T-3710-79
Commonwealth Construction Company Limited
(Plaintiff)
v.
The Queen (Defendant)
Trial Division, Walsh J.—Vancouver, March 15,
16 and 23, 1982.
Income tax — Income calculation — Payments pursuant to
judgment made in 1974 and 1975 — Not reported as income
until 1977 because judgment under appeal — Payments sub
ject to plaintiffs agreement to refrain from execution proceed
ings, to repay amounts, if any, deducted by Court of Appeal,
and guarantee by plaintiffs parent corporation — Appeal
abandoned in 1977 — Whether payments should be included
in 1974 and 1975 taxation years or in 1977 taxation year —
Plaintiff submits amount could not be finally determined until
appeal settled, and that payments merely deposits — Defend
ant submits payments should be included in 1974 and 1975 as
any reduction or deletion would be amount transferred or
credited to reserve or contingent account which is prohibited by
s. 18(1)(e) of Act — Defendant also submits that even if
amounts had not been paid pursuant to judgment, they would
have constituted receivable which must be shown under s.
12(1)(b) of Act — Payments not deposits as plaintiff free to
use money as it chose, notwithstanding amounts subject to
repayment if judgment reversed — Contract, if any, created by
conditions precedent to payments, was subject to uncertain
resolutory condition — Judgment stands as final adjudication
until set aside and constituted determination of amount pay
able — Payments to be included in income when received
notwithstanding possibility of repayment — Income Tax Act,
S.C. 1970-71-72, c. 63, ss. 12(1)(b), 18(1)(e).
In an action to determine priorities between lienholders and
financier, Manitoba Development Corporation (M.D.C.),
Queen's Bench Division held that interests of lienholders had
priority. The County Court, bound by decision of superior
Court, awarded judgment to plaintiff in mechanic's lien action.
In 1974 the amount of the judgment and interest was paid to
the plaintiff subject to plaintiffs agreement to refrain from
execution proceedings, to repay any amounts as might be
deducted from the judgment by the Manitoba Court of Appeal,
and a guarantee by plaintiff's parent corporation. In 1975 an
amount was paid to plaintiff in respect of costs. M.D.C.
appealed the County Court decision, but abandoned the appeal
in 1977 in consideration for a return by plaintiff of a portion of
the monies paid to it. The plaintiff did not report amounts
received in its 1974 and 1975 taxation years until its 1977
taxation year. The plaintiff contends that as long as an appeal
was outstanding, the amount to which it was entitled could not
be finally determined because if the M.D.C. appeal on the issue
of priorities succeeded, the guarantee of the plaintiffs claim by
its registration of a mechanic's lien would be worthless. Accord
ingly, the plaintiff argues that payment of the amounts ordered
by the judgments were merely deposits. The defendant submits
that amounts paid to the plaintiff in 1974 and 1975 should be
properly included. Alternatively, the defendant submits that
any reduction or deletion of any of the said amounts constitutes
deduction of an amount transferred or credited to a reserve or
contingent account which is prohibited by paragraph 18(1)(e)
of Income Tax Act. Finally, the defendant contends that even if
the amounts ordered to be paid by virtue of the judgment had
not been paid, they would have constituted a receivable by
taxpayer which by paragraph 12(1)(b) of the Act would have
to be shown as such. The issue is whether the payments should
be included in the 1974 and 1975 taxation years or in the 1977
taxation year.
Held, the plaintiff's appeal against assessments for its 1974
and 1975 taxation years is dismissed with costs. The amounts
paid were not deposits. Where an amount is paid as a deposit it
is not for the use or enjoyment of the recipient. The payments
were subject to repayment in whole or in part if an appeal
reversed the initial judgment by virtue of which they were paid,
but this does not make them a mere deposit. If the conditions
by virtue of which the payment of the amounts ordered by the
judgments was made created a contractual relationship be
tween plaintiff and M.D.C., it was in any event no more than a
contract subject to a resolutory condition which was uncertain
and might never occur. Plaintiff was free to use the money as it
chose in the interval while the appeal was still pending and was
not, as plaintiff argued, in the position of a company borrowing
from a bank and using the proceeds of the loan in its business in
which event such proceeds would not be taxable, since in that
case there is a clear obligation to repay the amount borrowed,
which therefore, although a receipt by the borrower does not
constitute income in its hands. In Meteor Homes Ltd. v.
