Peter Kinnee, Dennis Kinnee v. Minister of National Revenue, [1981] CTC 2813, 81 DTC 771

Guy Tremblay:—These cases were heard in Edmonton, Alberta, on June 2, 1981.

1. The Point at Issue

The issue is whether the appellants (father and son) who in 1977 carried on a partnership in the business of farming should include in their income which is $5,480.65, the part of the patronage dividends they have not actually received from The Alberta Wheat Pool (hereinafter referred to as the “Pool”), but which was kept by the Pool as reserve in accordance with the Alberta Wheat Pool Act.

2. Burden of Proof

2.01 The burden is on the appellants to show that the respondent’s assessments are incorrect. This burden of proof results especially from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 According to that judgment, the assumptions of fact on which the Department of National Revenue bases the assessments are deemed to be correct unless they are contradicted by the appellants. In the present case, the assumptions of fact are described in paragraph 4 (Peter Kinnee) of the reply to the notice of appeal:

4. In so assessing the Appellant for his 1977 taxation year, the Respondent acted upon the following assumptions of fact, inter alia'.

(a) the Appellant and his brother (sic) carried on in partnership the business of farming;

(b) the profits from the farming business were split in the rate of one-third to the Appellant and two-thirds to his brother (sic);

(c) the Appellant and his brother (sic) were members with full voting rights of the Alberta Wheat Pool;

(d) by virtue of their membership in and patronage of the Alberta Wheat Pool, the Appellant and his brother (sic) on account of the farming partnership, received patronage dividends totalling $9,163.49 paid to the Appellant and his brother (sic) for the partnership in the following amounts:

Appellant	$1,830.00
Appellant’s brother (sic)	7,333.49
Total	$9,163.49

(e) the said payments by the Alberta Wheat Pool were amounts calculated with reference to a rate based on the quantity of wheat delivered by the Appellant to the Alberta Wheat Pool prior to 1977;

(f) the amounts paid to the partnership as patronage dividends were paid in part in cash and in part by the application of the amounts as reserves deducted to the liability of the Appellant and his brother (sic) to loan funds to the Alberta Wheat Pool pursuant to the Alberta Wheat Pool Act.

3. The Facts

3.01 The facts for the major part are not in dispute. The agent for the appellants practically admitted all the assumptions of fact of the respondent quoted above (para. 2.02).

Indeed, he denied only subparagraph (d) because of the word “received”. In subparagraph (e) he added after the word “delivered” the following words “and on quantity of fertilizers and supplies purchased .. . ”.

3.03 It was also admitted by both representatives of the parties that Mr Peter Kinnee had included in his income for the 1977 taxation year the amount of $1,227.61, and his son Mr Dennis Kinnee included the amount of $2,455.23, which are / and /3 of the amount received in cash as patronage dividends, the total is $3,682.84.

3.04 The T4-A forms issued by the Pool to the appellants are as follows:

3.05 The amount of $5,480.65 ($9.163.49 of paragraph 3.04 less $3,682.84 of paragraph 3.03) is the sum that the appellants have not actually received and that the respondent has included in their income on the basis of the partnership / and %.

4. Law — Cases of Law — Analysis

4.01 Law

The main legal provisions involved in the present case are section 135 and subsection 56(2) of the Income Tax Act and section 32 of the Alberta Wheat Pool Act 1970. They read as follows:

135(1) Notwithstanding anything in this Part, there may be deducted in computing the income of a taxpayer for a taxation year, the aggregate of the payments made, pursuant to allocations in proportion to patronage, by the taxpayer

(a) within the year or within 12 months thereafter to his customers of the year,

and

(b) within the year or within 12 months thereafter to his customers of a previous year, the deduction of which from income of a previous taxation year was not permitted.

(2) Notwithstanding subsection (1), if the taxpayer has not made allocations in proportion to partronage in respect of all his customers of the year at the same rate, with appropriate differences for different types or classes of goods, products or services, or classes, grades or qualities thereof, the amount that may be deducted under this section is an amount equal to the lesser of

(a) the aggregate of the payments mentioned in subsection (1), and

(b) the aggregate of

(i) the part of the income of the taxpayer for the year attributable to business done with members, and

(ii) the allocations in proportion to patronage made to non-member customers of the year.

(3) Where at any particular time in a calendar year and after 1971 a payment pursuant to an allocation in proportion to patronage is made by a taxpayer to a person who is resident in Canada and is not exempt from tax under section 149, the taxpayer shall, notwithstanding any agreement or any law to the contrary, deduct or withhold therefrom an amount equal to 15% of the lesser of the amount of the payment and the amount, if any, by which

(a) the aggregate of the amount of the payment and the amounts of all other payments pursuant to allocations in proportion to patronage made by the taxpayer to that person in the calendar year and before the particular time

exceeds

(b) $100,

and forthwith remit that amount to the Receiver General of Canada on behalf of that person on account of that person’s tax under this Part.

