Her Majesty the Queen v. Wilchar Construction Limited, [1979] CTC 117, 79 DTC 5086

Mahoney, J:—At the opening of the trial, the parties filed minutes of settlement which disposed of all but one of the issues raised in the pleadings.

The defendant is, inter alia, a building contractor. It seeks to exclude from its taxable income for the year ended July 31, 1968, an amount of $227,171. That is the amount referred to in paragraph 3 of the statement of agreed facts. The full text of the statement of agreed facts follows:

1. The parties agree that as of July 31, 1968, there was a total of $452,123 of accounts receivable of the appellant for which architect’s certificates had to be issued before the Company was entitled to receive payment and for which such certificates had not been issued on or before July 31, 1968.

2. The parties further agree that the appellant overstated certain accounts payable as of July 31, 1968 in a total amount of $57,426. In addition, the appellant incorrectly treated as part of its costs incurred in 1968 a total of $167,526 in respect of work done for it by subcontractors for which architect’s certificates had to be issued before the appellant was liable to make payment and for which such certificates had not been issued on or before July 31, 1968.

3. The net effect of these adjustments, if allowed, is to reduce the appellant’s 1968 income by $227,171, which totally eliminates its taxable income for 1968 and results in a loss which is deductible in computing its taxable income for 1967.

The defendant rested its case in chief on the agreed facts relying on MNR v John Colford Contracting Co Ltd, [1960] Ex CR 433; [1962] SCR viii; [1960] CTC 178; 60 DTC 1131; [1962] CTC 546; 62 DTC 1338, and the corollary decision in J P Guay Ltée v MNR, [1971] FC 237; [1971] CTC 686; 71 DTC 5423, as authority for the proposition that neither the $452,123 accounts receivable nor the $224,952 accounts payable ought to be taken into account in calculating the defendant’s income for its 1968 taxation year.

In addition to the agreed facts, I have the uncontradicted evidence of Robert Arthur Weavers, an official of the Department of National Revenue, who conducted the investigations that led to the assessment in issue.

In filing its returns for its taxation years 1962 through 1969, inclusive, the defendant consistently reported its income including holdbacks and uncertified progress claims outstanding as at year end in the calculation of its income. For its 1970 and 1971 taxation years, the defendant excluded holdbacks from the calculation but continued to include uncertified progress Claims.

On December 29, 1971, notices of re-assessment of the defendant’s 1967 and 1968 returns were issued. They dealt with a multitude of items no longer disputed by the parties but not, of course, with the matter remaining in issue. The Minister did not object to the defendant’s reporting of its holdbacks and uncertified progress claims as receivable and payable since, in the ordinary course of events over a period of years, that practice had the effect of anticipating, rather than deferring, tax liability. The issue was first raised by the defendant itself in notices of objection dated March 15, 1972.

The defendant claimed the right, in the notices of objection, to deduct “holdbacks contingently receivable” in the sums of $117,552 as to 1967 and $90,013 as to 1968. The Minister took no action on the notices of objection and, on March 14, 1974, in a notice of appeal to the Tax Review Board, the defendant asserted that right in the following terms:

3. In computing its income for the 1967 taxation year, the appellant deducted holdbacks totalling $117,552.

4. In computing its income for the 1968 taxation year, the appellant deducted holdbacks in the sum of $90,013.

5. By notices of reassessment dated December 29, 1971, in respect of the 1967

and 1968 taxation years, the Respondent reassessed the appellant and increased its declared income by including the sums of $117,552 and $90,013 which had previously been deducted as holdbacks.

The process by which the claimed deduction of $117,552 for 1967 and $90,013 for 1968 became the net claim of $227,171 for 1968 alone that was ultimately in issue before the Tax Review Board, and remains in issue here, is not in evidence.

What the defendant, in fact, did was set up two reserves out of income: one for holdbacks contingently receivable and the other for contingent maintenance and overbilling. In his reply to the notice of assessment, filed September 20, 1974, the Minister denied the allegations contained in paragraphs 3, 4 and 5 of the notice of appeal and disputed the propriety of the reserves. At that point in time, the reserves, for the 1968 taxation year only, mentioned in the reply amounted to $57,428.29 for holdbacks and $50,985 for the maintenance and overbilling contingencies.

Weavers had understood from the defendant that it wanted to alter its method of reporting holdbacks receivable and payable. The method he understood is that in fact adopted by the defendant for 1970 and 1971. He saw no particular problem with effecting that change for the 1968 taxation years since the total holdbacks reported as receivable and payable as at July 31, 1968, were practically identical amounts: $57,428.39 receivable, $57,425.82 payable. In the reply, the disallowance of the holdback contingency reserve was dealt with in the following terms:

12. The respondent submits that in computing the appellant’s income for the 1968 taxation year he properly disallowed as a deduction the sum of $57,428.39 since the appellant overstated its expenses by that amount and as such was prohibited from deduction by virtue of sections 3, 4 and paragraph 12(1)(a) of the Income Tax Act.

