In Re the Treasury Department Act, International Harvester Company of Canada, Limited, Income Tax Commission v. Attorney-General for Saskatchewan., [1940-41] CTC 280

TURGEON C. J.S. :—The appellant is an Ontario Company having its head office in the City of Hamilton, and is licensed to do business in Saskatchewan under the provisions of the Companies Act (Saskatchewan). The company manufactures and sells agri- cultural implements. It sells in this Province but does no manufacturing here. On August 23, 1938, three income tax assessments were made upon the company by the Commissioner of Income Tax (Saskatchewan) for the years 1934, 1935 and 1936, .respectively. The amount assessed for 1934 was $4,382.07, for 1935. $11,541.07 and for 1936, $10,136.60. The company takes exception to all three assessments. An appeal against them was taken in the first instance to the Board of Revenue Commissioners, from the Board to a Judge of King’s Bench, and now from the Judge to this Court.

The appellant’s case is met at the outset by the objection raised by the respondents’ counsel, that the appeals taken to the Judge and to the Court are not authorized by law. If there is an appeal in income tax proceedings it must be given by statute and the appellant must show that its case comes within the statute. The objection calls for an examination of a large number of statutory dispositions, the result of which, in my opinion, is to leave the question in a state of considerable doubt. For the sake of convenience I tabulate here the various enactments which bear upon the case. These are:

1932 —Chapter 9, ss. 53 and 54.

1934-35—Chapter 6, s. 2, ) Assented to on the same 1934-35—Chapter 16, s. 7 ) day, February 21, 1935.

Chapter 9 of the Statutes of 1932 was the original Income Tax Act. Sections 53, 54 and 55 dealt with appeals. They provided an appeal from the assessment to the "‘Minister,” meaning the Provincial Treasurer, and from the Minister to a Judge of King’s Bench. Power was given to the Judge to head and consider the cause upon the material filed by the Minister and upon any further evidence which might be produced by either party under his direction, and to affirm, amend or disallow the assessment. The Judge’s decision was to be final and subject to no appeal.

Chapter 6 of 1934-35 amended the Treasury Department Act, R.S.S. 1930, c. 21, by providing for the appointment of a Board of Revenue Commissioners, which was empowered to hear appeals respecting the payment of taxes or other monies due to the Crown; its decisions in such eases to be final and not subject to further appeal ‘‘unless otherwise provided in any revenue Act.’’ Chapter 16 of the same session amended the Income Tax Act. ©. 9 of 1932, by substituting this Board of Revenue Commissioners for the Minister as the body to whom an appeal should be taken in the first instance.

In 1936 a new Income Tax Act was enacted, being c. 15 of the Statutes of that year. Its effect was to divide the provincial income tax period into two parts for certain purposes. Section 73 provided that the new Act should apply to incomes earned or received in the year 1935 and to income in respect of fiscal years ending subsequently to August 31, 1935, and, by necessary intendment, to the incomes of future years; while s. 74(2) provided that the original Income Tax Act, e. 9 of the Statutes of 1932, and all its amendments, should continue, although repealed for other purposes, to apply to incomes earned or received in the years 1931, 1932, 1933, 1934, and to incomes in respect of fiscal years ending before September 1, 1935. The evident intention of the Legislature was that cases arising in respect of these earlier years should all be treated alike, whether the assessment was made before or after the coming into force of the new Act. Nothing has since been. done by legislation which can be interpreted as abrogating or modifying the law, either expressly or impliedly, in this respect. It follows that a taxpayer assessed now, in 1939, in respect of his income, say for 1932, is in the same position as were those taxpayers who were assessed for their 1932 incomes in 1933 or in 1934. This is the position of the appellant in respect to its appeal from the assessment made on August 23, 1938, upon its 1934 income. Its rights, and obligations must be determined by reference to the old statute, ec. 9 of 1932 with its amendments. This legislation gives the appellant the right to appeal in the first instance to the Board of Revenue Commissioners and from the board to a Judge of King’s Bench for final determination without further appeal. The Court has consequently no jurisdiction to entertain an appeal in respect to the assessment for 1934, and the application to the Court, in so far as it pertains to this assessment, must be dismissed. I shall add a word later on to what I have just said upon this question.