(4) For the purposes of this section,

(a) “allocation in proportion to patronage “for a taxation year means an amount credited by a taxpayer to a customer of that year on terms that the customer is entitled to or will receive payment thereof, computed at a rate in

relation to the quantity, quality or value of the goods or products acquired, marketed, handled, dealt in or sold, or services rendered by the taxpayer from, on behalf of or to the customer, whether as principal or as agent of the customer or otherwise, with appropriate differences in the rate for different classes, grades or qualities thereof, if

(i) the amount was credited

(A) within the year or within 12 months thereafter, and

(B) at the same rate in relation to quantity, quality or value aforesaid as the rate at which amounts were similarly credited to all other customers of that year who were members or to all other customers of that year, as the case may be, with apprpriate differences aforesaid for different classes, grades or qualities, and

(ii) the prospect that amounts would be so credited was held forth by the taxpayer to his customers of that year who were members or nonmembers customers of that year, as the case may be;

(b) “consumer goods or services’’ means goods or services the cost of which was not deductible by the taxpayer in computing the income from a business or property;

(c) “customer” means a customer of a taxpayer and includes a person who sells or delivers goods or products to the taxpayer, or for whom the taxpayer renders services;

(d) “income of the taxpayer attributable to business done with members” of any taxation year means that proportion of the income of the taxpayer for the year (before making any deduction under this section) that the value of the goods or products acquired, marketed, handled, dealt in or sold or services

rendered by the taxpayer from, on behalf of, or for members, is of the total value of goods or products acquired, marketed, handled, dealt in or sold or services rendered by the taxpayer from, on behalf of, or for all customers during

the year;

(e) “member” means a person who is entitled as as a member or shareholder to full voting rights in the conduct of the affairs of the taxpayer (being a corporation) or of a corporation of which the taxpayer is a subsidiary wholly-owned corporation;

(f) “non-member customer” means a customer who is not a member; and

(g) “payment” includes

(i) the issue of a certificate of indebtedness or shares of the taxpayer or of a corporation of which the taxpayer is a subsidiary wholly-owned corporation if the taxpayer or that corporation has in the year or within 12 months thereafter disbursed an amount of money equal to the aggregate face value of all certificates or shares so issued in the course of redeeming or purchasing certificates of indebtedness or shares of the taxpayer or that corporation previously issued,

(ii) the application by the taxpayer of an amount to a member’s liability to the taxpayer (including, without restricting the generality of the foregoing, an amount applied in fulfilment of an obligation of the member to make a loan to the taxpayer and an amount applied on account of payment for shares issued to a member) pursuant to a by-law of the taxpayer, pursuant to a statutory authority or at the request of the member, or

(iii) the amount of a payment or transfer by the taxpayer that, under subsection 56(2), is required to be included in computing the income of a member.

(5) For the purpose of this section a taxpayer shall be deemed to have held forth the prospect that amounts would be credited to a customer of a taxation year by way of allocation in proportion to patronage, if

(a) throughout the year the statute under which the taxpayer was incorporated or registered, its charter, articles of association or by-laws or its contract with the customer held forth the prospect that amounts would be so credited to customers who are members or non-member customers, as the case may be, or

(b) prior to the commencement of the year or prior to such other day as may be prescribed for the class of business in which the taxpayer is engaged, the taxpayer has published an advertisement in prescribed form in a newspaper or newspapers of general circulation throughout the greater part of the area in which the taxpayer carried on business holding forth that prospect to customers who are members or non-member customers, as the case may be, and has filed copies of the newspapers with the Minister before the end of the 30th day of the taxation year or within 30 days from the prescribed day, as the case may be.

(6) For greater certainty the amount of any payment pursuant to an allocation in proportion to patronage is the amount thereof determined before deducting any amount required by subsection (3) to be deducted or withheld from that payment.

(7) Where a payment pursuant to an allocation in proportion to patronage (other than an allocation in respect of consumer goods or services) has been received by a taxpayer, the amount of the payment shall be included in computing the recipient’s income for the taxation year in which the payment was received and, without restricting the generality of the foregoing, where a certificate of indebtedness or a share was issued to a person pursuant to an allocation in proportion to patronage, the amount of the payment by virtue of the issue thereof shall be included in computing the recipient’s income for the taxation year in which the certificate or share was received and not in computing his income for the year in which the indebtedness was subsequently discharged or the share was redeemed.

