A-246-91
West Kootenay Power and Light Company,
Limited (Appellant)
v.
Her Majesty The Queen (Respondent)
INDEXED AS: WEST KOOTENAY POWER AND LIGHT CO. V.
CANADA (CA.)
Court of Appeal, Heald, Hugessen and MacGuigan
JJ.A.—Saskatoon, November 25; Ottawa, December
6, 1991.
Income tax — Income calculation — Utility company previ
ously including only billed accounts in revenue for financial
statements and tax returns — Changing in 1979 to accrual
approach including electricity delivered but not billed in both
books and tax returns — Continuing to use accrual basis for
corporate financial statements — Reverting to billed account
basis for income tax reporting — Whether requirement to use
same accounting method for financial statements and tax
returns — No absolute requirement corporate books and tax
returns utilize same accounting method — Accrued revenue
approach better matching income and expenditure of utility
company providing continuing service — Amount receivable
where recipient having clear legal right to payment — Unbil-
led revenue sufficiently ascertainable to be receivable.
This was an appeal from a Trial Division judgment dis
missing the taxpayer's appeal against reassessments for the tax
years 1983 and 1984.
The appellant is an investor-owned company generating and
delivering electricity to customers in southeastern British
Columbia. The company is regulated by the British Columbia
Utilities Commission. Its residential customers are on a two-
month billing cycle, and meters are read bimonthly. Before
1979, the company did not include in its accounts for the year
any amount for electricity delivered but not yet billed. In 1979
it began a practice of including unbilled revenues, on an
accrual basis, for both financial statement and tax reporting
purposes. In 1983, while continuing to use the accrual method
for its financial statements, the appellant reverted to reporting
income for tax purposes only when billed. The estimated sale
price of electricity delivered but not yet billed at year-end was
around $3.9 million in each of 1983 and 1984. The Minister
reassessed the taxpayer in those amounts.
Held, the appeal should be dismissed.
It would be undesirable to establish an absolute requirement
that accounting methods in financial statements and tax returns
always be identical. Taxpayers who are in the same situation,
except for using different accounting methods for their finan
cial statements, should be treated the same way. This is partic
ularly true where businesses are required by statute to keep
their books in a particular way. For tax reporting, the principle
is that whichever method presents the truer picture, which
more accurately portrays income, and which best matches rev
enue and expenditure, is the method to be followed. In Mari
time Telegraph and Telephone Company Limited v. The Queen,
the Trial Division found that, while the billed method and the
accrual method might both be within generally accepted
accounting principles (GAAP), the accrual method gives a
truer picture of the income of a utility company providing a
continuing service. Here, when the change was made from
billed revenue to accrued revenue in 1979, the company's
directing mind considered the accrual method to present a truer
picture of taxpayer's revenue because it better matched reve
nue and expenditure.
To be a receivable, an amount must be one to which the
recipient clearly has a legal right, although not necessarily an
immediate right. Paragraph 12(1)(b) of the Act distinguishes
between amounts receivable and amounts due. The taxpayer
had a clear legal right to payment for the electricity which had
been delivered, and the amounts in question were sufficiently
ascertainable to be receivables although not yet billed or due.
The exemption clause in paragraph 12(1)(b) applies only to
accounting methods accepted for the purpose of computing
income, and the "truer picture" principle prevents acceptance
of the accounts billed method used by the taxpayer on the
returns in this case.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 9(1), 12(1)(b)
(as am. by S.C. 1980-81-82-83, c. 140, s. 4), 248(1)
"property" (as am. by. S.C. 1974-75, c. 26, s. 125;
1980-81-82-83, c. 140, s. 128).
Sale of Goods Act, R.S.B.C. 1979, c. 370, ss. 31, 32.
CASES JUDICIALLY CONSIDERED
APPLIED:
The Queen v. Maritime Telegraph and Telephone Co. Ltd
(1990), 91 DTC 5038 (F.C.T.D.); Minister of National
Revenue v. John Colford Contracting Co. Ltd., [1960] Ex.
C.R. 433; (1960), 26 D.L.R. (2d) 15; [1960] C.T.C. 178;
60 DTC 1131.
DISTINGUISHED:
Willingale (Inspector of Taxes) v International Commer
cial Bank Ltd, [1978] 1 All ER 754 (H.L.); Neonex Inter
national Ltd v The Queen, [1978] CTC 485; (1978), 78
DTC 6339; 22 N.R. 284 (F.C.A.); Cyprus Anvil Mining
Corp. v. Canada, [1990] 1 C.T.C. 153; (1989), 90 DTC
6063; 104 N.R. 299 (F.C.A.).
CONSIDERED:
Consolidated Textiles Ltd. v. Minister of National Reve
nue, [1947] Ex.C.R. 77; [1947] 2 D.L.R. 172; [1947]
C.T.C. 63; Minister of National Revenue v. Benaby Real-
ties Limited, [1968] S.C.R. 12; (1967), 64 D.L.R. (2d)
665; [1967] C.T.C. 418; 67 DTC 5275; Maple Leaf Mills
Ltd. v. Minister of National Revenue, [1977] 1 S.C.R.
