Timing

The taxpayer traded foreign currency options as a separate business from its pulp and paper business, with its principal option activity being the writing of European-style puts and calls with banks as the counterparties. It could lock in profit on these by entering into offsetting option contracts. In its 1998 taxation year, the taxpayer reported gains and losses on these options essentially on a mark-to-market basis (although it amortized option premiums paid and received over the term to maturity of the related options). This resulted in the taxpayer claiming a loss for ITA purposes approximately $72 million greater than if it had reported on the basis of losses (or gains) actually realized. For financial statement purposes, it had accounted for its foreign exchange operations using mark to market accounting starting in 1997. The year -end options values used by it "were reliable" (para. 77).

Before concluding (at para. 72) “that there was no basis on which the Tax Court judge could reject the appellant’s use of mark to market accounting in computing income from its dealings in foreign exchange options,” Noël CJ stated (at paras. 58, 59, 61, 71):

[T]he mark to market method is consistent with well accepted business principles, is GAAP’s preferred basis of accounting for foreign exchange option contracts and…the FASB and international accounting recognize that income generated by such dealings is best depicted in accordance with this method… .

…It is clear from [Canderel and Ikea] that the realization principle can give way to other methods of computing income pursuant to section 9 of the Act where these can be shown to provide a more accurate picture of the taxpayer’s income for the year… .

Canadian General Electric is in direct contradiction with the Tax Court judge’s holding that realization is an overarching principle which applies in the absence of a provision authorizing or requiring the application of a different method.

Given [Rip J's] findings...as to the broad recognition of mark to market accounting for purposes of computing income from dealing in foreign exchange options, and the uncontested evidence that banks, financial institutions and mutual funds which engage in this activity report their income on this basis with the CRA’s approval, it seems clear that mark to market provides a picture of the appellant’s income which is as accurate...as that which the principle of realization would provide.

The Minister was directed to reassess the 1998 taxation year on the basis that the taxpayer was entitled to use the mark to market method of accounting, but without deferring or amortizing any portion of the premiums paid or received during that year.

The taxpayer, a real estate developer, prepaid municipal real estate development charges applicable to one of its residential lots developments. In finding that the deduction of the charges, in full, in the year paid gave a more accurate picture of the taxpayer's income notwithstanding that GAAP would have required addition of the charges to the taxpayer's cost of land inventory, Noël J.A. noted that there was no evidence that payment of the charges increased the fair market value of the lands.

The Queen v. Johnson and Johnson Inc., 94 DTC 6125 was followed in finding that a refund of federal sales previously paid in error did not represent income in the year of refund.

Given that the trial judge had made a finding that the primary purpose of the taxpayer in making two payments to or for the benefit of two tenants was to induce them to lease space in the building, the matching principle could not be applied because there was no linkage to future revenue. (If the matching principle had been applicable, the payments would have been amortized only over the terms of the leases, and not any renewal periods). Because the Minister had not persuaded the Court that the amortization of the payments would present even as accurate a picture of income as the method adopted by the taxpayer (current deduction of the full amount of the payments), the taxpayer was entitled to deduct the payments entirely in the year they were made.

Because there were no conditions attached to the use by the taxpayer of a tenant inducement payment (the sole condition precedent to receipt of the payment was the assumption of its obligations under the lease agreement), the payment was income to the taxpayer when received.

The taxpayer, which had entered into an agreement with a property owner to develop the property as a commercial office development, paid just over $4 million in tenant inducement payments in order to get the project 85% leased.

Because the inducement payments thus could not be correlated directly or principally with the rents generated by the leases which they had induced (given that there were other current benefits that were generated such as obtaining permanent financing and earning performance-related fees), the taxpayer's method of expensing the payments in full achieved at least as accurate a picture, for tax purposes, of the taxpayer's financial position as would the method favoured by the Crown (amortization over the terms of the leases).

A federal sales tax refund was not receivable by the taxpayer until the Minister had given some public and irrevocable indication thereof. Although, on this basis, the refund was receivable by the taxpayer in its 1983 taxation year, it did not represent income in that year. Instead, the refunds represented a reduction in its expenses for the earlier taxation years in which the federal sales tax paid by it had been included in its expenditures. Hugessen J.A. stated (pp. 6129-6130):

"Where... a business receives a payment, not as compensation for the goods or services which it provides but rather as a reimbursement for an expenditure which was not due and should never have been paid... it is not the year of receipt which is relevant for the determination of profit, but the year of the expenditure which is now found to have been no expenditure at all."

