A-162-81
The Queen (Appellant)
v.
Timagami Financial Services Limited (Respond-
ent)
Court of Appeal, Urie, Ryan JJ. and Kelly D.J.—
Toronto, May 4; Ottawa, July 28, 1982.
Income tax — Income calculation — Appeal — Agreement
entered into by respondent to sell part of assets — Agreement
providing for payment of part of purchase price upon execu
tion of agreement and balance in instalments over two and
one-half years — Respondent included in income only that
part of purchase price which fell due in 1975 — Trial Division
held that "payable" in s. 14(1) of the Act synonymous with
"due" — Appeal dismissed — Income Tax Act, R.S.C. 1952,
c. 148, s. 85 (as rep. by S.C. 1970-7/-72, c. 63, s. 12) —
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 14, 20.
This is an appeal from a judgment of the Trial Division
allowing an appeal from reassessments whereby respondent's
1975 taxable income was adjusted to include amounts for
goodwill which, under the terms of agreement, were to be paid
in future years. The Trial Division held that the word "pay-
able" in subsection 14(1) of the Act is synonymous with "due",
a present obligation to pay.
Held, the appeal is dismissed. The word "payable" in subsec
tion 14(1)—"... an amount has become payable to a taxpayer
in a taxation year ..."—is to be read in an ordinary, everyday
way. It cannot be said that sums which, by the express terms of
an agreement, are not to be paid to a taxpayer until 1976, 1977
and 1978 are payable to him in 1975. To achieve such a result,
more extended or technical language is required, such as in
paragraph 12(1)(b): "There shall be included in computing the
income of a taxpayer for a taxation year as income ... any
amount receivable ... notwithstanding that the amount or any
part thereof is not payable until a subsequent year ...." It may
be inconsistent that the cumulative eligible capital of a taxpay
er includes amounts payable in later taxation years; if such is
the case, in certain instances, the Act is not symmetrical.
CASE JUDICIALLY CONSIDERED
CONSIDERED:
The Minister of National Revenue v. John Colford Con
tracting Company Limited, [1960] Ex.C.R. 433.
COUNSEL:
Wilfrid Lefebvre for appellant.
J. L. McDougall, Q.C., for respondent.
SOLICITORS:
Deputy Attorney General of Canada for
appellant.
Fraser & Beatty, Toronto, for respondent.
The following are the reasons for judgment
rendered in English by
RYAN J.: This is an appeal from a judgment of
the Trial Division [[1981] 2 F.C. 777] dated Feb-
ruary 24, 1981 allowing an appeal by the respond
ent, Timagami Financial Services Limited
("Timagami") from income tax reassessments
made by the Minister of National Revenue
respecting Timagami's 1975, 1976 and 1977 taxa
tion years.
The appeal turns on the interpretation of the
words "... an amount has become payable to a
taxpayer in a taxation year ..." ("the disputed
words") appearing in subsection 14(1) of the
Income Tax Act, R.S.C. 1952, c. 148, as am. by
S.C. 1970-71-72, c. 63, s. 1, as that subsection was
written in the relevant taxation years'.
Subsection 14(1) reads:
14. (1) Where, as a result of a transaction occurring after
1971, an amount has become payable to a taxpayer in a
taxation year in respect of a business carried on or formerly
carried on by him and the consideration given by the taxpayer
therefor was such that, if any payment had been made by the
taxpayer after 1971 for that consideration, the payment would
have been an eligible capital expenditure of the taxpayer in
respect of the business, there shall be included in computing the
taxpayer's income for the year from the business the amount, if
any, by which 1/2 of the amount so payable (which 1/2 is
hereafter in this section referred to as an "eligible capital
amount" in respect of the business) exceeds the taxpayer's
cumulative eligible capital in respect of the business immediate
ly before the amount so payable became payable to the
taxpayer.