558; (1976), 76 DTC 6182; Commissioners of Inland Rev
enue v. Gardner, Mountain & D'Ambrumenil, Ltd. (1947),
29 T.C. 69 (H.L.).
REFERRED TO:
Guay (J. L.) Ltée v. Minister of National Revenue, [1971]
F.C. 237; [1971] C.T.C. 686; (1971), 71 DTC 5423
(T.D.); affd [1972] F.C. 1441 (C.A.); Newfoundland Light
and Power Co. Ltd. v. The Queen, [1986] 2 C.T.C. 235;
(1986), 86 DTC 6373 (F.C.T.D.); Quebec Hydro-Electric
Commission v. Deputy Minister of National Revenue for
Customs and Excise, [1970] S.C.R. 30; [1969] C.T.C.
574; (1969), 69 DTC 5372; R. v. Derbecker, [1985] 1 F.C.
160; [1984] CTC 606; (1984), 84 DTC 6549 (C.A.).
AUTHORS CITED
Arnold, Brian J. "Conformity Between Financial State
ments and Tax Accounting" (1981), 29 Can. Tax
J. 476.
COUNSEL:
I. H. Pield for appellant.
J. Shipley and Al Meghji for respondent.
SOLICITORS:
Thorsteinssons, Vancouver, for appellant.
Deputy Attorney General of Canada for respon
dent.
The following are the reasons for judgment ren
dered in English by
MACGUIGAN d.A.: The issue in this case is one of
tax timing: whether estimates of unbilled revenue at
December 31, the end of the taxpayer appellant's tax
ation year, must be included in its income from busi
ness in that year.
I
The appellant is an investor-owned corporation
engaged in the business of generating and distribut
ing hydroelectric power in southeastern British
Columbia and subject to regulation, including as to
its rates, by the British Columbia Utilities Commis
sion ("the BCUC"). Its residential customers were on
a two-month billing cycle, and meter readings were
made on a bi -monthly basis.
At the relevant fiscal year-ends, 1983 and 1984,
the appellant had delivered some electricity for
which, as of those year ends, the customers had not
yet been billed. In fact, the BCUC-approved tariff did
not permit the appellant to issue bills for electricity
supplied to December 31 until the completion of the
billing cycle ending after that date.
Until 1979, the accounting practice followed by
the appellant did not take account of unbilled reve
nue, but in that year, on the advice of accountants, the
appellant changed its practice and recorded income
based on estimates of the revenue anticipated to be
received, both for financial statements of its opera
tion and for tax purposes. This accrual basis was con
tinued through 1982.
In 1983, while maintaining the accrual basis for
calculating income for its annual statements, the
appellant changed from an accrual to a "billed" basis
for its income tax return, eliminating from its income
the estimate of revenue unbilled at year-end, and
reported revenues only as billed.
The estimated sale price of the delivered but as yet
unbilled electricity at year-end was $3,919,176 as of
the end of 1983, and $3,874,834 as of the end of
1984 ("the unbilled revenue"). This unbilled revenue
was added to the appellant's income by the Minister
of National Revenue for the 1983 and 1984 taxation
years by reassessments dated May 21, 1987.
The impact of generally accepted accounting prin
ciples ("GAAP") on this fact situation was partially
covered by the partial agreed statement of facts, as
follows (Appeal Book IV, at pages 495-496):
3. Under generally accepted accounting principles as applied to
the particular facts of this case, it would be acceptable to treat
the unbilled revenues in either of the following ways:
(a) either the Plaintiff could include the unbilled revenues as
of year-end in its computation of income for financial
statement purposes (as the Plaintiff in fact did in its Finan
cial Statements for the years in issue); or
(b) the Plaintiff could exclude the unbilled revenue as of year-
end from its computation of income for financial statement
purposes. If the Plaintiff chose this second option, the
unbilled revenues would be included in the computation of
its income for financial statement purposes in the follow
ing year when the amounts were billed and recorded as
accounts receivable.
4. Under generally accepted accounting principles accounting
policies followed by an enterprise should be consistent within
each accounting period and from one period to the next.
Changes in accounting policy should be made in a manner
consistent with section 1506 of the Canadian Institute of
Chartered Accountants Handbook, a copy of which is annexed
hereto.
5. Nothing in this agreement precludes either party from lead
ing evidence as to whether, for generally accepted accounting
principles, the unbilled revenues constituted earned income in
the year in which the electricity was delivered.
