A-156-79
Wilchar Construction Limited (Appellant)
v.
The Queen (Respondent)
Court of Appeal, Heald, Le Dain JJ. and Kelly
D.J.—Toronto, September 16; Ottawa, October 9,
1981.
Income tax — Income calculation — Appeal from judgment
holding that taxpayer might not exclude from its 1968 taxable
income the amount of holdbacks and progress claims for
which architect's certificates had not issued — From 1962 to
1969, taxpayer reported income including holdbacks and
uncertified progress claims — In 1970 and 1971 taxpayer
excluded holdbacks but included uncertified progress claims
— Whether taxpayer may deduct contingently receivable hold-
backs — Nothing in case law or in the Act prohibiting
taxpayer from choosing method which has effect of anticipat
ing tax liability — Generally accepted accounting principles
require adoption of consistent method from year to year —
Taxpayer's reporting for 1962-1969 not on legally incorrect
basis — Taxpayer estopped from changing basis of reporting
uncertified progress claims — Income Tax Act, R.S.C. 1952,
c. 148, ss. 4, 85e(1)(b).
Appeal from part of the trial judgment wherein it was held
that the appellant was not entitled to exclude from its 1968
taxable income the net amount of holdbacks and progress
claims for which architect's certificates had not issued on or
before July 31, 1968. In its tax returns for 1962 to 1969
inclusive, the appellant consistently reported its income includ
ing holdbacks and uncertified progress claims which were
outstanding at the end of the taxation year in the calculation of
its income. In 1970 and 1971, the appellant excluded holdbacks
but continued to include uncertified progress claims in its
income calculations. The Minister reassessed the appellant's
1967 and 1968 returns. He did not reassess in respect of the
matter in issue. The issue is whether the appellant is entitled to
deduct holdbacks which are contingently receivable. The appel
lant submits that, pursuant to the Colford and Guay decisions,
accounts receivable contingently owing to a taxpayer do not
constitute income for tax purposes; that neither generally
accepted accounting principles nor the appellant's consistent
reporting of income on a legally incorrect basis can prevail over
this principle; and, that the appellant is not precluded by the
doctrine of estoppel from insisting that it be assessed for 1968
in accordance with this principle.
Held, the appeal is dismissed. In the case at bar, the taxpayer
did not exclude contingent accounts receivable in any of its
returns for the years 1962 to 1969 inclusive. The Colford case
does not decide that in a factual situation like the present one
where the taxpayer chose to include subject amounts in its 1968
taxation year, and the Minister agreed thereto, such a practice
is prohibited by paragraph 85B(1)(b) of the Income Tax Act.
All that Colford is authority for, where the facts are as in this
case, is that the Minister could not require the taxpayer to take
subject amounts into income. The method chosen by the appel
lant and accepted by the Minister had the effect of anticipating
rather than deferring tax liability. Nothing in the Colford
judgment or in the provisions of the Act prohibits the adoption
of this method of anticipating tax liability. Paragraph
85B(1)(b) does not prohibit such a method. All that paragraph
provides is that where an amount is, at law, receivable, the
taxpayer is required to include that amount. The paragraph is
silent with respect to other amounts. The item here in issue is
such an other amount since it was only contingently receivable
in 1968. Section 4 of the Income Tax Act provides that
"Subject to the other provisions of this Part, income for a
taxation year from a business ... is the profit therefrom for the
year". There are no "other provisions" in the Act which
prohibit the method used by the appellant for the taxation
years 1962 to 1969 inclusive. Accordingly, the computation of
that profit is to be determined by generally accepted accounting
principles which require that the method employed be con
sistent from year to year. The Guay decision simply reaffirms
the principle set out in Co!ford. Since the appellant's consistent
reporting of income for the years 1962 to 1969 inclusive was
not on a "legally incorrect basis", it follows that the second
submission is not acceptable since its validity is based on the
correctness of the first submission. Dealing with the final
submission, since the method of reporting chosen by the appel
lant is not contrary to law, there is no legal bar to estoppel. The
Trial Judge was correct in holding that the appellant was
estopped from changing the basis upon which the uncertified
progress claims are to be treated in the calculation of its profit
for 1968.