By an agreement dated April 30, 1975, Timaga-
mi sold its business, or a goodly part of it, to
Hurontario Management Services Limited
("Hurontario") for $150,000. It is not disputed
' Subsection 14(1) was repealed and replaced by subsection
7(1) of An Act to amend the statute law relating to income
tax, S.C. 1977-78, c. 1. All references to the Income Tax Act in
these reasons are references to the provisions of the Act appli
cable in the taxation years 1975, 1976 and 1977 unless I
indicate otherwise.
that $141,474 of this amount was on account of
goodwill. Under the agreement Hurontario agreed
to pay Timagami $20,000 upon execution of the
agreement. The balance of the purchase price was
to be payable in instalments: $20,000 was to
become due and payable on November 1, 1975,
and $20,000 was to become due and payable on
the first days of May and November in each of the
years 1976 and 1977 and on the first day of May
1978; the balance of $10,000 was to become due
and payable on November 1, 1978. Interest was
payable on the instalments as they became due.
Hurontario was given the privilege of making
advance payments 2 . It appears from the evidence
that this privilege was exercised from time to time,
and that the price was fully paid by the end of
1977.
The Minister, in reassessing, took the position
that the total purchase price, $150,000 (this
would, of course, include the $141,474 in respect
of goodwill), had become payable to Timagami in
1975 and assessed under subsection 14(1) on that
basis. It is not in dispute that, if the Minister were
correct, the amount to be included in computing
Timagami's income for 1975 would be $38,905;
this would be a consequence of applying section 21
of the Income Tax Application Rules, 1971, S.C.
1970-71-72, c. 63, Part III, ss. 7 and ff.
2 It may be as well to quote clause 4 of the agreement:
4. Hurontario agrees to pay to Timagami the sum of Twenty
Thousand Dollars ($20,000.00) upon the execution of this
Agreement. The balance of the purchase price, namely One
Hundred and Thirty Thousand Dollars ($130,000.00), to
gether with interest at the rate of ten per centum (10%) per
annum shall be payable in the following manner: the sum of
Twenty Thousand Dollars ($20,000.00) on account of princi
pal, plus interest, shall become due and payable on the 1st
day of November, 1975; thereafter the sum of Twenty Thou
sand Dollars ($20,000.00) on account of principal, plus
interest, shall become due and payable on the 1st days of
May and November in each of the years 1976 and 1977, and
on the 1st day of May, 1978, and the balance of Ten
Thousand Dollars ($10,000.00) together with accrued inter
est shall become due and payable on the 1st day of Novem-
ber, 1978. Hurontario shall have the privilege of paying the
whole or any part of the amount owing to Timagami at any
time or times without notice or bonus.
Timagami appealed the reassessments on the
ground that only that part of the purchase price
which, under the terms of the agreement, fell due
during 1975 had become payable in the taxation
year 1975; the instalments which were to become
payable in 1976 and 1977 were not, it was said,
payable until they became due. The learned Trial
Judge allowed the appeal on the ground that [at
page 779]: "... the word `payable' in section 14(1)
is synonymous with `due', a present obligation to
pay". The Trial Judge [at page 780] referred the
matter "... back for reassessments for the taxa
tion years 1975, 1976 and 1977 in a manner not
inconsistent with these reasons". (The Trial Judge
noted that counsel for Timagami had agreed that,
if the meaning of "payable" in subsection 14(1)
was determined to be what he submitted it was, he
had no objection to assessment for the years 1976
and 1977 on that basis.)
The appellant appealed this judgment.
The issue before us is the same as the issue
before the Trial Judge. The basic submission of
the appellant to us was that: "... the word 'pay-
able' means an obligation which is not precarious
or contingent and which the debtor must legally
though not necessarily immediately, pay". The full
amount of the purchase price had thus become
payable in 1975. The respondent submitted that
the disputed words in subsection 14(1), when read
grammatically and in their ordinary sense, mean
that a sum of money does not become payable
until it becomes due, that is until the debtor is
under a legally enforceable duty to pay it. And
there was no good reason, it was submitted, not to
read the disputed words in their ordinary and
grammatical sense.
It seems to me that a taxpayer, engaged in a
business, who enters into a contract to sell his
goodwill would not regard an amount which the
purchaser promised to pay in part consideration of
the purchase a year after the making of the con
tract as an amount which had become payable to
him in the year in which the contract was made; he
would, I think, regard the amount as an amount to
become payable the following year when the due
date arrived. The ordinary taxpayer would, in my
view, regard the two sums of $20,000 each which
Hurontario promised to pay during 1975 as
amounts which became payable during 1975, but
would not regard the instalments which, by the
express terms of the contract, were not "due and
payable" until 1976 and 1977 as having become
payable to him in 1975.