We come now to the assessments made, also on August 23, 1938, in respect of the appellant’s income in 1935 and in 1986. The question raised here is much more involved than the one first dealt with.

The Income Tax Act, 1936, (ce. 15 of that year), in setting up the procedure to be followed in respect to incomes for the year 1935 and subsequent years, provided for an appeal in ss. 97, 58 and 59. The appeal granted was of the same nature as that provided in the Act of 1932 as amended. It lay, first, to the Board of Revenue Commissioners, and from the Board to a Judge of King’s Bench, the Judge having power to review the case and to affirm, amend or disallow the assessment; and his decision being final and subject to no further appeal.

In 1937, the Income Tax Act, 1936, was amended by e. 8. A new section, 58a, was added to the Act providing for an appeal from the decision of the Judge to this Court, such appeal to be had as if the decision were a judgment in an action between subject and subject. And the section went on to say that there should be no further or other appeal.

The statute remained in this form until March 23, 1938, granting an appeal from the assessment, first to the Board of Revenue Commissioners (s. 57), then from the Board to a Judge of King’s Bench (s. 58), and finally, from the Judge to the Court of Appeal (s. 58a).

During this time the provisions of the Treasury Department Act respecting appeals to the Board of Revenue Commissioners remained as originally enacted in 1934-35 by c. 6 of that year. The Board had power to hear appeals ‘‘respecting the payment of taxes or other moneys due to the Crown,’’ and to give decisions which should be final ‘‘unless otherwise provived for in any revenue Act.” There are many revenue Acts in Saskatchewan, reference to s. 12 of the Provincial Tax Commission Act, 1938 (c. 10), showing that there must be at least eleven of them including the Income Tax Act. This Income Tax Act therefore was a revenue Act providing for an appeal from the Board to a Judge in exception to the general provision that no such appeal should lie.

On March 23, 1938, two Acts were assented to whose effect must be considered with care. These were ec. 8 and 91. Chapter 8 repealed the former Treasury Department Act and enacted in its stead the Treasury Department Act. 1938. This new legislation, which is now in force, alters the statutory provisions respecting appeals heard by the Board of Revenue Commissioners. It provides in the first place (s. 40(8) (a)) that the Board shall have power, as formerly, to hear appeals "respecting the payment of taxes or other moneys due to the Crown, ’ but instead of saying, as in the case of the former Act, that such appeals "shall be final and not subject to further appeal unless otherwise provided for in any revenue Act,’’ it provides (ss. 40 and 41), that an appeal shall lie from a decision of the Board on a question of law to a Judge of King’s Bench and from the Judge to the Court of Appeal. In order to be heard by a Judge of King’s Bench the appellant must show that he is appealing, in the language of the statute, (s. 41(1)), "from a decision of the board on a question of law arising in an appeal to it under clause (a) of subsection (8) of section 40.” Subsection (6) of s. 41 then provides that ‘‘the judge may affirm the decision of the board or amend or reverse the same in so far as it was based upon any error in law.’’ And s. 42 says that an appeal shall lie from the decision of the Judge to the Court "‘as if such decision were a judgment in an action between subject and subject.’’

So much for c. 8 of the Statutes of 1938 assented to on March 23rd of that year. We come now to c. 91 assented to on the same day. This c. 91 is the Statute Law Amendment Act, 1938. Section 2 says: ‘‘Sections 58 and 58a of The Income Tax Act, 1936, are repealed.’’ The sections of the Income Tax Act so repealed were those which provided an appeal from the Board of Revenue Commissioners to a Judge and from the Judge to the Court. It may be noted that the appeal thus abrogated was not an appeal confined to questions of law but one which went to the merits of the assessment.

The question now to be determined is, does the legislation of 1938 abolish appeals in income tax matters beyond the appeal to the Board of Revenue Commissioners, or on the contrary, does it provide a new kind of appeal, an appeal on questions of law only, from all decisions of the Board including those delivered in respect to income tax assessments?