Minister of National Revenue v. John Colford Contract
ing Co. Ltd. [1960] Ex.C.R. 433, affirmed by [1962]
S.C.R. viii, explained. J. L. Guay Ltée v. Minister of
National Revenue [1971] F.C. 237, explained. Dominion
Taxicab Association v. Minister of National Revenue
[ 1954] S.C.R. 82, referred to. Ostime (Inspector of Taxes)
v. Duple Motor Bodies, Ltd. [1961] 2 All E.R. 167,
referred to. Western Smallware & Stationery Co. Ltd. v.
Minister of National Revenue [1972] F.C. 437, referred
to. Woon v. Minister of National Revenue [1951] Ex.C.R.
18, referred to. Ken Sleeves Sales Ltd. v. Minister of
National Revenue [1955] Ex.C.R. 108, referred to.
Moulds v. The Queen [1977] 2 F.C. 487, referred to.
Greenwood v. Martins Bank, Ltd. [1933] A.C. 51, referred
to.
INCOME tax appeal.
COUNSEL:
J. M. Clow for appellant.
W. J. A. Hobson, Q.C. and R. E. Taylor for
respondent.
SOLICITORS:
Goodman and Carr, Toronto, for appellant.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment
rendered in English by
HEALD J.: This is an appeal against that part
only of the judgment of the Trial Division [[1979]
2 F.C. 220] wherein it was held that the appellant
"... is not entitled to exclude from its 1968
taxable income the sum of $227,171 being the net
amount of holdbacks and progress claims for
which architect's certificates had not issued on or
before July 31, 1968."
In the Trial Division [at page 221], the parties
filed a statement of agreed facts, dated November
1, 1974, which reads as follows (see A.B., page
318):
1. The parties agree that as of July 31, 1968, there was a total
of $452,123 of accounts receivable of the Appellant for which
architect's certificates had to be issued before the Company
was entitled to receive payment and for which such certificates
had not been issued on or before July 31, 1968.
2. The parties further agree that the Appellant overstated
certain accounts payable as of July 31, 1968 in a total amount
of $57,426. In addition, the Appellant incorrectly treated as
part of its costs incurred in 1968 a total of $167,526 in respect
of work done for it by subcontractors for which architect's
certificates had to be issued before the Appellant was liable to
make payment and for which such certificates had not been
issued on or before July 31, 1968.
3. The net effect of these adjustments, if allowed, is to reduce
the Appellant's 1968 income by $227,171, which totally elimi
nates its taxable income for 1968 and results in a loss which is
deductible in computing its taxable income for 1967.
Additionally, there was one witness at trial,
namely, Robert Arthur Weavers, the official of the
Department of National Revenue who conducted
the investigations that led to the assessment in
issue.
In its tax returns for the years 1962 to 1969
inclusive, the appellant consistently reported its
income including holdbacks and uncertified
progress claims' which were outstanding at the
end of the taxation year (July 31 in each of the
above years) in the calculation of its income. For
its 1970 and 1971 taxation years, the appellant
excluded holdbacks but continued to include
uncertified progress claims in its income calcula
tions. On December 29, 1971, the Minister reas
sessed the appellant's 1967 and 1968 returns, deal
ing therein with a number of items no longer in
dispute between the parties. He did not, however,
reassess in respect of the matter in issue in the
Trial Division and in this Court because the Minis
ter did not object to the appellant's reporting of its
holdbacks and uncertified progress claims as
receivable and payable since experience in past
years had demonstrated that this method had the
effect of anticipating, rather than deferring tax
liability. The matter was however raised by the
appellant on March 15, 1972, when it filed notices
of objection in respect of the 1967 and 1968
taxation years. It claimed, inter alia, to be entitled
to deduct holdbacks which are contingently receiv
able, in the sum of $117,552 for 1967 and in the
sum of $90,013 for 1968. The Minister took no
action on these notices of objection and, on March
14, 1974, the appellant in its notice of appeal to
the Tax Review Board reasserted that right.