Minister of National Revenue (1960), 61 DTC 1001, it was
stated that "Not every contingency prevents the accrual of
income; the contingency must be real and substantial ... the
validity of a statutory law must be presumed until the contrary
is proved, and until then any monetary obligation which it
imposes should be treated as an outstanding liability". The
same could be said with respect to a judgment which might
later be reversed on appeal. R. v. Hess (No. 2), [1949] 4 D.L.R.
199 sets out a fundamental principle of law. It states that "The
judgment of a competent Superior Court is a final adjudication
in itself and stands as such unless it is set aside on appeal. It is
conclusive as to all relevant matters thereby decided...." The
County Court judgment constituted a determination of the
amount payable. The mere possibility that these amounts would
have to be refunded in whole or in part would not have the
effect of not requiring the amounts to be taken into income
when received.
CASES JUDICIALLY CONSIDERED
APPLIED:
Meteor Homes Ltd. v. Minister of National Revenue
(1960), 61 DTC 1001 (Ex.C.); R. v. Hess (No. 2), [1949]
4 D.L.R. 199 (B.C.C.A.); Nouvion v. Freeman (1889), 15
App. Cas. 1 (H.L.).
DISTINGUISHED:
Dominion Taxicab Association v. Minister of National
Revenue (1954), 54 DTC 1020 (S.C.C.).
CONSIDERED:
Kenneth B. S. Robertson, Limited v. Minister of Nation
al Revenue, [1944] CTC 75 (Ex.C.); The Minister of
National Revenue v. Atlantic Engine Rebuilders Limited,
[1967] S.C.R. 477; 67 DTC 5155; Minister of National
Revenue v. John Colford Contracting Company Limited
(1960), 60 DTC 1131 (Ex.C.); Minister of National
Revenue v. Pine Ridge Property Ltd. (1971), 71 DTC
5392 (F.C.T.D.); Minister of National Revenue v.
Benaby Realties Limited (1967), 67 DTC 5275 (S.C.C.);
Picadilly Hotels Ltd. v. Her Majesty the Queen (1978),
78 DTC 6444 (F.C.T.D.).
REFERRED TO:
Brown v. Helvering, Commissioner of Internal Revenue,
291 U.S. 193 (Cir.).
INCOME tax appeal.
COUNSEL:
B. J. Wallace and B. D. Fulton for plaintiff.
W. H. Heinrich and J. Deane for defendant.
SOLICITORS:
Lawson, Lundell, Lawson & McIntosh, Van-
couver, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
WALSH J.: The issue in the present case was
whether the sum of $5,072,595 paid to plaintiff in
its 1974 taxation year and $725,221 paid in
respect of costs in its 1975 taxation year, said
amounts resulting from a judgment rendered in
favour of plaintiff on November 24, 1974 in the
County Court of the Pas by His Honour Judge
Ferg, which was under appeal, should have been
declared for income tax in those years as defend
ant contends rather than in the year 1977 as
plaintiff contends, when pursuant to an agreement
entered into between the Manitoba Development
Corporation (M.D.C.) which had paid said
amounts to plaintiff, the appeal was abandoned on
agreement by plaintiff to return to the said
M.D.C. $455,000 of the monies paid by it to the
plaintiff in 1974 and 1975.
While the issue to be decided is comparatively
simple the background is complex. The plaintiff, a
construction company, entered into a series of
contracts for construction at the Pas in Manitoba
for Churchill Forest Industries (C.F.I.) of a pulp
mill as well as eventually a paper mill, saw mill
and machine shop. Financing was provided by the
M.D.C. Payments were made as due to the end of
1970 when C.F.I. defaulted in its payments to
M.D.C. as a result of which, on January 7, 1971, a
receiver-manager was appointed for C.F.I. Not
being satisfied with the manner in which the
receiver was carrying out his duties, the creditors
of C.F.I., including plaintiff, put C.F.I. in bank
ruptcy on December 6, 1971. Meanwhile, on
March 2, 1971, plaintiff commenced action in the
County Court of the Pas to enforce its claim
against the project under the provisions of The
Mechanics' Liens Act'.
