Stevenson & Hunt Insurance Brokers Ltd. v. The Queen, 93 DTC 5125, [1993] 1 CTC 383 (FCTD), briefly aff'd 98 DTC 6383 (FCA)

Rothstein, J.:—

Background:

The issue in this cases involves the accounting treatment, for income tax purposes, of contingent profit commissions earned by insurance brokers. Contingent profit commissions are commissions received by insurance brokers in excess of regular sales commissions for selling insurance policies. As the term contingent profit commissions implies, these are commissions paid by an insurance company to a broker that are contingent on the insurance company's profitability on its policies sold by the broker. One purpose for this type of commission is to encourage brokers to sell profitable policies, i.e., policies in which there is a low risk of claim or loss.

Each insurance company calculates contingent profit commissions in accordance with its own formula. However, the following simplified example taken from the evidence of Dr. Lawrence Rosen, professor and director, M.B.A. program, York University, an expert called by the defendant, would be indicative of the calculation:

Premiums that were actually earned (as opposed to those premiums being received in cash) in the calendar year, as a result of the

expiry of time	$1,000
Subtract:
Sales commissions earned by the
broker	$200
Administrative expenses (often a
predetermined percentage of
earned premiums)	$170
Insurance losses incurred in the
year (adjusted for estimates of un
settled losses, and incurred but not
	700
reported losses)	$330
Net	$ 300
Contingent profit commission (say 10 per cent)	$30.00.

Each component of the contingent profit commission calculation can be subject to its own detailed calculation based on formulas, estimates or both.

1. Premiums: These are usually "earned" as opposed to “written”. For example, in the case of the Royal Insurance Company, one of the insurers with which the plaintiff dealt, the evidence indicated that for the calendar year ended December 31, 1982 the formula for calculating net earned premiums was:

NET EARNED PREMIUMS means: Premiums written for the current year, less refunds, and less premiums for reinsurance placed or requested by the Agent; then adjusted by deducting 50 per cent of net premiums written in the current year and adding 50 per cent of net premiums written in the previous year.

2. Sales commissions earned by the broker: This is usually a percentage of the net earned premiums.

3. Administrative expenses: These are usually an agreed percentage of earned premiums, although in some cases they may be based on the insurance company's actual expenses.

4. Insurance losses in the year: This item included actual losses paid, an estimate of unsettled claims and an allowance for incurred but unreported losses.

Evidence was led that some companies will average premiums, profits or insurance losses over two or three years to arrive at the basic profit on which to calculate the contingent profit commission.

In this case, Stevenson 8: Hunt reported contingent profit commissions of $55,586 in its fiscal year ended January 31, 1984, that being the fiscal year in which it actually received the cash payments for these commissions. Her Majesty the Queen (the Minister of National Revenue, herein referred to as the Minister) reassessed Stevenson 8: Hunt adding $55,586 to the company's income for tax purposes for the fiscal year ended January 31, 1983 on the grounds that these commissions were earned in the fiscal year ended January 31, 1983. (Stevenson 8: Hunt was originally reassessed $55,586 but by agreement of the parties, the amount in dispute was changed to $46,574).

Stevenson 8: Hunt had always reported contingent profit commissions on a cash basis and evidence was led to the effect that this was the usual practice in the industry. It was submitted that Stevenson & Hunt in particular, and insurance brokers generally, could not calculate contingent profit commissions and had to rely upon the insurance companies to do so. The reasons provided for Stevenson 8: Hunt's inability to calculate or even estimate the contingent profit commissions were:

1. Insurance brokers track premiums and commission on a written as opposed to an earned basis. Differences arise as a result of policies being written near the year end in that the broker and the insurance company recognize the premiums in different years.

2. Different formulas are used by the various insurance companies to calculate earned premiums. In some cases, contingent profit commissions are based on premiums after certain adjustments made by an insurance company to exclude certain types of insurance.