At the hearing of the appeal, counsel for the
appellant made three basic submissions which may
be summarized as follows:
1. Accounts receivable contingently owing to a
taxpayer do not constitute income for tax pur
l( use the term "holdback" herein to mean holdbacks pre
scribed pursuant to the provisions of the Mechanics' Lien Act,
R.S.O. 1980, c. 261. The term "uncertified progress claims" as
used herein, means progress claims for which architect's certifi
cates have not yet issued.
poses. In support of this principle, counsel relies
on the Colford and Guay decisions 2 .
2. Neither generally accepted accounting princi
ples nor the appellant's consistent reporting of
income on a legally incorrect basis can prevail
over the legal principle set out in No. 1 supra.
3. The appellant is not precluded by the doctrine
of estoppel from insisting that it be assessed for
its 1968 taxation year in accordance with princi
ple No. 1 supra.
I turn now to the first submission advanced by
counsel for the appellant as summarized supra.
The appellant submits that the Colford and Guay
cases (supra) are authorities for the legal principle
that, in order for an item of revenue to be receiv
able, it must be an amount for which all the
necessary steps have been taken to establish the
taxpayer's right to take action to collect such
amount, even if his right of action cannot be
commenced until some future time and, that,
accordingly, accounts receivable which are only
contingently owing to the taxpayer do not consti
tute income for tax purposes. He submits further
that the learned Trial Judge erred in law in hold
ing that the method of reporting income for tax
purposes approved in the Colford and Guay cases
(supra) is permissive and not mandatory. Dealing
with the Colford case (supra), in that case, the
taxpayer was a subcontractor who furnished and
installed plumbing, heating, air conditioning and
ventilation equipment. It received from the prime
contractor monthly progress payments for either
85% or 90% of the work done, the remaining 15%
or 10% as the case may be, was retained as a
holdback'. Final payment was made when the
project was completed and the certificate of the
architect or engineer specified in the particular
contract was issued that the work was satisfactory.
For the taxation year 1953, the taxpayer did not
2 M.N.R. v. John Colford Contracting Co. Ltd. [1960]
Ex.C.R. 433, affirmed by the Supreme Court of Canada
[1962] S.C.R. viii; J. L. Guay Ltée v. M.N.R. [1971] F.C. 237.
3 I seems clear from the Colford judgment that "holdback"
as used therein is used in the wider sense and includes "uncerti-
fied progress claims".
report progress payments of $80,000 actually
received or holdbacks of $67,000 not yet received
relating to three contracts not completed, a large
one in Ontario and two smaller ones in Quebec.
The Court decided firstly that the payments of
$80,000 actually received in 1953 were properly
taxable in 1953 under the Income Tax Act. It
decided further that in the case of that portion of
the holdbacks where architect's or engineer's cer
tificates had been received in the taxation year
1953, that portion was properly taxable in 1953 as
"amounts receivable" in 1953 within the meaning
of paragraph 85B(1)(b) of the Income Tax Act,
R.S.C. 1952, c. 148g notwithstanding that they
were not payable in that taxation year under the
terms of the contract. However, in the case of the
remaining portion of the holdback where the engi
neer's or architect's certificate did not issue until
subsequent years, the Court held that this portion
was not an "amount receivable" within said para
graph 85B(1)(b) supra.
In my view, it is important to note that in
Colford (supra) it was the Minister who was
seeking to include in the 1953 income "amounts
receivable" which, in the view of the Court, were
not "amounts receivable" because of the contin
gency factor above discussed. I agree with the
° Said paragraph 85s(1)(6) as it applied to the taxation year
1953 reads as follows:
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;
Note—The said paragraph applies also to the taxation year
herein under review, i.e. 1968.
learned Trial Judge that the Colford case (supra)
is authority for the proposition that a taxpayer
may exclude such amounts. But in the case at bar,
the taxpayer did not exclude such amounts in any
of its returns for the years 1962 to 1969 inclusive.