The relevant part of section 1506 of the Canadian
Institute of Chartered Accountants Handbook, section
1506.02, is as follows:
CHANGE IN AN ACCOUNTING POLICY
Accounting policies encompass the specific principles and the
methods used in their application that are selected by an enter
prise in preparing financial statements. There is a general pre
sumption that the accounting policies followed by an enterprise
are consistent within each accounting period and from one
period to the next. A change in an accounting policy may be
made, however, to conform to new Handbook Recommenda
tions, Accounting Guidelines published by the Accounting
Standards Steering Committee, Abstracts of Issues Discussed
by the CICA Emerging Issues Committee or legislative
requirements or if it is considered that the change would result
in a more appropriate presentation of events or transactions in
the financial statements of the enterprise.
The relevant provisions of the Income Tax Act,
S.C. 1970-71-72, c. 63 as amended by S.C. 1980-81-
82-83, c. 140, subsection 4(1) ("the Act"), are as fol
lows:
9. (1) Subject to this Part, a taxpayer's income for a taxation
year from a business or property is his profit therefrom for the
year.
12. (1) There shall be included in computing the income of a
taxpayer for a taxation year as income from a business or prop
erty 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 busi
ness 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, and for the purposes of this paragraph, an amount
shall be deemed to have become receivable in respect of ser
vices rendered in the course of a business on the day that is
the earlier of
(i) the day upon which the account in respect of the ser
vices was rendered, and
(ii) the day upon which the account in respect of those
services would have been rendered had there been no
undue delay in rendering the account in respect of the ser
vices;
(2) Paragraphs (1)(a) and (b) are enacted for greater cer
tainty and shall not be construed as implying that any amount
not referred to therein is not to be included in computing
income from a business for a taxation year whether it is
received or receivable in the year or not.
The rate schedule approved by the BCUC for resi
dential users at the beginning of 1983 was as follows
(Appeal Book I, at page 126):
For a two month period
First 40 K.W.H. $10.00
Next 360 K.W.H. 4.270¢ per K.W.H.
All over 400 K.W.H. 2.398¢ per K.W.H.
The tariff amounts were increased twice during the
relevant tax years (Appeal Book I, at pages 127-128)
but the general scheme of different rates based on the
volume of energy consumed remained throughout.
Indeed, the same points of consumption volume (40
K.W.H., 360 K.W.H. and 400 K.W.H.) were retained
on each occasion as the thresholds for the rated dif
ferentials.
The appellant used two methods in estimating for
its financial statements the amount of unbilled reve
nue. The first was the "prorate method", in which by
means of a computer program each customer's
account was computed on the basis of consumption
to date, previous rates of consumption and
allowances for changing weather conditions or other
factors. The second method, used primarily for
checking purposes, was the "gross load method", in
which an amount was determined based on produc
tion output to December 31, reduced by estimated
line losses for energy lost in transmission.
MacKay J. at trial [[1991] 1 C.T.C. 327, at pages
331-332] found as follows on the facts:
It was Mr. Ash's view that as a practical matter the company
did not have resources that would be required if it were to
attempt to read all meters on December 31 of any year. It
retained approximately 20 meter readers and utilized some 20
billing dates within each month so that to read all meters on
any one day would require more than 400 meter readers.
While it would be possible in a theoretical sense to deter
mine actual amounts owed to that date by "unbilled" custom
ers, I accept that it was not possible in any reasonable, practi
cal sense to do so. Even if it were possible it would be contrary
to the principles approved by the provincial commission for
billing and recovery of revenues in one or two-month cycles
utilizing a differential pricing structure relating to the volume
of consumption. Moreover, it would result in distributing a
higher portion of customers' accounts and thus of the com-
pany's revenue to the company's year end than would be war
ranted on an earned basis averaged over the billing cycle as a
whole. Thus, I accept that revenue attributable to unbilled
accounts at year end could only be estimated on a reasonable
basis without pretence that the estimate was accurate for any
customer or for all customers.
This finding as to unbilled revenue does not, of
course, determine the issue.
The Trial Judge went on to state the issue as he
saw it (at page 332):
In essence the issue presented by argument of the parties is
whether a taxpayer who uses the accrual method of accounting
for revenues, in accordance with GAAP, for purposes of its
financial statements and general accounting, can utilize
another method of accounting also consistent with GAAP, for
purposes of its reporting for income tax purposes. Counsel for
the Crown acknowledged that if in 1983 the company had
reverted to its practice prior to 1979, accounting for revenues
on the billed account basis for purposes of both its financial
statements and its reporting for income tax purposes, the issue
presented by the Minister's reassessments would not have been
raised.
Since he analyzed the issue in terms of consistency
between the financial statement and the tax return,
the Trial Judge devoted a great deal of attention to the
evidence of a chartered accountant, Dennis Culver,
given on behalf of the respondent. Culver relied in
particular on the CICA Handbook, section 1506.02,
cited above. The Trial Judge summarizes Culver's
evidence as follows (at page 333):
In the opinion of Mr. Culver the change in method of calculat
ing revenue for income tax purposes only, while retaining the
accrual method for financial statement purposes, was akin to
trying to ride "two GAAP horses at one time". Having adopted
the accrual method for accounting for financial statement pur
poses, Mr. Culver's opinion was that it would be inconsistent
with GAAP to utilize another method, and that the method
adopted for basic financial purposes is then applicable for all
other financial reporting purposes for the same period.
