170635 Canada Ltée v. Minister of National Revenue, [1993] 1 CTC 2602, 93 DTC 1129

P.R. Dussault, T.C.C.J.:— This is an appeal from a reassessment for the appellant's 1985 taxation year. By that reassessment the Minister of National Revenue ("the Minister”) added to the appellant's income the value of its work in progress at the end of its 1984 taxation year and granted him a deduction as “reserve for work in progress" of an amount equal to the value of that work at the end of its 1985 taxation year. The appellant admitted that it was not eligible for the election mentioned in paragraph 34(1)(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"); however, it challenged the Minister's procedure and argued essentially that he could not add to its 1985 income amounts representing the value of work in progress done during year 1984 and earlier years, even though the value of that work in progress was in part realized in 1985.

Essentially, the facts are not in dispute. However, as the origin of some figures submitted was not clearly established counsel for the parties agreed at the Court's request to submit a joint table, setting out the figures and assumptions in support of their respective positions. This table is reproduced a bit further on.

The facts out of which the dispute arose are described in detail by counsel for the appellant in a document titled "appellant's grounds of appeal”. Paragraphs 1.1 to 1.15 of this document read as follows:

1.1 The appellant was incorporated on May 4, 1976.

1.2 From 1978 onward, the appellant operated a business consisting of practising the profession of a bankruptcy trustee following its purchase of the goodwill of Gingras Robitaille Marcoux et Associés Enr.

1.3 At some time before the 1985 taxation year, the appellant ceased accepting new cases and its business was limited to winding up cases it had already begun.

1.4 For the taxation years prior to 1985, the appellant reported its income on the basis that it was eligible for the special treatment mentioned in section 34 of the Income Tax Act.

1.5 The appellant's tax returns for the 1984 and 1985 taxation years were prepared by the accounting firm Poissant Richard Thorne Riddell (hereinafter referred to as "the accounting firm”).

1.6 In preparing the appellant's tax return for the taxation year ending August 31, 1984 the accounting firm, pursuant to section 34 of the Income Tax Act, deducted from the appellant's income the sum of $350,000 for work in progress at the end of the appellant's year.

1.7 The appellant's financial statements prepared by the accounting firm for the taxation year ending August 31, 1984 show that the appellant's work in progress at the end of that year was $370,553 (see exhibits contained in tabs 1 and 6 of the respondent's documents). There is no explanation to justify the discrepancy between this amount and the $350,000 for which there was an adjustment in the appellant's tax return.

1.8 In preparing the appellant's tax return for the taxation year ending August 31, 1985 the accounting firm, pursuant to section 34 of the Income Tax Act, added the sum of $350,000 to the appellant's income for the appellant's work in progress at the end of the preceding year and deducted the sum of $198,005 from the appellant's income for work in progress at the end of the appellant's year.

1.9 On November 26, 1987 Revenue Canada, Taxation issued a notice of reassessment to the appellant for its fiscal year ending August 31, 1985. The attachment to the said notice of reassessment mentioned an adjustment to the income of a business actively operated, that is a refusal to deduct the work in progress reserve of $198,005, as the appellant's revised net taxable income was set at $369,245 (see exhibit contained in tab 3 of the respondent's documents).

1.10 On December 18, 1987, the appellant duly filed a notice of objection to the notice of reassessment (see exhibit contained in tab 4 of the respondent's documents). The said notice of objection contained, inter alia, the following paragraph:

Assuming the Department's position is correct, the net income of the company has been improperly increased by the inclusion of $350,000, representing the amount of work in progress at the end of the fiscal year ending August 31, 1984. This amount should not have been added to the company's income for its fiscal year ending August 31, 1985.

1.11 On May 16, 1988 Mr. Gilles Guy, director of the Québec district tax office of Revenue Canada, Taxation, sent the appellant a letter which was a determination made pursuant to subsection 10(3) of the Income Tax Act regarding inventories of the appellant's work in progress at the start of the 1985 taxation year. At that time these inventories were valued at zero in the said determination.

1.12 No notice of determination made pursuant to subsection 10(3) of the Income Tax Act regarding inventories of the appellant's work in progress at the start of the 1985 taxation year was sent to the appellant before the reassessment notice dated November 26, 1987 was issued.

