Richard Robert Easton v. Her Majesty the Queen, [1976] CTC 285, 76 DTC 6174

Collier, J:—The plaintiff is a barrister and solicitor. In 1972 and prior years he practised his calling in Windsor, Ontario. His business was and is “a profession”.f [1] In the taxation years previous to January 1, 1972 he had elected to compute his income on the cash method, as he was entitled to do under the old Act.t [2] Under that method he did not bring into income for a particular year any professional fees billed but unpaid (accounts receivable) as of the end of his taxation year. Under an accrual system of computing income, one would normally bring accounts receivable into the calculation.

By paragraph 34(1 )(b) of the new Act accounts receivable are now to be included.* [3] That provision is applicable for the 1972 and subsequent taxation years.t [4] It is not retrospective.

The dispute between the plaintiff and the Minister of National Revenue is as to how the plaintiff must compute his income for the taxation year 1972. It arises out of the fact the plaintiff had accounts receivable, as of the end of 1971, which under his cash method of computation had not been brought into the calculation for 1971 and previous years. The issue is to be resolved by the proper interpretation to be given to ITAR, section 23. I set out that section, except subsection (5):

23. (1) There may be deducted in computing a taxpayer’s income for the 1972 taxation year from a business that is a profession the aggregate of amounts payable by him In respect of the business at the end of the 1971 fiscal period of the business, to the extent that they were not deductible in computing his income from the business for that year but would have been so deductible if he had paid them in that year.

(2) Where a taxpayer has not elected under paragraph 34(1 )(d) of the amended Act in respect of his income from a business that is a profession for his 1972 taxation year, work in progress in respect of the business at the commencement of the 1972 fiscal period of the business shall be valued at the same amount at which it was valued at the end of the 1971 fiscal period of the business for the purpose of computing his income from that business for the 1971 taxation year.

(3) For the purposes of computing the Income of a taxpayer for a taxation year ending after 1971 from a business that is a profession, the foilowing rules apply:

(a) there may be deducted such amount as he may claim, not exceeding the lesser of

(i) the amount deducted under this paragraph in computing the taxpayer’s Income from the business for the immediately preceding taxation year, and

(ii) the taxpayer’s investment Interest in the business at the end of the year;

(b) where the taxation year is the taxpayer’s 1972 taxation year, the amount deducted under paragraph (a) in computing the taxpayer’s income for the immediately preceding taxation year from the business shall be deemed to be an amount equal to the taxpayer’s 1971 receivables in respect of the business;

(c) there shall be included the amount deducted under paragraph (a) In computing the taxpayer’s income for the Immediately preceding taxation year from the business; and

(d) there shall be included amounts received by the taxpayer in the year on account of debts in respect of the business that were established by him to have become bad debts before the end of the 1971 fiscal period of the business,

(4) Paragraph (3)(a) does not apply to allow a deduction in computing the income of a taxpayer from a business that is a profession

(a) for the taxation year in which the taxpayer died, or

(b) for any taxation year, if

(i) in the case of a taxpayer who at no time in that year was resident

in Canada, the taxpayer ceased to carry on the business, or

(ii) in the case of any other taxpayer, the taxpayer ceased to be resident in Canada

at any time in that year or the immediately following year.

The disagreement between the parties is best recounted by first setting out the methods of calculation asserted by the taxpayer on the one hand, and the Minister on the other. The actual figures used in each computation, to arrive at a final result, are agreed.

The Plaintiff's Computation

1.

Net income from professional business for 1972

as per section 34

etc

$17,164.46

2.

Paragraph (a) of ITAR section

23(3)

Deduct the lesser of:

(i)

Amount

deducted

under

this

paragraph

(a) in computing income for the 1971

taxation

year—as this paragraph (a) was not in force

for the

1971

taxation year (see ITAR section

9)

this amount is—

Nil

(ii) 1972

Investment

Interest

as

defined

in

ITAR section

23(5)(a)(i)—

$9,765.18

The lesser of (i) and

ii)

is

Nil

3.

Paragraph (b) of ITAR section 23(3)

Deduct

An

amount

equal

to

the

Plaintiff's

1971

Receivables

(as

defined

in

ITAR

section

23({5)(c)(i)—this paragraph

deems,

for

the

1972 taxation year only, that the Nil

amount,

deducted

under paragraph

{a)

in

2.

above,

to instead be

14,702.01

$ 2,462.45

4.