I do not read the Colford case (supra) as deciding
that in a factual situation like the present one
where the taxpayer chose to include subject
amounts in its 1968 taxation year, and the Minis
ter agreed thereto, such a practice is prohibited by
paragraph 85B(1)(b) of the Act. All that Colford
(supra) is authority for, in my opinion, where the
facts are as in this case, is that the Minister could
not require the taxpayer to take subject amounts
into income. As stated earlier herein, the method
chosen by the appellant and accepted by the Min
ister had the effect of anticipating rather than
deferring tax liability. I can find nothing in the
Colford (supra) judgment or in the provisions of
the Act which prohibits the adoption of this
method of anticipating tax liability. Paragraph
85B(1)(b) does not, in my view, prohibit such a
method. All that paragraph provides is that where
an amount is, at law 5 , receivable, the taxpayer is
required to include that amount. The paragraph is
silent with respect to other amounts. The item here
in issue is such an other amount since it was only
contingently receivable in the taxation year 1968.
Section 4 of the Income Tax Act provides that:
4. Subject to the other provisions of this Part, income for a
taxation year from a business ... is the profit therefrom for the
year.
As above stated, I have been unable to find any
"other provisions" in the Act which prohibit the
method used by the appellant in this case for the
taxation years 1962 to 1969 inclusive. Accord
ingly, the computation of that profit is to be
determined by generally accepted accounting
5 I use the phrase "at law" having regard to the Colford
decision.
principles 6 which require that the method em
ployed be consistent from year to year'. In my
opinion, these principles have been adhered to in
this case.
The Guay decision referred to supra simply
reaffirms the principle set out in Colford (supra)
and does not, in my view, add to or extend that
principle in any way. Whereas Colford (supra)
deals with amounts receivable, Guay (supra) deals
with amounts payable but the principle set out in
both cases is, in my view, the same.
Turning now to the appellant's second basic
submission as set forth supra, since I do not agree
that the appellant's consistent reporting of income
for the years 1962 to 1969 inclusive was on a
"legally incorrect basis" it follows for the reasons
stated supra that I do not accept this second
submission since its validity is necessarily based on
the correctness of the first submission.
Dealing now with the appellant's final submis
sion to the effect that estoppel does not lie in this
case, counsel relied heavily on four decisions of the
Exchequer Court and the Trial Division 8 . The
basic principle enunciated in those decisions is
succinctly stated in Phipson on Evidence, 8th Edi
tion, page 667 as follows:
Estoppels of all kinds, however, are subject to one general
rule: they cannot override the law of the land .... Thus, where
a particular formality is required by statute, no estoppel will
cure the defect ....
Since in my view, the method of reporting chosen
herein by the appellant, and accepted by the
respondent is not contrary to law, for the reasons
set forth herein, the legal principle enunciated in
Phipson (supra) and in the four cases set forth
6 See Dominion Taxicab Association v. M.N.R. [1954]
S.C.R. 82 at p. 85.
7 See Ostime (Inspector of Taxes) v. Duple Motor Bodies,
Ltd. [1961] 2 All E.R. 167 at p. 175.
8 Western Smallware & Stationery Co. Ltd. v. M.N.R.
[1972] F.C. 437 per Cattanach J.; Woon v. M.N.R. [1951]
Ex.C.R. 18 per Cameron J.; Ken Steeves Sales Limited v.
M.N.R. [1955] Ex.C.R. 108 per Cameron J.; Moulds v. The
Queen [1977] 2 F.C. 487 per Marceau J.
supra and relied on by the appellant do not have
any relevance to the situation in the case at bar.
Having concluded that there is no legal bar to
estoppel, the only remaining question to consider is
whether, on the facts of this case, the necessary
elements of estoppel have been established. In this
regard, it is my opinion that the learned Trial
Judge was correct in holding that the appellant
was estopped from changing the basis upon which
the uncertified progress claims are to be treated in
the calculation of its profit for its 1968 taxation
year. The essential elements of an estoppel have
often been stated as follows:
(1) a representation intended to induce a course
of conduct on the part of the person to whom
the representation is made;
(2) an act resulting from the representation by
the person to whom the representation was
made; and
(3) detriment to such person as a consequence of
the act 9 .
