Maritime Telegraph and Telephone Company v. Her Majesty the Queen, [1992] 1 CTC 264

MacGuigan J.A. (Heald and Linden, l].A., concurring.):—This case deals with an issue of tax timing similar to that recently decided by this Court in West Kootenay Power and Light Company Ltd. v. Canada, [1992] 1 C.T.C. 15, 92 D.T.C. 6023, but raises for resolution questions which as a matter of judicial economy were not found necessary for decision in West Kootenay.

On this much the parties agreed, but they disagreed as to the additional matters to be decided. For the appellant the Court needs merely to apply the 1983 amendment to paragraph 12(1)(b) of the Income Tax Act, R.S.C. 1952,

c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act"). For the respondent the Court must consider the purport of section 9 and subsection 12(2) of the Act. At stake is the question of whether year-end amounts which the taxpayer included in its 1985 income should, as the respondent argued, be included in its 1984 taxation year (and similarly for the year-end of 1985 in relation to 1986).

The relevant provisions of the Act, at the relevant time, were as follows, with the 1983 amendment highlighted in italics:

9. Income from business or property.—(1) Subject to this Part, a taxpayer's income for a taxation year from a business or property is his profit therefrom for the year.

12. Amounts to be included as income from business or property.—(1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:

(b) Amounts receivable in respect of services, etc., rendered.—any amount receivable by the taxpayer in respect of property sold or services rendered in the course of a business in the year, notwithstanding that the amount or any part thereof is not due 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, and for the purposes of this paragraph, an amount shall be deemed to have become receivable in respect of services rendered in the course of a business on the day that is the earlier of

(i) the day upon which the account in respect of services was rendered, and

(ii) the day upon which the account in respect of those services would have been rendered had there been no undue delay in rendering the account in respect of the services;

(2) Interpretation.— Paragraphs (1)(a) and (b) are enacted for greater certainty and shall not be construed as implying that any amount not referred to therein is not to be included in computing income from a business for a taxation year whether it is received or receivable in the year or not.

34. Professional business.—(1) In computing the income of a taxpayer for a taxation year from a business that is the professional practice of an accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor, the following rules apply:

(a) paragraph 12(1)(b) is not applicable;

(b) every amount that becomes receivable by him in the year in respect of property sold or services rendered in the course of the business shall be included;

(c) for the purposes of paragraph (b), an amount shall be deemed to have become receivable in respect of services rendered in the course of the business on the day that is the earliest of

(i) the day upon which the account in respect of the services was rendered,

(ii) the day upon which the account in respect of those services would have been rendered had there been no undue delay in rendering the account in respect of the services, and

(iii) the day upon which the taxpayer was paid for the services; and

(d) where the taxpayer so elects in his return of income under this Part for the year, no amount shall be included in respect of work in progress at the end of the taxation year, except as otherwise provided by this section.

I

The appellant provides telephone and other telecommunications services to customers throughout Nova Scotia. It bills its customers on a monthly basis, but not all at the same time of the month. In fact, there are nine separate billing groups, billed approximately three days apart, each bill being for services rendered up to the date of the billing.

Until 1984, the first of the two taxation years in issue, the appellant did its accounting for income tax purposes on the basis of the "earned" method, estimating the amount of revenue earned by year-end (its fiscal year coinciding with the calendar year), even though some customers had not yet been billed for those amounts. Its financial statements were prepared in the same way, both for reporting to its shareholders and for review by the Nova Scotia Board of Commissioners of Public Utilities.

However, as of the 1984 taxation year, the appellant changed its method of accounting for income tax purposes, adopting a "billed" method of reporting income, but retaining the "earned" method for its financial statements. This change in its tax reporting, as Reed, J. found at trial, was made on the advice of its accountants, who relied on what they considered to be the meaning of the 1983 amendment to paragraph 12(1)(b).

Reed, J. also found that the earned method gives a truer picture of the taxpayer's income for the year than the billed method, and held that the taxpayer was consequently required to report in that way. This "truer picture” approach was adopted by this Court in West Kootenay.

On the factual question the learned trial judge said (Appeal Book at page 155):

It is clear from the evidence that both methods of accounting are in accordance with Generally Accepted Accounting Principles. At the same time, while there is some evidence that the billed method is used by some utility companies, there was no evidence that any large Canadian telephone company uses the billed method for its general financial statements. Also, it is fair to conclude that the earned method accords a "truer" picture of the company's income for the year in question than does the billed method. The plaintiff is engaged in providing a continuing service which by its very nature results in revenue accruing daily.

On the Kathy K standard, this finding of fact could be upset only in the presence of palpable and overriding error: Stein v. The Ship "Kathy K", [1976] 2 S.C.R. 802, 2 D.L.R. (3d) 1. The appellant did succeed in showing that there is evidence going both ways, but was unable to establish an error of the requisite magnitude.

The appeal can, therefore, succeed only if the appellant can establish, as it contended, that the 1983 amendment to paragraph 12(1)(b) must change the result.

II

Whatever the 1983 amendment may mean, its language makes clear that it applies only to the provision of services. It is common ground that it is services, i.e., telecommunications services, that the appellant supplies to its customers, and so the amendment prima facie applies. West Kootenay did not have to consider this issue because the taxpayer there supplied electricity, which, it was held, is properly classified as a good rather than a service.

In elucidating the background of the 1983 amendment, the appellant drew our attention to section 34 of the Act, which for some years previously had provided a special regime for professional taxpayers, allowing them to make use of a billed method of reporting their income.

It will be noted that, in addition to specifying the actual billing date as an option under subparagraph 34(1)(i), another option is an imputed billing date where there has been undue delay in rendering the account (subparagraph 34(1)(ii)). Both options (but not subparagraph 34(1)(iii)) have been carried over into paragraph 12(1)(b) in the 1983 amendment.