In arriving at the applicable law, the Trial Judge
followed the decision of Reed J. in The Queen v.
Maritime Telegraph and Telephone Co. Ltd. (1990),
91 DTC 5038 (F.C.T.D.), where the corporate tax
payer, whose business was the provision of telephone
and other telecommunication services, adopted for
tax purposes the "billed" method of reporting
income, although for general accounting purposes
and for reporting to its regulatory agency it continued
to use the accrual method. Reed J. held that unbilled
but earned revenues are not receivables under para
graph 12(1)(b) of the Act, but are caught rather under
subsection 9(1), since this method gives a truer pic
ture of income for the year then the alternative
method.
MacKay J. therefore concluded (at pages 335-336):
If the exclusion of unbilled revenue in accounting for profits
for tax purposes is not required by the Act, is there a basis for
support of the plaintiffs position that its exclusion, following a
method consistent with one phase of generally accepted
accounting principles, is permissible under the Act? The expert
evidence of Mr. Culver, questioned but maintained in cross-
examination, was clearly to the effect that adopting one
method for financial statement accounts and another for report
ing income for tax purposes is not supportable under GAAP,
for that does not comply with the principle of consistency, par
ticularly section 1506.02, applicable within each accounting
period and from one period to the next. Further, the principles
underlying the decisions of the Court of Appeal in Neonex
International Ltd. v. The Queen, [1978] C.T.C. 485; 78 D.T.C.
6339 (F.C.A.), and Cyprus Anvil Mining Corporation v. The
Queen, [1990] 1 C.T.C. 153; 90 D.T.C. 6063 (F.C.A.); rvg
[1985] 2 C.T.C. 74; 85 D.T.C, 5306 (F.C.T.D.), in my view,
support the conclusion that the Act does not permit reporting
revenues for tax purposes on a different basis than that adopted
for purposes of accurately portraying the financial picture of a
company for shareholders and creditors, aside from provisions
of the Act which specifically require different treatment. In
Neonex, in relation to claimed deductibility of expenses
incurred in making unfinished signs under contract for pay
ment upon completion, the Court relied on the principle of
matching expenses and revenues to preclude a different treat
ment for tax purposes than that followed by the company in
financial statements prepared for shareholders and general
public purposes. In Cyprus Anvil, relying on the principle
requiring consistency in accounting, the Court precluded cal
culation of profit on a basis different for tax purposes from that
followed for the corporation's own financial accounting in a
tax-exempt period which affected the tax situation of the com
pany in the succeeding period. While the facts of both cases
are easily distinguished from the case before this Court, the
general principle supports the conclusion set out that the Act
does not permit reporting for tax purposes as the plaintiff here
seeks to do. That conclusion is also supported by the interpre
tation of subsection 12(2) together with subsection 9(1) in the
decision of Madame Justice Reed in Maritime Telegraph,
supra.
I conclude that the Income Tax Act does not require or per
mit a taxpayer to account for revenues, and thus profits, on a
billed basis for a taxation year when at the same time it
accounts for financial statement purposes on an earned or
accrued basis, including estimates of unbilled revenue in its
account at year end. It may well be that the taxpayer could opt
to calculate income on the billed basis, at least in the plaintiffs
industry where either of the two treatments appears to be fol
lowed by individual companies, assuming appropriate reasons
for so doing are supportable within GAAP, if it does so for
purposes of both financial statements and for reporting for
income tax purposes. That would simply put the plaintiff in
this case in the same position that it followed prior to 1979.
II
In the submission of the appellant, the Trial Judge
erred in two respects: (1) in deciding that the esti
mates of unbilled revenue were revenue for income
tax purposes, even though they were not receivable
under paragraph 12(1)(b) of the Act; and (2) in decid
ing that profit for tax purposes must be computed on
the same basis used for computing profit for general
financial purposes, even though there are two alterna
tive generally accepted accounting principles. I shall
deal with these errors in reverse order. For ease of
reference, I shall describe the Trial Judge's conclu
sion that the Act requires a taxpayer to utilize the
same method for tax returns and financial statements
as expressing a principle of consistency.
The appellant argued that consistency as referred
to in section 1506.02 of the CICA Handbook required
only the consistent use of a particular accounting
principle for a specific purpose, and not the use of the
same principle for different purposes. Moreover, it
was said that there is no Canadian authority for the
Trial Judge's principle, while there is an English
authority, Willingale (Inspector of Taxes) y Interna
tional Commercial Bank Ltd, [1978] 1 All ER 754
(H.L.) to the contrary. In short, the appellant con
tended that it was entitled to use either of the two
accounting methods in question, as provided for in
the partial agreed statement of facts.