1.13 When the appellant filed a notice of objection the Appeals Division of Revenue Canada, Taxation accepted the notice of objection in part. A notice of reassessment was accordingly issued to the appellant on March 2, 1989 (see exhibit contained in tab 4 of the respondent's documents). Appendix T7W-C attached to the said notice of reassessment mentioned an adjustment to the income of a business actively operated, namely the deduction of an amount of $198,005 for “work in progress reserve", the appellant’s revised taxable income being set at $171,240.

1.14 In response to a request to this effect by the appellant's representative, Mr. Henri Laferriére, appeals chief for the Québec district office of Revenue Canada, Taxation, on April 14, 1989 sent the appellant's representative an extract from the memorandum issued by head office in this matter, a copy of which was included in the record of the Court (hereinafter referred to as "the memorandum").

1.15 In response to a request to this effect by counsel for the appellant, the public affairs section of Revenue Canada, Taxation on February 13, 1991 sent counsel for the appellant a copy of the TOM(13)(10)(2)(3) referred to by the memorandum. A copy of the TOM was entered in the record of the Court (hereinafter referred to as “the TOM").

[Translation.]

The reconciliation of figures is contained in the table filed by counsel for the parties, in the following form:

Amended fiscal reconciliation (Note 4)

		Complete accrual accounting
	Section 34	W.I.P. at start	W.I.P. at start
	I.T.A.	having cost equal = $0	Cost = book
	Note 1	Note 2	Note 3
Income	$340,578	$340,578	$340,578
Cost of cases
W.I.P. at start of year	$370,553	$370,553	$370,553
Additions	$ 13,225	$ 13,225	$ 13,225
	$383,778	$383,778	$383,778
W.I.P. at year-end	$198,005	$198,005	$198,005
	$185,773	$185,773	$185,773
"Fees" from financial
statements	$154,805	$154,805	$154,805
Charges to financial
statements	$326,445	$326,445	$326,445
Net accounting loss in
financial statements of
31-08-1985	($171,640)	($171,640)	($171,640)
Adjustment re: bonus	$175 ,000	$175,000	$175 ,000
Adjustment accounting net
income	$ 3,360	$ 3,360	$ 3,360
TAX ADJUSTMENTS
Inventories at end of 1984
from T2S (1)	$350,000	$350,000	n/a
Inventories at end of 1985	($198,000)	n/a	n/a
Other adjustments not
connected with case	$ 15,885	$ 15,885	$ 15,885
Taxable income	$171,240	$369,245	$ 19,245

Note 1: The income was calculated by the appellant in its tax return by applying the

provisions of section 34 of the Income Tax Act. Inventory excluded at the end of the preceding taxation year was added to income and inventory for work in progress at the end of the fiscal year deducted. The reassessment dated March 2, 1989 was based on similar taxable income obtained by deducting a "work in progress reserve".

Note 2: Taxable income established by the method used as the basis for issuing the

reassessment of November 2, 1987 and out of which the case arose. This method assumes that work in progress at the start of the fiscal year has a tax cost equal to $0 and value of $198,005 at the close. Using this method, the amount of the reserve claimed in 1984 is added to the appellant's income and the Minister revises work in progress assuming that he can do so in accordance with the provisions of subsection 10(3) of the Income Tax Act.

Note 3: Taxable income established by the method proposed by the appellant in its

notice of objection. This method assumes that work in progress at the start of the fiscal year has a tax cost equal to its book cost and a value of $198,005 at the close.

Note 4: Counsel agreed to submit a joint table indicating the differences between the

methods suggested. Counsel agreed that the appellant's accrued net income was determined by reference to the decrease in the appellant's work in progress during the year.

For the purposes of the appeal the parties agreed that the value of the appellant's work in progress at the close of its 1984 taxation year was $350,000.

Counsel for the appellant argued essentially that the reassessment, notice of which is dated March 2, 1989, is wrong for the reason that the Minister improperly added the sum of $151,995 to its 1985 income. In reality, this sum is the difference between the value of the appellant's work in progress at the close of its 1984 taxation year, namely, $350,000, and that of its work at the end of its 1985 taxation year, namely, $198,000, or if you will, the part of the work in progress from earlier years realized in 1985.

