Margeson
J.T.C.C.:
—
Before
the
commencement
of
the
appeal
the
party
filed
an
Agreed
Statement
of
Facts
as
set
out
below,
reserving
the
right
to
reduce
evidence
not
inconsistent
with
those
facts.
STATEMENT
OF
AGREED
FACTS
For
the
purposes
of
these
proceedings,
the
parties
agree
that
the
facts
are
as
follows
but
reserve
the
right
to
adduce
evidence
not
inconsistent
with
these
facts.
1.
The
appellant
is
a
corporation
having
its
registered
and
records
office
at
2800-666
Burrard
Street,
Vancouver,
British
Columbia.
The
appellant,
in
the
Province
of
British
Columbia,
carries
on
the
business
of
harvesting
logs
and
using
those
logs
to
manufacture
finished
timber
and
plywood
for
sale
and
to
make
chips
to
manufacture
pulp
for
sale.
2.
This
is
an
appeal
from
reassessments
issued
under
the
Income
Tax
Act
of
Canada
(the
“Act”)
as
set
out
in:
(a)
Notice
of
Reassessment
dated
March
9,
1993
with
respect
to
the
appellant’s
1987
taxation
year;
and
(b)
Notices
of
Reassessment
Nos.
3841868,
3841867,
3841866
and
3841865
dated
August
8,
1994
with
respect
to
the
appellant’s
1988,
1989,
1990
and
1991
taxation
years
respectively,
Notice
of
Reassessment
No.
taxation
year,
and
Notice
of
Assessment
No.
3860277
with
respect
to
the
appellant’s
1991
taxation
year.
3892051
dated
August
3,
|
1995
with
respect
to
the
|
appellant’s
1988
|
The
1987,
1988,
1989,
1990
and
1991
taxation
years
shall
hereinafter
be
referred
to
as
the
“taxation
years”.
3.
In
order
to
harvest
logs
at
any
location
in
British
Columbia,
a
person
must
obtain
a
timber
harvesting
licence
issued
under
the
Forest
Act
R.S.B.C.
1989
c.
40
in
respect
of
that
location.
The
Forest
Act
requires
that,
as
a
condition
of
harvesting
timber
at
a
particular
location,
an
applicant
for
a
timber
harvesting
license
must:
(a)
before
harvesting
the
timber,
prepare
and
submit
for
approval
a
preharvest
silviculture
plan
for
the
land
from
which
the
timber
is
to
be
harvested;
and
(b)
during
and
after
harvesting
the
timber,
carry
out
the
specified
silvicul-
ture
plan
at
its
own
expense
and
in
accordance
with
the
regulations.
Under
the
Forest
Act,
where
the
holder
of
a
timber
harvesting
licence
has
not
caused
to
be
carried
out
such
work
as
is
necessary
to
meet
the
reforestation
requirements
of
the
pre-harvest
silviculture
prescription
and
has
failed
to
comply
with
the
terms
of
a
notice
regarding
same,
the
regional
manager
shall
at
the
expense
of
the
licence
holder
cause
to
be
carried
out
such
work
as
is
necessary
to
meet
the
requirements
of
the
pre-harvest
silviculture
prescription.
4.
Prior
to
harvesting
timber,
the
appellant,
like
other
licence
holders,
must
file
and
have
approved
by
the
Government
of
British
Columbia,
a
Pre-Harvest
Silviculture
Prescription
(“PHSP”).
The
PHSP
is
signed
by
a
registered
professional
forester
prior
to
filing
and
sets
out
specific
site
requirements
for
silviculture
work,
including
the
time
limit
for
achieving
a
free
growing
crop.
Attached
as
Exhibit
“A”
to
this
Statement
of
Agreed
Facts
is
an
example
of
one
of
the
appellant’s
PHSP’s
for
the
Co-op
Lake
area.
In
this
example,
the
appellant
must
achieve
a
free
growing
crop
within
14
to
16
years
of
harvesting.
Attached
as
Exhibit
“B”
to
this
Statement
of
Agreed
Facts
is
an
example
showing
the
appellant’s
PHSP’s
for
the
Torpy
River
area.
In
this
example,
the
appellant
must
achieve
a
free
growing
crop
within
5
to
12
years
of
harvesting.
5.
To
achieve
a
free
growing
crop,
and
depending
on
the
site
requirement,
the
appellant
has
to
carry
out
various
operations
including
site
preparation,
artificial
and
natural
regeneration,
windrowing
(burning),
brushing,
spacing
and
stand
tending,
pesticide
treatment
and
other
operations
if
prescribed.
These
operations
are
generally
completed
within
7
years
of
harvesting
but
may
continue
until
a
free
growing
crop
has
been
achieved.
6.
Prior
to
October,
1987,
the
Government
of
British
Columbia
assumed
the
obligation
to
reforest
Crown
lands
logged
by
licence
holders.
In
estimating
future
silviculture
costs
for
a
particular
area,
the
Forest
Service
relied,
in
part,
on
estimates
provided
by
the
licence
holder
in
that
area.
7.
The
estimated
cost
of
silviculture
for
a
particular
area
is
expressed
as
a
cost
per
cubic
meter,
and
is
a
function
of
the
size
of
the
area,
the
estimated
number
of
cubic
meters
harvested
in
that
area,
and
the
estimated
cost
of
establishing
a
free
growing
crop,
which
includes
among
other
things
the
cost
of
site
preparation,
planting,
brushing
and
weeding,
all
of
which
vary
depending
on
the
species
of
tree
to
be
planted,
terrain,
soil
type,
meteorological
conditions
and
the
need
for
pest
control.
8.
In
the
taxation
years
the
appellant
harvested
timber
under
various
licences,
and
became
obliged
under
the
Forest
Act
to
perform
the
required
silviculture
and
to
pay
the
attendant
costs
as
they
arose.
The
obligation
to
perform
the
silviculture
arose
at
the
time
the
timber
was
harvested.
9.
The
appellant’s
silviculture
obligation
is
to
produce
a
free
growing
crop
of
trees
within
a
specified
time
period.
This
period
may
range
from
five
to
sixteen
years
commencing
with
the
start
of
reforestation
activities.
These
activities
typically
commence
in
the
year
following
harvesting;
however,
where
conditions
are
favourable,
some
early
silviculture
activities
such
as
burning
may
be
undertaken
in
the
same
fiscal
year
as
the
harvest.
A
free
growing
crop
of
trees
means
a
crop
of
healthy
trees,
the
growth
of
which
is
not
impeded
by
competition
from
plants,
shrubs
or
other
trees.
10.
For
the
purpose
of
preparing
its
financial
statements
for
each
taxation
year,
the
appellant:
(a)
in
determining
its
cost
of
timber
harvested
for
the
year,
made
a
number
of
estimates,
one
of
which
was
the
cost
of
the
silviculture
obligation
with
respect
to
the
timber
harvested
during
that
year,
whether
or
not
the
silviculture
was
performed
in
or
paid
for
in
the
year
of
harvest;
(b)
the
cost
of
timber
harvested
so
determined,
expressed
as
an
amount
of
money
per
cubic
meter,
was
included
in
the
cost
of
inventory
for
the
taxation
year;
(c)
the
cost
of
inventory
so
determined
was
added
to
the
value
of
the
opening
inventory
for
the
year,
and
the
value
of
inventory
on
hand
at
the
end
of
the
year
was
subtracted
from
the
total
to
determine
the
cost
of
goods
sold
for
the
year;
and
(d)
the
cost
of
goods
sold
for
the
year
was
subtracted
from
receipts
for
the
year
to
determine
gross
profit
for
the
year.
11.
The
appellant’s
treatment
of
estimated
silviculture
costs
as
described
above
was
the
same
for
financial
statement
purposes
and
for
income
tax
purposes.
