INCOME TAX |
Reserves |
Argus Holdings Ltd. v. Canada
A-216-99
McDonald J.A.
10/11/00
9 pp.
Appeal from Tax Court decision ((1999) 99 DTC 597) upholding MNR's reassessment--Appellant engaged in business of operating racquetball club in British Columbia--New members charged one-time initiation fee--Appellant accounted for fees (total of $441,154) on assumption not earned in year of receipt--Rather, treated initiation fees as coming into income on straight-line basis month to month over ten years from date fee paid--Therefore, beginning with month of receipt onwards, appellant included 1/120th of initiation fee as income--Appellant's director, president and majority shareholder promised members (but no explicit term to that effect in membership agreement), if business failed to prosper, pro rata portion of their initiation fees would be refunded based on ten-year scale--T.C.J. found initiation fees earned in year of receipt and no basis warranting amortization--T.C.J. found in excluding from income portion of initiation fees, appellant, in effect, deducted reserve under ITA, s. 20(1)(m) and balance remaining in appellant's deferred initiation fee account must be included in income under ITA, s. 12(1)(e)--Appellant has conceded amortizing initiation fees over ten years inappropriate--Central issue whether T.C.J. erred in concluding appellant deducted reserve in 1991 taxation year under ITA, s. 20(1)(m)--Question whether principled difference between excluding from income portion of entire amount of initiation fee and including entire amount of initiation fee and then deducting portion of amount as statutory reserve--Appeal allowed--Effect of two accounting procedures same--Well-established accounting treatment of amount not governing deductibility, but rather true nature of amount deducted--No palpable and overriding error with respect to T.C.J.'s finding of fact appellant had deducted reserve under ITA, s. 20(1)(m)--However, balance remaining in "deferred initiation fee" account should not be taxed in entirety in 1992 taxation year--Whereas financial accounting usually concerned with providing comparative picture of profit from year to year, computation of income for tax purposes solely concerned with achieving accurate picture of income of each individual taxation year for benefit of taxpayer and tax collector: Canderel Ltd. v. Canada, [1998] 1 S.C.R. 147--Would be gross distortion of appellant's picture of income if balance remaining in account taxed in 1992 taxation year--Appellant neither earned nor received entire $441,154 in question in 1992 taxation year--Amount representing profit from 1982 to 1991 taxation years inclusive--T.C.J. erred in seeking to rectify appellant's under-reported income from 1982 to 1991 by adding those amounts to appellant's income in 1992 taxation year--Decision set aside and matter referred back to MNR for redetermination on basis initiation fees taxable in year of receipt--Income Tax Act, S.C. 1970-71-72, c. 63, ss. 12(1)(e), 20(1)(m).