I have come to the conclusion that the new appeal provisions of the Treasury Department Act do apply to decisions of the Board on appeals taken to them from assessments respecting incomes covered by the Income Tax Act, 1936, that is, (s. 73), incomes earned or received in the year 1935 and in the fiscal years ending subsequently to August 31,1935.

It is contended for the respondents against this conclusion that, the Treasury Department Act being a statute of general application, its provisions must be taken to be over-ridden by contrary or inconsistent provision found in statutes dealing with particular subjects, in so far as these particular subjects are concerned. The statement of principle is sound but it does not govern this case. I have already indicated that I believe it does govern assessments made in respect to incomes to which the procedure of the Income Tax Act, 1932; still applies. The old Act and its amendments are still alive in so far as these earlier years are concerned. They set up a mode of appeal complete in itself, with an express finality, and applicable only to one particular form of taxation, viz., Income tax. In my opinion,it would require an express repeal of these provisions, or inconsistent legislation of an equally particular nature and of later enactment, to alter the law concerning assessments made in those earlier years. Later inconsistent legislation effective to alter the law need not necessarily be found in a later income tax statute; it may well be woven into another statute, such for instance as the Treasury Department Act, so long as the language used leaves no doubt of its application to the particular subject of income tax. We have an example of this in the case of The (< Dart 9 ’ (1892), 62 L.J.P. 32, where the effect of certain legislation was considered. The subject-matter of the legislation was, appeals from the decisions of a Divisional Court altering judgments of County Courts in certain admiralty matters. The Judicature Act, 1873 (Imp.), c. 66, enacted that from the decision of a Divisional Court on such an appeal there should be no further appeal without leave. The County Courts Act, 1875 (Imp.), ce. 90, which came into operation later, enacted that, in such cases, no leave to appeal should be necessary. It was held that, the two enactments being inconsistent, the later of the two, the County Courts Act, must prevail. But the question in that case does not seem to have been a difficult one, because both enactments were directed to the same thing : appeals in admiralty cases from the County Courts to the Divisional Courts, and from the Divisional Courts to the Court of Appeal. Both enactments covered the whole of what was common ground; both could not validly occupy this ground at the same time, so the earlier had to give way to the later. Here, the provisions of the Treasury Department Act, 1938, apply generally to appeals coming before the Board of Revenue Commissioners from whatever source; the Income Tax Act, 1932, applies only to a particular class of appeals; there is certainly no express, and, in my opinion, no implied, repeal of the particular statute by the general, and, consequently the former remains in force.

But the case is different, I think, when ec. 8 and 91 of the Statutes of 1938 are placed side by side. The result of c. 91 is to leave the Income Tax Act, 1936, in the position of granting an appeal (s. 57) upon the assessment to the Board of Revenue Commissioners. The section does not say that the appeal thus created shall be final. It serves merely to bring the assessment before the Board, which must proceed to hear it under the provisions of the Treasury Department Act. Sections 41 and 42 of that Act provide an appeal from all the decisions of the Board. Section 58 and 58a of the Income Tax Act, 1936, being repealed, there remains no particular legislation creating an exception to the general law in respect to decisions rendered by the Board upon income tax appeals. The special Act may create an exception whether expressly or impliedly, but it does not necessarily do so. Here no such exception can be pointed out.

It follows, therefore, that the Court has jurisdiction to hear, and is bound by statute to hear, the appeals respecting the assessments for the years 1935 and 1936, provided it can be shown that a question of law arises; in which event it will be the Court’s duty to go into the case presented to the Board and to the learned Judge of King’s Bench and to "‘affirm the decision of the Board or amend or reverse the same in so far as it was based upon any error in law” (s. 41(6)).

The doubt created by the simultaneous enactment of ec. 8 and 91 of 1938 has been removed for the future by s. 16 of c. 9 of the Statutes of 1939. This enactment adds a new section (58) to the Income Tax Act, 1936, providing that appeals from decisions of the Board of Revenue Commissioners upon assessments shall be subject to and governed by ss. 41 and 42 of the Treasury Department Act.

