Stanton B Hogg v. Minister of National Revenue, [1981] CTC 2447, 81 DTC 390

D E Taylor:—This is an appeal heard in the City of Toronto, Ontario, on March 20, 1981, against an income tax assessment for the year 1974 in which the Minsister of National Revenue assessed to tax the amount received from billing and collecting of work in progress. An “Agreed Statement of Facts” as follows, was filed:

1. The appellant carried on the practice of law in partnership with John Hoolihan from 1967 to 1971.

2. In 1971, the appellant and John Hoolihan decided to carry on the practice of law separately as individual practioners, but retained the firm name and continued to operate from the same premises.

3. At all material times the fiscal period of the appellant’s business, which was a profession, ended on March 31 of each year.

4. The appellant was appointed to the Bench as a Judge of the County and District Courts of Ontario on May 18, 1973.

5. The work in progress at the time of appointment amounted to $35,183.38.

6. Such work in progress represented the worth of the appellant’s services rendered in the course of business, but not billed before May 18, 1973 and the accounts in respect thereof were then rendered by the appellant during the fiscal year ended March 31, 1974.

7. Said amount of $35,183.38 became receivable during the fiscal year ended March 31, 1974.

8. The appellant, in the income tax return filed for his 1974 taxation year, reported that he had received the said amount of $35,183.38, but did not include the said amount in the computation of his income for that taxation year.

9. The respondent, by Notice of Reassessment dated February 17, 1978, reassessed the appellant for his 1974 taxation year and included in the computation of the appellant’s income for the year the said amount of $35,183.38.

The appellant submitted that:

— Work in progress is not income in these circumstances;

— Section 36 of the Judges’ Act prohibits and forbids a judge from engaging in any business or occupation other than his judicial duties.

In assessing the appellant, the respondent relied inter alia, upon sections 3, 9 and 34 of the Income Tax Act SC 1970-71-72, c 63, as amended, and contended that:

— the amount of $35,183.38 became receivable by virtue of of paragraph 34(1 )(c) of the Income Tax Act during the appellant’s 1974 taxation year and was properly included by virtue of paragraph 34(1 )(b) of the Income Tax Act in computing the appellant’s income from a business that was a profession for his 1974 taxation year.

Section 34 of the Income Tax Act reads as follows:

Professional business.

(1) In computing the income of a taxpayer for a taxation year from a business that is a profession, 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 am satisfied that Judge Hogg ceased providing legal services as of May 18, 1973. The account for the amount in question was rendered after that date. To that degree, therefore, the judge’s disagreement with some of the reasoning presented for the Minister’s assessment, is in order. Under paragraph 34(1 )(c) of the Act, the amount “shall be deemed to have become receivable” on the day the account was rendered, but that does not provide the Minister with the authority, also by the same subsection, to deem that the appellant was still carrying on a business, a very different state of affairs. The Minister’s view that paragraph 34(1 )(b) of the Act served the purpose of making such a determination was also less than convincing to me. While it might appear to the Minister that “in the year” did not end on May 18, 1973 for purposes of this appeal, and that “in the course of the business” modified “rendered” and had no reference to “receivable” in the section, no jurisprudence or argument was made on those points, and to me they are vital. However, it is not necessary for the board to examine those points further in order to determine the issue in this appeal.

In my view, subsection 28(5) of the Act serves to include the account receivable as if Judge Hogg had been carrying on a business after May 18, 1973, without determining that indeed he did so. Subsection 28(5) reads:

Accounts receivable. There shall be included in computing the income of a taxpayer for a taxation year such part of an amount received by him in the year, upon or after disposing of or ceasing to carry on a business or a part of a business, for, on account or in lieu of payment of, or in satisfaction of debts owing to the taxpayer that arose in the course of carrying on the business as would have been included in computing the income of the taxpayer for the year had the amount so received been received by him in the course of carrying on the business.

At first glance it might appear that subsection 28(5) deals only with farmers, but I do not see that the wording of the section so restricts it. The perception that subsection 28(5) is applicable to the present case (a profession) is strengthened by a review of the predecessor section in the Old Act — 85F(4) which is identical to the current subsection 28(5). The preamble and opening clause of section 85F reads:

SPECIAL METHOD OF COMPUTING INCOME:

SALE OF ACCOUNTS RECEIVABLE

85F. (1) For the purpose of computing the income of a taxpayer for a taxation year from a business of the following description, namely:

(a) farming, or

(b) a profession . . .

As I read the Income Tax Act for purposes of determining this appeal, section 36 of the Judges’ Act does not intervene to benefit the appellant. The amount in question as a receivable should be included in taxable income.

The appeal is dismissed.

Appeal dismissed.