INCOME TAX |
Income Calculation |
Deductions |
Wawang Forest Products Ltd. v. Canada
A-153-99, A-154-99
2001 FCA 80, Sharlow J.A.
26/3/01
15 pp.
Appeal from Tax Court Judge (T.C.J.) decision holdbacks not deductible in years claimed, thereby upholding MNR's decision portion of contract payments held back against possibility of failure by contractors to meet their obligations under workers' compensation legislation deductible only when paid or demanded, upon presentation, by contractors, of clearance certificates proving compliance with workers' compensation legislation--Taxpayers hired contractors to cut, delimb and skid logs and haul wood from various logging sites to mills--Scaling slips conclusive proof work done--Bi-weekly payments on basis of stipulated amount per metric tonne of wood delivered--Holdbacks means of giving taxpayers some security against risk of vicarious liability for workers' compensation obligations of contractors--Common ground that taxpayers complied with ordinary accounting principles in deducting holdbacks in computing income for year in which subcontractors completed their work, regardless of date of payment--Holdbacks deductible in years claimed unless deduction in that year precluded by provision of ITA or some income tax law principle--T.C.J. held ITA, s. 18(1)(a) or (e) precluded deduction of holdbacks until year of payment--Appeals allowed--ITA, s. 18(1)(a) imposing purpose test for deductibility of amounts in computing income from business or property--Crown and T.C.J. misapprehended meaning of "incurred" used in s. 18(1)(a)--Generally, taxpayer incurring expense when has legal obligation to pay sum of money--In most situations, legal obligation exists upon fulfilment of contractual obligations to which payment relates--Whether payment of obligation required then or in subsequent year irrelevant--Question herein whether holdbacks contingent liabilities of taxpayers once contract work completed--Accepted test for determining whether liability contingent in Winter and Others (Executors of Sir Arthur Munro Sutherland) (deceased) v. Inland Revenue Commissioners, [1963] A.C. 235 (H.L.): contingent liability depending for its existence upon event which may or may not happen--Correct interpretation of contracts that contract price becomes absolute obligation of taxpayers when contractors complete their work, as evidenced by scalers' slips--Holdback provisions apply only after that obligation comes into existence--Holdbacks thus constitute amounts due to contractors and taxpayers have continuing obligation to pay holdbacks even though, as long as no clearance certificate provided, they may choose to pay them to contractors or to Workers' Compensation Board for account of contractors--Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, s. 18(1)(a),(e)--Workers' Compensation Act, R.S.O., 1990, W.11.