Among the contentions put forward by the appellants the broadest in its effect is the one which goes to the constitutionality of the legislation under which the assessments were made. The appellants say that the Income Tax Act, 1936, or at least that part of it which affects them, is ultra vires the Legislature of Saskatchewan because it does not provide for direct taxation within the Province as authorized by the B.N.A. Act, s. 92(2). The respondents submit argument in favour of the validity of the legislation, but at the same time they contend that the constitutional question involved is not ‘properly before the Court in these proceedings. They say that the position of the parties here is similar to the position of those concerned in the Alberta case of Royal Trust Co. v. A.-G. Alta., [1934] 1 W.W.R. 824, where Ewing J. held that in certain proceedings taken before him under the Succession Duties Act of that Province he did not have jurisdiction to determine whether or not the Act was ultra vires the provincial Legislature. It will not be necessary for me to examine the merits of the respondent’s objection because, having heard a full argument on the constitutional question and examined the authorities submitted on both sides, I am convinced that the charge of unconstitutionality cannot be sustained. The Income Tax Act affects many classes of individuals and of corporations, some of its provisions may be applicable in one case and not in another, and it may, like any enactment of a Canadian Legislature, be valid in part and invalid in part: Toronto v. York Tp., [1938], 1 D.L.R. 593, A.C. 415, 47 C.R.C. 361. It is not necessary on this occasion to make any pronouncement on the statute further than to say that those portions of it which govern the taxation of corporations in the appellant’s position, that is extra-provincial corporations doing business in the Province, are so worded as to indicate an intention to impose only a form of taxation which falls within the description of

" " direct taxation within the province : ’ ‘ see the remarks of the present Chief Justice of Canada, then Mr. Justice Duff, in Lovitt v. The King (1910), 43 S.C.R. 106 at p. 130 [revd [1912] A.C. 212]. It will be well upon this point to read in the first place the following sections of the statute :

"‘4. The following incomes shall not be liable to taxation hereunder :

"" (j) profits earned by a corporation or joint stock company, other than a personal corporation, in that part of its business carried on at a branch or agency outside of Saskatchewan. ‘

"23. The income liable to taxation under this Act of every person residing outside of Saskatchewan, who is carrying on business in Saskatchewan, either directly or through or in the name of any other person, shall be the net profit or gain arising from the business of such person in Saskatchewan. ‘

These two statutory provisions must be read along with s. 3 which is a lengthy section defining "‘income.'' When this is done it will appear clearly that in so far as the subject matter of the tax is "‘income'' this term means in the present case and in the case of all corporations or joint stock companies, whether resident inside or outside the Province, (other than personal corporations), only the net profits arising from that part of the business of the corporation which is carried on in Saskatchewan. But in addition to ss. 3, 4(j) and 23 regard must be had to s-s. (4) of s. 9, which in its scope applies to all companies, provincial or other, doing business in the Province and which says :

"9(4) Where the commissioner is unable to determine or to obtain the information required to ascertain the income within the province of any corporation or joint stock company or of any class of corporations or joint stock companies, the Lieutenant Governor in Council may, on the recommendation of the commissioner, make regulations for determining such income within the province or may fix or determine the tax to be paid by a corporation or joint stock company liable to taxation.''

