M Linett, Robert Karoly v. Minister of National Revenue, [1985] 2 CTC 2037, 85 DTC 416

Bonner, TCJ [Orally]:—Each appellant appeals from assessments of income tax for the 1979 and 1980 taxation years. During those years the appellants carried on a practice of law in partnership. The firm had an account with an organization known as Tradex. Tradex operated a barter exchange. The Tradex scheme was one under which member businesses agreed to accept something called Tradex credits from other members in exchange for goods or services. The credits were apparently expressed in dollar amounts. The appellants accepted such credits for professional services rendered, though not for disbursements.

In computing income from the partnership for the years in issue the appellants valued the Tradex credits which they received or earned on the basis that each one dollar credit had a value of 55 cents. In assessing tax the Minister acted on the basis of a finding or assumption of fact that the value of each such credit was one dollar.

It was common ground that the credits were not a form of account receivable but, rather, that they were received or accepted in full satisfaction of each relevant claim for fees for legal services rendered by the appellants. It was also common ground that in principle the credits ought to be brought into income at their market value or exchange value at the time of receipt. It was not suggested that the appellants were entitled to some sort of deduction equal to the difference between each one dollar Tradex credit and 55 cents in the form of a doubtful debt reserve. The evidence did not describe the nature of a Tradex credit with any degree of precision. The nature of the covenant was quite unclear. The identity of the covenantor was not disclosed.

It was necessary to the appellants’ complete success that they establish two things:

(a) that a Tradex credit, having a one dollar face amount, was worth less than that one dollar; and

(b) the extent to which the value was less than one dollar.

Some features of the Tradex system, at least as it operated in practice, which Mr. Karoly suggested tended to limit the value of Tradex credits were the following:

(1) The credits could only be exchanged for goods or services offered by Tradex members;

(2) Tradex permitted and itself participated in the creation of deficit positions, that is to say, it acted so as to debase the coinage by issuing credits for which value had not been given; and

(3) Members of the exchange became disenchanted and refused to accept credits, either to the extent agreed upon or at all.

This third factor was really, at least in part, a result of the second, according to the evidence. Trading under the system eventually died out. The Tradex organization collapsed completely and ceased to operate in June or July of 1983.

Evidence was given by Victoria Robbins who operated the trade desk at Tradex from May of 1980 to October of 1982. She stated that the system deteriorated gradually over the time while she was at Tradex.

Evidence was also given by Samuel Figdor, the appellants’ accountant. He was also the accountant for Tradex. He stated that in 1980 he sold 2,800 face value dollars of credits for $1,400 in cash. He said that he did so because he realized he could not spend the credits that he had, at least for things that he desired.

On the other hand, Mr Linett testified that he did not differentiate between Tradex members and non-members in fixing the amount of fees to be charged for services rendered. Mr Karoly was less clear in his answers on this topic, but he appears to have done likewise so far as I could tell from what he said. Further, Mr Linett was able to exchange credits for dental services for himself and his family. Although the dentist accepted payment of 100 per cent of his fees in Tradex credits, he does not appear to have inflated his fees to take account of the fact that he was accepting Tradex credits. Mr Linett testified that the 55 cent value was arrived at in conference with Mr Figdor. There was no evidence, however, as to what took place at the conference and what considerations went into the fixing of the 55 cent value which the appellants asserted.

I note that neither appellant appears to have been left with any Tradex credits in hand at the time the system collapsed. Although neither appellant testified directly on that point, Mr Figdor did state that he knew of no one who had surplus credits when the system ceased to operate and he must have known where the appellants stood since he was and is their accountant. Although it is market value at the time of receipt of the credits that is relevant and not value to the appellants, the system does appear to have continued to function to at least some degree for some time after the end of 1980, a year during which the appellants, as is evident from the issue in these appeals, accepted them.

The value of money as a medium of exchange rests, at least in part, on its broad general acceptance. On all of the evidence it is clear that the acceptability of Tradex credits was somewhat limited. It follows that, to some degree, those credits were worth less than their face value expressed in money. Thus, the appellants have succeeded in showing that the assessments were too high in that they were based on the premise that the trade credits were worth their face amount in money. However, the evidence which I have summarized does not disclose how much less they were worth. In the circumstances the only proper disposition is to allow the appeals and to refer the assessments back to the respndent for reconsideration and reassessment on the basis that in computing income the value of the Tradex credits was less than their face value in money.

Appeal allowed.