M.D.C. took the position that plaintiff and other
lien holders did not have priority over its interest
and in 1971 two actions were commenced before
the Court of Queen's Bench in Manitoba to deter
mine the issue of priorities. On August 16, 1972,
Chief Justice Tritschler of the Court of Queen's
Bench, Manitoba, handed down judgments in
which he found the interests of the lien holders
took priority over those of M.D.C. These were
appealed and the appeal was heard but by agree
ment of the parties, the receiver of M.P. Industrial
Mills, Limited, one of the C.F.I. group of compa
nies, and M.D.C. and the trustee in bankruptcy of
the C.F.I. group of companies, the Court of
Appeal was requested to refrain from rendering
' R.S.M. 1970, c. M80.
reasons for judgment. However, in the spring of
1973 the Honourable Mr. Justice Dickson, one of
the three judges who heard the appeal, was
appointed to the Supreme Court of Canada and, as
a result, was required to render all pending deci
sions, so he filed his reasons on June 15, 1973, and
plaintiff's then counsel saw them. They were
subsequently sealed by order of the Chief Justice
of the Manitoba Court of Appeal, hence are not
available and it must be stressed that no judgment
was ever rendered by the Manitoba Court of
Appeal from the judgment of Chief Justice
Tritschler.
In his reasons for judgment on the mechanic's
lien action brought before the County Court of the
Pas, on November 24, 1974, Judge Ferg relied
upon the unreversed decision of Chief Justice
Tritschler as binding upon him with respect to the
relative priorities between the plaintiff and
M.D.C. The other issues before him included the
quantum of the various claims for extras and
changes as is not unusual in contract actions, and
he concluded by rendering judgment in favour of
plaintiff for $4,573,601.55 with interest. No find
ing was made as to costs, the parties being invited
to make submissions at a later date and in the
event of their failing to agree to speak to the
Court. The judgment stated that no formal
application for an order for sale of the property
found subject to the lien had been made to the
Court but that the Court would so order in the
event that payment of the amount found due was
not made within a reasonable time.
On December 24, 1974, M.D.C. filed a notice of
appeal from this judgment but meanwhile an
agreement was entered into between plaintiff and
M.D.C. whereby M.D.C. agreed to pay the
amount found due by the judgment with interest
making a total of $6,072,595 immediately in con
sideration of plaintiff agreeing to refrain from
execution proceedings, to repay any amounts as
might be deducted from the judgment by the
Manitoba Court of Appeal, and a guarantee in the
amount of $1,500,000 by Guy F. Atkinson Com
pany, an American corporation being the sole
shareholder of the plaintiff.
On March 6, 1975 Judge Ferg gave judgment
on the issue of costs of the mechanic's lien action
awarding costs to plaintiff against M.D.C. in the
amount of $725,221 which were paid during the
1975 fiscal year of the plaintiff.
In Febuary 1976, M.D.C. filed an amended
notice of appeal from the decision of His Honour
Judge Ferg, including an appeal on the issue of
costs. In April 1977, an agreement was concluded
between plaintiff and M.D.C. by virtue of which
M.D.C. agreed to abandon its appeal from the said
decision. Both parties agreed to execute a mutual
release and the plaintiff agreed to return to
M.D.C. $455,000 from the monies paid in 1974
and 1975.
Plaintiff did not report the amounts received in
its 1974 and 1975 taxation years until its 1977
taxation year. The defendant reassessed plaintiff's
1974 and 1975 tax returns so as to include these
amounts. As a result of an amended 1977 return
dated August 4, 1978, the plaintiff asked that the
sum of $5,997,816 representing these amounts,
after adjustments, be deleted from its income for
1977 and the Minister of National Revenue so
assessed plaintiff on April 12, 1979 so that there
would be no duplication should the defendant's
reassessments for 1974 and 1975 taxation years be
upheld as a result of the present proceedings.
In its return for the 1974 taxation year, plaintiff
deducted for financial statement purposes a
reserve of $600,000 for appeal costs in relation to
the Pas judgment and reserved an amount of
$200,000 for legal costs and in reconciling income
for financial statement purposes and income for
tax purposes, deducted $5,472,595 shown as "the
Pas judgment less provision for appeal" com
menced by M.D.C. In its return for the 1975
taxation year and in purported reconciliation of
income for financial statement purposes with
income for tax purposes, plaintiff included in
income the amount of $5,472,595 but deducted an
amount of $5,997,816 for "the Pas judgment, less
provision for appeal".
In its reassessment for the 1974 taxation year,
defendant has added back said amounts claimed
by plaintiff as a deduction from income and simi
larly in the 1975 taxation year added back the
amount of $525,221 being the amount of the
increased deduction claimed by plaintiff from
1974 to 1975 for the Pas judgment less provision
for appeal*. Contending that the amounts paid to
the plaintiff in 1974 and 1975 should be properly
included, the Minister also submits in the alterna
tive that any reduction or deletion of any of the
said amounts constitutes a deduction of an amount
transferred or credited to a reserve or contingent
account which is prohibited by paragraph 18(1)(e)
of the Income Tax Act, S.C. 1970-71-72, c. 63.