The taxpayer, who was the general partner of a firm of commodity brokers, entered into spread positions in gold futures contracts, and in the same taxation year closed out the losing legs on his spread positions (while entering into further contracts to maintain his hedged position) but deferred closing out the remaining contracts until the subsequent taxation year. The Crown had failed to demonstrate that it was inappropriate for the taxpayer to report losses when they were actually incurred (on closing out the losing legs) and to not report gains until they are actually realized (in the subsequent year). In particular, the Court was not satisfied that the "marked to market" accounting method proposed by the Crown could describe income for income tax purposes, nor were they satisfied that a margin account balance is the appropriate measure of realized income for tax purposes.

Given that the method followed by the taxpayer did not entail the deduction of unincurred losses, it was not necessary to consider the income tax validity of the "lower of cost or market" method in this case.

Hydro-Electric Utility included in its income for financial statement purposes an estimate of the value of electricity which had been consumed by its customers between the time they last had their meters read and the year-end and for which they had not yet been billed. In finding that the utility was required to follow this method of income recognition for tax purposes as well (rather than excluding accrued but unbilled revenue) MacGuigan J.A. stated that the taxpayer should follow whichever of the accounting methods available to it that "presents the 'truer picture'" of its revenue and that "more fairly and accurately portrays income" (p. 6028) and noted that the vice-president of finance of the utility had admitted that inclusion of the accrued revenue more accurately reflected the utility's profit picture for the year.

If the accused had been taxable on amounts misappropriated by him (which was not the case), he would have been taxable in the year the money was misappropriated rather than the previous year in which he first received the money.

The taxpayer, which billed its clients for local and long distance charges on a monthly basis, and which prior to 1984 had included in its income the value of the services which it had performed but not yet billed, was found to be precluded from switching to the "billed method" of recognizing income for tax purposes. Reed J. stated (p. 5039):

"It is fair to conclude that the earned method accords a 'truer' picture of the company's income for the year in question than does the billed method. The plaintiff is engaged in providing a continuing service which by its very nature results in revenue accruing daily."

The taxpayer was not permitted to exclude from its income from a pipeline the portion of the tariffs charged by it to shippers which was in excess of the level of tariffs that had been properly authorized by the B.C. Energy Commission, notwithstanding that (in the submission of the taxpayer's counsel) one day the taxpayer would have to either lower its tariffs, or retain its present tariffs despite increased costs thereby in effect refunding the overage. The taxpayer's right to the money it had charged was unrestricted, and all that was required of it was to factor any surplus into its tariffs in subsequent years.

In consideration of the payment to the taxpayer of franchise fees the taxpayer granted to the franchisee the right to use the taxpayer's name and materials for a term of 10 years and agreed to provide promotional and consulting services. McNair, J. accepted (at p. 6111) the position of the Crown's expert accountant that:

"all material conditions relating to the sale of a franchise had been substantially performed by the franchisor not later than three weeks following the opening of a franchised outlet, that the costs properly allocable to the earning of the initial franchise fee had been incurred by then, and that there was no requirement for refund or repayment of the initial franchise fee in any event,"

and that the full amount of the fees accordingly should be included in income at the time of receipt, rather than being brought into income over the term of the contracts.

The taxpayer, upon completing each of the various stages of construction of ships, became absolutely entitled to receive progress payments. The progress payments accordingly were revenue when received.

The taxpayer was entitled to receive a management fee equal to 10% of the net profits from a shopping centre including gains from its sale. Since the payments were not due until 60 days after the year-end, a 10% fee which the taxpayer received in 1974 from the sale in 1974 of the shopping centre was not taxable until 1975. The amount was not receivable until 1975, and the taxpayer had no absolute right in 1974 to it.

It was stated by Muldoon, J. that under the scheme of the Act, taxable income is determined on an annual basis, as opposed to being determined over some shorter period of time.

A submission was accepted that a property is sold when (1) the beneficial ownership has passed under a binding agreement of purchase and sale, and (2) the purchaser has obtained some possessory right which is inconsistent with the vendor's exclusive control over the property.

The costs of inventory should be deducted from income in the year of sale. To deduct such costs during a prior year in which such costs were incurred or laid out would have the effect of distorting income.

Amounts received by the taxpayer pursuant to judgment in a mechanics' lien action were ascertained amounts, and income in the years of receipt, notwithstanding that a portion of those amounts was returned in a subsequent year to the payer to secure an abandonment of an appeal of the judgment. The plaintiff was free to use the money as it chose after its receipt, a judgment "'must be assumed to be valid until interfered with by a higher tribunal'", and analogies to the receipt of deposits were fallacious.

Inclusion of uncertified progress claims in a construction company's income (as opposed to deferring recognition to the year of certification) was consistent with GAAP and acceptable for income tax purposes.

A sale of apartments by the taxpayer was held to occur under the laws of Quebec at the time of execution and delivery of the deed of sale rather than at the time of executing the memorandum of agreement because the taxpayer was not paid in full at the time of executing the memorandum of agreement, and the parties in the memorandum agreed that "the present memorandum of Agreement shall not be equivalent to a sale."