3. Reserves for insurance losses are solely under the control of the insurance company. Reserves for unsettled claims and for incurred but unreported losses would involve actuarial calculations or estimates of which the broker would have no knowledge.

Mr. George Ley, president of Stevenson 8: Hunt, explained that contingent profit commissions were not the primary source of revenue for insurance brokers and no formal verification or audit of the insurance companies’ calculations were performed. Occasionally, if the calculation of contingent profit

commissions was grossly different than what was expected, Stevenson 8: Hunt would make an inquiry, but, usually the insurance company's calculations were accepted without verification. When inquiries were made to obtain information about contingent profit commissions by Stevenson 8: Hunt, the calculations would not always have been completed by the insurance company and consequently the information could not be obtained. Accordingly, Stevenson 8: Hunt waited until the insurance company forwarded a cheque for the contingent profit commissions before recording it and recognizing it as revenue.

In the fiscal year 1983, Stevenson & Hunt handled in excess of 10,000 policies with a total of 15 different insurance companies. Claims on these policies were in the thousands. Counsel for Stevenson 8: Hunt submitted that given these circumstances, it would be impractical for Stevenson 8: Hunt to even estimate contingent profit commissions before receiving precise information from the insurance companies.

Generally contingent profit commissions were paid by the insurance companies in February, March or April of each year. This is because the fiscal year end of the insurance companies was December 31 and annual statements required under the Canadian and British Insurance Companies Act, R.S.C. 1970, c. 1-15 and the Foreign Insurances Companies Act, R.S.C. 1970, c. 1-16, had to be deposited with the Department of Insurance on or before March 1 of each year. Thus the relevant calculations would have been made enabling the contingent profit commission payments to be in the early months of a calendar year.

Mr. Ley agreed that in respect of the contingent profit commissions in issue in this case, Stevenson 8: Hunt was not required to do anything after December 31, 1982 to be entitled to the commissions of $46,574 and that there was no problem of collection.

For the fiscal year ended January 31, 1983, Stevenson & Hunt's accountants Peat, Marwick Mitchell performed their field work and substantially completed their preparation of financial statements by mid-March 1983. Between January 31 and March 15, 1983, Stevenson & Hunt had received or definitely knew it would receive, on account of contingent profit commissions, $46,574.

Position of the parties

The evidence of John Alexander Milburn, F.C.A., Ph.D., senior partner, Ernst 8: Young's National Accounting and Auditing Services Group, an expert witness called on behalf of Stevenson & Hunt, raised the following question at page 2 of his affidavit:

. . .whether GAAP would have required the inclusion of these commissions as revenues and income in the plaintiff’s 1983 financial year — that is, whether the plaintiff's accounting policy was in accordance with GAAP.

Mr. Milburn stated that no specific recommendations of the Canadian Institute of Chartered Accountants (CICA) apply to the treatment of contingent profit commissions. It was therefore necessary, in his view, to fall back on generally accepted accounting principles — GAAP. In his affidavit he stated:

The CICA Handbook, section 3400, codifies general revenue recognition principles. It states that revenue should be recognized at the time the underlying service is performed, subject to a very important condition:

Such performance should be regarded as having been achieved when reasonable assurance exists regarding the measurement of the consideration that will derived from rendering the service. . . .[paragraph 3400.08]

According to this provision of the CICA Handbook, revenue is recognized when the underlying service is performed. However, such performance should be regarded as having been achieved only when reasonable assurance exists regarding the measurement of the consideration that will be derived from rendering the service. Mr. Milburn said that while some factors are known by the broker, e.g., premiums written, some factors, e.g., loss reserves, are only within the knowledge and expertise of the insurer. Mr. Milburn concluded that since there was no basis for the broker reasonably measuring the contingent profit commissions as of January 31, 1983, these revenues should not be recognized for the fiscal year ended January 31, 1983.