12.
Periodically
throughout
each
year,
the
appellant
compares
its
actual
expenditures
on
silviculture
to
estimates
previously
made,
and
adjusts
its
cost
of
timber
to
account
for
any
variance
in
an
attempt
to
make
the
estimates
used
from
time
to
time
as
accurate
as
possible.
13.
An
example
of
a
situation
which
would
result
in
a
subsequent
adjustment
to
the
estimated
silviculture
costs
is
the
possibility
of
natural
regeneration,
which,
depending
on
the
species
of
tree
to
be
planted,
could
reduce
the
extent
of
the
obligation.
For
instance,
for
species
such
as
lodge
pole
pine,
the
rate
of
natural
regeneration
will
be
higher
than
that
of
some
other
species,
such
as
spruce.
While
some
natural
regeneration
may
be
factored
into
the
estimates,
the
actual
extent
of
natural
regeneration
is
not
known
until
some
point
after
the
first
year
following
harvesting.
14.
Silviculture
cost
estimates
may
also
require
adjustment
in
the
following
situations:
(a)
changes
to
the
Forest
Act
subsequent
to
October,
1987
requiring
Northwood
to
use
alternative
equipment
to
access
reforestation
sites
and
to
adopt
new
methods
of
site
preparation
as
former
methods,
such
as
“broadcast
burning’’,
were
prohibited.
These
changes
resulted
in
unanticipated
and
increased
costs
of
reforestation;
(b)
the
destruction
by
fire
of
artificial
and
natural
regeneration
prior
to
that
date
when
a
free
growing
crop
has
been
achieved.
In
such
cases
the
licence
holder’s
silviculture
obligation
continues,
and
the
duty
to
provide
a
free
growing
crop
remains,
with
some
allowances
for
the
time
limit.
In
such
cases,
the
silviculture
costs
would
exceed
estimates.
15.
The
Minister
of
National
Revenue
disallowed
the
amount
of
the
estimated
silviculture
costs
which
had
been
included
in
the
cost
of
sales
and
allowed
only
those
costs
for
silviculture
to
the
extent
that
an
outlay
or
expenditure
was
made
or
incurred
in
the
year
as
follows:
Year
|
1987
|
1988
|
1989
|
1990
|
1991
|
Estimated
|
$244,787
$11,279,387
$12,931,902
|
$11,550,387
|
$9,987,559
|
Silviculture
|
|
costs
included
|
|
in
cost
of
|
|
goods
sold
|
|
Costs
made
or
|
|
(1,296,307)
|
(5,827,064)
|
(10,180,313)
|
(9,260,513)
|
incurred
as
|
|
allowed
by
|
|
the
Minister
|
|
Seedling
|
|
(
805,156)
|
(1,037,921)
|
(
813,942)
|
(
7,971)
|
Adjustment
|
|
Net
|
$244,787
$9,177,924
|
$6,066,917
|
$
56,132
|
$
629,075
|
Adjustment
|
|
to
Income
|
|
16.
In
the
particular
taxation
years
in
which
the
disallowance
occurred,
the
appellant
did
not
expend
any
money,
or
incur
any
debt
of
an
ascertained
amount
to
an
identified
person,
with
respect
to
the
disallowed
silviculture
costs
Dated
at
Vancouver,
British
Columbia,
this
23rd
day
of
October,
1995
Davis
&
Company
(Robert
C.
Strother)
Solicitor
for
the
appellant
Dated
at
Vancouver,
British
Columbia,
this
24
day
of
October,
1995.
Max
Weder
Solicitor
for
the
Respondent
Both
parties
filed
expert
reports
and
rebuttals
in
accordance
with
the
relevant
Rules
on
the
issue
as
to
whether
or
not
the
appellant’s
treatment
of
the
items
in
dispute
were
in
accordance
with
generally
accepted
accounting
principles.
Ross
Smith
was
a
chartered
accountant
with
the
office
of
Peat
Marwick
and
Thorne
in
Vancouver.
He
was
familiar
with
the
appellant’s
operations
in
the
years
in
question.
He
was
also
familiar
with
the
operation
of
other
timber
and
forest
related
companies.
The
witness
indicated
that
the
appellant
prepared
its
own
internal
documents
and
Peat
Marwick
and
Thorne
were
engaged
to
review
these
documents
after
preparation.
His
firm
insured
that
the
documents
were
prepared
in
accordance
with
generally
accepted
accounting
principles
and
that
the
documents
fairly
represented
the
financial
position
of
the
company.
This
firm
also
insured
that
the
income
tax
returns
of
the
company
were
consistent
with
the
financial
statements.
Normal
practice
of
their
firm
was
to
review
“significant
estimates”
and
they
did
so
in
respect
to
the
years
in
issue
for
the
appellant
company.
They
reviewed
all
estimates
of
all
costs
for
silviculture
for
future
years.
They
concluded
that
the
estimates
made
by
the
appellant
were
reasonable.
The
firm
reviewed
the
timber
licences
of
the
appellant
and
ndicated
that
the
appellant
had
only
“a
right
to
cut
timber”.
The
company
has
a
duty
to
perform
silviculture.
The
Statute
required
that
a
vested
silviculture
agreement
be
in
place.
If
no
logging
was
done
there
would
be
no
silviculture
costs.
The
more
logging
that
was
done,
the
more
would
be
the
cost.
Insofar
as
the
basis
for
the
estimates
was
concerned,
they
were
based
upon
past
experience
as
to
the
cost
of
preparation,
considering
the
type
of
timber
and
the
cubic
measure
of
logs
that
the
company
calculated
that
they
would
obtain
from
a
given
area.
The
witness
indicated
that
other
companies
with
which
he
was
familiar
treated
the
expenses
in
issue
here
as
“inventory
expenses”.
Northwood
accounted
for
the
expenses
at
the
time
of
harvest
because
that
is
when
the
obligation
arose.
Over
the
years,
the
estimates
of
expenses
varied
high
or
low
in
relation
to
the
actual
outlay,
but
there
was
a
good
average
obtained.
In
cross-examination
the
witness
indicated
that
he
performed
tests
to
see
if
the
estimated
costs
were
consistent
with
the
actual
outlays.
He
admitted
that
there
was
nothing
in
their
pre-harvest
plan
that
indicated
that
costs
were
related
to
the
amounts
of
timber
that
had
to
be
harvested.
It
was
suggested
to
the
witness
that
there
was
no
rule
of
auditing
that
required
the
financial
statement
to
present
the
“truest
picture
of
profit”.
He
did
not
agree
and
said
that
that
was
precisely
what
he
attempted
to
do.
The
costs
were
recognized
on
the
books
of
the
company
after
the
harvest
not
when
the
plan
was
made.
The
company
was
basing
its
estimate
on
actual
costs
encountered
in
other
areas.
If
they
did
not
do
the
silviculture
the
government
would
do
it
and
charge
the
company
with
the
costs.
This
was
a
long
term
liability
that
was
not
discounted
to
present
value.
The
bulk
of
the
site
preparation
was
done
in
year
one
and
the
costs
were
allotted
within
twelve
months
after
harvest.
Some
site
preparation
could
be
done
in
October
and
not
much
else
after
that
until
April.
The
witness
said
that
the
estimates
of
the
appellant
were
improving
and
the
fluctuations
were
smaller.
Changes
in
government
regulations
could
cause
significant
changes
in
estimates.
Log
inventory
was
valued
at
lower
of
cost
or
market.
There
was
no
deduction
from
the
cost
of
inventory.
The
formula
used
was
opening
inventory
+
cost
of
purchases
less
closing
inventory
equals
cost
of
goods
sold.
Within
that
concept
(cost
of
goods
sold)
was
the
estimated
cost
of
the
silviculture
obligation.
