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Minister of National Revenue, [1981] CTC 2005, 81 DTC 21 The Assistant Chairman:—G W Dorman Pulp Chip Company Ltd (the appellant) has appealed to this Board from assessments for income tax for the 1973 and 1974 taxation years. ... Counsel for the appellant also likened this appeal to the case of Her Majesty The Queen v V & R Enterprises Limited, [1979] CTC 465; 79 DTC 5399, another case which supposedly involved the question of an accrued bonus. ... Counsel also referred to the V & R Enterprises Limited case, but the reasons of Mr Cardin, Chairman of this Board, purely to indicate what, at least in Mr Cardin’s view, was the criteria to be met in the case of accrued bonuses. ...

Contentions For the appellant: — I had more than sufficient income tax deducted at the source and remitted (monthly) instead of making quarterly payments; — The department actually owes me (interest) money; — My salary is credited (to my drawings account) as at December 31 of each year. For the respondent: — In the circumstances, the appellant is required to make further payments on account of the remainder of his tax liability by way of interim instalments of tax on or before April 30, 1977; — Interest is required to be paid in respect of unpaid or tardy instalments; — For this purpose, the appellant is deemed to be liable for instalments computed on the basis of the lower of his actual tax payable for the taxation year or the preceding taxation year; — The appellant did not pay any of the instalments of tax and consequently, interest is required to be paid on the balance of tax outstanding, as well as the arrears of instalments; — Tax in the amount of $8,293.18 had not been paid by the time the statutory delay for the filing of the return of the appellant of income for the 1976 taxation year — that is April 30, 1977 — and the arrears interest in the amount of $88.61 is correctly assessed in accordance with subsection 161(1) of the Income Tax Act; — The appellant failed to pay interim instalments of his tax when due as required by subsection 156(1) of the Income Tax Act, and the instalment interest in the amount of $900.08 assessed by the respondent pursuant to subsection 161 (2) of the Income Tax Act is properly payable. ... Turning to the other point at issue — the interest on the instalments — I would note a recent decision of this Board for some general comments relevant to the question of “bonus” and “salary”: G W Dorman Pulp Chip Company Ltd v MNR, [1981] CTC 2005; 81 DTC 18. ...

For the respondent: — The amount of $100,000* was set up as a liability and deducted as an expense in order to reduce the total amount of taxes payable by the appellant: (*The amount at issue in the appeal, the total was $110,000) — There was no contract or agreement between the appellant and the persons to whom the alleged bonus was owing and a bonus would be paid; — There was no contract of employment between the appellant and any person who was within the management category requiring the payment of the stated bonus; — With respect to the bonuses no expense was made or incurred for the purpose of gaining and producing income for the businesses; — The claim of the bonus expense, if it has been found to have been made or incurred unduly or artificially reduces the income of the appellant; — The appellant did not intend to create a legal obligation to pay the bonuses; — The claim of bonus payable as an expense was in effect a reserve which is not permitted by the Income Tax Act. ... However, there were certain critical factors introduced: — the financial statements for previous years indicated a similar process of “bonus” accrual had regularly taken place; the 1976 financial statements showed in part: Revenue $1,049,301.20 Expenses 794,376.62 Profit before undernoted $ 254,924.58 Add — Gain on sale of fixed assets 150,936.00 $ 405,860.58 Less — Management bonus 110,000.00 $ 295,860.58 — Mr Staley noted that it was the business policy of his firm that clients reduce corporate profits by the utilization of such accrued management bonuses where and when it was advantageous, so that such an accrual would bring the net taxable profit from active business below the small business limit. ... The basic conditions outlined in McClain Industries of Canada, Inc v Her Majesty the Queen, [1978] CTC 511; 78 DTC 6356; and in G W Dorman Pulp Chip Company Ltd v MNR, [1981] CTC 2005; 81 DTC 18, would appear to be fulfilled. ...

Year Ended September 30 Gross Income Salaries Profits Profits 1969 NIL NIL NIL 1970 $ 3,458 — $ (3,921) 1971 65,235 — (14,977) 1972 275,200 16,000 11,362 1973 324,458 70,000 96,654 1974 982,744 79,334 443,408 1975 233,507 500,000 (225,999) 1976 306,596 100,000 69,253 1977 151,418 161,200 109,640 6. ... Mr Alfred Berry outlined the development and progress of the company, and in particular emphasized the reasons as he saw them — largely unexpected and external to the operations of the business — which brought about the business decline after 1974. ... G W Dorman Pulp Chip Company Ltd v MNR, [1981] CTC 2005; 81 DTC 21; 3. ...

This was comprised as follows: Sale Gross Project Closing Date Proceeds Profit E2 June 25, 1976 $ 48,574 $ 10,459 E9 June 30, 1976 75,450 10,743 E15 July 1, 1976 148,931 $ 29,480 $272,955 $ 50,682 House Sales (3) — made Apr. 1/76- July 1/76 $272,955 Lot Sale (1) — with a cost of $27,571 27,000 Renovations and Repairs 106,462 $406,417 (8) In January 1977, a nine month interim financial statement to December 31, 1976 was prepared for management and banking purposes. ... These are — The Queen v V & R Enterprises Limited, [1979] CTC 465; 79 DTC 5399; Toronto Heel Limited v M.N.R., [1980] CTC 2277; 80 DTC 1250. ... Argument The case law referenced by the parties included: G W Dorman Pulp Chip Limited v MNR, [1981] CTC 2005; 81 DTC 21; Toronto Heel Limited v MNR, [1980] CTC 2277; 80 DTC 1250: Her Majesty the Queen v V & P Enterprises Limited, [1979] CTC 465; 79 DTC 5399; McClain Industries of Canada, Inc. v The Queen, [1978] CTC 511; 78 DTC 6356; Ken & Pay’s Collins Bay Supermarket Limited, [1975] CTC 504; 75 DTC 5346. ...

Revenue Canada — Taxation granted the permission in a letter dated June 18, 1976, filed as Exhibit R-3. ... Law — Cases at Law — Analysis 4.01 Law The main provisions of the Income Tax Act involved in the present case are paragraphs 18(1)(e) and 78(3)(a). ... G W Dorman Pulp Chip Company Ltd v MNR, [1981] CTC 2005; 81 DTC 21; 13. ...