Francon Limitee v. Minister of National Revenue, [1972] CTC 547, 72 DTC 6468

Pratte, J:—This is an appeal against the decision of the respondent confirming the reassessments of the appellant’s income tax for the years 1967, 1968 and 1969. These reassessments were made on the basis that, to the declared income of the appellant for those years, were to be added amounts of $165,937 for 1968* [1] and $654,462.50 for 1969. The appellant does not deny having received those amounts; it Submits, however, that they have been improperly included in its income.

The appellant is a building contractor which, in the normal course of its business, enters into building contracts providing that a percentage of the moneys to be paid to the appellant (which percentage is commonly called “holdback”) will be withheld by its customers for a certain period of time after the completion of the work and will be paid at the end of this period if the work is then accepted by an engineer or other representative of the owner.

It is common ground that the amounts added by the respondent to the appellant’s declared income were received by the appellant from some of its customers who, after the appellant had transferred to them some securities, paid immediately “holdbacks” that were not yet due or claimable.

It was also agreed at the hearing that all those payments had been received under arrangements similar to the one that the appellant made with one of its customers, the Quebec Autoroute Authority, which arrangement is evidenced by the documents filed as Exhibit No 1. The terms of this particular agreement are set out in a letter dated January 13, 1968 sent by the appellant to the Quebec Autoroute Authority. The first paragraph of this letter makes reference to the fact that under several building contracts previously entered into by the appellant and the Quebec Autoroute Authority there were holdbacks that the appellant could not normally claim until a later date; the rest of this letter reads as follows:

You have advised us verbally that the Quebec Autoroute Authority will release the above holdbacks to us upon deposit in escrow in our Bank, term certificates of Hydro-Quebec in an equal amount.

In order to complete this release of holdbacks we propose as follows:

1. We will purchase term notes of Hydro-Quebec made payable to Quebec Autoroutes (sic) Authority in amounts equal to the above holdbacks and maturing on the dates when the holdbacks become due.

2. These term certificates of Hydro-Quebec will be placed in escrow in our bank, Canadian Imperial Bank of Commerce, Phillips Square Branch, and will not be released except on the written authority of the Quebec Autoroute Authority.

3. The Quebec Autoroute Authority will then immediately release to us the holdbacks covered by the Hydro-Quebec term notes deposited.

4. The interest on the Hydro-Quebec term notes will accrue for the benefit of Francon Limitée and when received by the Quebec Autoroute Authority from Hydro-Quebec it will be remitted to Francon Limitée.

5. At the maturity date of the Hydro-Quebec term notes the face value of these notes will be paid to the Quebec Autoroute Authority, which will in turn then release these funds to Francon Limitée under the same conditions that would have applied to the holdbacks for which the term notes were substituted.

Please indicate on the enclosed copy of this letter your acceptance of this proposal and forward it to us by return mail to enable us to make immediate arrangements as outlined. . . .

The offer contained in this letter was accepted by the Quebec Autoroute Authority which “released” to the appellant holdbacks of approximately $446,000 upon receiving notice that the appellant had deposited in escrow in its bank a Hydro-Quebec term note in the amount of $450,000 bearing interest at 7%, maturing July 2, 1969, and made payable to Quebec Autoroute Authority.

The only question raised by this appeal is whether the respondent was right in including in the appellant’s income for the years under consideration, the amounts that the appellant received during those years from the Quebec Autoroute Authority and other customers when, in the circumstances that I have just described, these customers released holdbacks that were not yet due and claimable.

Counsel for the appellant first submitted that these payments were not income since they had been made under an agreement which merely provided that the appellant would substitute interest-producing securities for the amount of the holdbacks that were to become due on a later date.

In a certain sense, it may be said that the arrangement that the appellant made with its customers merely involved a substitution of one kind of security for securities of another kind. Indeed, in a very loose sense, it may be said that the right of the owner to defer the payment to be made to the contractor until final acceptance of the work is, for the owner, a “security”. It must not be forgotten, though, that if the contractor renounces to this “security” and, upon the contractor giving him other kind of securities, pays amounts which under the building contract are not yet due, he, in so doing, pays the price of the work done by the contractor. In my view, the fact that the arrangement made by the appellant with its customer may be construed as providing merely for the substitution of securities for the cash withheld does not support appellant’s counsel’s submission that the amounts received by the appellant were not part of its income.

Counsel for the appellant also argued that the amounts received by the appellant represented the price of the securities that the appellant had purchased in the name of its clients. In other words, according to counsel, the arrangement made by the appellant with his customers should be construed as being a contract under which the customers would have agreed:

(a) to purchase securities and to pay therefor a price equal to the amount of the holdbacks;

(b) to amend the terms of the building contracts so that the amount payable to the contractor upon final acceptance of the work by the engineer be not that of the holdback but that of the securities.

In my view, a mere reading of the letter setting out the terms of the agreement entered into by the appellant and its clients shows that it cannot be given such an interpretation.

The appeal will therefore be dismissed. The respondent will be entitled to his costs.