That
figure
was
deducted
from
revenue
to
arrive
at
gross
profit.
Patricia
O’
Malley
was
qualified
as
an
expert
to
give
opinion
evidence
with
respect
to
generally
accepted
accounting
principles
and
as
to
why
businesses
account
for
certain
transactions
in
certain
ways.
She
was
a
partner
in
the
firm
of
Peat
Marwick
Thorne
in
the
National
Office.
She
considers
standards
in
relation
to
a
specific
set
of
facts.
She
said
to
treat
the
silviculture
items
other
than
as
the
appellant
treated
them
here
would
result
in
an
inaccurate
picture
of
the
company’s
business.
Harvested
logs
became
part
of
the
inventory.
Cost
of
logs
harvested
became
part
of
the
costs
of
inventory.
It
was
proper
to
take
into
account
the
costs
of
the
reforestation
in
determining
the
proper
costs
of
the
logs.
Accrual
accounting,
she
said,
reflects
the
financial
effects
of
the
expenses
in
the
period
to
which
they
relate.
You
must
have
periodic
accounting
to
determine
how
a
business
is
doing
at
any
time.
The
matching
principle
is
a
way
of
applying
the
accrual
process.
Using
the
cash
basis
in
the
case
at
bar
would
create
a
distortion
over
the
years.
You
should
record
the
expense
at
the
time
when
you
incur
it
or
when
you
incur
the
obligation.
The
witness
described
periodic
costs
as
those
relating
to
a
specific
period
and
those
which
are
expended
at
that
time.
Costs
creating
benefits
during
other
periods
are
related
to
assets.
These
capital
assets
are
charged
to
income
over
the
period
of
time
the
asset
is
used.
She
further
referred
to
inventory
costs,
pointing
out
that
if
all
the
inventory
was
used
up
in
the
year
there
would
be
no
problem.
However,
when
the
inventory
is
not
sold
by
the
year-end
you
have
some
inventory
being
obtained
at
different
costs
but
the
inventory
cannot
be
differentiated.
It
is
necessary
to
develop
a
method
for
determining
cost
of
inventory.
In
the
manufacturing
business
it
is
much
more
difficult
to
determine
cost
of
inventory.
You
must
take
into
account
all
costs
related
to
the
process
of
manufacturing
the
inventory.
One
must
attempt
to
show
the
most
direct
relationship
between
the
expense
and
the
manufactured
goods.
The
farther
away
one
gets
from
the
direct
relationship,
the
less
likely
you
will
include
the
expense
in
the
cost
of
inventory.
This
witness
indicated
that
in
the
forest
industry,
costs
such
as
cutting
down
trees
would
be
costs
of
inventory.
If
there
is
a
causal
connection
between
the
expense
and
the
inventory
it
should
be
included
in
the
cost
of
inventory.
Inventory
costs
are
costs
of
assets
held
for
sale.
They
are
not
related
to
capital
assets
which
are
held
for
use.
She
indicated
that
the
calculation
of
inventory
cost
by
estimates
was
not
novel
or
unique.
It
is
necessary
to
make
some
kind
of
assumption
as
to
how
the
expenses
incurred
to
acquire
inventory
relate
to
each
part.
An
estimate
of
cost
is
not
a
reserve.
One
is
estimating
the
cost
of
an
obligation,
it
does
not
relate
to
some
even
that
might
not
occur.
In
the
case
at
bar
there
was
an
obligation
to
do
the
silviculture.
It
was
necessary
to
file
a
plan.
The
proper
time
to
record
the
obligation
was
when
it
occurred.
That
time
was
when
the
trees
were
harvested.
If
the
company
did
not
do
it
that
way
it
would
not
be
showing
a
true
picture
of
the
existing
obligation.
If
you
did
not
do
the
estimate
at
that
time
you
would
be
underestimating
the
company’s
obligation.
The
proper
treatment
is
to
include
such
expenses
in
the
cost
of
inventory.
Such
expenses
are
directly
related
to
the
cost
of
the
final
product.
Silviculture
is
a
cost
that
is
necessarily
incurred
in
harvesting
timber.
Costs
of
silviculture
vary
directly
with
the
number
of
logs
cut
down
and
to
that
extent
it
varies
proportionately
to
the
area
as
Mr.
Smith
indicated
in
his
testimony.
The
greater
the
area
harvested,
the
greater
the
silviculture
expenses.
They
are
not
periodic
costs
because
they
cannot
be
carried
forward
to
future
periods.
There
is
a
direct
relationship
to
the
cost
of
inventory
because
of
the
liability.
She
considered
the
term
“period
cost”
to
be
a
catch
all
phrase
used
at
the
end
of
the
day
when
a
direct
relationship
could
not
be
found
‘between
the
expenses
and
the
other
items.
In
arriving
at
a
determination
as
to
what
is
a
generally
accepted
accounted
principle
treatment
given
by
her
peers
was
an
important
consideration
for
her.
In
cross-examination,
this
witness
indicated
that
there
was
no
generally
accepted
accounting
principle
known
as
the
“truest
picture”
of
the
company’s
position
as
reflected
by
the
financial
statements.
It
was
suggested
that
the
real
audit
question
is
whether
or
not
the
specific
treatment
“fairly
represents
the
financial
position
of
the
company
under
generally
accepted
accounting
principles”.
The
witness
admitted
that
the
term
“gross
profit”
was
not
referred
to
in
the
handbook
on
generally
accepted
accounting
principles
but
is
discussed
in
most
textbooks
in
intermediate
accounting.
There
is
no
separate
line
on
the
statements
requiring
a
gross
profit
figure.
She
confirmed
her
position
that
the
silviculture
expenses
were
“product
costs”.
She
said
that
without
it
there
would
be
no
harvesting.
She
could
think
of
no
other
product
costs
that
were
not
included
in
“costs
of
inventory”.
She
confirmed
that
the
logs
would
have
no
added
value
because
of
the
silviculture
costs
and
that
such
costs
were
not
a
cost
of
direct
labour
applied
to
the
product
but
were
an
applicable
share
of
overhead
expenses
even
though
they
were
not
“laid-down”
expenses.
Silviculture
expenses
are
variable
overhead
costs
dealing
directly
with
the
quantity
of
inventory
produced.
It
was
suggested
to
the
witness
that
the
amount
of
the
expenses
varied
directly
with
the
estimate,
not
according
to
the
actual
expenses
and
therefore
it
was
immaterial
as
to
how
they
were
allocated.
The
witness
disagreed.
She
stated
that
the
expenses
varied
directly
according
to
the
timber
harvested
or
logs
produced.
She
did
not
consider
whether
or
not
the
production
might
be
cancelled
if
the
silviculture
work
was
not
performed.
She
did
not
discount
the
costs
to
reflect
what
amounts
might
actually
be
paid
out
as
expenses
in
light
of
the
short
periods
of
time
involved,
in
this
case
five
years.
She
did
not
consider
“stumpage”
in
relation
to
silviculture
expenses
and
indicated
that
if
the
silviculture
expenses
were
treated
as
“operating
expenses”
the
charge
to
income
would
be
higher
and
the
net
income
would
be
lower.
Counsel
for
the
appellant
read
into
evidence
certain
parts
of
the
discovery
evidence
by
agreement.
Ross
Smith
was
recalled
and
testified
that
in
his
review
of
the
company
affairs
he
had
considered
the
status
of
the
licenses,
their
duration
and
their
type.
There
were
no
assurances
that
the
licences
would
be
renewed
year
after
year.
The
appellant
has
no
right
to
harvest
the
product
when
grown
even
though
they
perform
the
requisite
silviculture.
Ms.
Kathryn
Holgate
was
called
by
counsel
for
the
Respondent.