It will be observed that the machinery of this section is set in motion when the Commissioner of Income Tax is unable through lack of the necessary information to ascertain the income of the company within the Province. In such a case the company does not escape taxation but another procedure is provided for taxing it. The Commissioner may recommend to the Government, and the Government may issue on his recommenda- tion, regulations which he may use "‘for determining such income^ which in the circumstances must mean, I take it, not the company’s exact income, since the information on which this might be established is lacking, but an amount which is to be deemed to be its income for the purposes of the tax. Or the Government, acting under this s. 9(4), may go further and, instead of issuing regulations for the Commissioner’s guidance, may itself dispose of the matter summarily by fixing the tax to be paid by the company. It may be said that, strictly speaking, a tax imposed by either of these methods is not a tax on income because admittedly the company’s real income in the Province has not been ascertained, but a tax on income, using this word income in its ordinary sense, is not the only tax which a Province may impose upon an extra-provincial company doing business in its territory. The judgment of the Privy Council in the case of Bk. of Toronto v. Lambe (1887), 56 L.J.P.C. 87 at p. 91, says that "‘Any person found within the province may legally be taxed there if taxed directly.’’ In that case the tax was levied in Quebee upon a bank doing part of its business in that Province but having its domicile and its capital in Ontario and it was held to be a valid tax although its amount was fixed in relation to the amount of the bank’s paid up capital, thus situated outside the Province.

In the present case the amount of the tax was determined by the Commissioner in accordance with regulations made by the Government under the authority of the Act as above cited. These regulations, after first disposing of interest, dividends, and other sources of revenue with which we are not concerned, 70 on to say:

" ‘2. The income referred to in regulation 1 having been separately determined and ascertained, the remainder of the income of the taxpayer liable to taxation shall be taken to be such percentage of the remainder of the income as the sales within the Province bear to the total sales.

‘‘The sales of the taxpayer shall be measured by the gross amount which the taxpayer has received during the preceding year from sales and other sources in connection with the said business, excluding, however, receipts from the sale or exchange of capital, assets and property not sold in the regular course of business and also receipts from interest, dividends, rents and royalties the income of which has been separately determined or ascertained under the provisions of regulation 1.”

In effect these regulations substitute for an amount which would be the net profits of the company earned in Saskatchewan, if the information necessary to ascertain these profits was available, another amount, to be such portion of the company’s total. income as corresponds to the percentage which the company’s sales in Saskatchewan bear to its total sales. I think that under the authority of Bk. of Toronto v. Lambe, supra, such a tax is valid as being a direct tax within the Province.

In my opinion, therefore, it was within the power of the Legislation to enact all the provisions of the Income Tax Act, 1936, with which we are now concerned, and it was within the authority of the Lieutenant-Governor in Council, acting under s. 9(4), to make the regulations which the Commissioner applied in determining the assessments in question.

We next have to examine certain objections taken by the appellants to the procedure followed by the Commissioner. Before going into these matters it is convenient here to recall that we are concerned upon this appeal with errors in law only.

Acting under the powers conferred upon him by the regulations the Commissioner assessed the company in the amounts already mentioned, viz., $11,341.07 for 1935 and $10,136.60 for 1936. The appellant objects to these assessments. They say in the first place that the circumstances required by law to make the regulations available to the Commissioner had not arisen. The regulations are intended to become effective ‘‘when the commissioner is unable to determine or to obtain the information required to ascertain the income within the province, etc.’’ It will suffice upon this point to say that the material contained in the appeal book, including that relied upon by the appellants in their appeal to the Board of Revenue Commissioners, makes it clear that in fact it was impossible to arrive with certainty at the portion of the company’s profits earned in Saskatchewan, and that the best the company itself could do was to propose a formula of allocation which in its opinion appeared fair. In this condition of uncertainty the Commissioner had recourse instead to the formula provided by the regulations. In my opinion he was justified in doing this. The extent of the uncertainty will be illustrated by the action of the appellants themselves. In their appeal to the Board of Revenue Commissioners they said:

‘“The appellant company further says that the profit or income of the company is one and indivisible. It is the sum total of the gains and losses of the company in all places where it carries on its business placed against each other at the head office of the company and arises only at such head office when such computation has been made. The appellant company says that it carries on business in several provinces of Canada and that its head office is in the Province of Ontario and that its income can therefore be said to have existence only in the Province of Ontario.”