There is no issue between the parties as to any
of the figures and there is common ground that in
the event that the Manitoba Court of Appeal
should determine at any material time that the
claim of M.D.C. had priority over the claim of the
plaintiff, then there would have been no monies
available for distribution to the plaintiff or any
other creditors since the amount owing to M.D.C.
was far in excess of what could be realized if the
assets of the pulp and paper mill were sold. The
issue of priority was, therefore, a very essential one
and while a viewing by plaintiff's counsel of rea
sons for judgment submitted by the Honourable
Mr. Justice Dickson in connection with the appeal
may have had some effect on the advice given to
his client in connection with the agreement in 1977
to return some small part of the monies paid in
1974 and 1975, hearsay evidence as to reasons for
judgment by one of three judges hearing an appeal
* A reconciliation of amounts reported in financial state
ments and those reported for income tax purposes was pro
duced as Exhibit D-2, and further explanation of the figures
appears on page 3 and Note 10 (page 21) of plaintiff's 1974 tax
return and page 51 and Note 8 (page 68) of its 1975 return.
The figures used in the reassessment by the Minister appear on
pages 96 and 98 respectively. (All page numbers given are
those in Exhibit D-1, containing the returns.)
in which judgment was never rendered cannot be
taken into consideration in deciding the present
issue, even if they might have indicated that plain
tiff was in some jeopardy of not being able to
collect or repay amounts ordered by the judgment
of Judge Ferg which judgment, not having been
reversed in appeal, remained in effect until, as a
result of the agreement in 1977, the appeal was
abandoned.
It should be added that no application for a stay
of execution pending appeal was ever made nor
was the amount of the judgment deposited in
Court but it was paid in full to the plaintiff with
no restrictions as to its use. The agreement, prior
to payment in 1974, to repay any amounts which
might be deducted from it by the Manitoba Court
of Appeal, represents no more than a statement of
what would have had to be done in any event, and
the security put up by plaintiffs parent company
of $1,500,000, was of course in addition to the
guarantee by the plaintiff itself of any repayment
eventually required, but was merely a guarantee
and did not in any way restrict the plaintiff's use
of the funds in the meanwhile.
Five witnesses testified for plaintiff, Mr.
Michael J. Mercury, Q.C., Manitoba counsel for
the periods in question, Mr. Robert G. Urquhart,
current president and general manager, who has
been with plaintiff since 1968 and was manager of
its central operations in Canada at the time,
becoming vice-president and director in 1972, Mr.
Ritchie McCloy, C.A., a partner in the accounting
firm of Peat, Marwick, Mitchell & Company, who
testified as an expert witness, John Dawson, C.A.,
of Coopers & Lybrand, who was the auditor of the
plaintiff corporation in all pertinent years and Mr.
George Stekl, C.A., also a partner of Coopers &
Lybrand who was its tax specialist and advised
with respect to the tax returns made for the years
in question. The defendant called no witnesses.
Plaintiff contends that as long as the appeal was
outstanding, the amount to which it was entitled
could not be deemed to be finally determined, and
in fact was reduced by $455,000 by the 1977
agreement. In addition, there was the risk that
should the M.D.C. appeal succeed on the issue of
priorities, the guarantee of plaintiff's claim by its
registration of a mechanic's lien would be worth
less. While it is of interest to note that plaintiff did
not apparently consider the risk to be too great
since in its financial returns it merely set aside an
amount of $600,000 as a reserve for this, it is the
manner in which plaintiff treated these receipts in
1974 and 1975 in its tax returns by failing to
consider them as income in those years which is
the issue here.
Mr. Mercury testified that after the Tritschler
judgment claims of most of the lien creditors were
settled as a result of an agreement dated April 5,
1973, which resulted in payment of 90% of the
claims plus interest and costs, or alternatively,
100% of the claims with costs but without interest.
The plaintiff refused to accept this agreement and
continued with its action which had commenced in
February 1972 and was well advanced. It involved
266 days of hearing, terminating in May 1973,
followed by two months of argument in July and
August which accounts for the substantial costs
which amounted to over $600,000. This offer was
made after the appeal from Chief Justice Tritsch-
ler's judgment had been heard but, as indicated, no
judgment was ever entered on the appeal. Accord
ing to Mr. Mercury, the entire development had
been most unfortunate, with serious political
implications, involving three successive Manitoba
governments and the Manitoba Development Cor
poration in the difficult position of explaining how
some $145,000,000 had been advanced to compa
nies incorporated by non-resident promoters and
used in the development of property worth only
some $60,000,000.