She
was
qualified
to
give
opinion
evidence
with
respect
to
generally
accepted
accounting
principles.
She
filed
an
expert
report
in
chief
and
a
rebuttal
report.
This
witness
indicated
that
the
period
between
1987
and
1991
was
a
period
of
great
change
in
the
forest
industry.
It
was
difficult
to
isolate
generally
accepted
accounting
principles
relative
to
this
industry.
It
was
her
position
that
there
may
be
more
than
one
acceptable
method
of
treating
the
silviculture
expenses.
She
took
the
position
that
the
preferable
treatment
was
to
regard
them
as
“period
costs”
and
not
“direct
expenses”.
She
agreed
that
generally
accepted
accounting
principles
could
be
derived
from
usage.
This
enables
one
to
know
what
others
are
doing.
Then
you
can
assess
its
appropriateness
according
to
the
circumstances.
If
a
new
issue
arises,
you
look
to
see
how
similar
issues
are
being
dealt
with
or
have
been
dealt
with.
She
considered
the
treatment
given
to
silviculture
expenses
by
companies
in
Canada
and
the
United
States.
Not
all
companies
treated
them
the
same
way
according
to
this
witness.
She
based
her
ultimate
opinion
on
the
“deductive
approach”.
She
would
be
surprised
if
a
large
number
of
companies
were
treating
them
as
product
costs
but
it
would
not
change
her
opinion.
She
concluded
that
silviculture
costs
were
not
related
to
the
“cost
of
product”.
It
is
an
expense
that
occurs
in
a
later
time
period.
It
is
a
compliance
cost
because
of
the
law.
Silviculture
costs
do
not
add
value
to
the
product.
There
is
no
future
benefit.
Therefore,
they
are
period
costs.
They
are
costs
quite
remote
from
the
cost
of
producing
logs.
They
may
be
related
to
inventory
but
not
as
a
product
cost.
Silviculture
costs
are
similar
to
a
sales
tax
cost.
They
are
created
by
Legislation.
She
considered
whether
or
not
the
silviculture
costs
were
a
replacement
for
the
stumpage
charge.
She
concluded
that
the
appellant
did
not
use
the
stumpage
fee
as
a
basis
for
determining
silviculture
cost.
She
said
that
any
benefit
that
silviculture
costs
added
to
the
inventory
was
shortlived
since
Northwood
turned
over
its
inventory
7
times
per
year.
In
cross-examination,
she
agreed
that
an
argument
could
be
made
that
Northumberland’s
treatment
was
an
acceptable
one
but
that
was
not
the
preferred
treatment.
She
agreed
that
in
order
for
it
to
be
a
product
cost
it
need
not
benefit
the
product.
Where
there
is
a
direct
relationship
between
the
cost
and
the
product,
it
is
more
likely
to
be
treated
as
a
“product
cost”
and
not
a
“period
cost”.
She
concluded
that
there
was
nothing
wrong
with
treating
the
item
as
the
appellant
did
but
from
a
cost
accounting
point
of
view
there
was
a
preferable
method
of
treatment.
It
would
not
change
her
opinion
even
if
100%
of
the
companies
treated
the
item
as
a
cost
of
inventory.
She
saw
no
advantage
from
a
cost
accounting
point
of
view
of
treating
the
item
as
Northwood
did
after
the
first
year.
The
bottom
line
would
change
little.
If
there
were
no
sales
then
there
would
be
a
difference.
This
was
the
second
time
she
had
dealt
with
the
forest
industry.
Jerry
Miller,
Colin
Campbell
and
Kevin
Irvine
all
took
issue
with
some
of
the
facts
referred
to
in
the
Respondent’s
expert
report.
They
all
indicated
that
the
type
of
expenses
in
issue
here
were
treated
by
Coopers
&
Lybrand,
Deloitte
and
Touche
and
Slocom
Forest
Products
as
costs
of
inventory.
Mr.
Michael
MacCallum
was
a
partner
of
the
firm
Price
Waterhouse.
He
was
familiar
with
the
results
of
a
survey
in
the
forest
industry
sent
to
68
companies,
45
of
which
responded.
He
also
considered
the
annual
reports
of
49
companies
and
included
that
information
in
the
study.
Thirty-six
of
the
companies
who
responded
incurred
silviculture
costs
and
all
treated
them
as
costs
of
inventory,
thirty
of
those
companies
at
the
year
of
harvest
and
6
at
other
times.
Five
of
the
six
recorded
expenses
in
the
year
that
silviculture
was
done.
Three
of
these
latter
companies
were
in
the
same
group
of
companies.
Universally,
he
said,
they
were
not
written
off
as
“period
costs”.
Argument
of
the
appellant
The
appellant
had
only
the
right
to
harvest
timber
from
the
land.
As
a
pre-condition,
it
had
to
prepare
for
approval
a
plan
of
silviculture
and
had
an
obligation
to
carry
out
that
silviculture
and
to
pay
stumpage.
The
appellant
estimated
its
cost
of
silviculture
at
the
time
of
harvest
and
included
that
cost
as
a
cost
of
timber
which
in
turn
was
the
cost
of
inventory.
The
method
is
to
estimate
the
silviculture
cost
for
the
area
in
question,
estimate
the
quantity
of
timber
to
be
harvested
from
the
area,
divide
the
estimated
silviculture
cost
by
the
estimated
cost
of
timber
to
determine
on
a
cubic
metre
basis
the
estimated
silviculture
cost.
That
goes
in
to
the
inventory
together
with
other
costs
of
harvesting
the
timber.
Experience
has
shown
that
the
actual
cost
of
silviculture
varies
directly
with
the
volume
of
wood
harvested.
Estimates
are
based
on
experience
and
are
constantly
upgraded.
Counsel
considered
that
there
was
a
direct
causal
connection
between
the
harvesting
of
the
logs
and
the
cost
of
silviculture,
therefore,
it
was
correct
to
treat
the
silviculture
cost
as
one
related
to
the
inventory
of
logs
harvested
and
not
as
a
period
cost.
Counsel
argued
that
both
expert
witnesses
agreed
that
accrual
accounting
is
the
proper
method
for
a
business
such
as
the
appellant.
They
agreed
that
matching
expenses
with
revenue
is
a
proper
technique
in
accrual
accounting.
It
was
proper
to
estimate
silviculture
expenses
and
the
appellant’s
estimates
were
reasonable.
They
did
not
agree
on
the
“methodology”.
Counsel
took
the
position
that
both
experts
agreed
that
the
cost
must
be
accounted
for
at
the
time
of
the
harvest
whether
they
are
treated
as
period
costs
and
deducted
from
income
immediately
or
inventory
costs
that
are
written
off
as
the
inventories
were
used.
Both
experts
agreed
that
the
accounting
method
used
was
in
accordance
with
generally
accepted
accounting
principles
and
commercial
accounting
principles.
The
only
debate
was
whether
or
not
there
was
a
“preferred
treatment”
to
that
used
by
the
appellant.
Counsel
argued
that
Ms.
Holgate
based
her
opinion
partly
on
a
misreading
of
certain
corporate
financial
statements
such
as
West
Fraser,
Slocan
and
Doman.
She
interpreted
these
financial
statements
as
if
they
treated
the
silviculture
costs
as
period
costs.
This
conclusion
was
rebutted
by
the
witnesses
called
by
the
appellant
who
had
a
personal
knowledge
of
the
way
in
which
these
companies
treated
silviculture
costs.
They
agreed
that
they
were
treated
as
product
costs
or
costs
of
inventory.
Further
evidence
of
Mr.
MacCallum
confirmed
the
latter
treatment
being
given
by
these
companies
involved
in
the
forest
industry.
Counsel
argued
that
the
main
question
to
be
decided
is
“what
is
profit”?
