Roland St-Onge:
1 This appeal deals with the 1972 taxation year and came before me on December 9, 1974, in the City of London, Ontario.
2 At the beginning of the hearing, counsel for respondent reminded the Board that consents to judgment had been filed to the effect that any decision of this Board or of a higher court in the present appeal would apply equally to the appeals of J D Lawson (74-686) and C J Clark (74-685).
3 The appellant at all material times in 1971 and 1972 carried on the practice of law under the firm name and style of “R Robert Easton, QC, Barrister and Solicitor”. The year end of the said law practice is December 31st.
4 Prior to 1972, section 85F of the old Act provided that for the purpose of computing the income of a taxpayer for a taxation year from a business which was a profession, the income from the business for that year could, if the taxpayer elected, be computed in accordance with the “cash” method whereby the income for that year would be deemed to be an amount equal to an amount calculated as set out in paragraphs 85F(1)(a), (b), (c) and (d) which read as follows:85F. (1) Special method of computing income.—For the purpose of computing the income of a taxpayer for a taxation year from a business of the following description, namely:(a) farming, or
(b) a profession,
- (c) the aggregate of all amounts that
(i) were received in the year, or are deemed by this Act to have been received in the year, in the course of carrying on the business, and
(ii) were in payment of or on account of an amount that would, if the income from the business were not computed in accordance with the cash method, be included in computing income therefrom for that or any other year,
minus- (d) the aggregate of all amounts that
(i) were paid in the year, or are deemed by this Act to have been paid in the year, in the course of carrying on the business, and
(ii) were in payment of or on account of an amount that would, if the income from the business were not computed in accordance with the cash method, be deductible in computing income therefrom for that or any other year;
and minus any deduction for the year permitted by paragraph (a) of subsection (1) of section 11.
The same section also specifies that:(1) in case of a business carried on jointly with others by a taxpayer who computes his income in accordance with the cash method, they also should be under the “cash” method;
(2) concurrence of the Minister is necessary if the taxpayer wants to change this method from “cash” to the accrual basis;
(3) in case of a change of residence outside Canada and if the taxpayer ceases to carry on the business, some of the property in the inventory or some amounts therein, that would have been included in computing his income for the year if the amount had been received by him, shall be included in computing his income.
5 It is admitted that the appellant in 1971 calculated his income on the cash method and that he had unpaid bills for services rendered in the amount of $14,702.01 at the end of his 1971 taxation year.
6 With the amendments to the Income Tax Act in 1972, special rules were enacted for a taxpayer in the professional business. Some of these rules are set forth in section 34 of the new Income Tax Act which states as follows:
34. (1) Professional business.—In computing the income of a taxpayer for a taxation year from a business that is a profession, the following rules apply:(a) paragraph 12(1)(b) is not applicable;
(b) every amount that becomes receivable by him in the year in respect of property sold or services rendered in the course of the business shall be included;
- (c) for the purposes of paragraph (b), an amount shall be deemed to have become receivable in respect of services rendered in the course of the business on the day that is the earliest of
(i) the day upon which the account in respect of the services was rendered,
(ii) the day upon which the account in respect of those services would have been rendered had there been no undue delay in rendering the account in respect of the services, and
(iii) the day upon which the taxpayer was paid for the services; and
(d) where the taxpayer so elects in his return of income under this Part for the year, no amount shall be included in respect of work in progress at the end of the taxation year, except as otherwise provided by this section.
(2) Application of para (1)(d) where election made.—Where a taxpayer has elected that paragraph (1)(d) be applicable in computing his income for a taxation year from a business that is a profession, that paragraph shall apply in computing his income from the business for all subsequent taxation years unless the taxpayer, with the concurrence of the Minister and upon such terms and conditions as are specified by the Minister, revokes his election to have that paragraph apply.
7 As may be seen, the effect of this section is to have a professional calculate his income on the accrual basis but this method is somewhat more precise compared to the one prior to 1972 by the fact that a taxpayer may elect not to include any amount in respect of his work in progress at the end of the taxation year. Moreover, the professional who was on the accrual method is not as free as he was before to choose on which day an account becomes an account receivable.