For purposes of settlement, M.D.C. had evaluat
ed plaintiff's claim at some 4.2 million dollars. The
action in the County Court sought 5.6 million and
judgment was eventually rendered for some 4.6
million plus interest, bringing the total to over 6
million as indicated. Various settlement discus
sions had taken place and at one stage M.D.C.
verbally offered 4.8 million in May 1972, which
was rejected. Mr. Mercury had some concern as to
what might happen if the appeal proceeded, espe-
cially after he had seen Mr. Justice Dickson's
reasons in the appeal of the Tritschler judgment
but the only person to whom he communicated this
information was Mr. Fenton, of the plaintiff com
pany from whom he had received his instructions
at the time, and who has since died. He testified
that it was never necessary to register Judge Ferg's
judgment in the land registry. He was under the
impression that the last thing the Manitoba De
velopment Corporation would want was to have
the property seized as a result of the judgment.
That is why it was paid promptly although the
judgment was appealed. Appeal factums were filed
between June and December, 1976, and plaintiff
finally agreed to the reduction of the total claim
by $455,000 in 1977 in order to have the appeal
withdrawn. He had made a calculation that in his
view the client had a total of about 1.4 million, not
counting interest, in jeopardy in the appeal, aside
from the question of priority of claim.
Plaintiff's expert witness, Mr. McCloy, testified
that there are two generally accepted methods of
accounting for revenue in long term construction
contracts, namely the completed contract method
which required that any revenue, and therefore
profit, from a contract not be recognized until the
contract is substantially completed, and the per
centage of completion method which requires that
revenue, and therefore profit, on the contract be
recognized on a pro rata basis, based on costs
incurred to date as a percentage of total estimated
contract costs. Losses are recognized as soon as
they become evident. The latter method, however,
which was used by plaintiff, requires the contrac
tor be able to estimate with reasonable accuracy
the total amount of costs to be incurred on the
contract until completion, which total costs are
subtracted from the total contract price to give a
reasonable estimate of profit on the total contract.
A percentage of the total contract equal to the
percentage of completion of the contract is recog
nized in the revenue of the company in the fiscal
year being reported upon. Accordingly, an equiva
lent portion of the contract profit is also
recognized.
He testified further that one area in which
judgment is utilized lies in a situation where the
company is involved in litigation which might
result in financial liability of the company. In such
situations the auditor communicates with the com-
pany's solicitor and carries out discussions with
management to elicit the facts surrounding the
litigation, and obtain management's estimates of
financial exposure of that litigation in order to
assess the reasonableness of that estimate. Recog
nition of this possible liability is usually done
either by means of a note to the financial state
ment disclosing the contingent liability (as was
done on the company's financial statements in this
case) or when the anticipated liability is quantifi-
able and determinable as having a high degree of
probability by making a provision for this amount.
He concludes in his affidavit "where an amount is
received by a company as a result of a judgment
and the judgment is under appeal at the end of the
fiscal year of the company, the usual treatment is
not to recognize as revenue any part of the amount
received from the judgment if management and
the company's solicitor are of the opinion that the
judgment will be overturned on appeal". [Empha-
sis mine.]
While it is clear from the evidence of Mr.
Urquhart and of the company's solicitor, Mr. Mer
cury, that some risk of reversal in appeal existed,
and that on the worst possible view the mechanic's
lien claim might prove to be worthless, neverthe
less it was felt that the sum of $600,000 was an
adequate provision for the risk in the company's
financial statements, and it certainly cannot be
said that "management and the company's solici
tor are of the opinion that the judgment will be
overturned on appeal". In fact, as the evidence of
Mr. Mercury indicates, even after having seen the
reasons for judgment of Mr. Justice Dickson ren
dered in June, 1973 in connection with the
Tritschler appeal, which gave him some concern,
he nevertheless refused to recommend a settlement
of the proceedings before Judge Ferg even when
defendant suggested a possible figure of 4.8 mil
lion dollars, and eventually in 1977 only reduced
the plaintiff's claim by $455,000 in return for the
withdrawal of the appeal.
Mr. McCloy's evidence concerned primarily the
financial statements of the company and conclud
ed that the footnotes to the statements in 1974 and
1975 respecting the litigation under appeal repre
sented a conservative manner of reporting from the
auditing point of view. It certainly does not conclu
sively settle the question of whether the amounts
received should have been declared for taxation
purposes in those years.