Profit
is
not
defined
in
subsection
9(1)
of
the
Income
Tax
Act.
In
this
case
the
issue
is
whether
or
not
in
determining
profit
we
should
treat
silviculture
costs
as
costs
of
inventory
or
period
costs.
The
appellant
determined
“profit”
correctly
by
treating
silviculture
cost
as
costs
of
inventory,
there
is
nothing
in
the
Income
Tax
Act
to
prevent
that
treatment.
What
follows
for
the
purposes
of
accounting
necessarily
follows
for
the
purpose
of
income
tax
in
this
case.
The
resolution
of
this
issue
in
the
case
at
bar
depends
upon
whether
or
not
the
Court
accepts
or
rejects
as
the
proper
accounting
treatment
the
method
which
the
appellant
used
here.
Counsel
argued
that
the
question
of
what
is
profit
is
a
question
of
law
for
the
Court
to
determine
but
the
Court
can
look
to
expert
opinion
for
guidance.
If
the
Court
decides
that
there
was
a
preferred
method
to
that
used
by
the
appellant,
then
that
is
what
governs
the
determination
of
profit
in
section
9.
Counsel
quoted
Mr.
Justice
MacGuigan
in
West
Kootenay
Power
&
Light
Co.
v.
R.,
(sub
nom.
West
Kootenay
Power
&
Light
Co.
v.
Canada),
[1992]
1
C.T.C.
15,
92
D.T.C.
6023,
at
page
22
(D.T.C.
6028)
where
he
said:
The
approved
principle
is
that
whichever
method
presents
the
“truer
picture”
of
a
taxpayer’s
revenue,
which
more
fairly
and
accurately
portrays
income,
and
which
“matches”
revenue
and
expenditure,
if
one
method
does,
it
is
the
one
that
must
be
followed.
The
position
taken
by
Mrs.
O’Malley
was
that
you
treat
the
silviculture
costs
as
costs
of
inventory
just
the
same
as
“stumpage”
costs
or
part
of
log
costs.
Therefore,
it
becomes
part
of
inventory
costs
and
therefore
part
of
the
cost
of
goods
sold
formula.
On
the
other
hand,
Ms.
Holgate
says
that
you
write
if
off
as
you
incur
it,
when
you
are
obliged
to
do
the
silviculture
work.
This
Court
must
decide
which
is
correct.
Counsel
suggested
that
Ms.
Holgate’s
position
is
incongruous.
She
would
treat
stumpage
costs
as
a
cost
of
inventory
but
would
treat
silviculture
costs
in
a
different
manner.
Yet,
neither
the
stumpage
charge
nor
the
silviculture
costs
add
anything
to
the
value
of
the
logs
but
both
are
obligations
that
must
be
met
to
obtain
the
right
to
harvest
the
logs.
Ms.
Holgate
had
no
experience
with
the
forest
industry
and
her
conclusion
was
based
on
“analogy”.
She
overlooked
the
analogy
that
was
close
at
hand
to
the
facts
upon
which
she
was
giving
an
opinion.
The
weight
of
the
evidence
should
favour
the
treatment
given
by
the
appellant.
Once
the
Court
concludes
that
the
treatment
afforded
by
the
appellant
in
the
determination
of
profit
is
the
correct
one,
it
must
then
conclude
whether
there
are
any
provisions
in
the
Income
Tax
Act
which
dictate
another
result.
He
opined
that
there
are
not.
His
position
was
that
subsection
18(1)
of
the
Income
Tax
Act:
18(1)
In
computing
the
income
of
a
taxpayer
from
a
business
or
property
no
deduction
shall
be
made
in
respect
of....
[Emphasis
added.]
does
not
apply
because
the
cost
of
inventory
is
not
a
“deduction”.
Counsel
relied
upon
Oryx
Realty
Corp.
v.
Minister
of
National
Revenue,
[1974]
C.T.C.
430,
74
D.T.C.
6352
(F.C.A.),
Minister
of
National
Revenue
v.
Shofar
Investment
Corp.,
[1980]
1
S.C.R.
350,
[1979]
C.T.C.
433,
79
D.T.C.
5347,
and
Friesen
v.
R.,
(sub
nom.
Friesen
v.
Canada),
[1995]
3
S.C.R.
103,
[1995]
2
C.T.C.
369,
95
D.T.C.
5551
in
support
of
this
proposition.
Finally,
the
appellant
argued
that
the
cases
of
Nomad
Sand
&
Gravel
Ltd.
v.
Minister
of
National
Revenue
(sub
nom.
Nomad
Sand
&
Gravel
Ltd.
v.
Canada),
[1991]
1
C.T.C.
60,
(sub
nom.
R.
v.
Nomad
Sand
&
Gravel
Ltd.),
91
D.T.C.
5032
(F.C.A.)
and
R.
v.
Burnco
Industries
Ltd.,
[1984]
C.T.C.
337,
84
D.T.C.
6348
(F.C.A.)
have
no
application
here.
The
appellant
argued
that
the
appeal
should
be
allowed
with
costs.
Argument
of
the
respondent
The
Respondent
took
the
position
that
the
Court
should
first
of
all
consider
whether
the
costs
in
question
are
prohibited
from
deduction
by
some
provision
of
the
Income
Tax
Act.
Counsel
argued
that
the
cases
of
Oryx
Realty
Corp.,
supra,
and
Shofar
Investment
Corp.,
supra,
talk
about
the
cost
of
inventory
as
such
as
not
being
a
deduction
per
se
but
he
disagreed
that
because
you
run
such
a
cost
through
the
cost
of
goods
sold
formula
that
that
figure
is
somehow
not
a
deduction
in
computing
income.
This
is
tantamount
to
arguing
that
section
18
of
the
Income
Tax
Act
applies
only
to
those
deductions
which
are
running
expenses.
It
does
not
apply
any
time
when
generally
accepted
accounting
principles
allow
the
expense
to
be
run
through
inventory.
Counsel
argued
that
in
order
for
the
costs
to
be
recognized
as
a
cost
of
goods
sold
it
must
satisfy
the
test
under
paragraph
18(l)(a)
that
it
was
made
and
incurred
and
must
not
be
excepted
by
paragraph
18(l)(e),
that
it
was
a
contingent
liability.
Counsel
argued
that
the
appellant’s
position
was
that
such
costs
do
not
apply
in
the
computation
of
“gross
profit”
and
he
disagreed
with
that
submission.
There
is
nothing
in
paragraph
18(l)(a)
which
makes
it
applicable
to
running
expenses
or
current
expenses
only.
Both
experts
testified
that
cost
of
goods
sold
was
an
expense.
That
is
what
the
Minister
of
National
Revenue
has
done
here.
He
has
disallowed
the
amount
that
was
charged
to
cost
of
goods
sold
that
was
the
estimated
amount.
He
has
allowed
the
expenditures
on
silviculture
as
they
were
made
or
incurred.
The
appellant
is
in
a
better
position
than
if
they
were
run
through
the
inventory
account.
Thus,
if
paragraph
18(l)(a)
prevents
the
deductions
until
made
or
incurred,
the
advantage
is
to
the
appellant.
Nothing
turns
on
the
Minister’s
treatment
of
the
expenses
but
the
appellant
is
better
off
by
that
treatment
than
if
the
Court
should
decide
to
refer
the
assessment
back
on
the
basis
that
the
cost
of
goods
sold
included
the
silviculture
costs
as
incurred.
Counsel
argued
that
in
Associated
Investors
of
Canada
Ltd.
v.
Minister
of
National
Revenue,
[1967]
C.T.C.
138,
67
D.T.C.
5096
(Ex.
Ct.)
the
Court
recognized
the
cost
of
goods
sold
as
a
deduction.