Dr. Rosen came to a different conclusion. He said that the CICA Handbook is explicit when it comes to recognizing increases in revenue. In support of this position he referred, inter alia, to sections 1000.38, 1000.39(a) and 1000.47 of the CICA Handbook, which state:

1000.38 The recognition criteria below provide general guidance on when an item is recognized in the financial statements. Whether any particular item is recognized or not will require professional judgment in considering whether the specific circumstances meet the recognition criteria.

1000.39 The recognition criteria are as follows:

(a) The item has an appropriate basis of measurement and a reasonable estimate can be made of the amount involved. . . .

1000.47 Revenues are generally recognized when performance is achieved and reasonable assurance regarding measurement and collectability of the consideration exists.

He asserted that there was no uncertainty of measurement once contingent profit commissions were received. Since Peat, Marwick Mitchell did not substantially complete their examination of Stevenson & Hunt's accounts until March 15, 1983, the measurement of all contingent profit commissions received or known by that date would have been obvious. Therefore, receipt of contingent profit commissions up to that time should have been taken into account in fiscal 1983, and adjustments to the Stevenson & Hunt's financial statement should have been made to reflect the inclusion of the contingent profit commissions in income.

Several other sections of the CICA handbook appear to be relevant to the cases at bar. For example, sections 3400.16 and 3400.18(a) deal with when revenue is recognized and the factors that affect recognition. They state:

3400.16 Recognition of revenue requires that the revenue is measurable and that ultimate collection is reasonably assured. When there is reasonable assurance of ultimate collection, revenue is recognized even though cash receipts are deferred. When there is uncertainty as to ultimate collection, it may be appropriate to recognize revenue only as cash is received.

3400.18 Uncertainties relating to the measurement of revenue may result from one or more of the following issues.

(a) Consideration. When consideration is not determinable within reasonable limits, for example, when payment relating to goods sold depends on the resale of goods by the buyer, revenue would not be recognized.

The treatment of information arising from events subsequent to a financial statement date is dealt with in sections 3820.05 and 3820.06 of the CICA Handbook:

3820.05 Subsequent events may provide additional information relating to items included in the financial statements and may reveal conditions existing at the financial statement date that affect the estimates involved in the preparation of financial statements. All such information that becomes available prior to completion of the financial statements would be used in evaluating the estimates made and the financial statements would be adjusted where necessary. For example, the institution of bankruptcy proceedings against a debtor, subsequent to the date of the financial statements, may be indicative of the underlying financial situation of the debtor at the date of the financial statements. If the provision for that debt were inadequate, adjustment of the financial statements would be required.

3820.06 Financial statements should be adjusted when events occurring between the date of the financial statements and the date of their completion provide additional evidence relating to conditions that existed at the date of the financial statements [July 1979].

Mr. Milburn said that since no estimate of contingent profit commissions could have been made at the financial year end, there was nothing to adjust upon the receipt of the actual contingent profit commissions. Dr. Rosen, however, said that since all conditions necessary to earn the contingent profit commissions were satisfied by the financial year end and the only missing information necessary for the calculation was subsequently provided, the recognition criteria had been met.

As I understand sections 3820.05 and 3820.06 of the CICA Handbook, they refer to adjustments arising from information acquired subsequent to the financial statement date, in this case subsequent to January 31, 1983. The precondition for an adjustment is the existence of an estimate to adjust. Such estimate must be reasonable [see sections 1000.39 and 3400.18(a) of the CICA Handbook]. Dr. Rosen relied on the fact that information about contingent profit commissions comes into the accountant's possession after the financial statement date but before the accountant signs off the financial statements. However, these are subsequent events. The inference I draw from the CICA Handbook is that information arising from subsequent events can only be used to adjust estimates that could be made at the financial year end. Use of subsequently acquired information on a stand alone basis, without a previous estimate to adjust, would be tantamount to postponing the fiscal year end of the taxpayer. In coming to this view, I have had regard to M.N.R. v. Benaby Realties Ltd., [1968] S.C.R. 12, [1969] C.T.C. 418, 67 D.T.C. 5275, in which Judson, J., writing for the Court, stated at pages 15-16 (C.T.C. 420, D.T.C. 5276):

The application of this decision to the Canadian Income Tax Act is questionable. This decision implies that accounts can be left open until the profits resulting from a certain transaction have been ascertained and that accounts for a period during which a transaction took place can be reopened once the profits have been ascertained.