The gist of counsel's argument may be summarized in the following propositions:

— by consistently applying generally recognized accounting principles, the appellant has always recorded the realization of its accrued net income on the basis of the degree of progress in its work, that is the extent to which work has been completed on cases;

— this procedure implies that the subsequent recovery of work in progress, or its realization, does not result in income except to the extent that the amount realized differs from the amount previously recorded as income for work in progress;

— by calculating its income for accounting purposes in this way, the appellant has always established the value of its inventory of work in progress in the same way and using the same method at the start and the close of each fiscal year and from one year to another;

— for tax purposes the appellant, by making the election provided for in section 34 of the Act, annually adjusted its accrued net income by excluding the value of work in progress at the end of the year from it and adding to it the value of work in progress excluded at the end of the preceding year, so that it paid tax on the value of the work in progress realized during the year; the adjustment between the accrued net income and income for tax purposes was made on appendix T2S(1) attached to its tax return;

— the appellant continued to proceed in the same way for 1983, 1984, 1985 and even 1986, believing in good faith that it could still benefit from the provisions of section 34 of the Act for those years;

— the appellant admits it does not practise the profession of an accountant and recognizes that in view of the legislative changes introduced after 1983 it is no longer eligible to make the election provided for by section 34 of the Act, so that it ought not to have excluded from its income for tax purposes the value of its work in progress from that year;

— the appellant argues that its accumulated work in progress at the end of 1982 should have been added to its income, half in 1983 and half in 1984, pursuant to subsection 10(6) of the Act, added by S.C. 1980-81-82-83, c. 140, subsection 3(3);

— the appellant further admitted that, insofar as it could not benefit from the section 34 election for 1983 and subsequent years, its opening and closing inventories were not valued in accordance with subsection 10(1) of the Act; thus, for the 1985 taxation year counsel for the appellant stated the following:

For accounting purposes its opening inventory of work in progress was valued at $370,553 and its closing inventory at $198,005. For tax purposes its opening inven- tory of work in progress was valued at $20,553 (that is, $370,553 less the sum of $350,000 deducted at the end of 1984) and its closing inventory was valued at nil. [1]

— the appellant argued that in making his reassessment the respondent corrected the value of the appellant’s work in progress at the end of 1985, putting it at $198,005 to make it consistent with subsection 10(1) of the Act and generally recognized accounting principles;

— however, the appellant submitted that the Minister had a “duty and obligation” also to correct the value of its opening inventory and make it $370,553, in accordance with section 9 and subsection 10(1) of the Act as well as generally recognized accounting principles; the Minister could not rely on the application of subsection 10(3) of the Act, since an amendment to the closing inventory without amending the opening inventory mentioned in that subsection must be made before the assessment, and this was not done in the instant case;

— the appellant accordingly maintained that the result of the Minister amending the 1985 closing inventory was that the amount of its taxable income is the same as the amount reported, but that this improperly made amendment is only a“ manipulation which has no legal basis”; although the result is the same as that initially claimed by the appellant in its tax return pursuant to section 34 of the Act, the Minister arrived at it by refusing to apply that provision and failing to use the power conferred on him by subsection 10(3) of the Act at the proper time.

In essence, the appellant argued that subsection 10(6) of the Act should have been applied to determine his income for the 1983 and 1984 taxation years and that the Minister cannot remedy the fact that he did not assess under that provision by trying to do so partially in 1985 by an unauthorized amendment to the value of its work in progress at the end of the year, the result of which is to include an additional $151,995 in its income for that year.

Counsel for the appellant based its arguments principally on the following decisions:

— Rudolph Furniture Ltd. v. The Queen, [1982] C.T.C. 211, 82 D.T.C. 6196 (F.C.T.D.);

— Taylor v. M.N.R., [1990] 2 C.T.C. 2040, 90 D.T.C. 1574 (T.C.C.);

— Dominion Taxicab Ass’n. v. M.N.R., [1954] S.C.R. 82, [1954] C.T.C. 34, 54 D.T.C. 1020.

Counsel for the respondent's position is that the Minister was justified in including the sum of $151,995 in the appellant's 1985 income, as representing work in progress from previous years realized in 1985 and calculated as the difference between work in progress carried over from 1984, namely, $350,000, and work in progress at the close of 1985, namely, $198,005.