Counsel
argued
that
there
was
no
expense
until
there
was
the
obligation
to
pay
money
to
someone,
until
the
work
had
to
be
done
or
until
there
was
an
identifiable
credit,
or
until
the
amount
was
ascertained.
If
the
expenses
were
running
expenses,
then
under
Burnco,
supra,
and
Nomad
Sand
and
Gravel
Ltd.,
supra,
the
deductions
would
be
prohibited
under
paragraph
18(1
)(a)
of
the
Income
Tax
Act.
J.L.
Guay
Ltée.
v.
Minister
of
National
Revenue,
[1971]
C.T.C.
686,
71
D.T.C.
5423
(F.C.T.D.)
held
that
amounts
held
back
from
subcontractors
were
not
deductible
from
income
other
than
for
the
period
in
which
the
expenses
were
paid.
Further,
the
amounts
could
not
be
exactly
determined
and
in
some
cases
might
not
even
be
payable.
They
were
not
certain
or
current
expenses.
Counsel
pointed
out
that
no
distinction
was
made
in
this
case
between
current
expenses
and
costs
of
inventory
or
costs
of
goods
sold.
The
case
points
out
what
kind
of
deductions
the
Act
seeks
to
prevent.
It
may
be
that
many
estimates
must
be
made
by
a
taxpayer
in
determining
what
profit
is
for
the
purpose
of
the
financial
statements
but
there
is
a
clear
difference
for
tax
purposes
between
the
types
of
estimates.
On
the
one
hand,
you
have
estimates
related
to
work
done
here
and
now,
such
as
the
cost
of
labour
in
harvesting
a
particular
amount
of
logs.
If
such
an
estimate
is
done
in
accordance
with
generally
accepted
accounting
principles,
then
that
is
what
it
is
for
tax
purposes.
But,
where,
as
in
the
case
at
bar,
the
estimate
goes
beyond
the
year-end,
it
is
uncertain,
the
present
cost
is
applied
to
logs
to
be
harvested
in
the
future,
where
there
may
be
factors
affecting
the
reforestation
obligations
such
as
forest
fires,
decrease
or
increase
in
actual
costs,
whether
the
costs
will
be
greater
or
less
than
the
taxpayer
estimated
or
that
which
was
suggested
in
the
preharvest
silviculture
plan,
then
this
is
a
different
situation.
It
is
not
a
question
of
measuring
it
at
the
end
of
the
taxation
year
but
estimating
what
will
happen
in
the
future.
This
may
be
acceptable
for
financial
statement
purposes
but
not
for
income
tax
purposes.
This
type
of
expense
has
consistently
been
held
to
be
non-deductible
whether
it
is
a
current
expense
or
a
cost
of
goods
sold.
What
the
Minister
had
done
has
been
to
consider
the
formula,
opening
inventory,
plus
costs
of
acquisitions,
less
closing
inventory
equals
cost
of
goods
sold.
The
Minister
has
removed
from
cost
of
goods
sold
the
estimated
amount.
The
taxpayer
receives
no
credit
for
it
until
it
is
incurred,
in
the
sense
that
there
is
an
identifiable
creditor
or
certain
obligation.
That
is
what
happened
in
Burnco,
supra,
where
the
Federal
Court
of
Appeal,
reversing
the
Trial
Division
decision,
in
essence
decided
that
even
though
there
was
a
contractual
obligation
to
do
the
backfilling
and
the
taxpayer’s
treatment
was
satisfactory
from
an
accounting
point
of
view,
if
the
obligation
was
not
matched
with
the
revenues
from
the
gravel
pit,
the
treatment
would
be
inappropriate.
There
must
be
an
expense
in
the
tax
sense
to
make
the
matching
relevant.
If
there
is
a
prohibition
in
the
Statute
which
says
that
the
expense
cannot
be
recognized
for
tax
purposes,
matching
is
not
to
be
considered.
In
Canderel
Ltd.
v.
R.,
(sub
nom.
Canderel
Ltd.
v.
Canada),
[1995]
2
C.T.C.
22,
(sub
nom.
R.
v.
Canderel),
95
D.T.C.
5101
(F.C.A.),
the
“matching
principle”
was
held
to
apply
and
the
Court
matched
the
lease
inducement
payment
to
the
income
from
the
lease
by
amortizing
it
over
the
term
of
the
lease.
Expenses
were
related
to
a
particular
item
of
income
and
were
not
running
expenses.
The
case
at
bar
is
almost
the
opposite.
The
expense
will
not
be
incurred
until
some
time
in
the
future
depending
upon
how
much
time
it
takes
to
produce
a
free
standing
growing
crop.
In
the
case
of
Newfoundland
Light
&
Power
Co.
v.
R.,
(sub
nom.
Newfoundland
Light
&
Power
Co.
v.
Canada),
[1990]
1
C.T.C.
229,
90
D.T.C.
6166
(F.C.A.),
at
pages
238-40
(D.T.C.
6173),
the
Court
found
that
holdbacks
of
moneys
owed
to
subcontractors,
the
payment
of
which
was
subject
to
the
satisfaction
of
a
series
of
contractual
conditions,
including
the
settlement
by
the
contractor
(to
the
satisfaction
of
the
taxpayer)
of
any
claims
by
third
parties,
and
the
certification
by
the
taxpayer’s
own
engineers,
made
the
holdbacks
non-deductible,
contingent
liabilities.
This
finding
applied
to
holdbacks
related
to
work
of
a
capital
nature
as
well
as
holdbacks
related
to
maintenance
work
claimed
as
a
current
expense.
This
conclusion
was
reached
in
spite
of
expert
testimony
being
led
from
a
chartered
accountant
that
the
holdbacks
qualified
as
liabilities
under
generally
accepted
accounting
principles
on
the
basis
that
the
total
billings
did
not
exceed
the
value
received
by
the
company
and
that
the
holdback
on
an
asset
purchase
was
reflected
as
a
liability.
The
cost
of
the
asset
at
that
point
in
time
included
the
amount
of
the
holdback.
The
holdback
on
a
service
purchase
was
reflected
as
a
liability
and
the
expense
for
the
period
included
that
amount.
Counsel
took
the
position
that
this
case
stands
for
the
proposition
that
no
conditional,
contingent,
unsubstantiated
capital
cost
can
be
recognized
until
that
cost
comes
into
existence.
The
holdbacks
for
current
expenses
are
disallowed
by
paragraph
18(
1
)(a)
under
Burnco,
supra.
Capital
cost
is
a
deduction
from
income
not
defined
in
the
Act.
It
is
a
special
allowance
under
section
20
of
the
Act
and
therefore
different
from
the
costs
we
are
taking
about
in
this
case
under
section
9.
Normally
where
we
do
not
have
a
defined
term
under
the
Act,
we
look
at
the
cost
for
accounting
purposes,
but
the
Federal
Court
of
Appeal
has
said
no,
the
obligation
to
pay
that
cost
must
come
into
existence.
Counsel
contended
that
the
case
of
Shofar,
supra,
and
Oryx
Realty
Corp.,
supra,
deal
with
the
issues
raised
by
the
appellant
that
the
deduction
from
cost
of
goods
sold
is
not
a
deduction
for
purposes
of
paragraph
18(1)(a).
In
Shofar
and
Oryx,
supra,
the
Minister
sought
to
apply
section
78
because
when
the
property
was
sold
there
was
unpaid
inventory.
The
Court
held
that
the
section
did
not
apply.
But
in
that
case
there
was
no
cost
of
goods
sold
in
the
prior
year.
In
the
case
at
bar
there
has
been
a
resale
of
the
asset
in
normal
trading
operations
and
therefore
there
is
a
deduction
of
an
amount
in
determining
cost
of
goods
sold.