(8) For the purposes of this section, where

(a) a person has sold or delivered a quantity of goods or products to a marketing

board established by or pursuant to a law of Canada or of a province,

(b) the marketing board has sold or delivered the same quantity of goods or products of the same class, grade or quality to a taxpayer of which the person IS a member, and

(c) the taxpayer has credited that person with an amount based on the quantity of goods or products of that class, grade or quality sold or delivered to it by the marketing board,

the quantity of goods or products referred to in paragraph (c) shall be deemed to have been sold or delivered by that person to the taxpayer and to have been acquired by the taxpayer from that person.

56(2) A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer’s income to the extent that it would be if the payment or transfer had been made to him.

Section 32 of the Alberta Wheat Pool Act, 1970—

32. When authorized by resolution of the delegates, the Pool may issue the reserves created by section 31 or acquired by purchase under section 26 hereof that have not been reissued to members who were patrons in any crop year in proportion to their patronage in that year, and each member to whom reserves are so issued shall thereupon become liable to the Pool for the reserves so issued to him at the par value thereof, and the Pool shall apply against the liability of each such member the cash patronage dividend then or thereafter payable to the member in proportion to patronage for the same crop year, provided that if within twelve (12) months of such issue of reserves the Pool does not authorize payment of a cash dividend in proportion to patronage equivalent to the liability of the respective members for the reserves so issued to the members, any member may advise the Pool in writing that he elects to reject the issue of reserves to him and his liability therefor shall cease and determine

4.02 Cases of Law

The cases of law that the respondent referred to the Board are:

1. Trinidad Lake Asphalt Operating Company Limited v Commissioners of Income Tax for Trinidad and Tobago, [1945] AC 1;

2. Percy John Salter v MNP, [1947] CTC 29; 2 DTC 918;

3. Cline Arthur Hoggard v MNR, 5 Tax ABC 146; 51 DTC 391;

4. MNR v La Société Coopération Agricole de la Vallée d’Yamaska, [1957] CTC 132; 57 DTC 1078;

5. Edgar Lantagne v MNP, [1978] CTC 2233; 78 DTC 1212;

6. Leonard Mendels v HMQ, [1978] CTC 404; 78 DTC 6267.

4.03. Analysis

4.03.1 Subsection 135(7) of the Income Tax Act quoted above, mainly specified that “where a payment pursuant to an allocation in proportion to patronage

. . . has been received by a taxpayer, the amount of the payment , shall be included in computing the recipient’s income . ..”. The agent for the

appellants contended that the “payments” of the patronage dividends “received” by the appellants are the amounts received in cash (para 3.03) and that they were included in filing the 1977 income tax return. The other amounts (para 3.05) were not received by the appellants. Therefore they were illegally included in the appellants’ income by the respondent.

4.03.2 On the one hand, subparagraph 135(4)(g)(ii) of the Act quoted above, says that the word “payment” includes the “application by the taxpayer of an amount to a member’s liability to the taxpayer. . . pursuant to a by-law of the taxpayer, pursuant to statutory authority . . . ”.

On the other hand, section 32 of the Alberta Wheat Pool Act, 1970 stipulates that each member to whom reserves are issued becomes liable to the Pool for the reserves so issued to him and the Pool shall apply against the liability of each member the patronage dividend payable to the member.

It seems to the Board, that this is exactly what happened in the present case. The Pool applied, against the patronage dividends, the liability for the reserves issued to the appellants. The latter had a debt towards the Pool, and the Pool also had a debt to the appellants. In paying the latter, the Pool applied the principle of compensation specifically provided in section 32 of the Alberta Wheat Pool Act.

4.03.3 It is crystal clear to the Board that there is also room for the application of subsection 56(2) of the Income Tax Act quoted above.

From the income of the appellants, the latter agreed that a payment be made to the Pool.

4.03.4 Legally it is exactly the same thing as if the appellants actually had received the total amount of the patronage dividends and as if they had immediately afterwards paid the Pool for the amount due concerning the reserves.

Therefore, the Board must conclude, that even if the appellants actually did not receive the money, legally they did receive the money.

4.03.5 The agents for the appellants also contended that the farmers used a cash basis system to compute their income, therefore the money they have not actually received, cannot be included in their income.

As explained before, the amount was legally received. It was indeed transferred to pay a debt of the appellants.

4.03.6 The agent for the appellants finally argued that the Pool, on receiving the third party demand from the respondent, refused to pay. According to him, this is the proof that the amount is uncollectable and therefore not taxable.

In the Board’s opinion, the amount is not uncollectable, but cannot be the object of a third party demand because of the special nature of the reserve provided by the Alberta Wheat Pool Act.

5. Conclusion

The appeals are dismissed in accordance with the above reasons for judgment.

Appeals dismissed.