The maintenance and overbilling contingency reserve was, however, simply dealt with on the basis of its not being permitted by the Act.

The parties’ representatives met November 4, 1974. Weavers was present. The statement of agreed facts was completed for the Tax Review Board hearing which began November 7. It was at that meeting that Weavers first learned of the defendant’s intention to seek to deduct the uncertified progress claims as at the end of its 1968 tax year as distinct from seeking to set up and deduct the maintenance and overbilling contingency reserve. By then, re-assessment of the defendant’s 1969 return was statute barred. That assessment is not before me and I upheld the defendant’s objection to the admissibility of evidence on the hypothetical issue of the re-assessment that would ordinarily have resulted from the changes the defendant seeks, by this action, to make in its 1968 income.

The learned member of the Tax Review Board accepted the argument which the defendant urges me to accept, namely: that the amounts in issue and their nature are clearly established by the statement of agreed facts and their inclusion in the calculation of the defendant’s taxable income is clearly contrary to the jurisprudence. The issue is not, in my view, that simple.

While the Co/ford and Guay cases, to the extent they are germane to the issue here, dealt only with holdbacks as distinct from uncertified progress claims, I accept that they apply equally to the latter type of accounts receivable and payable in this case. In my view they are authority for the proposition that a taxpayer may exclude such amounts in the calculation of his income under the Income Tax Act. They are not authority for the proposition that he must exclude them or, to put in another way, that if the taxpayer does not exclude them, the Minister is obliged to re-assess to exclude them.

It is trite to say that the Income Tax Act creates a self-assessing income tax system. A person liable to tax is required to prepare and file a tax return in which he calculates his income and the tax payable in respect of it. He is obliged to make those calculations in accordance with the requirements of the Act and, by the assessment process, the Minister is supposed to ensure that he does.

The Act, as it stood during the period in issue, provided that a taxpayer’s income for a taxation year included his income for the year from all businesses and that

4. Subject to the other provisions of this Part, income for a taxation year from a business . . . is the profit therefrom for the year.

There are no “other provisions” that would have prohibited the defendant from including the holdbacks and uncertified progress claims, outstanding at year end, in the calculation of its profit for the year.

In the absence of such “other provisions”, the profit must be computed in accordance with generally accepted accounting principals. I have no evidence as to what those principals are and probably ought not take judicial notice of what I deem them to be. Suffice it to say, while I lean to the conclusion, on the evidence, that there are probably at least two acceptable methods of accounting for the amounts in issue, the defendant has not discharged the onus on it of proving that the application of different acceptable methods to successive fiscal periods accords with generally accepted accounting principles.

The plaintiff also pleads that the defendant is, in any event, now estopped from changing the basis upon which the uncertified progress claims are to be treated in the calculation of its profit for its 1968 taxation year. I agree.

The defendant reported, in its 1968 tax return, income based on a profit calculation that included the uncertified progress claims made by and upon it. That was consistent with the way it had calculated its profit since 1962 and would continue to report it through 1971. In both its notices of objection and notice of appeal to the Tax Review Board, it referred to holdbacks “contingently receivable” and “not legally receivable” in its 1967 and 1968 taxation years. It did not refer to the uncertified progress claims.

The allegations of fact in paragraphs 3, 4 and 5 of the notice of appeal are not true. The defendant had not deducted holdbacks totalling $117,552 and $90,013 respectively in computing its 1967 and 1968 income nor, by the notices of re-assessment, had the Minister increased the defendant’s income by those amounts. I considered it necessary to make those findings and recited those paragraphs because, in these procedings, the defendant did not find it necessary to repeat them, being content to take as its points of departure the statement of agreed facts and the decision of the Tax Review Board.

The defendant did indicate a desire to change its method of accounting insofar as holdbacks were concerned when such a change could have been effected for 1968 at a time when any consequental adjustments of its 1969 income could have been effected by re-assessment. It indicated its desire to change its method of accounting for uncertified progress claims for 1968 too late to permit re-assessment of its 1969 return. While evidence as to magnitude of the disadvantage in dollars and cents was not admitted, Weavers’ evidence is that should such a change for 1968 be permitted without a complementary reassessment for 1969 there would be a loss of tax revenue.

The defendant made representations as to its 1968 and 1969 profits by the consistent way it calculated them. The plaintiff acted on those representations in the assessment of the returns for both years. If the defendant is permitted to change its method of calculating its 1968 profit, thereby denying the representations upon which the plaintiff acted, the plaintiff will be in the position of having acted to her detriment.

In essence, what the defendant seeks is to change its method of accounting for its profit to be effective for its 1968 taxation year without applying the same method to 1969. That is contrary to reason and, in my view, also contrary to law.

The defendant’s 1967 and 1968 returns will be referred back to the Minister of National Revenue for reassessment in accordance with these reasons and with the minutes of settlement filed herein. The plaintiff is entitled to costs.