l'alinéa a) qui, selon ce qui est raisonnablement prévu, devront être faits après la fin de l'année sur remise ou revente au contribuable d'articles autres que des bouteilles; |
|
|
| (d) where an amount has been included in computing the taxpayer's income from the business for the year or for a previous year in respect of property sold in the course of the business and that amount or a part thereof is not receivable,
| (i) where the property sold is property other than land, until a day that is |
| (A) more than 2 years after the day on which the property was sold, and |
| (B) after the end of the taxation year, or |
| (ii) where the property sold is land, until a day that is after the end of the taxation year, |
there may be deducted a reasonable amount as a reserve in respect of that part of the amount so included in computing the income that can reasonably be regarded as a portion of the profit from the sale;
|
d) lorsqu'un montant a été inclus dans le calcul du revenu du contribuable, provenant de l'entreprise, pour l'année ou une année antérieure, à l'égard de biens, vendus dans le cours de l'entreprise et que le montant n'est pas recevable en totalité ou en partie
| (i) lorsque les biens vendus sont des biens autres qu'un terrain, avant une date |
| (A) plus de deux ans postérieure à la date à laquelle les biens ont été vendus, et |
| (B) après la fin de l'année d'imposition, ou |
| (ii) lorsque les biens vendus sont un terrain, avant une date postérieure à la fin de l'année d'imposition, |
il peut être déduit un montant raisonnable comme réserve à l'égard de la partie du montant ainsi inclus dans le calcul du revenu qui peut raisonnablement être considérée comme une fraction du profit provenant de la vente;
|
| (da) where, pursuant to subsection (5ba) or (5c) of section 83A, an amount has been included in computing the taxpayer's income for the year or for a previous year in respect of the disposition after October 22, 1968 of a right, licence or privilege described in that subsection and that amount or a part thereof is not receivable until a day that is after the end of the taxation year, there may be deducted as a reserve in respect of that amount the part thereof that is not receivable until a day that is after the end of the taxation year, and no deduction may be made in respect of that amount by virtue of paragraph (d); and
(e) there shall be included the amounts deducted under paragraphs (c), (d) and (da) in computing the income of the taxpayer for the immediately preceding year.
|
|
| da) lorsque, en conformité du paragraphe (5ba) ou (5c) de l'article 83A, un montant a été inclus dans le calcul du revenu du contribuable pour l'année ou pour une année précédente en ce qui concerne l'aliénation, après le 22 octobre 1968, d'un droit, d'une licence ou d'un privilège décrit audit paragraphe et que ce montant ou une partie de ce dernier n'est pas recevable avant une date postérieure à la fin de l'année de d'imposition, et aucune déduction ne peut être faite relativement à ce montant en vertu de l'alinéa d); et
e) doivent être inclus les montants déduits sous le régime des alinéas c), d) et da) dans le calcul du revenu du contribuable pour l'année précédente.
|
|
Facts
[4] In the 1971 taxation year the plaintiffs, three brothers, were residents of Canada. During 1960 they purchased thirteen lots as partners. In 1962, doing business under the name and trade name of Lajeunesse Holdings, a company in which they each had a 33 1/3 % interest, they built on those lots eleven apartment buildings with 315 apartments, known and designated as "Fleury Gardens".
[5] On August 1, 1962, by a duly registered notarial deed, the plaintiffs sold the Fleury Gardens property to the companies Sutton Development Corp. ("Sutton") and Charlton Development Ltd ("Charlton") for the sum of $2,219,719.20, broken down as follows:
Cash $330,280.81
Balance payable in monthly instalments $1,889,438.39
[6] In disposing of this property the plaintiffs made an admitted profit amounting to $678,272, corresponding to 30.56 % of the total selling price.
[7] The balance of $1,889,438.39 corresponded to the amounts of mortgages still owed to the plaintiffs" creditors, namely $1,459,438.39, and two selling price balances owed to the plaintiffs, of $230,000 and $200,000. With respect to the balance of $1,459,438.39, the deed of sale provided: "The property hereby sold is free and clear of all hypothecs and encumbrances whatsoever, with the exception of the following and which the Purchasers, their successors and assigns agree to tolerate". There then followed a description of each of the hypothecs so "tolerated" by the purchasers Sutton and Charlton.
[8] As to the selling price balances owed the plaintiffs, the amounts of $230,000 and $200,000 in question were secured by a second hypothec.