Mr. Dawson, plaintiff's auditor, stated that in
showing the reserve of $600,000 in the assessment,
the possible effect of the appeal was taken into
account. In his acceptance of this, together with
the footnotes, he did not take Mr. Justice Dick-
son's reasons for judgment into consideration and,
in fact, did not learn of them until later. After he
had discussed the adequacy of the decision made
with both management and the company's counsel
in connection with the appeal situation he would
only have commented on management's appraisal
of it as shown in the financial statements if he had
thought they were flagrantly wrong.
Mr. Stekl, who as the taxation partner of the
company's auditors approved the tax returns, testi
fied that no certificates of the site engineers had
ever been made to approve the amounts for which
the mechanic's lien claims had been made. This
was one of the matters which was litigated before
Judge Ferg, however, and can be considered as
settled by his judgment. He testified that he con
siders that a judgment under appeal creates a
situation which is less certain than an engineer's
certificate of approval, which binds the owner. He
considers that the tax returns filed were in accord
ance with the case law and tax accounting
practice.
The parties referred to extensive jurisprudence
although there does not appear to be any case
directly on point on the question of how to deal
with payment made by virtue of a judgment under
appeal. Although counsel for both plaintiff and
defendant relied on the leading case of Kenneth B.
S. Robertson, Limited v. Minister of National
Revenue 2 , a judgment of the late President Thor-
son, it appears to me on a close reading to be of
2 [1944] CTC 75 (Ex.C.).
little help to plaintiff. At page 88 the learned
President referred to the United States Supreme
Court case of Brown v. Helvering, Commissioner
of Internal Revenue, 291 U.S. 193 (Cir.), and
quoted from the opinion of Mr. Justice Brandeis at
page 199:
The overriding commissions were gross income of the year in
which they were receivable. As to each such commission there
arose the obligation—a contingent liability—to return a pro
portionate part in case of cancellation. But the mere fact that
some portion of it might have to be refunded in some future
year in the event of cancellation or re-insurance did not affect
its quality as income.... When received, the general agent's
right to it was absolute. It was under no restriction, contractual
or otherwise, as to its disposition, use or enjoyment.
The learned President concluded that advance
fees received by appellant on behalf of underwrit
ers and remitted to them were not taxable when
received as they were subject to future adjustment
and might have to be refunded in part if they
exceeded the earned fee based on the ascertained
total payroll which could only be determined in the
annual adjustment. He relies on the wording of the
contract, however. At page 91 he states:
The "advance fee" paid by the employer to the underwriters
and received by the appellant on their behalf had, in my
judgment, a different quality, for under the contract between
the underwriters and the employer, as shown by the indemnifi
cation certificate, it was stipulated that the advance fee should
be "held as a deposit", and dealt with in a specified manner. It
was to be applied against the audited fee in the annual adjust
ments that had to be made, and not before then.
At page 92 he states that where an amount is
paid as a deposit it is not for the use or enjoyment
of the recipient.
The plaintiff contends that the payment of the
amount ordered by the judgment in 1974 and the
costs ordered by a subsequent judgment in 1975
were merely deposits. I do not agree. They were
subject to repayment in whole or in part if an
appeal reversed the initial judgment by virtue of
which they were paid, but this does not make them
a mere deposit. If the conditions by virtue of which
the payment of the amounts ordered by the judg
ments was made created a contractual relationship
between plaintiff and M.D.C. as plaintiff contends,
it was in any event no more than a contract subject
to a resolutory condition which was uncertain and
might never occur. Plaintiff was free to use the
money as it chose in the interval while the appeal
was still pending and was not, as plaintiff argued,
in the position of a company borrowing from a
bank and using the proceeds of the loan in its
business in which event such proceeds would not
be taxable, since in that case there is a clear
obligation to repay the amount borrowed, which,
therefore, although a receipt by the borrower does
not constitute income in its hands. Plaintiff also
raised a hypothetical argument as to what would
happen if, having paid tax on the amounts received
in 1974 and 1975, it were then found, as a result of
an appeal, that the tax should not have been paid
in those years but only in 1977, but it could only
get relief in 1977 for the amounts paid in 1974 and
1975 if it had sufficient other income in 1977 from
which the adjustment could be deducted. The con
verse of this argument is, of course, that if plaintiff
should not pay tax on the amounts received in
1974 and 1975, it could, by 1977, when according
to its contentions the tax would become due, have
gone into bankruptcy, and having had the use of
the funds from 1974 and 1975 to 1977 would never
pay any tax on these amounts. These arguments
are purely hypothetical contingencies and are
without merit.