In the Willingale decision, where the taxpayer
included income respecting discounted bills of
exchange calculated on a daily basis in its financial
statement, but excluded the discounts for tax pur
poses until the bills matured or were sold, the House
of Lords, by a bare 3-2 margin, decided in favour of
the taxpayer. Lord Fraser of Tullybelton may be said
to have expressed the majority view, as follows (at
pages 761-762):
... I am of opinion that the bank's accounts prepared for com
mercial purposes are drawn up on the principle of anticipating
future profits from its holding of bills and notes. There are no
doubt excellent commercial reasons for preparing the accounts
in that way.
But they are not a proper basis for assessing the bank's liability
to corporation tax.
In my opinion, Willingale cannot be interpreted, as
the appellant would have it, as rejecting the principle
of consistency, because it decided only that a tax
payer is not required to anticipate future profits.
The Trial Judge cited Neonex International Ltd v
The Queen, [1978] CTC 485 (F.C.A.); and Cyprus
Anvil Mining Corp. v. Canada, [1990] 1 C.T.C. 153
(F.C.A.), in support of the principle of consistency.
Neonex had to do with the deductibility of expenses
incurred in making unfinished signs, and the Trial
Judge accurately stated that [at page 336] "the Court
relied on the principle of matching expenses and rev
enues". But with respect, that is not the same as the
asserted principle of consistency, which must amount
to a rule of law rather than a factual determination. In
Neonex, Urie J. wrote for the Court (at pages 500-
501):
In my opinion, the method used by the appellant in calculat
ing its taxable income accorded neither with generally
accepted accounting principles nor with the proper method of
computing income for tax purposes .... The expenses
incurred in connection with the partially completed signs were
laid out to bring in income in the next or some other taxation
year, not in the year in which they were claimed. As a result,
the income of the appellant would not be portrayed fairly nor
accurately if it were permitted to adopt this method for tax pur
poses while for the purposes of its own creditors and share
holders it used the generally accepted accounting method pre
sumably because that method fairly and accurately provides
them with the profit or loss information to which they are enti
tled.
The decision made by this Court in Neonex was in
the interests of the fair and accurate presentation of
the company's income, and was based upon a factual
determination that a different method from that used
in its financial statement would not on the facts por
tray its position fairly and accurately.
In Cyprus Anvil this Court applied a principle of
consistency, but that principle related to the taxpay
er's own previous tax returns as well as to its finan
cial statements, and was based on sound business or
commercial principles. Urie J.A. said (at pages 158-
159):
The three-year exempt period granted by subsection 83(5) of
the Act and section 28 of the I.T.A.R. was provided as a tax
incentive for the development of new mines and, according to
the respondent, its purpose was to exempt from tax the fruits of
the income earning process carried on in the prescribed three
years.
In essence what this submission means is that no matter how
the respondent calculates its profit for either financial state
ment or tax purposes, it is entitled by virtue of the intention of
the incentive legislation to maximize its profits for that exempt
period.
It seems to me that when the issue is stated succinctly and
baldly in that way, it immediately discloses the fallacy in the
respondent's position. The tax exempt period cannot exist in
isolation and the rules to be applied in determining the profit
which the company earns from its production of concentrates
during the exempt period must be determined, as was said by
this Court in a different factual and statutory context in Deni-
son Mines Ltd. v. M.N.R., [1972] 1 F.C. 1324; C.T.C. 521; 72
D.T.C. 6444, at 524 [D.T.C. 6446]:
... must be determined by sound business or commercial
principles and not by what would be of greatest advantage to
the taxpayer having regard to the idiosyncrasies of the
Income Tax Act.
The undoubted fact that subsection 83(5) is incentive legis
lation does not, as I see it, entitle the recipient of the statutory
beneficence to propose a method of computing the profit it
purported to derive during the exempt period in a manner
which is contrary to its method of computing its income
before, during and after the exempt period both for its own
financial reporting purposes and for its tax reporting purposes.
To permit the taxpayer to change its usual accounting practices
solely to maximize its profits during the exempt periods dis
torts not only the income during that period but also that in the
periods before and after it. This is neither logical, authorized
by statute nor consistent with good business or accounting
practice.
This is a different concept, it seems to me, than the
principle of consistency as between financial and tax
statements. It has to do, rather, with fairly and accu
rately portraying income on the basis of sound busi
ness or commercial principles.
