Stanley M. Wise v. Minister of National Revenue, [1989] 1 CTC 2409, 89 DTC 250

Teskey, T.C.J.:—These appeals concern the valuation of inventory. The facts are not really in dispute. What is in dispute is “the proper way to calculate the appellant's income" for the taxation years 1979, 1980 and 1981 under the Income Tax Act. Subsection 10(1) of the Act and section 1801 of the Income Tax Regulations made thereunder provide:

"10(1) For the purpose of computing income from a business, the property described in an inventory shall be valued at its cost to the taxpayer or its fair market value, whichever is lower, or in such other manner as may be permitted by regulation.

1801. Except as provided in section 1802, for the purpose of computing the income of a taxpayer from a business

(a) all the property described in all the inventories of the business may be valued at the cost to him; or

(b) all the property described in all the inventories of the business may be valued at the fair market value.

The appellant is a businessman who owns and operates a retail jewelry shop as a sole proprietor.

When it comes to the sale of jewelry, he is a "wheeler-dealer". This is not said in any derogatory sense, but only in a descriptive sense. He does not maintain a fixed “bottom line” sale price on his merchandise.

On all merchandise there is a small paper tag showing two prices. The one price is what he represents to his customers as what the article would sell for in a high priced top of the line jewelry store such as "Birks". The second price is his asking price. On the back of the ticket, in code, is the original cost of the item.

Exhibit A-1 is a trade-in ring showing two prices $1,100 and $600 and in code the cost at $30. The $1,100 figure is the "Birk's" figure, the $600 figure is his asking figure.

The appellant expects his customers to negotiate with him and he is quite prepared to sell all items at substantially less than the asking price. On new jewelry purchased from a manufacturer, he tries to negotiate a sale at twice the original purchase price. On used jewelry such as Exhibit A-1, he calculates what the ring would cost from a jewelry supplier and doubles the figure to arrive at what he hopes to be his bottom line. He would hope to sell Exhibit A-1 for $180. However, there is no "set bottom line” figure as it will change as circumstances change. What he attempts to do is make as much money as possible out of each transaction. In the appellant's own words:

The price is always negotiable.

As long as I am making a good mark-up, —I sell.

I am in the business to make money as much as possible.

There certainly is nothing wrong with any of these statements or motives, our society functions on the independent businessman making a profit.

The appellant's sales can be broken down into three types:

(1) Cash

(2) Straight Exchange

(3) Part cash and part exchange or trade-in.

In this case we are only dealing with those sales that are for part cash and part exchange or trade-in.

The jewelry that he takes in on exchange or as a trade-in also falls into three categories, namely:

(1) jewelry he takes into inventory and re-sells over the counter such as Exhibit A-1.

(2) jewelry he takes into inventory and keeps for the purpose of repairing items of jewelry. Exhibit A-4 is an example.

(3) jewelry that he describes as scrap jewelry or scrap gold. Exhibit A-3 is an example.

This case only deals with the jewelry that falls into category 3 above and referred to as scrap jewelry or scrap gold.

The scrap jewelry or gold are saved in separate containers and from time to time are refined into gold bars. The appellant did not take this "scrap gold” into inventory and/or income because he says it has no value. The respondent's position is that this "scrap gold” should be valued and shown in his year-end inventory and therefore the appellant did not bring into computation of his income all income received by him.

The type of sale that we are dealing with herein is where the appellant sells an article for more cash than he would have been prepared to accept plus a trade-in of jewelry, i.e. "scrap gold”. An example of this is Exhibit A-1. Since his theoretical bottom line is a selling price of $180 and if someone offered him $375 cash, he could accept the offer or if he was offered $375 cash plus a trade-in piece of "scrap gold", he again would accept the offer and take the "scrap gold" in at a NIL VALUE.

Thus the appellant is saying: "that since I sold the item with a cash portion for as much or more than my theoretical bottom line would have been, the trade-in is valued at NIL as the trade-in piece of jewelry is an extra bonus and of no cost to me".

It is obvious that if inventory is understated then the revenue is understated. Also the reverse is true that if inventory is overstated the revenue is overstated.