[9] On the same day, namely August 1, 1962, Sutton and Charlton sold the same property, Fleury Gardens, to Cytro Real Estate Corp. ("Cytro"). In this second duly registered notarial deed of sale, although the plaintiffs did not intervene formally, Cytro expressly assumed the hypothecs for which they were responsible and which were referred to above as being "tolerated" by Sutton and Charlton. This second deed of sale between Sutton and Charlton, on the one hand, and Cytro on the other, contained at p. 29 the following clause 6:
| 6. That the said property is free and clear of all hypothecs and encumbrances whatsoever, save as hereinafter mentioned and assumed by the Purchaser. |
[10] The evidence disclosed that at the relevant time, that is between August 1, 1962 and the end of the 1971 taxation year, the selling price balances totalling $430,000 owed the plaintiffs were paid to them in full. Additionally, as regards the selling price balance of $1,459,437.39, corresponding to the plaintiffs" hypothecary obligations in connection with the loans made to them for construction of the buildings in question, the evidence further disclosed that they were in fact assumed by Cytro to the plaintiffs" benefit. The plaintiff Kenneth Wolofsky testified that he did not recall receiving any money whatever directly on this balance of $1,459,438.39, and also indicated his satisfaction and that of his brothers in having their hypothecary obligations assumed to their profit without having to spend any amount whatever.
[11] At December 31, 1971 the balance of the hypothecary loans still owed to the plaintiffs" creditors amounted to $1,093,467.52, namely the selling price balance.
[12] It should be noted that the amounts in question are not in dispute and the parties admitted that the deeds of sale of their property concluded on August 1, 1962 were not cases of non-arm"s-length dealing.
Issue
[13] Based on the selling price of the property in question to Sutton and Charlton, the plaintiffs in 1962 claimed a reserve against the profit made by them to allow for the fact that
part of the selling price, and hence the profit, would only be payable to them in subsequent years. The reserve claimed was allowed by the Minister. For each of the subsequent taxation years, 1963 to 1970, the plaintiffs paid tax on a fraction of the profit corresponding to the reduction in the selling price balance receivable incurred during the taxation year in question, and this was accepted by the Minister.
[14] The plaintiffs accordingly objected that the Minister altered his approach and for the 1971 taxation year disallowed the balance of the reserve he had accepted in 1962. In terms of the selling price balance of $1,093,467.52 which still existed at December 31, 1971, the part of the 1962 reserve which had not yet been re-included in the income of the plaintiff and his two brothers on December 31, 1971 amounted to a total of $334,163.67, or $111,387.89 for each of the three plaintiffs. The latter therefore submitted that they were each correct in filing their tax returns for the 1971 taxation year and including in their income only an additional amount of $23,075.81, representing the reduction of the amount receivable which took place during that taxation year.
[15] For her part, the defendant argued that the sum of $111,387.89, which was added to the income of each of the plaintiffs by the Minister for the 1971 taxation year was not a reserve for deferred profit deductible within the meaning of s. 85B(1)(d) of the Act. The defendant submitted that the amount of the hypothecs encumbering the property sold by the plaintiffs was assumed by the subsequent purchasers and that there was thus no reason to take this amount into account as an "amount receivable" within the meaning of s. 85B(1)(d ). The defendant further argued that this amount of $111,387.89 proposed as a reserve was not reasonable and that the Minister was justified in adding it to the income of each of the plaintiffs for the 1971 taxation year.
Analysis
[16] Section 85B(1)(b) of the Act lays down the rule that every amount receivable by a taxpayer in respect of property sold in the course of a business in the year shall be included in the taxpayer"s income for that taxation year, notwithstanding that the amount is not receivable until a subsequent year. However, s. 85B(1)(d ) provides that when this amount or a part thereof so included in computing the taxpayer"s income is not receivable until a date after the end of the taxation year, the taxpayer may deduct "a reasonable amount" as a reserve in respect of that part of the amount so included in computing his income "that can reasonably be regarded as a portion of the profit from the sale".