In the return they made for the year 1935 the appellants applied their own method of allocation, taxed themselves $871.42 in respect of Saskatchewan profits, and paid this sum in. For the year 1936 they taxed themselves $2,335.85 and paid this sum in also. Then on the hearing of the appeal they asked the Court to admit in evidence an affidavit of their auditor in order to establish that no profits at all were made by them in Saskatchewan in 1935 or in 1936 but that large losses were made in those years and that therefore no tax was collectable. I men- tion these things because they indicate the uncertainty which existed; but they do not concern us in any other respect because there is no appeal to the Court on questions of fact. It is usual in such cases of uncertainty to provide in the statute for the fixing of the taxable amount by means of an estimate. In Attorney-General v. Till (1909), 97 L.J.K.B. 141, Lord Shaw says, at p. 153 :

"‘The power of assessment and surcharge does not appear to me to assist the construction of section 55. Such powers are inserted in the Act simply because, in addition to all kinds of penalties, the Inland Revenue must ingather taxation ; and if the taxpayer will not furnish the information himself, some means must be provided of recovering the duty, and these powers are given to enable them to proceed with the best available estimate.”

In this statement Lord Shaw was dealing with the case of a taxpayer who would not furnish the information; but the same reasoning must apply when he is unable to furnish it. Here the best the appellants could do was to submit another method for arriving at an estimate.

If the Commissioner requires any justification for having had recourse to the regulations in arriving at an estimate of the income and in assessing the appellants, that justification is furnished, in my opinion, by the circumstances of the case with which he had to deal.

After providing that the amount subject to taxation shall be ascertained by referring to the company’s sales, the regulations go on to say that these sales "‘shall be measured by the gross amount which the taxpayer has received during the preceding year from sales and other sources in connection with the said business’’ (certain kinds of receipts being excluded). Some discussion arose on the argument upon the meaning to be given to the words ‘‘amount . .. received.’’ Taken by themselves and without regard to established practice these words would be eonstrued to mean ‘‘money received.’’ The Commissioner how- ever dealt with the case upon the assumption that amounts received, for instance, upon sales, included not only cash paid in but also receivables, such as notes, book debts, ete. This interpretation of the expression ‘‘amount received’’ is justified by Mr. H. W. A. Plaxton in the 1939 edition of his Canadian Income Tax Law, at p. 31, and also in the 1930 edition of Plaxton and Varcoe’s Dominion Income Tax Law at pp. 168 and 285, and the explanation given by these authors appears reasonable to me. The fairness and the practicability of these interpretations are illustrated, I think, by the facts dealt with in St. Lucia Usines & Estates Co. v. Colonial Treasurer of St. Lucia (1924), 93 L.J.P.C. 212, and in Gleaner Co. v. Assessment Committee (1922), 91 L.J.P.C. 181.

The amount to be settled for taxation in each year by the application of the above method is taken to be the company’s income in Saskatchewan, although strictly speaking it is not its income but only an estimate of it. But the language used makes it clear that it must be dealt with by the Commissioner in the same manner as real income; that is, the same scale of taxation must be applied to it, the same deductions allowed, etc. Therefore the only question remaining to be determined on this appeal is whether the Commissioner made any mistake in law in arriving at the amount to be assessed. It is contended by the appellants that he did make such a mistake in dealing with the subject of "‘bad debts.” I have formed the opinion that a mistake was made, although not altogether of the kind set up by the appellants.

In dealing with the matter of bad debts the Commissioner refused to give any consideration to debts contracted before January 1, 1931, this year 1931 being the first year in respect to which the tax was levied. In doing this I think he was right. The tax is an annual tax and each year is a unit standing by itself: s. 3 of the statute; Gresham Life Ass’ce Co. v. Attorney-General (1916), 85 L.J. Ch. 201; Gleaner Co. v. Assess- ment Committee, supra. This justifies the exclusion from consideration by the Commissioner of all debts not contracted within the year actually under review. But in respect of each such year the question of bad debts arises in two forms: (1) the taxpayer may be able to satisfy the Commissioner that some of the debts contracted in his favour in the course of the year’s business have lost part or all of their original value; in such a case proper deductions should be made because it would be unjust to include money thus lost as part of the real profits;

(2) in respect of the remaining debts it may be reasonable to anticipate that some losses will ocur eventually, and the Com- missioner may allow the taxpayer to set aside from the profits a sum to be placed in reserve as insurance against this possible loss; but in doing this the Commissioner acts under specific statutory authority. The allocation of such a reserve is authorized by s. 6(d) of the Act which says:

"‘6. In computing the amount of the profits or gains to be assessed, a deduction shall not be allowed in respect of :

"(d) amounts transferred or credited to a reserve, contingent account or sinking fund, except such an amount for bad debts as the commissioner may allow and except as otherwise provided in this Act.’’

