Polar Quick Freezing Co LTD v. Minister of National Revenue, [1983] CTC 2666, 83 DTC 637

Bonner, TCJ:—The appellant appeals from an assessment of income tax for its 1979 taxation year. The respondent, in assessing tax, disallowed as a deduction in the computation of income the sum of $42,355, described as a “lobster rebate accrual”. The issue in this appeal is whether he was correct in doing so.

The appellant processes, cans and sells lobster flesh. It buys the lobsters which it requires from independent fishermen. The price paid at the time the catch is landed and purchased is not necessarily all that the fisherman gets. A practice has grown up in the industry whereby purchasers such as the appellant pay fishermen a so-called rebate calculated on a per pound basis.

Lobsters are purchased during two seasons of each year. The first is in May and June. The second runs from August 10 to October 10. The rate at which the rebate for purchases made during a calendar year is to be paid is not fixed until February or March of the following year. The appellant’s fiscal year ends on July 31. As a result, the appellant’s books are closed for the year before the rebate rate is fixed in respect of purchases made during the spring season.

The $42,355 which is in issue is the amount which the appellant, at the 1979 fiscal year end, estimated would have to be paid in respect of purchases during the spring season. It was, of course, unnecessary to use estimates in respect of purchases made during the August to October season.

The basis of the assessment was that the $42,355 was “an amount transferred or credited to a . . . contingent account” within the meaning of paragraph 18(1 )(e) of the Income Tax Act. The provision reads as follows:

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(e) an amount transferred or credited to a reserve, contingent account or sinking fund except as expressly permitted by this Part.

The evidence clearly shows that market and competitive conditions at and possibly after the end of the calendar year dictate whether any rebate will be paid and, if so, how much. James Murphy, Vice-President of North Shore Packing, a company doing business at Malpeque, Prince Edward Island, testified that the practice of paying rebates to lobster fishermen has existed for the last six or seven years. The price per pound paid at the time of sale is established with the expectation that there will be a rebate which, he said, is an amount per pound varying between nothing and twenty cents. Mr Murphy regarded the payment of rebates as a practice which developed in response to the payment by a co-operative of dividends to lobster fishermen who dealt with it.

Evidence was given by Edward Henderson, Vice-President and General Manager of the appellant. He said that the price paid at the time of purchase is a floor price or only part of the purchase price. He said that in fixing the amount paid it is not necessary to match what is paid by the co-operative. He explained that whether the appellant matches the co-operative payment or not depends on the appellant’s performance. In the spring when the appellant buys most of its lobsters it does not know what it will be able to charge for its product in December. In the case of the 1979 year the amount in issue was recorded as a payable, but it was not ultimately paid out. Rather, the amount in question went back in the general revenues in 1980. This happened, Mr Henderson said, because 1979 was “an unusual year”. The price of the appellant’s product dropped by fifty cents a can.

Finally, I will note that the appellant’s audited financial statements for 1981 refer to the lobster rebate as a contingent liability. Note 8(c) to the financial statements reads:

A lobster rebate of approximately $45,000 may become payable after the year end depending on the results of the lobster season. If an actual liability arises, it will be expensed in the period that it becomes payable.

In Harlequin Enterprises Limited v The Queen, [1977] CTC 208; 77 DTC 5164, the Federal Court of Appeal considered whether the appellant, a book publisher, was entitled to deduct an amount intended to provide for the post year end return of books which it had sold on the basis that they were returnable for full credit. Urie, J, in delivering the reasons of the Court said at 212 [5166]:

I agree that the provision for returns is contingent because in any fiscal period, although it was known from experience that there would be returns, the number and actual value thereof could not be fully known until all returns on sales made within that fiscal period had actually been received which might not be until some considerable period of time had elapsed after the end of the fiscal period. Therefore, the provision falls within the prohibition contained in section 12(1 )(e).

In Day & Ross Limited v The Queen, [1976] CTC 707; 76 DTC 6433, Dubé, J, said at 714 [6437]:

The terms “reserve” and “contingent account” of paragraph 12(1 )(e) connote the setting aside of an amount to meet a contingency, an unascertainable and indefinite event which may or may not occur.

The $42,355 is, therefore, a contingent account and falls within the ambit of the paragraph 18(1 )(e) prohibition. The appeal will be dismissed.

Appeal dismissed.