8 In order to accomplish the transition from the 1971 system, where accounts receivable and accounts payable were not taken into income, to the 1972 system where the said accounts were taken into consideration to compute income, transitional rules are necessary and consequently Income Tax Application Rule 23 was enacted of which subsections (1) and (2) state as follows:
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.
9 Subsection (1) of ITAR 23 allowed a professional who was under the cash method to deduct the expenses payable at the end of 1971 to the extent that they were not deductible in computing his income from the business for that year (as the case may be for the taxpayer who was on the accrual method) but would have been deductible if he had paid them in that year (as the case may be for the taxpayer who was on the cash method).
10 On the other hand subsection 23(2) of ITAR deals with work in progress. As already mentioned, section 34 allows both professional taxpayers, the one who was on the cash method as well as the one who was on the accrual method, to have the option to include as income after 1971 the work in progress but the professional who was already under the accrual method must follow subsection 23(2) to switch his work in progress from 1971 to 1972. There is no such subsection for the professional who was on the cash method.
11 As to ITAR 23(3), one must scrutinize all its elements and try to understand them with the help of examples.23. (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 following rules apply:- (a) there may be deducted such amount as he may claim, not exceeding the lesser of
(Example: The professional who was on the cash method prior to 1972 does not have any amount to deduct because he did not deduct any in 1971.(1) Let us assume that a professional was on the accrual method prior to 1972 and at the end of 1971 he had the following figures:
Accounts receivable $15,000
Doubtful debts 5,000
-------
Balance $10,000Under ITAR 23(3)(a)(i), the amount deducted by such professional would be $5,000.)(ii) the taxpayer's investment interest in the business at the end of the year.
12 As to this element, the Board will later refer to paragraph (a) of ITAR 23(5) which defines what investment interest is. But at this point, I would like to comment on the above example.(2) Let us assume again that the professional was under the accrual method prior to 1972—and use the same figures:
Accounts receivable $15,000
Doubtful debts 5,000
-------
Balance $10,000This balance of $10,000 would represent the taxpayer's investment interest in the business at the end of 1971.
13 ITAR 23(5)(a) defines investment interest as follows:
(a) ‘Investment interest’ in a business at the end of a taxation year of a taxpayer other than a corporation means the aggregate of amounts each of which is an amount in respect of each proprietorship or partnership by means of which the taxpayer carried on that business in Canada in the year, equal to,
14 According to this definition, investment interest is what was left of the accounts receivable after deducting the reserve for doubtful debts in accordance with paragraph 20(1)(l) of the new Act.
15 This shows without a doubt that ITAR 23(3)(a)(ii) was enacted only for the taxpayer who was on the accrual method.
16 For the professional who was on the cash method there is no “lesser of two amounts” because he cannot get any amount either under (i) or (ii) of ITAR 23(3)(a).
17 The rest of ITAR 23(3) reads as follows:
(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;
18 (As previously mentioned, the professional under the cash method did not have the lesser of two amounts because there was no amount with which to make the comparison. Consequently, nothing can 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; (There is none.) 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.
19 In this subparagraph it is not written “on account of debts in respect of a business that might be established by him to become bad debts” but “on account of debts in respect of a business that were established by him to have become bad debts”—“were” and “to have become” are two actions in the past that could have been accomplished only by a professional who was already on the accrual method.
20 By dissecting each element of ITAR 23(3), one realizes that the said subsection was enacted only for the taxpayer who was already on the accrual method.
21 Now let us analyse ITAR 23(5)(c) which defines what “1971 receivables” means:
the aggregate of(i) all amounts that became receivable by the taxpayer in respect of property sold or services rendered in the course of the business (within the meaning given that expression in section 34 of the amended Act) in taxation years ending before 1972 and that were not included in computing the taxpayer's income for any such taxation year, other than debts that were established by him to have become bad debts before the end of the 1971 fiscal period of the business, ...