[17] Section 85B(1)(d) of the Act does not require the calculation of the amount of the
reserve to be done according to any particular inflexible formula and does not take into account the circumstances peculiar to each case. This seems consistent with the views expressed by the Federal Court of Appeal when interpreting s. 20(1)(n)(ii) of the Act as compared with s. 85B(1)(d)(ii), in The Queen v. The Ennisclare Corporation, 84 DTC 6262, at 6265 and 6266:
| I am not at all persuaded by these submissions. To begin with, I can find nothing in the language of Section 20(1)(n)(ii) that necessarily requires the application of such a precise and inflexible formula in determining the amount of reserve permitted by its provisions. Parliament, of course, is free in its choice of language to produce a desired result but, as was submitted by the Respondent, failure to frame Section 20(1)(n)(ii) in terms of a mathematical formula as was done in framing other provisions of the Act [See e.g. Sections 20(1)(z), 20(1)(hh), 47(1)(b) and 86(1)(b)] leaves open to serious doubt that it ever intended the determination of the amount of reserve under that section in all cases and under all circumstances to be made by applying a rigid formula. In my view, judging from the language it used, all that Parliament intended was that the amount of reserve be "reasonable". The very use of that word suggests that Parliament, in its wisdom, understood that the amount of reserve would need to be determined from case to case and under differing circumstances rather than simply be the product of an inflexible formula. |
| I am fortified in this opinion by the views expressed in the decided cases concerning the interpretation of Section 85B(1)(d)(ii) [R.S.C. 1952, c. 148]. It, like Section 20(1)(n)(ii), permitted the deduction of a reserve in respect of the profit element of an amount receivable. Its form was somewhat similar to that of the provisions in question. In M.N.R. v. Burns [58 DTC 1028], Cameron J. noted (at p. 1032) that the reserve permitted by paragraph (d): |
| . . . is that which can reasonably be regarded as a portion of the profit from the sale, and does not relate in any way to a proportion or a percentage of the gross amount of the sale or to the value of the receivables. |
| In commenting on the intent underlying Section 85B(1)(d)(ii) in Station Heights Subdivision Limited v. M.N.R. [73 DTC 13], the Tax Review Board stated (at p. 16): |
| The Income Tax Act and Income Tax Regulations nowhere set out any formula or any procedure for determining what is a reasonable amount. However, there are cases which deal with the issue and in which the formula, gross profit over gross selling price, less the amount of the mortgage assumed, times the amount receivable, can produce a reasonable amount. |
| Finally, in the Makis case, this important point was once again emphasized by that Board when it stated (at p. 1105): |
| In computing the amount of the reserve to be granted to a vendor, it is important to bear in mind that such a reserve under section 85B(1)(d) is only allowable in respect of the profit element in the amount receivable. The only requirement in regard to the allowable amount of a reserve in respect of the profit element in such a receivable is that the reserve must be a reasonable amount. |
| I entirely agree with these observations. It seems to me that Section 20(1)(n)(ii) calls for no more than the determination of a "reasonable amount" as a reserve. The section does not on its face or by necessary implication require that this determination be made in every case and regardless of circumstances merely by applying an inflexible formula. At the same time, in the present case it seems to me proper that the determination be made by taking into account the percentage of gross profit contained in the gross selling price of the units. |
| Illustrations of differing applications of the provisions of Section 85B(1)(d)(ii) under differing circumstances are to be found in the Makis case. There, the taxpayer had built an apartment building on land acquired by it in 1959. The cost of construction was financed almost entirely through borrowed money under mortgage loan arrangements. As the building could not be operated at a profit, the taxpayer decided to sell it. The sale price of $680,000 was made up, in part, of $400,000 in first mortgages assumed and in a second mortgage of $167,000 taken back by the taxpayer. The taxpayer claimed a reserve in respect of this latter amount which was not due until after the end of its 1967 taxation year. In computing the reserve the Minister, however, reduced the selling price of $680,000 to $280,000 by deducting the full amount of the first mortgages assumed. As a result, a reserve of $130,000 was arrived at. In agreeing with the reasonableness of this amount the Tax Review Board had this to say about the application of Section 85B(1)(d)(ii) of the Act (at p. 1105-06): |
