Tera Mining and Exploration Limited (Npl) v. Minister of National Revenue, [1983] CTC 2537, 83 DTC 497

St-Onge, TCJ [ORALLY]:—The appeal of the company Tera Mining and Exploration Limited (NPL), came before me on April 7, 1981, in the City of Edmonton, Alberta, and the issue is whether the appellant is entitled to use “the method regularly followed” by it in computing income for tax purposes and not the income for financial statement purposes.

At the hearing, both counsel agreed on the following facts:

STATEMENT OF FACTS

1. The Appellant is a body corporate incorporated under the laws of Alberta and during all times material to this Appeal the Appellant carried on the business of mining and producing minerals primarily in the Northwest Territories.

2. The Appellant’s mine commenced production in commercial quantities on March 1, 1971 with the result that the period within which it could earn income exempt from tax pursuant to Income Tax Application Rule 28(1) commenced at that time.

3. During all relevant periods the Appellant reflected in its financial statements interest expenses on the accrual basis. In computing income for tax purposes the accrued interest expenses were reversed and interest was deducted for income tax purposes only in the years in which it was actually paid.

4. The Minister of National Revenue objected to the treatment of interest expense for tax purposes by the Appellant on a basis different from that used for financial reporting purposes. As a result, reassessments were issued by the Minister of National Revenue for each of the fiscal periods of the Appellant ended August 31, 1973; December 31, 1973; December 31, 1974 and December 31, 1975.

5. The reassessments reflect exempt income for the period ended August 31, 1973; a loss for tax purposes for the period ended December 31, 1973; nil income for tax purposes for the period ended December 31, 1974 and taxable income of $100.00 for the period ended December 31, 1975.

6. In each of the relevant fiscal periods deductions were available to the Appellant in respect of Canadian exploration and development expenses and capital cost allowances.

7. The Appellant had requested that the Minister adjust the capital cost allowances and exploration and development expenses (within the limits set out in the Income Tax Act) such that the Appellant had taxable income of $1.00 in each of the relevant fiscal periods.

Counsel for the appellant argued the following (paragraphs 8 to 13 of the notice of appeal):

REASONS ADVANCED IN SUPPORT OF APPEAL

8. Subsection 20(1 )(c) of the Income Tax Act provides, in essence, that interest on borrowed money used for the purpose of earning income from a business or property is deductible in the year in which it is paid or payable “depending upon the method regularly followed by the taxpayer in computing his income”. The clause in quotations refers only to the treatment of interest expense and not to the method used in computing income for financial statement purposes. Further, “the method regularly followed” referred to in subsection 20(1 )(c) means the method used by a taxpayer in computing income for tax purposes and not income for financial statement purposes. There is substantial authority to the effect that the method of accounting used by a taxpayer for financial statement purposes is not determinative of the method of accounting which is appropriate for income tax purposes.

9. Subsection 12(1 )(c) of the Income Tax Act provides, in essence, that a taxpayer must bring into his income for tax purposes income received or receivable by him in the year “depending upon the method regularly followed by the taxpayer in computing his profit”. There is judicial authority to the effect that the provisions of subsection 12(1 )(c) permit the taxpayer to follow different methods of accounting for including different types of revenue in his income. By analogy, a similar degree of flexibility should be permitted with respect to the method of computing interest expense.

10. With respect to compound interest subsection 20(1 )(d) clearly permits the deduction of interest paid in the year and does not permit the deductibility of compound interest on an accrual basis regardless of the practice of the taxpayer in treating such interest expense for financial statement purposes. Clearly, therefore, the Income Tax Act contemplates and, in fact, requires the deduction of compound interest on a cash rather than accrual basis without regard to the practice of the taxpayer in accounting for financial statement purposes.

11. The Minister of National Revenue’s interpretations of the provisions of subsection 12(1 )(c) of the Act, as set forth in Interpretation Bulletin No IT-396, should be applied in interpreting subsection 20(1 )(c) due to the similarity in wording of the two subsections. If a taxpayer is permitted to account for interest income in a manner different from his method of accounting for other sources of income from a particular business then it should follow that a taxpayer is permitted to account for interest expense in a manner which differs from the method used for the computation of other expenses.

12. The Income Tax Act, like any other statute, must be interpreted to give effect to the manifest intention of Parliament. There is substantial judicial authority to the effect that profit for income tax purposes is to be determined in accordance with “generally accepted accounting principles”, except where otherwise expressly provided in the Income Tax Act. If Parliament had intended that interest expense be treated according to generally accepted accounting principles it would have been unnecessary to provide the exception “depending upon the method regularly followed by the taxpayer in computing his income”. Since the Appellant regularly computed its interest expense for tax purposes on a cash basis that method should not be disturbed.

13. In respect of the fiscal periods ended August 31, 1973, December 31,1973 and December 31, 1974 the Appellant relies upon subsections 152(1.1) through (1.3) of the Income Tax Act (Canada). At the request of the Appellant the Minister of National Revenue made a determination of the taxpayer’s non-capital loss for each of the relevant periods and the taxpayer hereby objects to and appeals from such determination by the Minister.

The Court is impressed by the argument of the counsel for the appellant. A taxpayer can arrange its affairs to pay less taxes as long as it is not contrary to the Income Tax Act.

Since the appellant regularly computed its interest expense for tax purposes on a cash basis and since there is no section in the Act to allow the Minister to change this “method regularly followed” by the appellant to compute its income, the Court does not see why this method should be disturbed by the Minister.

It is not because it is more profitable to the respondent to change the “appellant’s method regularly followed” that he should be allowed to do so.

For these reasons, the appeal is allowed.

Appeal allowed.