Counsel for the appellant submitted, however,
that the meaning of the disputed words cannot be
determined by reading them within the context of
subsection 14(1) alone. That subsection is but part
of a legislative scheme, introduced by the new
Income Tax Act, under which deductions (not
previously permitted) are allowed to a taxpayer, in
computing his income from business or property,
based on costs incurred by him in acquiring good
will and certain other "nothings". (Only "good-
will" is pertinent in the present case.) For purposes
of the present appeal the relevant statutory context
includes at the very least paragraph 20(1)(b) of
the Income Tax Act and subsection 14(5), as well
as subsection 14(1). I agree that these additional
provisions are the relevant statutory context'.
Paragraph 20(1)(b) permits a taxpayer to
deduct up to ten per cent of his "cumulative
eligible capital" at the end of the year in comput
ing his income for the taxation year 4 . " Cumulative
eligible capital" is defined in paragraph 14(5)(a)
' See E. A. Driedger, The Construction of Statutes (Toronto,
Butterworth's & Co. (Canada) Ltd., 1974) 67.
4 Paragraph 20(1)(b) provides:
20. (1) Notwithstanding paragraphs 18(1)(a), (b) and (h),
in computing a taxpayer's income for a taxation year from a
business or property, there may be deducted such of the
following amounts as are wholly applicable to that source or
such part of the following amounts as may reasonably be
regarded as applicable thereto:
(b) such amount as the taxpayer may claim in respect of
any business, not exceeding 10% of his cumulative eligible
capital in respect of the business at the end of the year;
of the Act'. To understand this definition, it is
necessary to read it along with the definition of
"eligible capital expenditure" in paragraph
14(5)(b) 6 .
As I understood counsel's argument, his basic
submission was that a consequence of reading
subsection 14(1) and paragraphs 14(5)(a) and (b)
together is that the disputed words "... an amount
has become payable to a taxpayer in a taxation
Paragraph 14(5)(a) provides:
14....
(5) In this section,
(a) "cumulative eligible capital" of a taxpayer at any time
in respect of a business means
(i) 1/2 of the aggregate of the eligible capital expendi
tures in respect of the business made or incurred by the
taxpayer before that time,
minus
(ii) the aggregate of
(A) all amounts each of which is an amount in respect
of any taxation year of the taxpayer ending before
that time, equal to the amount deducted under para
graph 20(1)(b) in computing the taxpayer's income
for that year from the business,
(B) for each eligible capital amount in respect of the
business that became payable to the taxpayer before
that time, the lesser of
(I) the eligible capital amount, and
(II) the cumulative eligible capital of the taxpayer
in respect of the business immediately before the
disposition as a result of which the eligible capital
amount became payable, and
(C) all amounts by which the cumulative eligible
capital of the taxpayer in respect of the business at
the end of any taxation year of the taxpayer ending
before that time was reduced by virtue of subsection
( 3 ); .. .
6 Paragraph 14(5)(b) provides in part:
14....
(5) In this section,
(b) "eligible capital expenditure" of a taxpayer in respect
of a business means the portion of any outlay or expense
made or incurred by him, as a result of a transaction
occurring after 1971, on account of capital for the purpose
of gaining or producing income from the business, other
than any such outlay or expense
[Exceptions are set out in subparagraphs (i)-(vi) inclu
sive; "goodwill" does not fall within any of the
exceptions.]
year ..." in subsection 14(1) must be read as
meaning that the amount referred to is an amount
to be determined on an accrual basis. It was then
submitted that, on an accrual basis, the amount
payable to Timagami in 1975 would include, not
only the amounts expressly made payable in 1975,
but also the amounts described by the agreement
as not being due and payable until 1976 and 1977.
Paragraph 14(5)(b) defines "eligible capital
expenditure" of a taxpayer as meaning, for rele
vant purposes, an expense made or incurred by the
taxpayer to acquire goodwill. The effect is to
include, it was argued, the portions of the purchase
price of goodwill payable in the future, even in
subsequent taxation years. A consequence, it was
argued, is that the cumulative eligible capital of
the taxpayer, as that term is defined in paragraph
14(5)(a), would include, not only immediately
payable amounts, but also amounts payable in
later taxation years. It was submitted that consist
ency requires that the disputed words in subsection
14(1) must be read in the same way, so that
amounts payable in a taxation year would include
amounts not due until later years.