| In practice, it is considered reasonable to assume that the percentage of any amount of the sale price receivable in a subsequent taxation year that should be taken to represent the profit element included in the said receivable would be the same percentage of that receivable as the gross profit is of the total sale price. Conceivably a reserve might be allowed equal to the full amount of the profit so determined if no portion at all of the selling price had been received in the year of sale. Stated as a formula, the foregoing would be expressed as: |
| Gross Profit x Amount = reserve |
| Gross Selling Price Receivable |
| A modification of this formula is called for in a situation where an existing mortgage (or mortgages) is assumed by the purchaser, provided that none of these assumed mortgages has been placed on the property subsequent to the completion of the building so as to reduce the owner"s existing equity in the property. In such a case, the mortgage or mortgages so obtained are disregarded in calculating the reserve. In the case of the assumption of an existing mortgage by the purchaser, the above formula is modified by changing the denominator from the amount of the gross selling price to the difference between the gross selling price and the amount of the mortgage or mortgages taken out on the building during construction and later assumed by the purchaser. The formula then becomes: |
| Gross Profit x Amount = reserve |
| Gross Selling Price Receivable |
less Mortgages
Assumed
| On this appeal, the Appellant contends that, as we are not bound by the decision in the Makis case, we ought to apply the first formula rather than the second one discussed in that case. |
| In my opinion, having regard to the fact that the language of the provisions with which we are concerned requires only that the amount of the reserve be "reasonable", the learned Trial Judge did not err in declining to apply the first formula discussed in the Makis case. It was open to him to do so as he did, namely, to take the cost of construction, as financed by way of first mortgage, into account in making his determination of the reserve. The result of doing so was to accept as the gross selling price of the units the aggregate prices agreed to by their purchasers less the cost of construction financed by way of first mortgage. |
[18] In the case at bar, I consider that the circumstances justified the Minister in changing his mind, which he may generally do from one taxation year to another, and considering that no amount could have been regarded as reasonable in respect of the 1971 taxation year for purposes of a reserve within the meaning of s. 85B(1)(d) of the Act,1 for all the following reasons:
| " the balance of the selling price on the plaintiffs' property at December 31, 1971, $1,093,467.52, corresponded exactly to the balance of the plaintiffs' hypothecary debts on the same property which were expressly assumed by the subsequent purchaser Cytro; |
| " the selling price balances owed the plaintiffs, namely $230,000 and $200,000, when they sold their property on August 1, 1962 were paid to them in full before December 31, 1971; |
| " between August 1, 1962, the date their property was sold, and December 31, 1971, the end of the fiscal year in question, the plaintiffs, still holding obligations assumed to them by the purchasers Sutton and Charlton, and still bound to their own hypothecary creditors, had in fact agreed that their hypothecary obligations would be paid in full by a subsequent purchaser of their property; |
| " the plaintiffs in fact benefited before December 31, 1971 from the full profit from the sale, $678,272, in view of the amounts from their hypothecary loans in question, the cash payment of $330,280.81 on the day of the sale and the repayment of the balances of $230,000 and $200,000 owed to them by the purchasers of their property; |
| " after the sale of their property, as they never had to pay their hypothecary creditors directly, the latter"s rights having been entirely assumed and observed by a subsequent purchaser of the property in question, the plaintiffs were not required after 1971 to lay out any sum in connection with the property and its related hypothecs. |
[19] For all these reasons, the appeals cannot be allowed and the action of each of the plaintiffs is dismissed. Costs are awarded to the defendant, but at the parties" request these will be limited to those of a single action.
OTTAWA, ONTARIO
November 2, 1999
Certified true translation
Bernard Olivier, LL. B.
FEDERAL COURT OF CANADA
TRIAL DIVISION
NAMES OF COUNSEL AND SOLICITORS OF RECORD
| STYLE OF CAUSE: Kenneth Wolofsky v. Her Majesty the Queen |
| STYLE OF CAUSE: Sydney Wolofsky |
| STYLE OF CAUSE: Peter Wolofsky |
| PLACE OF HEARING: Montréal, Quebec |
| DATE OF HEARING: September 14, 1999 |
| REASONS FOR JUDGMENT BY: PINARD J. |
APPEARANCES:
| Guy DuPont FOR THE PLAINTIFFS |
Françis-Ian Royas
| Richard Gobeil FOR THE DEFENDANT |
Carole Benoit
SOLICITORS OF RECORD:
| Goodman, Phillips and Vineberg FOR THE PLAINTIFFS |
Montréal, Quebec
| Morris Rosenberg FOR THE DEFENDANT |
Deputy Attorney General of Canada
__________________
1 See e.g. The Dominion of Canada General Insurance Company v. Her Majesty The Queen , 86 DTC 6154, at 6164.
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