A G Rodgers Real Estate Limited v. Minister of National Revenue, [1984] CTC 2051, 84 DTC 1034

Tremblay, TCJ:—This case was heard on June 1, 1983, at the City of London, Ontario.

l. The Point at Issue

The point at issue is whether the appellant is correct in contending that two commissions of $152,200 each were not receivable during the 1977 taxation year, but only in the 1979 taxation year.

The respondent’s contention is that the said commissions are due in 1979, but were receivable in 1977.

2. The Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his assessment or reassessment are also deemed to be correct. In the present case, the assumed facts are described in the reply to notice of appeal as follows:

4. In assessing the Appellant for its 1977 taxation year, the Respondent relied, inter alia, upon the following facts:

(a) the facts hereinbefore admitted;

(b) the Appellant and Ellesmere Estates Limited and Artswood Developments Limited were not dealing at an arm’s length;

(c) the agreements of purchase and sale, referred to in the “Ellesmere Commission Agreement” and the “Braeside Commission Agreement” were entered into and closed in accordance with the terms stipulated in the Commission agreements;

(d) commission in the amount of $152,200.00 was receivable by the Appellant under each of the “Ellesmere Commission Agreement” and the “Braeside Commission Agreement” in his 1977 taxation year.

3. The Facts

3.01 The facts are not really in dispute. They are detailed in the notice of appeal, and they read as follows:

I. A G Rodgers Real Estate Limited was incorporated under the laws of the Province of Ontario by Letters Patent bearing date the 21st day of September, 1964. By Certificate of Amalgamation that became effective on September 30, 1978, Marbenor Estates Limited, Dillabough Estates Limited and A G Rodgers Real Estate Limited were amalgamated pursuant to the provisions of the Ontario Business Corporations Act and continued under the name “A G Rodgers Real Estate Limited”.

2. The objects set forth in the Letters Patent of incorporation of A G Rodgers Real Estate Limited were to carry on generally the business of real estate brokers and to deal in mortgages as an agent only.

3. By agreement in writing dated as of the 31st day of March, 1977 Beaufort Estates Limited and Ellesmere Estates Limited (hereinafter jointly called the “Ellesmere Joint Venturers”) agreed to enter into a joint venture for the purpose of acquiring, develop- ing, financing, maintaining and selling certain real estate described therein situate in the City of London, in the Province of Ontario.

4. The appellant entered into a further agreement in writing dated the 31st day of March, 1977 with the Ellesmere Joint Venturers (the “Ellesmere Commission Agreement”) which contained the following provisions:

“(1) Provided the Joint Venturers are successful in entering into an Agreement of Purchase and Sale to a party other than the parties herein, prior to September 30, 1977 and the said Agreement closes in accordance with the terms thereof, the Joint Venturers agree to pay a commission of four per cent (4%) to Rodgers or his nominee which commission shall be paid upon the complete conclusion of the contract between Headway Corporation and Ellesmere Estates Limited and before any profits are paid to the Joint Venturers pursuant to contracts between Beaufort Estates Limited, Ellesmere Estates Limited, A H Graat Jr and Arthur G Rodgers.

(2) PROVIDED the Joint Venturers enter into the Agreement of Purchase and Sale to sell the lands described in Schedule “A” attached hereto, after the 30th day of September, 1977 to a buyer that Rodgers had been negotiating with to sell the said lands prior to September 30th, 1977, then the Joint Venturers agree to pay Rodgers or his nominee the commission of four per cent (4%) for arranging the said sale. PROVIDED Rodgers has submitted to the Joint Venturers in writing all perspective (sic) purchasers that he has negotiated with on or before the 30th day of September, 1977.”

5. By agreement in writing dated the 10th day of June, 1977 (the “Ellesmere Offer”) Headway Corporation Limited agreed to purchase the subject real estate which was accepted by the registered owner, Ellesmere Estates Limited, one of the Joint Venturers. This offer was subject to numerous conditions precedent and a breach of any one of such conditions would permit the Purchaser to terminate the agreement.

6. Among the conditions in the offer was a provision requiring the Ellesmere Joint Venturers to enter into a construction contract relating to the construction by them of a ten story apartment building on the subject lands containing one hundred thirtyseven (137) apartment units at a cost to the Purchaser of $3,476,200.

7. The said Headway Corporation and the said Ellesmere Estates Limited entered into a construction contract (the “Ellesmere Construction Contract”) dated the 14th day of June, 1977 which was completed in due course.

8. By agreement in writing dated as of the 21st day of April 1977 Artswood Developments Limited and Braeside Estates Limited (hereinafter jointly called the “Braeside Joint Venturers”) agreed to enter into a joint venture for the purpose of acquiring, developing, financing, maintaining and selling certain real estate described therein situate in the City of London, in the Province of Ontario.