The
amount
involved
in
the
case
at
bar
was
an
estimated
amount
as
in
Burnco,
supra,
and
there
is
no
identifiable
creditor.
The
work
has
not
been
done.
Therein
lies
the
difference
between
the
case
at
bar
and
that
of
Shofar,
supra.
Counsel
argued
that
the
quotation
of
Jackett
C.J.
in
Oryx,
supra,
at
page
433
(D.T.C.
6354)
was
not
relevant
to
the
case
at
bar.
This
quotation
was
made
in
reference
to
subsection
12(3).
That
quotation
relied
upon
by
the
appellant
in
the
case
at
bar
is
as
follows:
In
considering
what
application
subsection
12(3)
has,
there
can
be
no
doubt
that
“gross
profit”
must
be
computed
before
income
can
be
determined
and
that,
at
least
in
the
second
method
of
computing
“gross
profit”
indicated
above,
the
price
for
which
the
property
was
bought
is
“deductible”
in
its
computation.
If,
on
the
other
hand,
the
computation
of
“income”
for
a
taxation
year
is
thought
of
as
commencing
with
“gross
profit”
then
the
“cost”
of
the
property
bought
is
not
an
amount
that
is
“deductible”
in
its
computation.
When,
moreover,
one
thinks
of
applying
subsection
12(3)
to
a
trader
whose
transactions
are
so
numerous
or
of
such
a
character
as
to
dictate
the
use
of
the
proceeds
of
sales
less
cost
of
sales
formula,
then,
in
the
“computation”
of
the
“taxpayer’s
income
for
a
taxation
year”
there
is
no
deduction,
at
least
as
such,
of
the
cost
of
the
goods
that
were
sold
in
the
year.
Counsel
argued
that
the
case
at
bar
can
also
be
distinguished
from
Mara
Properties
Ltd.
v.
R.,
(sub
nom.
Mara
Properties
Ltd.
v.
Canada),
[1993]
2
C.T.C.
3189,
93
D.T.C.
1449
(T.C.C.).
In
that
case,
the
Court
held
that
you
cannot
attack
the
deemed
cost
of
inventory
where
there
was
nothing
artificial
in
the
transaction
and
the
cost
of
inventory
was
not,
in
or
of
itself,
a
deduction
in
computing
income.
In
the
case
at
bar,
what
the
Minister
was
attacking
was
an
estimation,
not
the
cost
of
inventory.
It
was
an
amount
charged
to
the
cost
of
goods
sold.
If
the
appellant’s
argument
is
upheld,
in
the
case
of
a
contractor
the
holdback
would
be
deductible
so
long
as
it
went
through
the
inventory
account
and
nothing
in
section
18
would
prevent
it.
However,
if
the
holdback
goes
through
as
a
current
expense
it
is
not
permitted.
Likewise,
an
expense
like
that
referred
to
in
subparagraph
18(
1
)(l)(ii),
membership
fees
would
not
be
deductible
if
charged
to
current
expenses
but
if
the
expenses
were
charged
through
inventory,
they
would
be
deductible.
For
income
tax
purposes
they
cannot
be
recognized
as
costs
but
may
be
for
financial
statement
purposes.
That
is
the
thrust
of
the
Income
Tax
Act
as
referred
to
in
J.L.
Guay
Ltée,
supra.
That
distinguishes
something
like
work
in
progress
which
may
be
difficult
to
measure,
or
the
amount
of
timber
which
may
be
harvested,
which
may
be
difficult
to
measure
as
compared
to
the
type
of
costs
in
issue
here,
which
at
the
end
of
the
year
and
beyond
are
contingent,
conditional,
uncertain
and
unascertainable.
The
reforestation
obligation
has
all
of
those
component
factors.
On
the
issue
of
whether
the
cost
is
a
period
cost
or
a
product
cost,
it
does
not
matter
from
the
distortion
point
of
view
according
to
Ms.
Holgate
in
light
of
the
high
rate
of
turnover
of
the
inventory.
It
was
the
position
of
counsel
that
Ms.
Holgate,
as
an
expert
did
not
want
to
appear
to
be
too
much
of
an
advocate
and
was
willing
to
consider
other
possibilities.
However,
Ms.
O’Malley
was
very
emphatic
in
her
position
and
did
not
appear
willing
to
consider
alternative
conclusions.
With
respect
to
“matching”
the
appellant
is
not
only
harvesting
timber
but
producing
logs,
fulfilling
a
future
obligation
under
their
licences.
Matching
is
not
so
clear
as
in
Canderel,
supra.
Whether
or
not
it
is
a
period
cost
is
up
to
the
Court
to
decide.
The
appellant
says
that
paragraph
18(l)(a)
does
not
apply
but
if
the
Court
finds
it
to
be
a
period
cost,
then
on
the
basis
of
Burnco,
supra,
and
J.L.
Guay,
supra,
the
deductions
cannot
be
allowed
as
the
appellant
claims.
The
question
is
for
the
Court
to
decide
whether
the
decisions
in
Shofar
and
Oryx,
supra
are
on
point
to
the
extent
that
they
decided
that
where
an
estimated
amount
is
deducted
from
gross
profit,
then
paragraph
18(l)(a)
has
no
application.
In
rebuttal,
counsel
for
the
appellant
reiterated
that
where
a
cost
has
been
charged
to
cost
of
goods
sold,
it
falls
into
a
formula:
Opening
inventory
+
purchases
-
closing
inventory
=
cost
of
goods
sold.
That
was
what
Mr.
Justice
Jackett
was
saying
in
Oryx,
supra,
that
you
do
not
deduct
cost
of
inventory.
Counsel
referred
to
subsection
10(1)
of
the
Act
which
says:
(1)
For
the
purpose
of
computing
income
from
a
business,
the
property
described
in
an
inventory
shall
be
valued
at
its
cost
to
the
taxpayer
or
its
fair
market
value,
whichever
is
lower,
or
in
such
other
manner
as
may
be
permitted
by
regulation.
Section
18
does
not
apply
to
inventories,
it
is
covered
in
section
10.
Analysis
and
Decision
The
Court
accepts
the
propositions
that
the
accrual
method
of
accounting
was
proper
for
a
business
such
as
that
of
the
appellant,
that
the
method
of
matching
expenses
with
revenue
is
a
proper
technique
in
accrual
accounting
and
that
in
the
case
at
bar,
from
an
accounting
point
of
view
it
was
reasonable
and
proper
for
the
appellant
to
estimate
the
silviculture
expenses.
The
estimates
prepared
were
as
reasonable
and
accurate
as
they
could
be.
However,
they
were
estimates
only
in
light
of
the
fact
that
they
were
based
to
some
extent
upon
the
appellant’s
experience
in
the
forest
industry.
The
Court
has
considered
the
expert’s
reports,
the
rebuttal
reports
and
the
evidence
of
both
experts
given
in
Court,
that
the
treatment
was
generally
acceptable
in
the
forest
industry
by
companies
that
were
responsible
for
silviculture
expenses
but
that
from
a
cost
accounting
point
of
view
there
might
have
been
a
better
method
of
treatment.
However,
the
fact
that
such
a
method
was
acceptable
from
an
accounting
point
of
view
does
not
mean
that
that
is
the
way
the
expenses
must
be
treated
for
taxation
purposes.
In
J.L.
Guay
Ltée,
supra,
at
page
691
(D.T.C.
5426),
Noël
A.C.J.
said:
The
Income
Tax
Act
does
not
always
give
a
complete
answer
to
the
question
as
to
what
the
total
amount
of
profits
and
earnings
in
the
year
assessed
is.
In
determining
the
taxable
profits
of
a
taxpayer
we
can
take
as
a
starting
point
the
profit
and
loss
statement
prepared
according
to
the
rules
of
accounting
practice.