"[F]or income tax purposes, while the 'matching principle' will apply to expenses related to particular items of income, and in particular with respect to the computation of profit from the acquisition and sale of inventory ... it does not apply to the running expense of the business as a whole even though the deduction of a particularly heavy item of running expense in the year in which it is paid will distort the income for that particular year." Payments made by the taxpayer to the City of Calgary for street improvements that the taxpayer hoped would maintain or increase the popularity of its shopping centre were such a running expense, and could be fully deducted by it, if it so chose, in the year of payment.

The taxpayer, upon its purchase of an oil tanker, received a secured revenue guarantee from the vendors. The amounts of the revenue deficiencies were income to it in the years in which they occurred, notwithstanding that a substantial portion of those amounts would not be payable to it until a sale of the vessel, and notwithstanding that amounts received by it under the agreement would be repayable in the event that revenues from the tanker later exceeded projected levels. "At all material times appellant had a clearly legal right to receive all the benefits that together would bring its income to the guaranteed minimum. There is also no doubt that the right of appellant to the amount of the debt resulting from the deficiency in any given year was held by it unconditionally. That amount was bound to accrue though not necessarily immediately."

The taxpayer was obliged to accept the return of paperbacks previously shipped by it which remained unsold, and it deducted in computing its income a reserve equal to the gross margin of paperbacks on hand at wholesalers at the end of the year. Under the Sale of Goods Act (Ontario) the books had not been shipped on a sale or return basis in light, inter alia, (1) of a clause in the sales agreements providing that title to the books and risk of loss thereof passed at the time of delivery, and (2) the payment for the goods well in advance of the usual time for any return thereof. The sales accordingly were made at the time of delivery. Accounting principles did not support the deduction of a reserve equal to the entire profit element, including that attributable to the approximately 90% of the books that would not be returned. The reserve was non-deductible.

In order to obtain an immediate release of construction holdbacks from the customers of its construction business, the taxpayer deposited securities with them, which were then released after the construction work which it had performed was certified.

Jackett C.J. held that although the holdbacks were in fact received by the taxpayer under this arrangement and therefore included in its income at the time of receipt, it was entitled to a deduction at that time for the value of the securities paid to the customers. This amount would then be included in its income when the securities were released to it.

In finding that the taxpayer realized income from land inventory in its 1955 taxation year (when an agreement was reached with the Crown fixing the amount of compensation for the expropriation of the land, and that amount was paid) rather than its 1954 taxation year (when the land was expropriated) Judson J. stated (p. 5277):

"My opinion is that the Canadian Income Tax Act requires that profits be taken into account or assessed in the year in which the amount is ascertained."

In order to secure a regular supply of rebuildable engines, when the taxpayer sold engines which it had rebuilt to Ford dealers it required the dealer to supply it with another rebuildable engine of the same model and to pay a substantial non-forfeitable deposit which would be held by the taxpayer until the dealer did supply such an engine. Cartwright J. held that because the taxpayer knew that it might not be able to retain any part of the deposit received by it (and, in fact, the probability was 96% that the amount would be returned to the dealer in the near future) the realities of the situation were that sums so received were not part of its profits. To the extent that in the following year the taxpayer ceased to be under a liability to return the amount to the depositor, the amount received became a profit in that year.

In the taxpayer's 1955 taxation year, he accepted the Department of Transport's formal offer of settlement for compensation in respect of its expropriation of his land inventory, and in his 1956 taxation year, the Treasury Board ratified the agreement and authorized the payment to the taxpayer. Abbott J. found that "in accordance with the ordinary rules of mandate, [the ratification of the Treasury Board] had retroactive effect to [the date of the agreement]", with the effect that the gain of the taxpayer was realized in his 1955 taxation year rather than 1956 taxation year.

In 1950, 1951 and early 1952, the taxpayer purchased supplies from its U.S. parents and gave promissory notes evidencing the U.S.-dollar amounts owing by it in respect of the unpaid purchase prices. In its accounts (but not for purposes of its initially-filed tax returns), the taxpayer recorded the Canadian-dollar equivalent of the amounts owing at the times of purchase, and re-translated the amounts owing at each year end. The notes were paid off in 1951 and 1952, when the Canadian dollar had appreciated.

The taxpayer's profit for 1952 was based on the difference between (a) the amount actually paid by it, and (b) the Canadian-dollar equivalent of the amount owing at the beginning of the year translated at the December 31, 1951 exchange rate. The initially-recorded Canadian dollar equivalent of the purchase prices was itself an estimate, and there was no reason for not revising this estimate at each year-end in accordance with ordinary commercial principles. Such an accounting system did not entail the anticipation of future profits, but instead entailed the revision of an estimate of a liability which actually had been incurred.

