INCOME TAX |
Reserves |
Wolofsky v. Canada
A-778-99, A-779-99, A-777-99
2001 FCA 119, Noël J.A.
30/4/01
17 pp.
Appeals from Trial Division decisions (2000 D.T.C. 6302) dismissing appellants' appeals from T.C.C. decisions dismissing appeals from reassessments for 1971 taxation year concerning application of ITA, s. 85B--Property sold by appellants in 1962 for $2,219,719, receiving about 15% cash, balance to be paid in monthy installments--Balance comprised of $1,459,438 in outstanding loans secured by hypothecs on property and further amount of $430,000 secured by vendor's privilege--Outstanding hypothecs tolerated by first buyers but not assumed--Property sold by first buyers on same day to second buyer which agreed to assume all existing hypothecs on property--Appellants' profit from sale of property $678,272--For each of 1962 to 1970 taxation years, appellants reported net amount in respect of share of profit from 1962 sale in apparent compliance with s. 85B and without challenge by MNR--By December 1971, amount secured by vendor's privilege had been paid in full and amount of $1,093,467 remained outstanding--Using same formula as in past, appellants claimed, for 1971 taxation year, reserve of $111,387 each, pursuant to ITA, s. 85B(1)(d)--By reassessments issued in 1978, MNR rejected appellants' basis for reporting profit from 1962 sale for 1971 and included in their income for that year their share in profit element in all amounts receivable, in respect of property sold in 1962, in 1971 and in all subsequent years--TCC dismissed appeals on ground for 1971 taxation year, no money owed to appellants on account of profit from sale of property--Found no evidence brought forward to effect value of unpaid balance of mortgages higher than value of property mortgaged, and that all subsequent purchasers had validly and personally assumed all of appellants' obligations towards hypothecary creditors--F.C. Trial Judge dismissed appeal, finding that while amounts receivable by appellants from sale of property in 1962 that had not been paid still receivable at end of 1971, no amount could be considered reasonable as ITA, s. 85B(1)(d) reserve for 1971 taxation year--Appeals allowed--As, apart from ITA, s. 85B(1), would be no liability in 1971 in respect of profit from sale in 1962, tax imposed on appellants in 1971 with respect to sale must result from operation of ITA, s. 85B(1) which requires appellants to include in computation of their 1971 income (85B(1)(e)) amount deducted under (d) in 1970 and which allows for deduction of "reserve" for 1971 for which provision made by (d)--Trial Judge's following findings of fact relevant to disposition of appeal: (1) appellants remained liable for outstanding loans which had value equivalent to balance of sale; (2) amounts receivable by appellants by virtue of 1962 sale, to extent had not been paid, still receivable at end of 1971, and amounts relied on by appellants in computing 1971 income tax liability correct--However, Trial Judge held (incorrectly) these amounts did not entitle them to reserve--Where amount included, by operation of ITA, s. 85B(1)(b), in computing income for year before receivable, taxpayer having right, every year before amount becomes payable, to claim s. 85B(1)(d) reserve--ITA, s. 85B(1)(b) and (d) essential components of single enactment providing that in computing income for year, profit arising from amount receivable not yet receivable will be included for every year until receivable and, profit element so included may be deducted in computing income for any year before receivable--In result, profit element in receivable only included in income for year in which receivable--Dominion of Canada General Insurance Co. v. The Queen (1986), 86 DTC 6154 (F.C.A.) and The Queen v. The Ennisclare Corporation (1984), 84 DTC 6262 (F.C.A.) both distinguished--Income Tax Act, R.S.C. 1952, c. 148, s. 85B(1) (as am. by S.C. 1952-53, c. 40, s. 73).