The arguments of counsel for the respondent may be summarized in the following propositions:

— having made the election pursuant to section 34 of the Act, the appellant always reported its income for tax purposes based on the time it was received or realized;

— the appellant continued to report its income by the same method for 1983, 1984, 1985 and 1986, though it had no longer been eligible for the election under section 34 since 1983 as the result of amendments to that provision limiting its application to six (6) specified classes;

— for 1983 and subsequent years, the appellant should have reported its income by the complete accrual accounting method, that is without excluding the value of its work in progress at the end of the year;

— a transitional provision, subsection 10(6) of the Act, provided that a professional should spread over two years, namely 1983 and 1984, the taxation on his work in progress accumulated at the end of 1982 when an election was applicable to him under section 34 for 1982; this provision was not applied either by the appellant in its tax return for these years nor by the Minister in making assessments for these years, so that the appellant’s work in progress at the end of 1982 was only taxed in part as it was realized, leaving a balance of work in progress carried over at the end of 1984 amounting to $350,000;

— for 1985 the appellant should have reported its income by the accrual method of accounting, adding the value of its work in progress at the end of the year, since according to generally recognized accounting principles this is the method which best reflects the pairing of income and expenditure;

— however, the appellant “also had to demonstrate continuity in its selection of an accounting method to report in 1985 income realized during that year and not reported in earlier taxation years"; in the submission of counsel, "There is no legal provision or case law expressly stating that the Minister must, when he becomes aware of it, revise a taxpayer's income using the accrual method and not taxing income realized during the year and carried over from earlier years. In the year in which the method is changed, an adjustment must be made to adequately determine the"benefit received" from the operation of a business"; [2]

— under the principle of continuity and to give an appearance of reality to its income, an appellant which deducts its work at the end of 1984 must therefore include it in 1985 even if it has to change its accounting method. For the year of change, however, the appellant is not entitled to any deduction for its work in progress at the end of the year.

In short, in the submission of counsel for the respondent "the best method is to apply the accrual and current methods, namely, accrual from 1985 and current to report income carried over from 1984". [3] He went on to say that "th is is what the Department could have done, but not necessarily what was done". [4] I will take the liberty here of pointing out that this is exactly what was done in the assessment at issue in the instant appeal, since a deduction of $198,005 was granted for 1985 as a" reserve for work in progress”.

Counsel for the respondent then submitted the following:

In assessing the appellant for the 1985 taxation year, the Minister of National Revenue only used the following income:

By proceeding in this way the Department sought to tax the appellant on its work in progress carried over from 1984 in two parts, and not to tax it on the full amount of $350,000 in 1985 even though it could have done so. It could have assessed the appellant as follows:

Year 1985
Income received	$340,578
Less adjustments	$ 33,778
	$306,800
Less: operating expenses	$151,445
Plus: other adjustments (MAIC)	$ 15,885
Taxable income	$171,240

Year 1985
Income received	$340,578
Less adjustments	$ 33,778
Plus: year-end WIP	$198,005
	$504,805
Less: operating expenses	$151,445
Plus: other adjustments (MAIC)	$ 15,885
Taxable income	$369,245

This result is arrived at by applying subsection 9(1) without clearly indicating that account is taken of the appellant's inventory property, as intended by section

10. Section 10 does not itself authorize the deduction of inventory property but only serves to complement subsection 9(1), to determine the income earned by a taxpayer in a given year. [5]

Counsel for the respondent considered that the appellant's work in progress cannot in principle be inventory property, since it was excluded in calculating income. Accordingly, in his submission "when a taxpayer goes from a modified accrual accounting method to a complete accrual accounting method, its work in progress at the start of the year will be given a nil valuation since the taxpayer had no inventory property at the end of the last year in which he used the modified accrual accounting method". [6] Counsel argued that this is exactly what happened in 1982 and that, had it not been for the transitional rule 10(6) of the Act, all the work in progress at the end of 1982 would have been taxed in 1983 rather than being spread over two years, namely 1983 and 1984, since work in progress carried over from 1982 had no value at the start of 1983. The application of these principles to the appellant's situation and the way in which the respondent made the assessment are then commented on as follows:

In the instant case, the value of the appellant's work in progress for tax purposes at the end of its 1984 taxation year, and so at the start of 1985, exceptionally amounted to $20,553. This situation resulted from the fact that it had work in progress of $370,553 and only received from its income for 1984 the amount of $350,000. The difference of $20,553 is inventory property for the appellant on which it in fact paid tax.