As a further illustration of inconsistency that
would arise if respondent's submission on the
meaning of the disputed words were accepted,
counsel referred to what, he argued, would be its
effect under subsection 14(5), clause (a)(ii)(B).
Paragraph 14(5)(a), as indicated above, sets out
the definition of "cumulative eligible capital" of a
taxpayer at any particular time. For relevant pur
poses, it means one half of the eligible capital
expenditure made or incurred by a taxpayer before
that time less the amounts which he had deducted
under paragraph 20(1)(b) in computing his
income and less the eligible capital amount that
became payable to the taxpayer before that time.
It was argued that, if the respondent's submission
were accepted, the result would be that, in building
up a cumulative eligible capital account of a tax
payer, one would use the accrual method where
goodwill was acquired by a purchaser, but would
not use this method in respect of the effect of the
sale on the seller's account. This, I take it, would
be so (according to the submission) for this reason:
the purchaser, in building up his cumulative eli
gible capital account, would at once add in the full
price of the goodwill he had bought, including
amounts not actually falling due until future years;
the seller of the goodwill, on the other hand, would
be required to reduce his account only by the
amount actually payable in the taxation year.
This, it was said, would be anomalous.
Assuming that the submission of counsel in
respect of the effect of the words "expense made
or incurred" is well founded, the consequence
might well be as indicated by counsel.
The short answer may, however, simply be that
suggested by the respondent in his memorandum
of fact and law: in Canadian income tax law there
are instances "... where the Act is not symmetri
cal: that is to say, where deductions and additions
to a taxpayer's income are not treated in the same
fashion". It seems to me to be pertinent that the
effect of subsection 14(1) is to add to a taxpayer's
income amounts that clearly would not be includ-
able on ordinary principles. It may well be that
there is a statutory intent, expressed in the disput
ed words, to spread the added tax burden over the
period in which the deemed income actually
becomes payable to the taxpayer'.
I must say that, to me, the meaning of the
disputed words in subsection 14(1) is reasonably
clear whether those words are read within subsec
tion 14(1) alone or within the wider context urged
by the appellant. In either context I do not find it
reasonably open to conclude that amounts which
(as in this case), by the express terms of an
agreement, are not to be paid to a taxpayer until
1976, 1977 and 1978 can be said to be payable to
' I, of course, realize that section 21 of the Income Tax
Application Rules, 1971 reduces the burden of the transitional
impact of subsection 14(1). I have in mind, however, the
long-term effect of the subsection.
him in 1975. It would take more than the inconsis
tencies (if they be inconsistencies) indicated by
counsel to persuade me that the disputed words in
subsection 14(1) carry the rather strained meaning
argued for.
Counsel for the appellant placed considerable
reliance on the judgment of Mr. Justice Kearney
in The Minister of National Revenue v. John
Colford Contracting Company Limited 6 . I would
not want to conclude without explaining why I do
not find counsel's submissions, based on this judg
ment, persuasive.
The Colford case had to do with the taxability,
as receivables, of amounts withheld under con
struction contracts, amounts which were to be
payable only after the issuance of an engineer's or
architect's certificate. It was held that such
amounts were not taxable as income prior to issue
of the certificate. In relation to one of the con
tracts involved, however, the "Ontario contract", it
was found that a certificate had been issued in the
relevant taxation year. It was accordingly held
that the amount was a "receivable" in that year,
though, under the contract, the amount was pay
able during a period after the issuance of the
certificate which did not expire until the following
year. In his reasons, Mr. Justice Kearney said (at
page 441):
In the absence of a statutory definition to the contrary, I think
it is not enough that the so-called recipient have a precarious
right to receive the amount in question, but he must have a
clearly legal, though not necessarily immediate, right to receive
it.
These words were relied on by appellant's counsel.
His submission was, as I understood it, that an
amount which is receivable by a taxpayer at a
particular time must be payable to him at that
time. I doubt that, for purposes of the Income Tax
Act, this would always follow. But, at any rate, the
transactions in Colford, including the "Ontario
contract", were clearly transactions which fell
within the provisions of the then paragraph
8 [1960] Ex.C.R. 433, affirmed without reasons [1962]
S.C.R. viii.