There can be no objection to this on the properly framed legislation, but the Canadian Income Tax Act makes no provision for doing this. For income tax purposes, accounts cannot be left open until the profits have been finally determined

My opinion is that the Canadian Income Tax Act requires that profits be taken into account or assessed in the year in which the amount is ascertained.

Accordingly, I am of the view that, insofar as GAAP and the recommendations in the CICA Handbook are concerned, the issue to be decided on the facts is whether a reasonable estimate could be made of contingent profit commissions as of the date of the financial statements, i.e., January 31, 1983. If so, the subsequently acquired information, i.e., the actual amounts received or amounts that were known and would be received after January 31, 1983 and before substantial completion of the examination of Stevenson & Hunt's accounts by Peat, Marwick Mitchell on March 15, 1983, should be taken into account to adjust the prior estimates.

To this point I have addressed the CICA Handbook and GAAP. I now turn to the relevant provisions of the Income Tax Act — subsection 9(1) and paragraph 12(1 )(b). Subsection 9(1) states:

9.(1) Subject to this Part, a taxpayer’s income for a taxation year from a business or property is his profit therefrom for the year.

Stevenson & Hunt's submitted, and I accept, that the calculation of income for income tax purposes under subsection 9(1) may be based on GAAP. In Friedberg v. Canada, [1992] 1 C.T.C. 1, 92 D.T.C. 6031 (F.C.A.), Linden, J.A. stated at page 7 (D.T.C. 6036):

Canadian law permits taxpayers to calculate their income in accordance with generally accepted accounting principles. The key issue, barring specific statutory direction, is whether "it is appropriate to the business” and whether it "tells the truth about the taxpayer's income.” In other words, the “opinion of accounting experts that is an accepted system and is appropriate to the taxpayer's business and most nearly accurately reflects his income position” may be adopted by the Court (see M.N.R. v. Publishers' Guild of Canada Ltd., [1957] C.T.C. 1, 57 D.T.C. 1017, at pages 16-17 (D.T.C. 1026), per Thorson, P.).

Thus, in the absence of specific statutory direction, the Court may have regard to GAAP and the recommendations in the CICA Handbook in computing income under subsection 9(1).

Paragraph 12(1)(b) states:

12.(1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:

(b) Any amount receivable by the taxpayer in respect of property sold or services rendered in the course of a business in the year, notwithstanding that the amount or any part thereof is not due until a subsequent year, unless the method adopted by the taxpayer for computing income from the business and accepted for the purpose of this Part does not require him to include any amount receivable in computing his income for a taxation year unless it has been received in the year, and for the purposes of this paragraph, an amount shall be deemed to have become receivable in respect of services rendered in the course of a business on the day that is the earlier of

(i) the day upon which the account in respect of services is rendered, and

(ii) the day upon which the account in respect of those services would have been rendered had there been no undue delay in rendering the account in respect of the services.

The relationship between subsection 9(1) and paragraph 12(1)(b) of the Income Tax Act was described in Maritime Telegraph and Telephone Co. v. Canada, [1992] 1 C.T.C. 264, 92 D.T.C. 6191 (F.C.A.) at page 267 (D.T.C. 6193), where MacGuigan, J.A. wrote:

In my opinion, subsection 12(1) operates so as to expand subsection 9(1 )'s ambit of inclusion. Obviously, at the boundary line of inclusion there may logically be some exclusions, but the joint thrust of section 9 and subsection 12(1) is to include, not exclude, and subsection 12(2) has the effect of ensuring, at the very least, that nothing clearly included in section 9 is henceforth excluded.