I think that were it not for this statutory permission the Commissioner would be in duty bound to tax the whole of the taxpayer’s profits, after deducting the debts presently found to be bad, without allowing any reserve for the future. This seems to follow from what was laid down in the Gresham case, supra. Upon this subject of bad debts I think the following passage from p. 228 of Plaxton and Varcoe’s work, already referred to, is in point and that it apples to proceedings under the Income Tax Act of this Province :

"This peculiar situation results from paragraph (d) of section 6. In the first place bad debts are deductible without a statutory provision. On the other hand, amounts of profits credited or appropriated to reserve to cover bad debts or any other eventuality are not deductible except by statute. Consequently the situation is that the taxpayer may deduct any debt which is found to be bad in the year in which it is incurred, and in addition it is suggested may set aside from his profits whatever the Minister allows. The ordinary allowance for the reserve is five per cent.’’

In the present case the Commissioner followed a course which in my opinion is not sanctioned by law. Instead of allowing the creation of a reserve he deducted from each year’s profits an amount representing the losses incurred by the company during that year in respect of debts whenever contracted so long as they were contracted in the year 1931 or in a later year. Thus a debt contracted in 1931 could have been allowed as a deduction from the profits of 1936, if it turned out to be bad during the latter year. I am not saying that from a practical standpoint such a method of taking care of bad debts is not a reasonable one; in any case it seems to show a desire on the Commissioner’s part to act with the utmost fairness towards the appellant. But I do think that the statute in its present form does not allow it. In effect this procedure reopens the taxation of the earlier year by creating a credit to the taxpayer because of something which has since happened to the profits ascertained, and determined, and acted upon, for that earlier year. I am satisfied that the statute does not contemplate the reopening of any year’s assessment at a later time on account of intervening fluctuations, upward or downward, in the profits determined at the time fixed for their determination: I refer again to the cases last cited. In another aspect the deduction thus allowed would appear to be something in the nature of a refund; but it does not appear to me to come within the operation of s. 53 which provides for refunds.

On the other hand, the course followed by the Commissioner in respect of these old debts does show the justice of making some provision in the taxpayer’s favour on account of future losses from debts presently taken to be good; hence the inclusion in the Act of s. 6(d).

In acting under s. 6(d) the Commissioner must exercise his discretion upon legal principles. In this case he refused to allow any deduction in respect of a reserve for bad debts and it is clear that he did so because he believed that he had power to protect them against all losses on account of bad debts by following the method I have described. But the Act does not sanction this method and therefore the Commissioner acted under a mistake of law.

The assessments for the years 1935 and 1936 are therefore defective in so far as the subject of a reserve for bad debts is concerned. They must accordingly be set aside and new assessments made in accordance with law. This means that in making the new assessments the Commissioner must reconsider the question of a reserve for bad debts in the light of this judgment and must exercise the discretion vested in him by s. 6(d) of the Act upon sound principles. It is the Commissioner’s discretion thus properly exercised which must prevail, and he is a party to these proceedings, having been represented before us by counsel. I think that in the circumstances the proper course to follow is to refer the assessments back to him : Pioneer Laundry & Dry Cleaners v. Minister of Nat f l Revenue, [1939], 4 D.L.R. 481, 4 All E.R. 254. The appeal fails on all other grounds.

As to costs, I think that, in view of the many issues raised and of the appellants’ partial success, justice would be done by awarding the appellants two-thirds of their costs here and below to be taxed on the King’s Bench scale.

Judgment accordingly.