858(1)(b) 9 . The sums in question arose from the
supply of goods or services in the regular course of
the business of a construction firm. This was clear
ly recognized by Mr. Justice Kearney. He said at
page 444 in relation to the "Ontario contract":
It will thus be seen that the condition precedent ceased to exist
before the termination of the taxpayer's fiscal year 1953 and
the holdbacks payable under it acquired the quality of a
receivable as of the date of the certificate. It is to be recalled
that final payment was to fall due thirty days after the issuance
of the certificate which would bring it into the taxpayer's
subsequent fiscal year, and it was in fact paid on April 11,
1953. I do not think that the latter can rely on the delay
allowed for payment as justification for bringing the amount of
the holdback into the fiscal year in which it fell due. In my
opinion, a term or instalment account must be included in the
taxation year in which it could be said that it had the quality of
a receivable since s. 858(1)(b) provides that it shall be thus
included "notwithstanding that the amount is not receivable
until a subsequent year."
It is, in my view, significant that Mr. Justice
Kearney referred expressly to these words in para
graph 85B(1)(b): "... since s. 85B(1)(b) provides
that it shall be thus included `notwithstanding that
9 At that time, paragraph 85B(1)(b) provided:
85B. (1) In computing the income of a taxpayer for a
taxation year,
(b) every amount receivable in respect of property sold or
services rendered in the course of the business in the year
shall be included notwithstanding that the amount is not
receivable until a subsequent year unless the method
adopted by the taxpayer for computing income from the
business and accepted for the purpose of this Part does not
require him to include any amount receivable in computing
his income for a taxation year unless it has been received
in the year;
Paragraph 12(1)(b) of the Act, which was in force during the
taxation years 1975, 1976 and 1977, provides:
12. (1) There shall be included in computing the income of
a taxpayer for a taxation year as income from a business or
property such of the following amounts as are applicable:
(b) any amount receivable by the taxpayer in respect of
property sold or services rendered in the course of a
business in the year, notwithstanding that the amount or
any part thereof is not due until a subsequent year, unless
the method adopted by the taxpayer for computing income
from the business and accepted for the purpose of this Part
does not require him to include any amount receivable in
computing his income for a taxation year unless it has
been received in the year;
the amount is not receivable until a subsequent
year' ".
I find it interesting that, in both the former
paragraph 85$(1)(b) and the new paragraph
12(1)(b), it was thought necessary, or at least
desirable, to make it clear that the word "receiv-
able" was to include sums which would not, in
ordinary language, be considered to be receivable
within the particular taxation year. In subsection
14(1), the words "payable to" are used without
any indication in the subsection that they are to be
read in an extended way or in a technical sense:
the subsection leaves the disputed words to be read
in their ordinary, everyday way. I would add that,
if in subsection 14(1), analogy to "receivable" (as
that word is defined in paragraph 12(1)(b)) were
intended, it would have been very easy to use the
words "receivable by the taxpayer" rather than
"payable to the taxpayer".
Actually, subsection 14(1) does not relate to the
kind of transactions covered by the old paragraph
85B(1)(b) or the present paragraph 12(1)(b).
Those paragraphs deal with what on general prin
ciples would be income receipts. Subsection 14(1)
brings into income (for purposes of imposing tax)
sums which, apart from the subsection, would
clearly not be income receipts at all. Subsection
14(1) must be read with this in mind.
In the present case, there was a transaction in
1975, the agreement between Timagami and
Hurontario. By virtue of this transaction,
amounts 10 became payable to Timagami in 1975,
1976, 1977, and also in 1978. (The 1978 taxation
year is not involved in this case.) I agree with the
Trial Judge that these amounts, subject to their
being translated into "eligible capital amounts",
became income of Timagami in the taxation years
in which they became payable to it, or, I would
add, in the years in which they were actually paid
if paid in advance. In the light of this conclusion, it
is not necessary to consider the submissions that
were made in respect of the establishment of a
reserve under paragraph 20(1)(n).
10 See the Interpretation Act, R.S.C. 1970, c. I-23, subsection
26(7).
I would dismiss the appeal with costs.
URIE J.: I concur.
KELLY D.J.: I concur in the reasons for judg
ment of my brother Ryan J., herein.
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.