Again, in Maritime Telegraph Reed J. relied on the
method which accords a "truer picture" of the com-
pany's income (at page 5039):
It is clear from the evidence that both methods of accounting
are in accordance with Generally Accepted Accounting Princi
ples. At the same time, while there is some evidence that the
billed method is used by some utility companies, there was no
evidence that any large Canadian telephone company uses the
billed method for its general financial statements. Also, it is
fair to conclude that the earned method accords a "truer" pic
ture of the company's income for the year in question than
does the billed method. The plaintiff is engaged in providing a
continuing service which by its very nature results in revenue
accruing daily)
Apart from the judicial authorities, I find myself in
agreement with the following analysis by Professor
Brian J. Arnold, "Conformity Between Financial
Statements and Tax Accounting" (1981), 29 Can. Tax
J. 476, at page 487, as to the policy considerations
involved:
Any requirement of conformity between financial state
ments and income tax accounting is undesirable basically for
I In my opinion the appellant was correct in its contention
that Maritime Telegraph was a weaker case for the taxpayer
than that at bar, because the telephone company's records
would indicate the exact timing of telephone calls, and only the
mechanics of calculation had not been applied. But for the rea
sons given I come to a different conclusion from the appellant
as to the principles involved in the case at bar.
two reasons. First, it will result in distinctions in the tax bur
dens on taxpayers on the basis of a criterion that is largely
irrelevant to the tax system. The determination of business
profit in accordance with ordinary accounting principles and
practices entitles taxpayers occasionally to choose between
alternative methods or practices. If this flexibility is unaccept
able for income tax purposes (and it is very questionable that it
is unacceptable), detailed provisions of the Act should be
adopted to prescribe the rules that must be used for computing
tax profit. But requiring conformity between a taxpayer's
financial statements and his tax return simply shifts the flexi
bility from the tax return to the financial statements. Taxpayers
in the same situation should be treated in the same way for
income tax purposes whether or not they happen to use differ
ent accounting methods and practices for financial statement
purposes. Second, any conformity requirement will operate
unevenly with respect to different types of taxpayers. Corpora
tions whose financial statements must be audited or are
required by legislative enactment to follow prescribed account
ing practices and methods will have less flexibility in reporting
their income for income tax purposes than private corporations
or individuals who will be more able to adopt alternative
accounting practices in their financial statements.
Many accountants have expressed the view from time to
time that a requirement of conformity between the computa
tion of profit for income tax purposes and the computation of
profit for financial accounting purposes would have the unde
sirable effect of constraining the development of generally
accepted accounting principles. The pressure on the develop
ment of financial accounting will be even greater if there is a
requirement of conformity between financial statements and
tax reporting. In order to reduce taxes, owners and managers
are likely to attempt to persuade accountants to prepare the
financial statements of the business on a basis that results in
less tax being paid but that does not result in the disclosure of
the best or most reliable information to other users of the
financial statements. [Footnote omitted]
In my view, it would be undesirable to establish an
absolute requirement that there must always be con
formity between financial statements and tax returns,
and I am satisfied that the cases do not do so. The
approved principle is that whichever method presents
the "truer picture" of a taxpayer's revenue, which
more fairly and accurately portrays income, and
which "matches" revenue and expenditure, if one
method does, is the one that must be followed.
The result often will not be different from what it
would be using a consistency principle, but the "truer
picture" or "matching approach" is not absolute in its
effect, and requires a close look at the facts of a tax
payer's situation.
Because the practical results of the two principles
are so closely related, it may be that the Trial Judge
implicitly reached a conclusion as to the application
of the truer picture approach, even though he did not
do so clearly and unequivocally. For instance, he said
of Culver's testimony, which he clearly found per
suasive as a whole (at page 333):
From the examination and cross-examination of Mr. Culver
I conclude the following. It is his view that the accrual method
of accounting better reflects the financial situation of a corpo
ration because it is intended to match expenditures with reve
nues, and thus net income, for a given period, consistent with
one of the basic tenets of GAAP.
Culver himself was very directly on point in his
expert report (Appeal Book, appendix I, at page 6):
Faced with a choice between the alternative of accruing or not
accruing the unbilled income, I would opt for the former. In
my opinion, the accruing of unbilled income more closely
matches the revenues of the organization with its relevant costs
(see CICA Handbook Sections 1000.41 to 1000.43) and there
fore produces a more accurate determination of net income for
a particular period.
This conclusion of Culver's is less significant than
two admissions by Stephen A. Ash, the Vice-Presi
dent of Finance of, and the only witness called by,
the appellant. The more general admission was made
in the context of the 1979 change of policy with
respect to unbilled revenues (Transcript of Verbal
Testimony, at page 91):
Q Would it be fair to say that by taking into account the
unbilled revenues, you would more accurately reflect the
profit picture for the company during the fiscal period?
A We were trying to reflect what the revenue would
be—ultimately what the revenue would be in the fiscal
year.
Q And would that be more accurate if you included unbil-
led revenues than if you excluded them?
A That's why we did it, yes.
Ash made a parallel admission with respect to expen
diture (Transcript, at page 85):
Q Would you agree that, therefore, in reporting your
income for tax purposes in 1983, that income would be
reduced by certain expenses that were incurred in order
to earn a so called unbilled revenue?
A Included in our expenses would be those items, yes.
