The Cementation Company (Canada) Limited v. Minister of National Revenue, [1977] CTC 2360, 77 DTC 249

A J Frost (orally: November 18, 1976):—This is an income tax appeal wherein the Minister of National Revenue reassessed the appellant with respect to the fiscal years ended March 31, 1971 and September 30, 1971, treating the full amount of a mediation award as income of the fiscal period ended March 31, 1971.

The appellant had two fiscal periods in the calendar year 1971, the second period being for only six months. The appellant reported the award money as belonging to the second period and the Minister reassessed it as belonging in the first fiscal period.

In 1963 the appellant entered into a contract with International Minerals and Chemical Corporation (Canada) Limited, hereinafter referred to as IMC, to sink a shaft at Esterhazy, Saskatchewan. The contract was insured. Structural defects developed and a large sum of money had to be spent by the appellant to de-water the shaft, and to make repairs. Invoices were sent to the appellant claiming reimbursement for costs. These claims led to a long and protracted dispute. Reserves were established on the books of the appellant in the amounts of approximately $512,000 in 1969 and $577,000 in 1971.

On March 12, 1971 the appellant won an award of approximately $1,092,000 under The Arbitration Act of Ontario, and filed the award with the Registrar of the Court of Appeal of Ontario on March 22, 1971. The award money was paid to the appellant company on April 5, 1971, five days after its year-end. The appellant contended that the collectability of the award remained in doubt until April 5, 1971, as IMC had a right to appeal the decision of the award dated March 12, 1971.

In preparing financial statements for the year-end, March 31, 1971, the appellant company included the full amount receivable as income for the year without any reserve against the asset. However, in reporting for tax purposes, the appellant claimed 100% reserve on the ground that the appellant had no absolute right to the award money until the appeal period had expired, which was after the appellant’s year-end.

The function of accounting is to measure income according to generally accepted accounting principles, and to cause accounts to be kept which accurately reflect the affairs of the company with respect to its debtor and creditor relationships, and all other assets, both long and short, and in addition report as required by statute to the management.

On the evidence, the Board finds that the appellant was legally entitled to receive the sum of $1,092,000 although not legally entitled to demand payment of it immediately. The amount was definitely ascertained as of the year-end, and no evidence was adduced to indicate that the sum would not be paid in full when due. The indebtedness, therefore, had the true quality of a receivable.

On Friday, April 2, 1971, Mr R C G Wilson, QC, the solicitor for the appellant, forwarded the release by taxi to the company for signature by the appellant’s officers, indicating that, if the release were signed forthwith, he would exchange it immediately, or at least he would exchange it for the settlement cheque, as of Monday, April 5. For accounting purposes the true position of the receivable was known before the balance sheet and profit and loss accounts were finalized, and the auditor, accordingly, showed the true position in the financial statements of the company. However, for tax purposes the appellant company claimed 100% reserve on the ground that the appellant had no absolute right to the sum in question as of March 31, 1971, and as IMC could take an adverse position at any time prior to payment, and possibly upset the award.

Counsel contended that no absolute entitlement could possibly arise until the time of the appeal had expired or the cash was received. For these reasons, he submitted that the amount of $1,092,000 was not income with respect to the year ended March 31, 1971.

In my view, the award money became a receivable of the appellant on March 12, 1971, the date on which the members of the Board of Arbitration signed the decision and award document, and at that point in time became properly assessable in the year ended March 31, 1971 as income of that year. To hold otherwise would almost, in my opinion, make a mockery of the Income Tax Act and generally accepted accounting principles and commercial practices. In this I lean towards the cases MNR v Benaby Realties Limited, [1967] CTC 418; 67 DTC 5275, and Vaughan Construction Company Limited v MNR, [1970] CTC 350; 70 DTC 6268, both Supreme Court decisions, as authority for the proposition that the Income Tax Act requires profits or gains to be included in the calculation of income in the year in which the amount of profit arising from an award is determined, although the award per se may be subject to appeal.

In my view, the possibility of an appeal does not affect the nature of the amount in question as a receivable or its character as income, and under no circumstances can it be considered as transferring the item from one taxation year to the next, or postponing the date when the moneys become receivable.

As to the question of a need for reserve for bad debts against the amount outstanding at the year-end, no question of ageing or ability to pay arises, as the creditor was in a sound financial position and the amount owing was for less than 30 days. Further, accounting practice is to set up reserves at the time the balance sheet is prepared which, in effect, means that for all practical purposes no reserve was required.

For these reasons the appeal must be dismissed.

Appeal dismissed.