He continued at page 268 (D.T.C. 6194), where he stated:

From the time of the decision in Ken Steeves Sales Ltd. v. M.N.R., [1955] C.T.C. 47, 55 D.T.C. 1044 (Ex. Ct.), it has been clear that receivables are included in income under section 9. In Silverman v. M.N.R., [1960] C.T.C. 262, 60 D.T.C. 1212 at page 266 (D.T.C. 1214-15)(Ex. Ct.), Thurlow, J., as he then was,said:

[S]ince what is declared to be the income from a business is the profit therefrom for the year, the method adopted must be one which accurately reflects the result of the year’s operations, and where two different methods, either of which may be acceptable for business purposes, differ in their results, for income tax purposes the appropriate method is that which most accurately shows the profit from the year's operation.

In this light the factual finding by the trial judge that the earned method gives a truer picture of the taxpayer's income therefore assumes capital importance, and leads immediately to her conclusion.

The earned but unbilled revenues of the taxpayer at year end are brought into income pursuant to subsection 9(1) of the Act and there is no need to rely upon paragraph 12(1)(b) for this purpose.

I am in full agreement with her conclusion. The purpose of paragraph 12(1)(b) is to ensure that income from a business is computed on the accrual basis, not a cash basis, with certain specified exceptions. It applies in cases where profit is not otherwise required to be computed on the accrual basis. In the present case, it has no application, because of the trial judge's factual finding that the earned method was the appropriate accounting method for this taxpayer. The appellant’s earned revenues to the end of each taxation year were receivables in law, and therefore income for the ending year. . . .The receivables already being recognized as profit under subsection 9(1), subsection 12(2) requires that that status be maintained.

Thus, paragraph 12(1)(b) operates to require inclusion of amounts receivable even though such amounts may not be included pursuant to subsection 9(1) and GAAP.

Plaintiff's counsel took the position that neither subsection 9(1) nor paragraph 12(1)(b) required inclusion of contingent profit commissions in this case because, in accordance with GAAP and the CICA recommendations, they could not be calculated or even estimated at the end of fiscal year 1983. He conceded that if a reasonable estimate could have been made, it was open to be adjusted to take account of events or information subsequent to the financial year end. However, he submitted that no reasonable estimate could be made at the financial year end.

Specifically, in respect of paragraph 12(1)(b), plaintiff's counsel submitted that contingent profit commissions were not included as income in the 1983 fiscal year because the amounts were not ascertainable and therefore, not a receivable as contemplated in that paragraph. In support of this contention, counsel referred me to a number of authorities including Benaby, supra, where at page 16 (C.T.C 420, D.T.C. 5277) Judson, J. stated:

My opinion is that the Canadian Income Tax Act requires that profits be taken into account or assessed in the year in which the amount is ascertained.

Try v. Johnson, [1948] 1 All E.R. 532, is much closer to the point in issue here. . . .The judgment was that the right of frontager to compensation under the Ribbon Development Act contained so many elements of uncertainty both as to the right itself and the quantum that it could not be regarded as a trade receipt for the purpose of ascertaining the appropriate year of assessment until the amount was fixed either by an arbitration award or by agreement.

Counsel for the Minister argued that the method of accounting to be employed for computation of income under subsection 9(1) and paragraph 12(1)(b) is the one that most nearly accurately reflects a taxpayer's income position for the year. In his submission, treating contingent profit commissions on an accrual or receivable basis would achieve this objective. He also argued that it would be possible for Stevenson & Hunt to make a reasonable estimate of contingent profit commissions at the financial year end.