Finally, there is an acknowledgement by Ash as to
the appellant's primary motive in its 1979 change of
policy, which I believe is tantamount to an accept
ance that the accrual method presents a truer picture
of the company's income (Transcript, at page 33):
Q Why was the company seeking to improve its income
for financial statement to [sic] purposes at that time, for
whose benefit?
A It was for the benefit of the shareholders and we were in
a serious position of potentially recording losses. We had
a serious concern that we would be unable to raise capi
tal if we got into a worse position. So we were seeking
ways to improve our earnings at that time.
On the basis of this evidence I can conclude only
to the fact that, even in the opinion of the appellant's
directing mind, the accrual method of accounting
adopted in 1979 for both financial and tax purposes
presented a truer picture of the appellant's revenue
because it more accurately and fairly matched reve
nue and expenditure—this, despite the fact that the
estimate of revenue for the "stub-end" of the year
could be only an approximation of the actual revenue.
Although, in my view, the learned Trial Judge was
in error as to the legal principle to be applied, the
approach which I propose to this problem leads to the
same result, one which I believe he reached implicitly
and in any event one to which he would inevitably
have come if he had clearly directed his mind to the
question.
III
The principal question remaining is as to whether
the unbilled revenues in question come under the pro
visions of paragraph 12(1 )(b) of the Act as an amount
receivable, and, if so, whether they are exempted
from that provision by the unless clause.
The word "receivable" is nowhere defined in the
Act. The respondent's witness Culver acknowledged
that, under GAAP, unbilled revenue at the end of a
year is not considered an amount receivable for that
year (Transcript, at pages 129-130). That is, of
course, relevant, but not decisive, as to the legal con
cept.
In Maritime Telegraph Reed J. held that the unbil-
led telephone charges there were not receivable under
paragraph 12(1)(b), and that the case should be
decided under subsections 9(1) and 12(2) (at pages
5040-5041):
I do not think the unbilled but earned revenues are "receiva-
ble" in the sense governed by paragraph 12(1)(b). It seems to
me that that paragraph refers to amounts which have been
billed as is the case with "accounts receivable". The paragraph
is particularly applicable to businesses who deal in the sale of
goods or the sale of services when those services are per
formed at a discrete time or times. The business in which the
plaintiff engages is not of this nature. The service it provides to
its customers is a continuous one and its profit therefrom is
earned on a continuous basis.
The earned but unbilled revenues of the taxpayer at year end
are brought into income pursuant to subsection 9(1) of the Act
and there is no need to rely upon paragraph 12(1)(b) for this
purpose. They were being accounted for by the taxpayer under
subsection 9(1) prior to 1984 and they should equally be
accounted for, pursuant to that subsection, after that date.
Lastly, it is my view that subsection 12(2) is pertinent. That
subsection makes it very clear that paragraph 12(1)(b) is not to
be construed as implying that amounts not referred to therein
are "not to be included in computing income". It seems to me
the taxpayer's argument in the present case would require one
to ignore that directive.
The Trial Judge in the case at bar seems to have
been in agreement with Reed J.
The locus classicus for the concept of "receivable"
is Minister of National Revenue v. John Colford Con
tracting Co. Ltd., [1960] Ex.C.R. 433, at pages 440-
441, where Kearney J. said:
As "amount receivable" or "receivable" is not defined in the
Act, I think one should endeavour to find its ordinary meaning
in the field in which it is employed. If recourse is had to a
dictionary meaning, we find in the Shorter Oxford, Third Edi
tion, the word "receivable" defined as something "capable of
being received." This definition is so wide that it contributes
little towards a solution. It envisages a receivable as anything
that can be transmitted to anyone capable of receiving it. It
might be said to apply to a legacy bestowed in the will of a
living testator, but nobody would regard such a legacy as an
amount receivable in the hands of a potential legatee. 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. A
second meaning, as mentioned by Cameron J., is "to be
received," and Eric L. Kohler, in A Dictionary for Account
ants, 1957 edition, p. 408, defines it as "collectible, whether or
not due." These two definitions, I think, connote entitlement.
The appellant argued that an amount which is not
capable of quantification in any reasonable or practi
cal sense and for which a claim of payment could not
be made by virtue of the tariff comprising the con
tractual basis upon which the appellant supplied, and
the customers consumed, electricity, is not receivable
within the meaning of that Act. The Act was said to
be concerned with certainty rather than estimation,
and the opinions that such estimates necessarily
entail.
Of the cases cited by the appellant, I do not find
that Guay (J. L.) Ltée v. Minister of National Reve
nue, [1971] F.C. 237 (T.D.); and Newfoundland Light
and Power Co. Ltd. v. The Queen, [ 1986] 2 C.T.C.