The case of The Minister of National Revenue
v. Atlantic Engine Rebuilders Limited 3 was also
referred to by plaintiff but here again it dealt with
taxation of a deposit which was made in connec
tion with the rebuilding of car engines to be
refunded to the dealer upon delivery of a used
engine of the same model. The majority judgment
of the Supreme Court maintaining the judgment
of Thurlow J., as he then was ([[1965] 1 Ex.C.R.
647], 64 DTC 5178) states at pages 479-480
[Supreme Court Reports]:
The question of substance in this case appears to me to be
whether in stating what its profit was for the year the respond
ent could truthfully have included the sum in question. To me
there seems to be only one answer, that it could not. It knew
3 [1967] S.C.R. 477; 67 DTC 5155.
that it might not be able to retain any part of that sum and that
the probabilities were that 96 per cent of it must be returned to
the depositors in the near future. The circumstance that the
respondent became the legal owner of the moneys deposited
with it and that they did not constitute a trust fund in its hands
appears to me to be irrelevant; the same may be said of moneys
deposited by a customer in a Bank which form part of the
Bank's assets but not of its profits. To treat these deposits as if
they were ordinary trading receipts of the respondent would be
to disregard all the realities of the situation.
In the case of Minister of National Revenue v.
John Colford Contracting Company Limited', Mr.
Justice Kearney dealt with progress payments
made to a contractor for which an engineering
certificate had not yet been received. At page 1133
he states:
The issue in respect of progress payments turns on whether the
taxpayer is justified in ignoring the payments actually received
during 1953 until the architect or engineer has given the
certificate referred to in the contract.
At page 1134 after referring to a section of the
Income Tax Act and previous jurisprudence, he
states:
I think the above reasoning is applicable mutatis mutandis in
the present case and it is my view that progress payments,
whether made on demand or otherwise during the course of any
year in connection with the contracts in question, must be
reckoned with in the year in which they are received and may
not in effect be ignored by placing them in a suspension
account as was done in the present case.
The defendant also relies on the case of Meteor
Homes Ltd. v. Minister of National Revenues in
which the judgment at page 1008 quotes from
Mertens, Law of Federal Income Taxation, Vol. 2,
c. 12, page 132 to the effect that:
Not every contingency prevents the accrual of income; the
contingency must be real and substantial. A condition prece
dent to the creation of a legal right to demand payment
effectively bars the accrual of income until the condition is
fulfilled, but the possible occurrence of a condition subsequent
to the creation of a liability is not grounds for postponing the
accrual. (Emphasis mine.)
On the same page the judgment reads:
In the present case there was no condition precedent to
prevent the provincial authorities from preferring a claim
against the appellant; and whether the law under which the
claim was instituted might later be declared ultra vires con
stituted a condition subsequent. In my opinion the validity of a
° (1960), 60 DTC 1131 (Ex.C.).
5 (1960), 61 DTC 1001 (Ex.C.).
statutory law must be presumed until the contrary is proved,
and until then any monetary obligation which it imposes should
be treated as an outstanding liability.
I believe the same could be said with respect to
the effect of a judgment which might later be
reversed on appeal. In this connection reference
was made to a criminal law case of R. v. Hess (No.
2) at page 203 6 :
The judgment of a competent Superior Court is a final adjudi
cation in itself and stands as such unless it is set aside on
appeal. It is conclusive as to all relevant matters thereby
decided ....
This sets out a fundamental principle of law which
is again emphatically stated in the case of Nouvion
v. Freeman' at pages 10-11:
Although an appeal may be pending, a Court of competent
jurisdiction has finally and conclusively determined the exist
ence of a debt, and it has none the less done so because the
right of appeal has been given whereby a superior Court may
overrule that decision. There exists at the time of the suit a
judgment which must be assumed to be valid until interfered
with by a higher tribunal, and which conclusively establishes
the existence of the debt which is sought to be recovered in this
country.
In the case of Minister of National Revenue v.
Pine Ridge Property Ltd. s, dealing with an expro
priation award which was appealed, the appeal
subsequently being dismissed, Sheppard D.J. states
at page 5399:
In the present case, the finding of the Arbitrators was on the
22nd day of September, 1966 ... and within the taxation year
of the Respondent Company. The unsuccessful appeal to Ver-
chere J. does not extend the date when the monies are
receivable.
In the case of Minister of National Revenue v.