22 This rule 23(5)(c)(i) was enacted to indicate to a professional who was already on the accrual method that he would be able to deduct all the amounts that became receivable in taxation years ending before 1972 to the extent that section 34 of the new Act applies.
23 According to this section 34 of the new Act (nothing similar exists in the old Act), only the earliest of three amounts shall be deemed to have become receivable in the year in respect of property sold or services rendered in the course of a business.
24 The reading of subparagraph 23(5)(c)(i) of ITAR with section 34 of the new Act indicates that only the professional who was already on the accrual method could take into account the accounts receivable, being able to meet the test of section 34 of the new Act and only to the extent that the said accounts receivable had not been included in computing the taxpayer's income “for any such taxation year”.
25 In other words, the taxpayer under the accrual method prior to 1972 could take into account only the earliest of the amounts mentioned in section 34 for the 1972 taxation year to the extent that it had not already been included in his income in 1971 and had never been considered as a bad debt.
26 Then, going back to ITAR 23(5)(c), the last four lines of subparagraph (i) state “other than debts that were established by him to have become bad debts before the end of the 1971 fiscal period of the business”. Here again because those two past actions could have been accomplished only by a professional who was already on the accrual method, this definition of “1971 accounts receivable” was given only for the use of the professional who was already on the accrual basis.
27 Consequently, as to the alleged accounts receivable, I have decided as follows:(1) that, prior to 1972, the accounts receivable should not be considered as income for the professional who was on the cash method;
(2) that, although some accounts could have been considered as accounts receivable in fact, they were not such in law for the professional who was on the cash method;
(3) that, according to the interpretation of section 34 of the new Income Tax Act and section 23 of the Income Tax Application Rules, there is nothing therein to allow the respondent to take into income the alleged accounts receivable of a professional who was computing his income on the cash method prior to 1972.
(4) there is nothing in the above sections referred to to oblige a professional who was on the cash method prior to 1972 to compute his income in 1972 and subsequent years as if he had had accounts receivable and bad debts prior to 1972. For him there was no such thing as accounts receivable and bad debts in law even if there were some in fact. For him, accounts receivable were not income and bad debts were not legal deductible expenses.
(5) There is nothing in section 23 of ITAR to state that a taxpayer who was under the cash method prior to 1972 should gather his accounts receivable as well as his bad debts in order to take them into account for the computation of his income for the 1972 taxation year.
28 Among other cases, the appellant referred the Board to the jurisprudence quoted hereunder to sustain the following principle:
Where the statute in question is a taxing statute the duty of the Court is to construe it strictly, the subject being not taxable by inference or analogy but only where the tax is imposed in categorical and unambiguous terms and where there is doubt the construction of the taxing statute must be resolved in favour of the subject.
See: H C Hatch v Minister of National Revenue, [1938] Ex. C.R. 208, [1938] C.T.C. 85, 1 D.T.C. 447; B L Shaw v Minister of National Revenue, [1939] S.C.R. 338per Duff, J at 342; [1938–39] CTC 346;1 D.T.C. 499-58; Cox v. Rabbitts (1877–78), App Cas 473 at 478; Patrick v Minister of National Revenue, [1936] Ex. C.R. 38; [1935–37] CTC 58;1 D.T.C. 303; Capital Trust (J M Mackenzie Estate) v Minister of National Revenue, [1937] S.C.R. 192; [1935–37] CTC 267;1 D.T.C. 314; A-G Canada v. J T Wait Co, [1938–39] CTC 1 at 10.
29 As far as the Board is concerned in the present appeal the appellant was wrongly reassessed because there is no provision in the new Act to allow the respondent to add this $14,702.01 of unpaid bills to the appellant's income in the 1972 taxation year.
30 In my opinion the relevant sections are ambiguous and because a taxpayer should not be taxed by inference or analogy, the appeal should be allowed.
31 For the above reasons the appeal is allowed.
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