The appellant called Mr. Ira Abrams, a chartered accountant, who gave evidence as to his interpretation of "generally accepted accounting principles" and how in his opinion he would apply those rules to the facts set out within his report.

However, the facts he sets forth are not entirely accurate and this Court cannot accept his conclusions.

The type of transactions that we are dealing with herein are “barter transactions". They are no different than any new car dealer selling new and used cars and taking trade-ins. The accountant admitted he did not have any experience with any car dealers. The only difference I can conclude would be the sloppy and/or non-existent records the appellant keeps.

It is quite obvious the appellant knows the value to him of the so-called "scrap gold" at the time of the sale or exchange. The exchange of scrap jewelry, i.e. "scrap gold” is an integral part of the deal. For the appellant to say: Il know I am getting $70 worth of scrap gold in this sale, but because the purchaser is paying me an amount of cash equal or more than I actually would have sold the item for, the value of the scrap gold is NIL” is not acceptable.

I am satisfied that:

(1) "Asset" means anything of value that is owned.

(2) “Market” means the cost of replacing an asset on the open market.

(3) "Revenue" means assets received by an entity in return for services performed or goods sold.

“Gross Revenue" as defined by section 248 of the Income Tax Act is:

gross revenue—of a taxpayer for a taxation year, means the aggregate of

(a) all amounts received in the year or receivable in the year (depending on the method regularly followed by the taxpayer in computing his income) otherwise than as or on account of capital, and

(b) all amounts (other than amounts referred to in paragraph (a) included in computing the taxpayer's income from a business or property for the year by virtue of paragraph 12(1)(o) or subsection 12(3), (4) or (8) or section 12.2.

"Amount" as defined by the same section is:

amount.—means money, rights or things expressed in terms of the amount of money or the value in terms of money of the right or thing, except that the "amount" of any stock dividend paid by a corporation is

(a) in the case of a dividend described in subsection 112(2.1), (2.2) or (2.3), the greater of

(i) the amount of the increase in the paid-up capital of the corporation by virtue of the payment of the dividend, and

(ii) the fair market value of the share or shares paid as a stock dividend at the time of payment, and

(b) in any other case, the amount of the increase in the paid-up capital of the corporation by virtue of the payment of the dividend.

In a barter transaction, the general rule is that the transaction should be recorded as a figure representing the market value of the thing acquired. I am satisfied the transactions in question are barter or part barter transactions.

Gold bars are as marketable as government bonds, or stocks listed on a stock exchange. The accountant claims that gold should be treated differently. There is no valid reason to treat the gold any differently than a government bond or a traded stock such as Bell Canada.

The appellant knows each time he acquires "scrap gold” the approximate amount of refined gold he will derive therefrom, the costs to do so and the market value of gold that day. Gold prices are published daily and fluctuate the same as stock prices do.

By not bringing into inventory the market value of the "scrap gold”, the appellant is understating his income by the value thereof. It is obvious from the evidence that at inventory time a good portion of the "scrap gold” has already been converted into gold bars.

It was admitted that during the three years in question the market value of refined gold fluctuated between $200 and $600 an ounce.

The respondent in his reply to notice of appeal under the heading "Statement of facts" alleges that: "in each of the relevant taxation years, the lower cost of and fair market value of gold acquired by the appellant was not less than $120.00 an ounce."

I accept the appellant's testimony at face value and find that he is a hardworking businessman and that he truly felt that when he took in on a trade "scrap gold” that there was not any cost to him. If he had structured his deals to show a trade-in allowance, he could have established "a cost of the asset". Since he did not do so he has been unable to meet the onus to disprove the respondent's position.

Having accepted the respondent's evidence as to what he thought, although I dismiss his appeal in regards to the assessment of this gold at $120 an ounce, I am satisfied that penalties ought not to be imposed under the circumstances of this case.

Therefore, I allow this appeal in part by deleting the penalties and the interest thereon and refer the matter back to the Minister for reconsideration and reassessment.

Since the results herein are divided and also because the notice of appeal was not specific in appealing the penalties, there will be no order as to costs.

Appeal allowed in part.

T.C.C.