Paragraph (c) of ITAR section 23(3)

Add the amount

deducted—as

in

2.

above

—under

paragraph

(a)

of

ITAR

23(3)

in

computing income for the 1971

taxation year

—once

again

as

paragraph

(a) was not in

force for the 1971

taxation year the amount

to be added is—

Nil

1972

SOLE

PROPRIETORSHIP

NET

INCOME

FOR

TAX

PURPOSES

$ 2,462.45

The Minister’s Computation
Net Income from Profession Business		$17,164.46
Deduct:
Pursuant to ITAR 23(3)(a) the lesser of:
(i) “1971 Receivables”	$14,702.01
(ii) “Investment Interest” at end of 1972
taxation year	9,765.18	9,765.18
Add:
Pursuant to ITAR 23(3)(c) “1971
Receivables”’	14,702.01	14,702.01
1972 Sole Proprietorship Net Income from
Professional Business for tax purposes		$22,101.29

In support of his calculation, the plaintiff analyzes, or interprets, subsection 23(3) as follows: the deduction under paragraph (a) is the lesser of subparagraph (i) or subparagraph (ii); the plaintiff did not deduct, in computing his 1971 income, any amount under subparagraph (a)(i). The simple reason, agreed here by counsel, is that paragraph

(a) was not in force in 1971.* [5] The arithmetical answer to subparagraph (a)(i) according to the plaintiff is, therefore, “nil”.

Under the plaintiff’s interpretation of subparagraph (a)(i) the amount, in respect of the 1972 year only, must always be “nil” whether the taxpayer in question had been on the cash or accrual system; for all professionals computing income for 1972, the “lesser” referred to in the opening lines of paragraph (a) must inexorably be “nil”.

The plaintiff then goes to paragraph (b). He argues that it was obviously recognized that the amount which, in 1972, might be claimed as a deduction under paragraph (a) would, as demonstrated above, in every case be “nil”. The plaintiff then says that, for 1972 only, the amount to be deducted under paragraph (a) (not subparagraph (a)(i)) is deemed to be the 1971 receivables; that, it is said, is what paragraph (b) means. Put another way, the plaintiff contends that for the 1972 taxation year one is not concerned with whether something is less than something else; the amount which may be deducted pursuant to paragraph (a) is, according to the plain meaning of paragraph (b), the 1971 receivables.

The plaintiff then turns to paragraph (c). He argues: paragraph (a) was not in force for the 1971 taxation year; no amount had been deducted, pursuant to the rules set out in that paragraph, by any professional in computing his 1971 income; the arithmetical result is, again, “nil”. The amount therefore to be added into income is “nil”, not the amount earlier deducted pursuant to paragraph (a) by reason of the deeming provision of paragraph (b).

The defendant does not, as can be seen from the computation earlier set out, agree with that analysis or interpretation of section 23. Counsel for the Minister contends that on the plain, ordinary and grammatical sense and meanings of the words and phrases used, the deemed amount in paragraph (b) obviously refers to the amount described in subparagraph (a)(i). I agree with that submission.

One could perhaps wish that paragraph (b) had made specific reference to subparagraph (a)(i) rather than to the whole of paragraph (a). I do not think that makes any difference to the plain, grammatical meaning of paragraphs (a) and (b), when read together. In my view the Minister’s interpretation and computation is correct. The amount referred to in subparagraph (a)(i) is, for the year 1972, deemed to be the 1971 receivables. The amount referred to in subparagraph (a)(ii) is the investment interest at the end of 1972. On the facts of this appeal, the lesser amount is the taxpayer’s investment interest and that is the amount he may deduct under paragraph (a).

The plaintiff’s interpretation of paragraph (c) is, to my mind, not quite logical. He contends, on his analysis, that he is entitled to deduct, for 1972, under paragraph (a) the amount of the 1971 receivables but, when he comes to paragraph (c), he does not include “the amount deducted under paragraph (a)” but some other amount which he says must always, for 1972, be "nil”.

Counsel for the defendant submits, and I agree, that paragraph (c) (when one reads section 23 as a whole) can again only refer to the amount described in subparagraph (a)(i); in this particular case, and for the year 1972 only, that amount is deemed to be the 1971 receivables.

In summary, I agree with the analysis and interpretation of section 23 as a whole put forward by the defendant. In my opinion there is no ambiguity, or gaps, in section 23 as it relates to the facts of this case. The ordinary grammatical sense to be given to the words, phrases, paragraphs and subparagraphs, as I see it, supports the interpretation advanced by the defendant.

The action is dismissed. The assessment by the Minister is confirmed.

Counsel for the defendant indicated, at the close of argument, that If the defendant were successful, she would not ask for costs. Accordingly, there will be no order as to costs.