The appellant said that the purpose of the 1983 amendment was to extend this section 34 benefit from the specified professional providers of services to all those in the business of rendering services. The effect was said to be to create an exception for those engaged in the providing of services from the normal rules with respect to tax timing, by allowing them to account for their receivables only as of the date of billing.

Stated in more detail, the appellants position was as follows. The general rule of paragraph 12(1)(b) is that a taxpayer is required to include any amount receivable in respect of property sold or services rendered in the year, notwithstanding that the amount may not be due until the next year. West Kootenay held that a reasonable estimate of the amount earned at a year-end is sufficiently ascertainable to be an amount receivable, but that case dealt with the passing of goods, whereas the 1983 amendment makes a specific exception with respect to the providing of services. This new deeming provision, it was argued, must therefore be conclusive in determining whether an amount for telecommunications services rendered is an amount receivable for purposes of the general rule; in other words, amounts relating to the provision of all services should be conclusively deemed not to be amounts receivable for the purposes of paragraph 12(1)(b). Subsection 12(2) cannot be interpreted to frustrate the obvious meaning of paragraph 12(1)(b), especially since it long predates the 1983 amendment.

In my opinion, and as the respondent argued, such an interpretation could not be accepted without first locating paragraph 12(1)(b), including the amendment to it, in the scheme of the Act.

The determinative provision for the definition of income is section 9, which equates income for a year with profit for a year. It was common ground that the purpose of section 12 of the Act was only to specify what should be included in income, but there was no agreement between the parties as to whether exclusions from income were created in the course of the delineating of inclusions in subsection 12(1).

In my view, the statutory language and structure support the respondent's position. That is particularly true of subsection 12(2), which explains that the purpose of subsection 12(1) is only to provide greater certainty, obviously by specifying with more exactitude what is to be included in income, and which clearly forbids any construction that would have the effect of excluding income that would otherwise be included. This interpretation is also confirmed by subsection 12(1) itself, which begins with the words "there shall be included in computing the income of a taxpayer for a taxation year . . .” [Emphasis added.]

In my opinion, subsection 12(1) operates so as to expand subsection 9(1)'s ambit of inclusion. Obviously, at the boundary line of inclusion there may logically be some exclusions, but the joint thrust of section 9 and subsection 12(1) is to include, not exclude, and subsection 12(2) has the effect of ensuring, at the very least, that nothing clearly included in section 9 is henceforth excluded.

This interpretation is, I believe, supported by the only extrinsic evidence available. [1] The technical note accompanying the 1983 amendment reads as follows:

1982 TN—Paragraph 12(1)(b) of the Act requires any amount receivable in respect of property sold or services rendered in the course of a business in a year to be included in that year's income. This paragraph is amended to add a provision that treats an amount as having become receivable for services performed on the day the account would have been rendered had there been no undue delay in rendering the account for the services. This rule, which previously applied only to services rendered in the course of a professional business under section 34 of the Act, has been expanded to apply to all services.

Not only is there no suggestion in the note of such a major change in the law as would completely exempt all services from the application of the earned method of computation, but the emphasis of the note is entirely upon subparagraph 12(1)(b)(ii), relating to an imputed billing date where there is undue delay. This suggests to me that the principal intention of the amendment was to prevent undue extension of billing times in rendering accounts for services rather than to establish any exclusion from income.

From the time of the decision in Ken Steeves Sales Ltd. v. M.N.R., [1955] C.T.C. 47,55 D.T.C. 1044 (Ex. Ct.), it has been clear that receivables are included in income under section 9. In Silverman v. M.N.R., [1960] C.T.C. 262, 60 D.T.C. 1212, at page 266 (D.T.C. 1214-5) (Ex. Ct.), Thurlow, J., as he then was, said:

[SJince what is declared to be the income from a business is the profit therefrom for the year, the method adopted must be one which accurately reflects the result of the year's operations, and where two different methods, either of which may be acceptable for business purposes, differ in their results, for income tax purposes the appropriate method is that which most accurately shows the profit from the year's operations.

In this light the factual finding by the trial judge that the earned method gives a truer picture of the taxpayer's income therefore assumes capital importance, and leads immediately to her conclusion (Appeal Book at page 158):

The earned but unbilled revenues of the taxpayer at year end are brought into income pursuant to subsection 9(1) of the Act and there is no need to rely upon paragraph 12(1)(b) for this purpose. They were being accounted for by the taxpayer under subsection 9(1) prior to 1984 and they should equally be accounted for pursuant to that subsection, after that date The 198[3] amendment was not intended to allow or require taxpayers to change their method of accounting for profit from the earned to the billed method and thereby accomplish a significant deferral of taxes. It seems clear the amendment's purpose was entirely the opposite. It was intended to require taxpayers who report on a billed method, when there is undue delay in billing, to account for the income which has not yet been billed.

I am in full agreement with her conclusion. The purpose of paragraph 12(1)(b) is to ensure that income from a business is computed on the accrual basis, not a cash basis, with certain specified exceptions. It applies in cases where profit is not otherwise required to be computed on the accrual basis. In the present case, it has no application, because of the trial judge's factual finding that the earned method was the appropriate accounting method for this taxpayer. The appellant's earned revenues to the end of each taxation year were receivables in law, and therefore income for the ending year. As I pointed out in West Kootenay, supra, at page 21 (D.T.C. 6027), footnote 1, the case at bar is a weaker case for the taxpayer than that of the taxpayer in West Kootenay, because the appellant's records indicate the exact times at which its services were rendered, making the amounts more readily quantifiable at year- end. The receivables already being recognized as profit under subsection 9(1), subsection 12(2) requires that that status be maintained.

The appeal must therefore be dismissed with costs.

Appeal dismissed.