Further, at paragraph 47 of its submission, the appellant admitted that for tax purposes the value of its opening inventory was $20,553. Additionally, it estimated its work in progress at the end of its 1985 year at $198,005, which is not disputed. In this situation the Department only had to assess the appellant in accordance with this information and was not in any way required to make the valuation mentioned in subsection 10(3). The Department should have taxed the appellant on the following income:

		1985 taxation year
	Income	$340,578
Deduct:	Cost of work
	WIP at start	$ 20,553
	Less WIP at close	$198,005
		($177,452)
		$518,030
Less:	Adjustments for WIP	$ 13,225
		$504,805
Deduct:	Operating expenses	$151,445
		$353,360
ldem, page 13.
ldem, page 15.

Add:	Adjustments re: MAIC	$ 15,885
		$369,245

Though the Department did not have to revise the valuation of the appellant's work in progress it should have taxed the latter in 1985 on income of $369,245, which in fact was initially done. The Department subsequently granted the appellant a deduction of $198,005 and did not tax it in 1985 on its non-current work in progress, but finally did so in 1986. By proceeding in this manner the Department taxed the appellant as if its year-end work in progress for the purposes of section 10 had no value since it was not included in the calculation of the appellant's income.

In reassessing the appellant the Department then taxed it on net income of $171,240, equivalent to income arrived at as follows:

			1985 taxation year
	income		$340,578
Deduct:	Cost of work
	WIP at start	$20,553
	Less WIP at close	$	0
			$ 20,553
			$320,025
Less:	Adjustments for WIP		$ 13,225
			$306,800
Deduct:	Operating expenses		$151,445
			$155,355
Add:	Adjustments re: MAIC		$ 15,885
			$171,240

In the instant case this Honourable Court cannot revise downward the tax value of work in progress at the start of 1985 on the ground that the said work in progress totalling $350,000 was not included in the appellant's income in 1984 and could not then be inventory property of the latter.

The point at issue is actually whether the Minister of National Revenue should have taxed the appellant on income under $171,240, regardless of the reasoning adopted in taxing the latter. What is at issue is the amount of income taxed, or the amount of tax claimed. In the instant case the Department could have assessed the appellant on income over $171,240, but even though it did not do so it was fully justified in assessing the appellant on income up to at least $171,240.

Further, subsection 10(2) clearly determines that work in progress at the commencement of a year is valued at the same amount as the amount at which it was valued at the end of the immediately preceding year for the purposes of computing income for that preceding year. In calculating its income for 1984 the appellant, wrongly or rightly, valued the said property at $20,553 and, in accordance with the provisions of subsection 10(2), it cannot now claim to place any other value upon it.

Finally, if the old subsection 10(6), now repealed, was applied to the appellant's situation the latter would have been taxed on its work in progress in 1984 in two parts, half in 1985 and the other half in 1986. By proceeding as he did the Minister of National Revenue taxed the appellant in 1985 on $151,995, and the balance of $198,005 was taxed in 1986. [7]

[Translation.]

In support of the arguments counsel for the respondent referred to the following decisions:

Woodward Stores Ltd. v. The Queen, [1991] 1 C.T.C. 233, 91 D.T.C. 5090 (F.C.T.D.);

— Friesen v. The Queen, [1992] 1 C.T.C. 296, 92 D.T.C. 6248 (F.C.T.D.); — Mattabi Mines Ltd. v. M.N.R., [1992] 2 C.T.C. 8, 92 D.T.C. 6252 (F.C.A.);

— West Kootenay Power and Light Co. v. Canada, [1992] 1 C.T.C. 15, 92 D.T.C. 6023 (F.C.A.);

— Riendeau v. M.N.R., [1991] 2 C.T.C. 64, 91 D.T.C. 5416 (F.C.A.)