9. The appellant entered into a further agreement in writing dated the 31st day of March, 1977 with the Braeside Joint Venturers (the “Braeside Commission Agreement”) which contained the following provisions:

“(1) Provided the Joint Venturers are successful in entering into an Agreement of Purchase and Sale to a party other than the parties herein, prior to September 30, 1977 and the said Agreement closes in accordance with the terms thereof, the Joint Venturers agree to pay a commission of four per cent (4%) to Rodgers or his nominee which commission shall be paid upon the complete conclusion of the contract between Headway Corporation and Artswood Developments Limited and before any profits are paid to the Joint Venturers pursuant to contracts between Braeside Estates Limited, Artswood Developments Limited, A H Graat Jr and Arthur G Rodgers.

(2) PROVIDED the Joint Venturers enter into the Agreement of Purchase and Sale to sell the lands described in Schedule “A” attached hereto after the 30th day of September, 1977 to a buyer that Rodgers had been negotiating with to sell the said lands prior to September 30th, 1977, then the Joint Venturers agree to pay Rodgers or his nominee the commission of four per cent (4%) for arranging the said sale. Provided Rodgers has submitted to the Joint Venturers in writing all perspective (sic) purchasers that he has negotiated with on or before the 30th day of September, 1977.”

10. Such numbered paragraph does not exist.

11. By a further agreement in writing dated the 10th day of June, 1977 (the “Braeside Offer”) Headway Corporation Limited agreed to purchase the further real estate which was accepted by the registered owner, Artswood Developments Limited, one of the Braeside Joint Venturers. This offer was substantially similar to the Ellesmere Offer and was subject to numerous conditions precedent and a breach of any one of such conditions would permit the Purchaser to terminate the agreement.

12. Among the conditions in the Braeside Offer was a provision requiring the Braeside Joint Venturers to enter into a construction contract relating to the construction by them of a ten storey apartment building on the subject lands purchased by Braeside containing one hundred thirty-seven (137) apartment units at a cost to the Purchaser of $3,476,200.

13. The said Headway Corporation and the said Artswood Developments Limited entered into a construction contract (the “Braeside Construction Contract”) dated the 27th day of June, 1977 which was substantially identical to the Ellesmere Construction Contract and which was completed in due course.

14. During the fiscal year of the Appellant ended September 30, 1979 both of the said apartment buildings were completed and sold and the Appellant received a commission on such sales in the total amount of $304,400 which it duly reported in its income tax return for its fiscal year ended September 30, 1979.

15. The Minister issued the Notice of Reassessment referred to above including the said sum of $304,400 in the income of the Appellant for its 1977 taxation year and the Appellant duly and timely filed a Notice of Objection to such inclusion, which Notice of Objection was disallowed by the Minister.

3.02 It was admitted by both parties that the four per cent commission was computed in each case of Ellesmere Estates Limited and Braeside Estates Limited on the total of the sale of the parcel of land ($378,800) and on the cost of the building ($3,805,000).

4. Law — Analysis

4.01 Law

The gist of the problem is the application of paragraph 12( l)(b) of the Income Tax Act:

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;

It is obvious that the last part of this provision (from “unless the method . . . year”) does not apply in the instant case because the appellant’s accounting system is not the cash basis system, but the accounts receivable basis system.

4.02 Analysis

4.02.1 The respondent’s contention on which is based the reassessment is that the commissions, even if they were due only in the 1979 taxation year, were receivable in the 1977 taxation year.

On the one hand, it was admitted indeed by the counsel for the respondent that if the appellant would have sued Ellesmere Joint Venturers in 1977 pursuant to the agreements (Exhibits A-l and A-2) the legal action would have been dis- missed by the Civil Court. It is also the Court’s opinion. Indeed the agreements are the law between the parties. To be collected, the commissions must be paid only upon the completion of the construction of the 10-storey apartment building containing 137 apartment units pursuant to paragraph I of Exhibit A-2 (it would be the same in an action against Braeside Joint Venturers because it was admitted that the agreements (A-3 and A-4) had exactly the same wording as Exhibits A-l and A-2). It is adduced evidence that the two 10-storey buildings were completed in late 1978, ie during the appellant’s 1979 taxation year. The financial year-end of the appellant is indeed September 30 of each year.

On the other hand, the counsel for the respondent contended that the form and the substance of the said paragraph 1 of Exhibit A-2 was to the effect that the amount was already receivable in 1977. Let us read the said paragraph:

1. PROVIDED the Joint Venturers are successful in entering into an Agreement of Purchase and Sale to a party other than the parties herein, prior to September 30th, 1977, and the said Agreement closes in accordance with the terms thereof, the Joint Venturers agree to pay a commission of four per cent (4%) to Rodgers or his nominee, which commission shall be paid upon the complete conclusion of the contract between Headway Corporation Limited and Ellesmere Estates Limited and before any profits are paid to the Joint Venturers pursuant to contracts between Beaufort Estates Limited, Ellesmere Estates Limited, A H Graat Junior and Arthur G Rodgers.