However,
the
profit
shown
on
this
statement
has
always
to
be
adjusted
according
to
the
statutory
rules
used
in
determining
taxable
profits.
This
is
because
a
number
of
facts
taken
into
consideration
by
accountants
are
excluded
by
certain
provisions
of
the
Income
Tax
Act
in
the
determining
of
taxpayers’
profits.
Again,
at
page
692
(D.T.C.
5427),
the
learned
A.C.J.
said:
The
difficulty
arises
from
the
fact
that
making
it
possible
to
determine
the
taxpayer’s
tax
liability
is
not
the
main
purpose
of
accounting.
In
the
case
at
bar,
two
experts
agreed
that
the
appellant’s
treatment
of
the
silviculture
expenses
was
in
accordance
with
generally
accepted
accounting
principles,
one
expert
believed
that
there
was
a
preferred
method
and
both
experts
differed
on
their
characterization
of
the
same
expenses.
One
expert
believed
that
the
expenses
were
period
costs,
to
be
expended
when
they
occurred
and
the
other
emphatically
stated
that
the
only
proper
method
of
dealing
with
the
silviculture
costs
was
to
include
those
costs
in
the
costs
of
inventory.
Counsel
for
the
appellant
suggested
that
the
evidence
must
be
weighed
as
in
a
balance
and
when
the
Court
does
so
the
balance
is
tilted
in
favour
of
the
appellant’s
position.
It
is
clear
that
the
Court
must
look
to
other
than
accounting
principles
on
the
facts
of
this
case
to
determine
the
proper
characterization
of
these
expenses
in
issue.
The
Court
certainly
takes
into
account
what
the
experts
said,
what
the
other
witnesses
had
to
say,
what
treatment
the
forest
industry
gives
to
these
expenses
and
considers
the
facts
established
in
light
of
the
case
law
and
the
Income
Tax
Act.
The
type
of
expenses
in
issue
here
have
never
been
considered
by
any
other
Court.
None
of
the
cases
referred
to
were
entirely
on
point
because
of
the
nature
of
these
expenses,
although
some
of
the
characteristics
of
the
expenses
in
the
cases
cited
were
similar
in
that
they
were
estimates,
unascertained
amounts,
had
not
been
paid,
were
provisional,
contingent
or
uncertain.
Those
cases
are
helpful
in
giving
the
Court
some
guidance
as
to
what
principles
and
factors
the
Court
should
consider
in
characterizing
expenses
but
they
do
not
answer
the
question
as
to
what
is
the
proper
characterization
of
the
expenses
in
issue
here.
Counsel
for
the
appellant
took
the
position
that
once
you
charge
the
silviculture
costs
to
the
cost
of
goods
sold
then
they
fall
into
a
formula
and
the
formula
says
you
take
your
opening
inventory,
you
add
your
purchases
in
the
year,
you
subtract
your
closing
inventory
and
that
gives
you
cost
of
goods
sold.
That
of
course
pre-supposes
that
the
silviculture
expenses
are
properly
added
to
the
cost
of
goods
sold.
Surely
that
is
the
main
issue.
Surely
an
expense
does
not
become
deductible
for
income
tax
purposes
just
because
it
is
treated
in
a
certain
manner
for
accounting
purposes.
The
question
becomes,
was
it
proper
for
income
tax
purposes
to
treat
the
silviculture
expenses
as
costs
of
inventory
or
cost
of
goods
sold.
What
is
otherwise
a
non-deductible
expense
does
not
become
deductible
merely
because
you
run
the
expense
through
the
inventory
account.
The
expense
must
firstly
be
properly
chargeable
to
inventory.
The
thrust
of
the
cases
referred
to
by
both
counsel
show
that
the
Courts
have
consistently
disqualified
for
income
tax
purposes,
in
calculating
taxable
profits,
amounts
that
are
provisional
estimates,
are
conditional,
contingent
or
uncertain.
The
estimates
disallowed
by
the
Minister
here
were
certainly
of
that
nature.
In
the
case
of
Newfoundland
Light
&
Power
Co.,
supra,
such
expenditures
were
both
of
a
capital
nature
and
a
current
expense
nature,
Mr.
Justice
Pratte,
at
page
239
(D.T.C.
6173)
said
as
follows:
Indeed,
in
order
for
an
expense
to
be
incurred
during
a
year,
the
obligation
to
pay
must
be
created
during
that
year;
similarly,
there
is
no
cost
of
property
to
a
taxpayer
as
long
as
the
obligation
to
pay
that
cost
has
not
come
into
existence.
As
pointed
out
by
counsel
for
the
Respondent,
that
case
disallowed
the
current
expenses
under
paragraph
18(1
)(a)
based
upon
the
decision
in
J.L.
Guay
Ltée,
supra.
It
is
true
that
the
expenses
in
issue
in
that
case
were
holdbacks,
but
their
undesirable
qualities
were
similar
to
those
possessed
by
the
estimates
in
issue
in
this
case.
The
Court
concludes
that
the
obligation
to
pay
the
costs
had
not
come
into
existence
in
the
case
at
bar.
Ms.
Holgate
in
her
testimony
concluded
that
silviculture
costs
were
not
related
to
the
“cost
of
product”.
It
was
an
expense
that
occurred
at
a
later
time
period.
It
did
not
add
value
to
the
product.
It
had
no
future
benefit.
It
was
a
period
cost
and
quite
remote
from
the
cost
of
producing
logs.
It
may
be
related
to
inventory
but
was
not
a
product
cost.
It
was
similar
to
a
sales
tax
cost.
It
was
created
by
legislation.
She
could
not
see
any
direct
relationship
between
the
cost
and
the
product
and
it
would
be
more
normal
to
treat
it
as
a
period
cost.
Ms.
O’
Malley
testified
that
the
silviculture
costs
were
directly
related
to
the
cost
of
the
final
product.
The
Court
finds
that
the
position
of
Ms.
Holgate
was
more
realistic
and
it
has
difficulty
in
finding
a
direct
relationship
between
the
silviculture
costs
and
the
end
product
costs.
With
respect
to
the
issue
under
paragraph
18(1
)(a),
as
the
Court
has
found,
the
costs
were
“period
costs”
and
paragraph
18(l)(a)
disallows
their
deduction
in
the
year
under
appeal.
The
cases
of
Burnco
and
J.L.
Guay
Ltée,
supra,
are
applicable
here.
The
Court
is
satisfied
that
the
costs
in
question
here
are
not
the
type
of
costs
referred
to
in
Shofar
and
Oryx,
supra,
and
those
cases
do
not
prevent
the
application
of
paragraph
18(
l)(a)
here.
The
Court
does
find
that
these
expenses
were
not
reserves
as
contemplated
by
paragraph
18(l)(e)
but
that
the
Minister
has
afforded
the
expenses
the
proper
treatment
under
the
Income
Tax
Act
for
the
years
in
question.
The
parties
have
filed
a
partial
Consent
to
Judgment
and
on
that
basis
the
assessments
for
the
1988
to
1991
taxation
years
will
be
referred
back
to
the
Minister
for
reassessment
and
reconsideration
on
the
basis
that
the
amounts
of
$323,672
in
1988,
$603,395
in
1989,
$991,300
in
1990
and
$506,772
in
1991
are
current
expenses
in
respect
of
seedlings
and
deductible
in
those
years
and
the
appellant’s
seedling
inventory
and
cost
of
sales
for
1988
to
1991
be
adjusted
accordingly.
The
Respondent
will
have
its
costs
to
be
taxed
on
the
disallowed
silviculture
expenses
issue
and
the
appellant
will
have
its
costs
to
be
taxed
on
the
seedling
issue.
Costs
disallowed.