It should also be noted that an additional or subsidiary argument made initially by counsel for the respondent was that generally recognized accounting principles, and in particular the principle of continuity, as well as the Act, require that the taxpayer include in his income for a year any reserve claimed at the end of the preceding taxation year, even if it was not validly claimed. Accordingly, on this argument the appellant should have included in its 1985 income the $350,000" reserve" claimed at the end of its 1984 taxation year. Here again, the conclusion is that the appellant could have been taxed on a larger amount in 1985, since it could not claim a "reserve" for the year-end work in progress as it was no longer eligible for the election under section 34 of the Act. Counsel for the respondent accordingly argued that a taxpayer who changes his accounting method must bear the consequences of doing so. The following decisions were cited in support of this argument:

— Weinstein v. M.N.R., [1968] C.T.C. 357, 68 D.T.C. 5232 (Exch. Ct.);

— No. 320 v. M.N.R. (1956), 14 Tax A.B.C. 334, 56 D.T.C. 100;

— Cyprus Anvil Mining Corp. v. The Queen, [1990] 1 C.T.C. 153, 90 D.T.C. 6063 (F.C.A.) ;

— The Queen v. Terra Mining & Exploration Ltd. (N.P.L.), [1984] C.T.C. 176, 84 D.T.C. 6185 (F.C.T.D.);

— Dominion of Canada General Insurance Co. v. The Queen, [1986] 1 C.T.C. 423, 86 D.T.C. 6154 (F.C.A.);

— Sears Canada Inc. v. The Queen, [1986] 2 C.T.C. 80, 86 D.T.C. 6304 (F.C.T.D.);

— Sears Canada Inc. v. The Queen, [1989] 1 C.T.C. 127, 89 D.T.C. 5039 (F.C.A.);

— Wilchar Construction Ltd. v. The Queen, [1981] C.T.C. 415, 81 D.T.C. 5318 (F.C.A.).

The only point to be decided is thus whether the respondent was justified to assess the appellant for 1985 by including in its income part of the work in progress done or produced during preceding taxation years, even prior to 1982, and realized in 1985. Let us recall the figures. At the end of its 1984 taxation year the appellant excluded from its income an amount of $350,000, which was its work in progress at the end of the year. Similarly, at the end of its 1985 year the appellant excluded an amount of $198,005, which was the value of its year-end work in progress. As we know, the appellant, and this is not in any way in dispute, always calculated its income in the same way for accounting purposes, namely on a work in advance basis and thus including its work in progress. From a tax standpoint, the appellant also always used the same procedure, that is excluding its year-end work in progress from its income, making the election provided for by section 34 of the Act and so only reporting its income earned in each year. The heart of the problem lies in the fact that since 1983 the appellant has no longer been entitled to use this procedure, as the result of amendments made to the Act, but that it has in good faith continued to do so.

Two changes relevant to this case occurred after 1983. First, the section 34 election was limited to only six classes of professionals. The appellant does not fall in those classes and that fact was admitted. Accordingly, the appellant had to alter its procedure for reporting income for purposes of the Act as of its 1983 taxation year, since it was no longer eligible for the election mentioned in paragraph 34(1)(a) of the Act. Accordingly in 1983 the appellant was required, subject to the provisions of subsection 10(6) of the Act which I will deal with below, to report its income using the complete accrual accounting method, that is by including in its income for tax purposes the value of any increase in its work in progress for the year. It goes without saying that at that point the time at which the work was completed ceased to be the test for recognizing the appellant's income for tax purposes. In the context of this specific legislative change, it is hard to see what relevance there is in discussing the election of an accounting method and the features it must have, on generally recognized accounting principles, in order to adequately reflect the profit received from the taxpayer's business.

Subject to the application of the transitional rule in subsection 10(6), the way in which the appellant has been required to report its income and be assessed under the Act since 1983 authorized no deduction for its work in progress not yet completed at the end of a year. The appellant was subject to the general rules applicable to the calculation of income from a business, in particular those in paragraph 12(1)(b). As it could no longer make the election under section 34, it was required each year to determine its income by generally recognized accounting principles and ensure, both for accounting and tax purposes, that it included work done during a year and not yet completed at the end of the year. This simple process is the opposite of what was done by the appellant for tax purposes, since it thought it could still benefit from the election pursuant to section 34 of the Act. It is also contrary to what the Minister did, where, while denying the appellant the right to exclude its work in progress under that provision, he nevertheless approved a" reserve for work in progress" which led to the same result. In either case the procedure was contrary to the Act and the Minister cannot in a given year apply an alternative method not in keeping with the Act to correct his failure to assess in earlier years by the method specified in the Act. The process is purely fictitious and cannot be likened to the system governing reserves established by sections 18 and 20 of the Act. Moreover, it is hardly necessary to recall the general limitation in this regard under paragraph 18(1)(e) of the Act.