The counsel for the respondent contends that an account is receivable by one person when all of the required services, to be rendered by this person, are effectively and completely rendered. And this is the case here according to him. Prior to September 30, 1977, the agreement of purchase and sale were indeed entered into. The land was acquired and the acquisition of the land was the last requirement of the receivable.

4.02.2 In the Béton Provincial Ltée case concerning paragraph 12(l)(b) of the Act, the undersigned did make the following comments at paragraph 5.03.1:

5.03 Analysis

5.03.1 The problem in its essence is whether the amounts withheld by Hydro-Québec constitute amounts receivable within the meaning of section 12(1 )(b) of the Act as amended in 1974.

An amount receivable within the meaning of the said section must be included in income “notwithstanding that the amount or any part thereof is not due until a subsequent year”.

Having reviewed the case law and the authorities cited by the parties, the Board considers that an account is receivable:

(1) where only the term, that is the time allowed for payment, precludes its collection in the current year, and accordingly

(2) where its legality is not in question and/ or there are no conditions governing this payment.

This definition is supported, inter alia, by the principle set forth in Kenneth B S Robertson Ltd v MNR, [1944] CTC 75; 2 DTC 655, to the effect that income is taxable to the extent that the right to the income is absolute and cannot be subject to any contractual or other restriction as to its enjoyment, use and disposition. In amending section 12(l)(b) in 1974, it would appear that Parliament has limited this principle somewhat by including in income accounts for which payment is due in a subsequent year. Moreover, in MNR v John Coif ord Contracting Co Ltd, 60 DTC 1131, at 1135, the Exchequer Court refers to “A Dictionary for Accountants” (1957 edition) by Eric L Kohler, in which “receivable” is defined as ‘‘Collectible, whether or not due”.

In the instant case, the problem is whether the payment at the completion of the two 10-storey buildings in late 1978 is only a term or if it is a condition governing the payment, ie a suspensive condition. Since the drawing up of “corpus juris civilis” under the directorship of Justinian of the VIth Century, many authors have written about the definition of term and suspensive conditions. In substance, the term is the space of time during which the debtor cannot be required to make, and the creditor to receive, the payment of the debt. The term may be a future and certain event which defers the payment of the debt. The suspensive condition is the one which differs the obligation to pay until the condition is completed. A term differs from a suspensive condition inasmuch as it does not suspend the obligation, but only delays the execution of it. The obligation, on suspensive condition, shall exist only if the condition is realized.

At first glance, it seems in the instant case, that it is only a term because the appellant has completed all his work, he is only waiting for the completion of the construction by the builders to receive the payment — and the completion only delays the payment. If the commissions would be computed only on the cost of the piece of land, the Court would be inclined to agree with the respondent’s thesis. However, because the commissions are computed on the total of the cost of land plus the cost of the buildings, it seems to the Court that if there is a change in the cost of construction, there shall be a variation in the commissions. For different reasons indeed (decisions from municipal or provincial government, because of unforeseen circumstances, etc) it is possible for instance that in lieu of building 137 apartment units only 100 apartment units be built, and hence let us suppose the cost of $2,000,000. Therefore, the amount of commissions would vary. In other circumstances, the variation of the commissions could be increased. It is even reasonable to assume that there could be fluctation in cost in construction of this nature. The circumstances can even be such that no buildings be built and that no commissions be then paid on the cost of the buildings. Therefore, the Court is inclined to think that the requirement is a suspensive condition to determine the quantum of the commissions and therefore to make the payment. Can it be said that in 1977 after the sale of the land that the amount of commissions was already determined? (The rate of four per cent is only one element of the computation.)

The Court has a great doubt of it. If the quantum of the amount was not yet determined in 1977, how can it be said it was receivable?

4.02.3 The counsel for the respondent contended that the determination of the quantum is only a red herring. The Court does not share this opinion. The cost of the buildings indeed is a necessary element of the computation of the commissions. However, the Court thinks that there is a part of the commissions which can be considered as already determined in 1977. It is the four per cent on the value of the pieces of land. For this part of the commissions the Court agrees that the completion of the buildings is only a term and therefore that this part was receivable in 1977. If the buildings had not been built at all, the appellant should have had the right to claim the part of the commissions based on the piece of land. For the other part of the commissions, the one based on the cost of the buildings, however, the Court thinks the amount was not yet determined and therefore not receivable before the completion of the buildings in the fiscal year 1979. In fact, the payment of this part of the commissions computed on the cost of the buildings can be receivable only on its completion. The obligation to pay exists only if the condition is realized ie if the buildings are built. It is a suspensive condition — it is not a term.

5. Conclusion

The appeal is allowed in part and the matter referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed in part.