235 (F.C.T.D.), add anything to Colford. In Consoli
dated Textiles Ltd. v. Minister of National Revenue,
[1947] Ex.C.R. 77, Thorson P. held that expenses are
claimable only against the income of the year in
which they are expended, and could not be appor
tioned against the year in which the income resulting
from them was earned. He declared (at page 80):
[A]t best such apportionment could only be an approximation
dependent on the auditor's opinion. I am unable to believe that
Parliament could have intended that the deductibility of
expenses should depend on such an indefinite factor.
As I see it, this is the counterpart to Colford on the
expense side, and adds nothing of substance.
In Minister of National Revenue v. Benaby Realties
Limited, [1968] S.C.R. 12, Judson J. held for the
Supreme Court of Canada that compensation follow
ing expropriation must be attributed to the year in
which it was received (at pages 15-16):
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.
For income tax purposes, accounts cannot be left open until the
profits have been finally determined. Taxpayers are required to
file a return of income for each taxation year (s. 44(1)) and the
Minister must "with all due despatch" examine each return of
income and assess the tax for the taxation year. However, in
many cases, compensation payable under the Expropriation
Act is not determined until more than four years after the
expropriation has taken place and, in many of these cases, the
Minister would be precluded from amending the original
assessment because of the four-year limitation for the assess
ment (s. 46(4)).
My opinion is that the Canadian Income Tax Act requires
that profits be taken into account or assessed in the year in
which the amount is ascertained.
Benaby is somewhat diminished by the Supreme
Court decision in Maple Leaf Mills Ltd. v. Minister of
National Revenue, [1977] 1 S.C.R. 558, cited by the
respondent, where Judson J. dissented, citing Benaby
and emphasizing "the year when the amount was
ascertained" (at page 568). The majority of the Court
reaffirmed the Colford test, about which it said (at
pages 566-567):
This test is the one this Court has applied in income tax
cases resulting from expropriations; for an amount to become
receivable in any taxation years, two conditions must coexist:
(1) a right to receive compensation;
(2) a binding agreement between the parties or a judgment fix
ing the amount.
In the case at bar, we are admittedly faced with a very different
set of facts; still as to the guaranteed minimum income, the
prescribed conditions exist: the right to receive that minimum
income is not contested and the binding agreement between
the parties stipulates the quantum thereof.
Applying the Colford rule to the facts at hand, at
first blush the unbilled revenue would seem to qual
ify as receivable because based on appellant's
"clearly legal, though not necessarily immediate,
right to receive it." Electricity produced, sold and
consumed is a commodity or good: Quebec Hydro
Electric Commission v. Deputy Minister of National
Revenue for Customs and Excise, [ 1970] S.C.R. 30. It
also falls under the definition of property in subsec
tion 248(1) of the Act. Where property is sold, deliv
ered and consumed, the rendering of an account is
not a precondition to the right to payment: sections
31 and 32, Sale of Goods Act, R.S.B.C. 1979, c. 370.
The language of paragraph 12(1)(b) itself makes a
distinction between "receivable" and "due" so that an
amount may be receivable even though not due until
a subsequent year. As this Court said in R. v.
Derbecker, [1985] 1 F.C. 160 per Hugessen J.A. "the
words 'due to him' look only to the taxpayer's enti
tlement to enforce payment and not to whether or not
he has actually done so" (at page 161).
The only contrary argument is that the unbilled
revenue was not receivable because, for practical pur
poses, it could not be known exactly. Viscount Simon
in Commissioners of Inland Revenue v. Gardner,
Mountain & D'Ambrumenil, Ltd. (1947), 29 T.C. 69
(H.L.), at page 93 was willing to accept "an estimate
of what the future remuneration will amount to" and
even "a discounting of the amount to be paid in the
future". In my opinion the amount here is sufficiently
ascertainable to be included as an amount receivable.
I can have no doubt that the appellant was abso
lutely entitled to payment for any electricity deliv
ered, and in an amount reasonably estimated. Sup
pose, for example, that a customer's residence was
destroyed by fire at midnight on December 31. The
appellant would surely have a legal right as of the
due date to reimbursement for the electricity supplied
since the previous billing, viz, through December 31,
and a Court would be prepared to fix the amount of
entitlement, probably using something like the appel
lant's prorated method.
I must therefore conclude that the appellant had a
clear legal right to payment: the amounts in question
were sufficiently ascertainable to be receivables even
though not yet billed or due, and therefore had to be
included in income for the year then ending, pro
vided only they are not exempted by the "unless"
clause in paragraph 12(1)(b).
In my opinion, this clause does not provide an
exemption because of the words "accepted for the
purpose of this Part." As previously set forth, I
believe the principle to be applied for purposes of
this Part of the Act is the "truer picture" or "match-
ing" principle, which, as applied here, has the effect
of denying the appellant the right to use the billed
account method.
In the light of this holding, it would be inappropri
ate to consider the applicability of subsection 9(1)
taken apart from paragraph 12(1)(b) or of subsection
12(2).
IV
In the result the appeal should be dismissed with
costs.
HEALD J.A.: I concur.
HUGESSEN J.A.: I concur.
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