The learned Trial Judge stated the essential facts
on this issue [at pages 225-227] as follows (see
A.B., pages 323-324):
The defendant reported, in its 1968 tax return, income based
on a profit calculation that included the uncertified progress
claims made by and upon it. That was consistent with the way
it had calculated its profit since 1962 and would continue to
report it through 1971. In both its notices of objection and
notice of appeal to the Tax Review Board, it referred to
holdbacks "contingently receivable" and "not legally receiv
able" in its 1967 and 1968 taxation years. It did not refer to the
uncertified progress claims.
The allegations of fact in paragraphs 3, 4 and 5 of the notice
of appeal are not true. The defendant had not deducted hold-
backs totalling $117,552 and $90,013 respectively in computing
its 1967 and 1968 income nor, by the notices of re-assessment,
had the Minister increased the defendant's income by those
amounts. I considered it necessary to make those findings and
recited those paragraphs because, in these proceedings, the
defendant did not find it necessary to repeat them, being
content to take as its points of departure the statement of
agreed facts and the decision of the Tax Review Board.
The defendant did indicate a desire to change its method of
accounting in so far as holdbacks were concerned when such a
change could have been effected for 1968 at a time when any
consequential adjustments of its 1969 income could have been
9 See: Greenwood v. Martins Bank, Ltd. [ 1933] A.C. 51.
effected by re-assessment. It indicated its desire to change its
method of accounting for uncertified progress claims for 1968
too late to permit re-assessment of its 1969 return. While
evidence as to magnitude of the disadvantage in dollars and
cents was not admitted, Weavers' evidence is that should such a
change for 1968 be permitted without a complementary reas
sessment for 1969 there would be a loss of tax revenue.
The defendant made representations as to its 1968 and 1969
profits by the consistent way it calculated them. The plaintiff
acted on those representations in the assessment of the returns
for both years. If the defendant is permitted to change its
method of calculating its 1968 profit, thereby denying the
representations upon which the plaintiff acted, the plaintiff will
be in the position of having acted to her detriment.
In essence, what the defendant seeks is to change its method
of accounting for its profit to be effective for its 1968 taxation
year without applying the same method to 1969. That is
contrary to reason and, in my view, also contrary to law.
In my view, the findings of fact and the inferences
which he drew therefrom as stated by the learned
Trial Judge were reasonably open to him on the
evidence before him. Given that factual situation,
he did not err in law, in my view, in deciding that
estoppel had been established. The appellant sub
mitted, however, that on the evidence adduced, it
was clear that the respondent was aware or should
have been aware, before the right to reassess in
respect of the 1969 taxation year was statute-
barred, that the appellant wished to change its
method of reporting the uncertified progress
claims. I do not agree that the evidence, either oral
or documentary, establishes such a factual situa
tion. It is clear from the documentary evidence,
that while the appellant raised this matter on
March 15, 1972 in its notices of objection with
respect to holdbacks contingently receivable, it did
not raise the matter of uncertified progress claims
until it filed its amended notice of appeal with the
Tax Review Board in November of 1974. Counsel
for both parties agreed that the right to reassess in
respect of the taxation year 1969 became statute-
barred during the summer months of 1974 and
before either the amended notice of appeal was
filed or the agreed statement of facts executed.
The significance of these dates is that the original
representation by the appellant inducing the
course of conduct entered into by the respondent
was not altered until it was too late for the
respondent to prevent the resultant prejudice and
loss of revenue. I have also read the oral evidence
of the witness Weavers in full and, as a result, I
am satisfied that he did not understand from any
of his discussions with the representatives of the
appellant that, at any time prior to November 1,
1974, the appellant intended to request or did
request a change in its method of reporting uncer-
tified progress claims.
For all of the above reasons, I would dismiss the
appeal with costs.
LE DAIN J.: I agree.
KELLY D.J.: I concur.
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.