A contractor was required to recognize income from contracts for the installation of heating and plumbing systems as the progress payments became receivable.

The taxpayer, which followed the "completed contract" method of recognizing income on long-term contracts for the excavation of sewers and water systems for accounting purposes, was permitted to deduct all the costs incurred by it in connection with those contracts only in the years those costs were made or incurred.

The contracts provided for the payment of 90% of the contract price (a fixed sum per lineal foot of work done) when the supervising engineer approved the account by monthly certification, and for the payment of all the 10% holdbacks when the contract was certified to have been completed. With respect to taxation years before the enactment of s. 12(1)(b), amounts under the contracts were earned (with the exception of the holdbacks) at the time of the monthly certification, and the holdbacks were earned at the time of final certification.

In computing its "profits ... reasonably attributable to the production of oil or gas", the taxpayer treated oil delivered by its producing department to other departments and still unsold at the end of the year as having been sold by the producing department at a profit. In rejecting this method, Judson J. stated (p. 1224):

"In fact, the producing department was not a separate entity for tax purposes ... No company makes an actual profit merely by producing oil. There is no profit until the oil is sold."

The taxpayer, whose business was the selling of books and magazines through door-to-door canvassers, was found by Thorson P. to be entitled to recognize income in accordance with the instalment method (which excluded from its income in the year of sale the gross profit content of the instalments which remained unpaid at the end of that year) in light of evidence that the period of payments for instalments was protracted, the collection of the instalments was uncertain, the costs of collection were high (representing 80% of its administration costs), the accounts were of such doubtful value that they could not be discounted or readily sold, and there were no valuable rights of repossession of the books or magazines sold. In addition, under s. 3 of the Income War Tax Act, which referred to the annual net profit or gain directly or indirectly "received" by the taxpayer, the test was whether the income was received by the taxpayer during the taxation year.

The taxpayer was found to have made deliveries of periodicals to its retail dealers on a sale or return basis, with the result that the sale price for periodicals which still were on hand at the dealers at the end of the taxation year were excluded from the taxpayer's income for that year, notwithstanding that for accounting purposes it had booked the sale price of all deliveries made by it to the dealers and deducted a reserve for expected returns. Locke J. stated (p. 1052) that "the position of a person holding goods on sale or return who has not exercised his option to purchase or otherwise become liable to the owner will be the same as if they were held on consignment. In the case of the bankruptcy of the dealer, the property would not pass to the trustee in either case." Kellock J. (who concurred with the majority on other grounds) characterized a sale or return as entailing a transfer of property to the retail dealer, but subject to a condition subsequent which could result in the property re-vesting in the taxpayer.

The taxpayer, which in the first year of its operations deducted expenses on an accrual basis but excluded from its income sales that were reflected in accounts receivable rather than cash received, was required to include the uncollected amounts in its income. Cameron stated (at p. 1050) that the taxpayer's method was "incomplete and misleading and one which fails entirely to show the true state of a taxpayer's position".

Taxi owners contracted with the taxpayer to pay the taxpayer $500 per taxi for the privilege of operating their taxis within the taxpayer's association. On the basis of a finding that the $500 paid was a deposit or joining fee and would become the absolute property of the taxpayer only if the particular owner withdrew from the association and the parties failed to agree on a satisfactory replacement for him, the $500 did not constitute income to the taxpayer.

The taxpayer, which acted as agent for underwriting members of Lloyd's of London in the writing of workman's compensation, employer's liability and occupational disease insurance, was entitled to receive, at the time each contract took effect, an "advance fee" based on the estimated amount of the payroll of the employer for a specified period (generally six months or a year), and at the end of the specified period was entitled to an "additional fee" computed on the actual remuneration earned by the employees during that period. The binder which initially was issued specified that "the advance fee shall be held as a deposit by the Underwriters" (to whom the taxpayer had remitted a portion of the advance fees received by it) to be retained if the total earned fee was higher, and to be returned to the extent that the total earned fee was less than the advance fee. The binder also fixed a "minimum fee" which was to be retained in any event.

Thorson J. held that the advance fees were not income to the taxpayer to the extent the right of retention of such advance fees had not accrued to the underwriters during each taxation year in question:

"Where an amount is paid as a deposit by way of security for the performance of a contract and held as such, it cannot be regarded as profit or gain to the holder until the circumstances under which it may be retained by him to his own use have arisen and, until such time, is not taxable income in his hands, for it lacks the essential quality of income, namely, that the recipient should have an absolute right to it and be under no restriction, contractual or otherwise, as to its disposition, use or enjoyment." (p. 661)