In his view, the contracts between Stevenson & Hunt and the insurance companies provided the formulas for determining contingent profit commissions and many of the components were known. Only the insurer's loss reserves would not be known. As to this item, counsel for the Minister relied on the evidence of one of Stevenson & Hunt's expert witnesses, Donald Smith, a consultant to insurance companies with 38 years' experience in the insurance industry, who said that loss reserves up to the end of the third quarter of the calendar year would be known to Stevenson & Hunt and that based on the figures for the first three quarters of the year at most a "swing" of 50 per cent could occur in the last quarter. In the Minister's counsel's view, that gave a set of parameters upon which to make an estimate.

In the alternative, if an accurate estimate of contingent profit commissions could not be made, counsel for the Minister submitted: “Where you can't make an accurate estimate, a reasonable estimate is zero" [page 170, transcript, September 11]. He then said at page 172:

Well, leaving aside for the present the issue of specific—excepting for the sake of argument the difficulties, one thing is very easy to do and acceptable according to Dr. Rosen, is make your estimate at zero.

And if in fact you don't get the amount in by the time you close off your books, you record nothing. So you don't make an adjustment.

Analysis

I have considered the evidence in this case and have concluded that in the absence of information acquired subsequent to the financial statement date, a reasonable estimate of contingent profit commissions could not be made by Stevenson & Hunt at the financial year end. I will deal with each of the components of the contingent profit commissions in turn.

1. Premiums earned: Stevenson & Hunt accounted for these on a written as opposed to an earned basis. For Stevenson & Hunt to convert premiums written to premiums earned would require a review of the contracts with each of the insurers that paid contingent profit commissions. Account would have to be taken of the periods covered by each premium and all other adjustments required by each insurer's contract would have to be made. Further, Stevenson & Hunt's fiscal year was not the same as that of the insurance companies. The evidence suggests to me that Stevenson & Hunt would have to keep a second set of books solely for the purpose of estimating contingent profit commissions. I have difficulty accepting that it is reasonable to expect an insurance broker to do this.

2. Administrative costs of each insurer would have to be calculated. While in a number of cases this was a simple percentage of premiums, in some cases e.g., United States Fidelity & Guaranty Co., this component was based on expenses computed by the insurer from its records. This could not be estimated by Stevenson & Hunt.

3. Loss reserves are determined solely by the insurers. While the evidence indicated that Stevenson & Hunt would have information about reserves as of the end of the third quarter of the calendar year, significant adjustment could take place in the fourth quarter. Counsel for the Minister referred to the evidence of Mr. Smith which indicated that a swing in reserves of up to 50 per cent might occur in the fourth quarter and suggested that this was a basis for estimation. However, the defendant's witness, Dr. Rosen, on the same point, testified

510 Q. If they were not told of specific amounts is it your view that they should estimate amounts or not?

A. No. I think in the formulas often the largest number is going to be the losses, and if they have no idea what the losses are, I don't see how they could estimate those.

In my opinion, a swing of 50 per cent in loss reserves presents such a wide spectrum that it does not provide a reasonable basis for estimation of such reserves. I would agree with Dr. Rosen that loss reserves could not be estimated.

I am therefore of the opinion that there was no practical way for Stevenson & Hunt to have reasonably estimated contingent profit commissions earned for the 1983 fiscal year by January 31, 1983. It was necessary for Stevenson & Hunt to rely on the actual information provided by insurance companies after the end of the fiscal year.

The Minister's counsel said that if contingent profit commissions could not be estimated accurately, that an estimate of zero should be used. In my opinion, zero is not a reasonable estimate. In deciding what the word "estimate" meant in the context of school taxation statute, Meredith, J. in Board of Education v. City of London (1901), 1 O.L.R. 284 (H.C.J.), at page 288 approved of the following:

There should be something to shew that proper inquiries and calculations have been made, from which they conclude that the sum named would be adequate for the purpose intended; something in short which has led them to the conclusion that the sum asked for in necessary and will be sufficient for the object.