Though this does not alter the conclusion regarding the appellant's 1985 taxation year, it seems important to make certain comments about a second amendment to the Act in order to explain the system created after 1983 for calculating income from a business which is a profession and its effect when the person operating that business could no longer make use of the election under section 34 of the Act, which is exactly the appellant's case.

Thus, at the same time as the amendment to section 34 of the Act, applicable for the 1983 and following taxation years, subsection 10(6) was added as a transitional rule in effect for the 1983 taxation year only, but the consequences of which also had repercussions on the 1984 taxation year. [8] That subsection 10(6) of the Act provided the following:

For the purpose of computing the income of a taxpayer from a business that is a profession, the amount of the cost of his work in progress, and the amount of the fair market value thereof shall be deemed to be

(a) at the end of his 1982 taxation year, nil, and

(b) at the end of his 1983 taxation year, /i of the amount thereof determined without reference to this paragraph,

if an election under paragraph 34(1)(d) is applicable in respect of the business for his 1982 taxation year.

In order to understand the effect of this transitional provision one must recall subsection 10(2) of the Act, which reads:

Notwithstanding subsection (1), for the purpose of computing income for a taxation year from a business, the property described in an inventory at the commencement of the year shall be valued at the same amount as the amount at which it was valued at the end of the immediately preceding year for the purpose of computing income for that preceding year.

Further, it should be noted that for the 1983 and following taxation years, paragraph 10(5)(a) provides that work in progress of a business which is a profession is inventory.

In this context, the effect of subsection 10(6) of the Act was to require the inclusion of only half of the value of work in progress at the end of 1982 in income for the 1983 taxation year, since the cost and value of this work was nil at the start of the 1983 taxation year, that is the deemed amount at the end of the 1982 taxation year, and half the amount determined otherwise at the end of the 1983 taxation year. For the 1984 taxation year the cost and value of work in progress at the start of the year was the same as that determined for the end of the 1983 taxation year and its cost and value at the end of that year was determined as usual, so that work in progress existing at the end of the 1982 taxation year and not yet subject to tax had to be included in income for the 1984 taxation year.

In reality, this procedure confirms the approach adopted by Parliament in calculating income for a business on which a taxpayer could no longer take advantage of the section 34 election after his 1983 taxation year, that is use of the complete accrual accounting method. It can be seen that work in progress existing at the end of the 1982 taxation year had to be included in the income of a taxpayer who had till then excluded it, part in the 1983 taxation year and part in the 1984 taxation year, regardless of when it was realized. In view of this clear provision in the Act, the Minister had no authority whatever to assess by any other method, including that based on completion of the work, as he did for the appellant in the 1983, 1984 and especially the 1985 taxation years, the last being the only one at issue here. He cannot now attempt to apply a transitional legislative provision to other years than those mentioned therein, and in particular to 1985, by attempting to include in income for that year items which ought to have been taxed during preceding years.

Having said that, it does not appear necessary to discuss the consequences which may have resulted from application of subsection 10(3) of the Act by the Minister. It is admitted that that provision was not used at the proper time.

The Minister has no power to assess a taxpayer in the year of his choice when he did not do so for the year in which he was required to do it under specific legislative rules. Allowing him to do this would be to give him a legislative power or discretion which he does not have. If he has failed to make an assessment in accordance with the provisions of the Act and it is now too late to do so under the rules laid down in subsection 152(4) of the Act, he cannot attempt to correct this error by making method changes which the Act does not authorize. Thus, the work in progress in the amount of $350,000 at the end of the appellant's 1984 taxation year, done during prior years, including year 1982, should have been taxed in 1983 and in 1984. It may not be added, even in part, to the appellant's income for its 1985 taxation year.

The appeal is therefore allowed with costs, and the assessment is referred back to the respondent for reconsideration and reassessment on the basis that the appellant's taxable income for its 1985 taxation year amounts to $19,245.

Appeal allowed.