Benaby Realties Limited 9 , another expropriation
case, Judson J. stated at page 5276:
In my opinion, the Minister's submission is sound. It is true
that at the moment of expropriation the taxpayer acquired a
right to receive compensation in place of the land but in the
absence of a binding agreement between the parties or of a
judgment fixing the compensation, the owner had no more than
a right to claim compensation and there is nothing which can
be taken into account as an amount receivable due to the
expropriation. [Emphasis mine.]
e [1949] 4 D.L.R. 199 (B.C.C.A.).
' (1889), 15 App. Cas. 1 (H.L.).
8 (1971), 71 DTC 5392 (F.C.T.D.).
9 (1967), 67 DTC 5275 (S.C.C.).
Later, in the same case, after referring to a British
case which he doubts would be applicable in
Canada, he states [at page 5276]:
The application of this decision to the Canadian Income Tax
Act is questionable. This decision implies that accounts can be
left open until the profits resulting from a certain transaction
have been ascertained and that accounts for a period during
which a transaction took place can be re-opened once the
profits have been ascertained.
There can be no objection to this on the properly framed
legislation, but the Canadian Income Tax Act makes no provi
sion for doing this. For income tax purposes accounts cannot be
left open until the profits have been finally determined.
In the present case, unlike expropriation cases,
the amount due was determined by the judgment
of Judge Ferg. The subsequent refund in the
amount of $455,000 in 1977 by plaintiff as a result
of an agreement resulting in the withdrawal of the
appeal would be properly deductible as an expense
item by plaintiff in its 1977 taxation return, but
this does not affect the taxability of the amounts
actually received in 1974 and 1975.
In the case of Picadilly Hotels Ltd. v. Her
Majesty the Queen 10 , Collier J. said at page 6446:
Subsequent litigation, and the possibility of a contract involving
sale being rescinded by court order, cannot, to my mind, change
the nature of the original transaction at the time it was entered
into.
Nor is the position changed, in my opinion, because the
plaintiff was contingently liable, in respect of the transaction,
for a potential damage award. Whether the damages could
have been set off against the sale price is a moot question.
Assuming that result, there was still, nevertheless, a disposition
or sale in 1970. The actual selling price might, for other
purposes including tax, have had to be subsequently adjusted.
The plaintiff referred to the Supreme Court
judgment in the case of Dominion Taxicab Asso
ciation v. Minister of National Revenue", in
which the question arose as to the treatment of the
$500 deposit paid by each taxicab owner to the
association which would be refundable when he
withdrew from it. The Supreme Court held that
this should not be treated as income. The judg-
f0 (1978), 78 DTC 6444 (F.C.T.D.).
" (1954), 54 DTC 1020 (S.C.C.).
ment of the late Justice Cartwright [as he then
was] stated at page 1022:
... I am of the opinion that in the case at bar the appellant
rightly treated the $40,500.00 as a deferred liability to its
members, and that unless and until the necessary conditions
were fulfilled to give absolute ownership of a deposit to the
appellant and to extinguish its liability therefor to the deposit
ing member, such deposit could not properly be regarded as a
profit from the appellant's business.
Here again, this was a case of deposit, however,
which I have found is not the nature of the pay
ments received by the plaintiff in satisfaction of its
judgment and costs. Moreover, later, on page
1022, the judgment continues:
The case at bar is distinguished from Diamond Taxicab
Association Ltd. v. Minister of National Revenue (1952) Ex.
C.R. 331, [52 DTC 1100] affirmed in this Court without
written reasons. In the circumstances of that case it was held
that the sums there in question had been paid outright to the
Association as part of the consideration for the services it
rendered; no question of a deposit arose.
The defendant further contends that any treat
ment of the amounts received in 1974 and 1975,
other than taking them into income, would have
the indirect effect of creating a reserve as prohib
ited by paragraph 18(1)(e) of the Income Tax Act.
The defendant further contends that even if the
amounts ordered to be paid by virtue of the judg
ment had not been paid, they would have con
stituted a receivable for the taxpayer, which, by
paragraph 12(1)(b) of the Act would have to be
shown as such.
In conclusion, I find on the basis of the above
jurisprudence and the facts of this case that the
judgment of Judge Ferg constituted a determina
tion of the amount payable, that the said amount
was paid in 1974 and costs determined by a second
judgment were paid in 1975, and that the mere
possibility that these amounts would have to be
refunded in whole or in part as, in fact, took place
in 1977 to the extent of $455,000, would not have
the effect of not requiring the amounts to be taken
into income when received.
The plaintiff's appeal against assessments for
income tax for its 1974 and 1975 taxation years is
dismissed with costs.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.