Sexton J.A:
We are all of the view that the appeal must be dismissed and the judgment rendered on 19 January, 1996, by the Tax Court of Canada must be affirmed. In that decision, Judge Margeson dismissed the appellant’s appeal from a reassessment of the Appellant’s 1987 taxation year, finding that the appellant’s reforestation costs were a period cost or expense and that the deduction of estimated reforestation costs were prohibited by paragraph 18(1)(a) of the Income Tax Act. The full facts of the case were agreed upon by the parties at trial and are reproduced in Judge Margeson’s judgment. I will briefly outline the salient points.
The appellant carries on the business of harvesting logs and manufacturing finished timber and other goods in the province of British Columbia. In order to carry on its business, the appellant is required to obtain a timber harvesting license by the Forest Act, R.S.B.C. 1979, c. 140. A condition of this license is that the appellant has the obligation to carry out, at its own expense, the reforestation of the area from which timber is to be harvested.
In the year of harvest, for both accounting and taxation purposes, the appellant included the estimated costs of the reforestation it was obligated to perform, in its cost of inventory, despite the fact that most of the reforestation would take place in a year subsequent to harvest. The Minister of National Revenue disallowed the amount of the estimated reforestation costs and only allowed the reforestation costs that had actually been incurred.
The issue in this case is whether the appellant properly included the reforestation costs in its cost of inventory for the purposes of calculating profit under the Income Tax Act. The appellant argued that first, its treatment of the reforestation costs accorded with generally accepted accounting principles and commercial practice and second, that no provision in the Income Tax Act or common law principle prohibited this treatment. The respondent asserted that the trial judge was correct in determining that reforestation costs were period costs rather than inventory costs and therefore deductible from income only as incurred.
The Tax Court Judge heard the conflicting accounting evidence of the experts called by both sides. He was obligated to assess that evidence in light of the agreed upon facts. The learned Judge properly found, on the basis of the accounting evidence before him, that silviculture expenses were period or running expenses, rather than costs to be added to the cost of inventory and accordingly, such costs should be deducted only when incurred. In so finding, the Tax Court made no palpable or overriding error which would warrant the intervention of this Court. We agree that these expenses were properly period expenses rather than inventory costs because the actual expense would not be incurred until a subsequent period. Indeed the costs estimated by the taxpayer may well turn out to be greater or lesser than the taxpayer estimated because of such things as natural regeneration or destruction of a new crop of trees quite outside the control of the taxpayer and unrelated to its estimates.
The fact that the taxpayer’s treatment of the reforestation costs was generally acceptable from an accounting point of view does not dictate that it should be treated similarly for income taxation purposes. In Canderel Ltd. v. R., [1998] 1 S.C.R. 147 (S.C.C.), lacobucci J.stated:
Moreover, financial accounting is usually concerned with providing a comparative picture of profit from year to year, and therefore strives for methodological consistency for the benefit of the audience for whom the financial statements are prepared: shareholders, investors, lenders, regulators, etc. Tax computation, on the other hand, is solely concerned with achieving an accurate picture of income for each individual taxation year for the benefit of the taxpayer and the tax collector.
Noel A.C.J. spoke to the same affect in J.L. Guay Ltée v. Minister of National Revenue (1971), 71 D.T.C. 5423 (Fed. T.D.) aff’d. (1972), 73 D.T.C. 5373 (Fed. C.A.).
We find the decision of this Court in À. v. Burnco Industries Ltd. (1984), 84 D.T.C. 6348 (Fed. C.A.) to be instructive. In that case a gravel pit operator sought to deduct estimated costs of backfilling which, by contract, it was obligated to carry out, after it had excavated a gravel pit. The backfilling did not take place in the same period, but the taxpayer claimed that by reason of the accounting principle of matching, these costs should be deductible in the earlier year. Pratte J.A. in delivering the judgment of this Court said:
In our opinion, an expense, within the meaning of paragraph 18( 1 )(a) of the Income Tax Act, is an obligation to pay a sum of money. An expense cannot be said to be incurred by a taxpayer who is under no obligation to pay money to anyone. Contrary to what was decided by the Trial Judge, an obligation to do something which may in the future entail the necessity of paying money is not an expense.
Thus the recent decision of the Supreme Court of Canada in Canderel Ltd. v. R. does not assist the appellant in the present case. The Court there said (at paragraph 53) that:
in ascertaining profit, the taxpayer is free to adopt any method which is not inconsistent with - inter alia - established case law principles.
The appellant’s position in the present case in inconsistent with ‘established case law principles . We agree with what the learned Trial Judge said in the present case:
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.
The appeal will therefore be dismissed with costs and the judgment of the Tax Court of Canada affirmed.
Appeal dismissed.
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