Sections 1000.39 and 3400.18(a) of the CICA Handbook provide that unless a reasonable estimate can be made or when consideration is not determinable within reasonable limits, revenues would not be recognized. This suggests to me that an estimate is, at the least, an approximation of what is expected. To simply use zero because actual numbers are not known is not, in my view, an approximation of what is expected. I do not think a reasonable estimate can be zero unless zero is the approximation of what is expected. The evidence in this case does not support such a conclusion.

In support of his position that paragraph 12(1)(b) required the accrual method of accounting with respect to contingent profit commissions, counsel for the Minister relied on Maritime Telegraph, supra, and West Kootenay Power and Light Co. v. Canada, [1992] 1 C.T.C. 15, 92 D.T.C. 6032 (F.C.A.). However, at page 26 (D.T.C. 6030) of West Kootenay, MacGuigan, J.A. stated:

The only contrary argument is that the unbilled revenue was not received because, for practical purposes, it could not be known exactly. Viscount Simon in Commissioners of Inland Revenue v. Gardner Mountain & D'Anbrumenil, Ltd. (1947), 29 T.C. 69, at page 93 was willing to accept "an estimate of what the future remuneration will amount to" and even "a discounting of the amount to be paid in the future”. In my opinion the amount here is sufficiently ascertainable to be included as an amount receivable.

I can have no doubt that the appellant was absolutely entitled to payment for any electricity delivered, and in an amount reasonably estimated

I must therefore conclude that the appellant had a clear legal right to payment: the amounts in question were sufficiently ascertainable to be receivables even though not yet billed or due, and therefore had to be included in income for the year then ending, provided only they are not exempted by the "unless" clause in paragraph 12(1)(b).

In the case at bar, the issue is not whether amounts can be" known exactly”, it is whether indeed they could even be estimated. While estimates and, where necessary, discounting of amounts to be paid in the future appear to be acceptable practice, they must be predicated on an ability to approximate what is expected or knowledge of the amount to be discounted. Neither of these conditions is present in the case at bar.

I accept the principle that the accounting method chosen by the taxpayer for income tax purposes should most accurately reflect the profit of the company for the year in question. However, I do not think this contemplates mere guessing as to contingent profit commissions at the financial year end or keeping the books open passed [sic] the fiscal year end until contingent profit commissions are ascertained. The application of the principle has certain practical limitations and, in my opinion, those practical limitations preclude the use of the accrual method in the case at bar.

It may be worth adding one further observation. The Minister reassessed Stevenson & Hunt by including in the fiscal year 1983 the contingent profit commissions received or known as of March 15, 1984. However, he did not exclude contingent profit commissions received in the fiscal year 1983 in cash but earned in fiscal year 1982. Counsel for the Minister submitted there was no obligation on the Minister to do so. While there may be no obligation, if the basis for the Minister's to do so. While there may be no obligation, if the basis for the Minister's position in this case is that the accounting method adopted should most nearly accurately reflect the profit of the company for the year in question, consistency would dictate that the prior year's contingent profit commissions be rolled back. Indeed, the Minister's own witness, Dr. Rosen stated at page 318, transcript, September 1 :

HIS LORDSHIP: He said that if you do that then you have to go back retroactively, because otherwise you would end up having one year, like 19. . . fiscal year 1983, I guess it is, that would have both cash and accrual and contingent profit commissions in it and you would have to go back and make retroactive adjustments. Could you comment on that, please?

THE WITNESS: I would agree with this, because it is. . .what you are saying is if you now require the financial statements to recognize revenue and the asset, then you would try to roll it back to the previous years so that it is a consistent policy.

It seems to me that if I were to have accepted the Minister's position and included contingent profit commissions received or known up to March 15, 1984 in the fiscal year 1983 computations of income, I should also have excluded contingent profit commissions received or known up to the date of substantial completion of the accountant's investigation after the end of the 1982 fiscal year. As I understood the evidence, this may have resulted in a lower income figure for Stevenson & Hunt for the fiscal year 1983 than was originally reported.

I would allow the appeal with costs.

Appeal allowed.