A-1072-90
A-1098-90
Maritime Telegraph and Telephone Company,
Limited (Appellant) (Plaintiff)
v.
Her Majesty the Queen (Respondent) (Defendant)
INDEXED AS: MARITIME TELEGRAPH AND TELEPHONE CO. V.
CANADA (CA.)
Court of Appeal, Heald, MacGuigan and Linden
JJ.A.—Toronto, February 13; Ottawa, February 19,
1992.
Income tax — Income calculation — Telephone company
previously including value of services delivered but not billed
in revenue for tax reporting and other purposes — Changing in
1984 to billed account basis for income tax only — Whether
value of services delivered but not yet billed income under Act,
s. 9 — Whether sales of services to be reported only when
billed under s. 12(1)(b) — Purpose of s. 12(1)(b) to specify
inclusions in income as defined by s. 9, not to create exclusion
for sales of services — Receivables included in income for year
— Telephone services quantifiable, receivable, when delivered.
This was an appeal from a Trial Division judgment dis
missing the plaintiff's claim.
The appellant sells telephone and other telecommunications
services to customers in Nova Scotia. Until 1984, it accounted
for income on an earned basis, including in its income for the
year the value of services delivered whether or not they had
been billed. The company used the same accounting method
for income tax reporting and for its reports to the provincial
regulatory body. In 1984, the appellant changed its reporting
of income for tax purposes only to a billed basis, reporting
income from the sale of its services in the year in which they
were billed; the earned basis was retained in the company's
financial statements for other purposes.
In 1983, paragraph 12(1)(b) of the Income Tax Act had been
amended to deem an amount receivable for services when the
account is rendered or when it should have been rendered,
whichever is earlier. The appellant argues that, as a result of
that amendment, receivables from the sale of services become
income only when billed.
Held, the appeal should be dismissed.
The Trial Judge found that the earned method gives a "truer"
picture of the income of a utility company providing a continu
ing service, resulting in revenue which accrues daily. There
was no palpable and overriding error made in arriving at that
finding of fact.
Paragraph 12(1)(b) must be located in the scheme of the
Act. Section 9 is the fundamental provision for defining
income; it says that the income for a year from a business is
the profit in that year. The purpose of section 12 is to specify
what should be included in income, not to exclude any income
which is clearly contemplated by section 9. Receivables are
included in income under section 9. The purpose of paragraph
I2(I)(b) is to ensure that business income is generally com
puted on an accrual basis, not a cash basis. The principal inten
tion of the 1983 amendment is to prevent undue extension of
billing times in rendering accounts for services rather than to
establish any exclusion from income. The appellant's earned
revenues to the end of each taxation year were receivables and,
therefore, income in that year. Because the company's records
indicate the exact times at which services were rendered, that
income is even more readily quantifiable than the receivable
for electricity delivered at issue in West Kootenay Power and
Light Co. v. Canada.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 9, 12(1 )(b) (as
am. by S.C. 1980-81-82-83, c. 140, s. 4), 34 (as am. by
S.C. 1973-74, c. 14, s. 8; 1980-81-82-83, c. 140, s. 16).
CASES JUDICIALLY CONSIDERED
CONSIDERED:
West Kootenay Power and Light Co. v. Canada, [1992] 1
F.C. 732; (1991), 92 DTC 6023 (CA.); Stein et al. v. The
Ship "Kathy K" et al., [1976] 2 S.C.R. 802; (1975), 62
D.L.R. (3d) 1; 6 N.R. 359; Silverman, Harry v. Minister
of National Revenue, [1961] Ex.C.R. 19; [1960] C.T.C.
262; (1960), 60 DTC 1212.
REFERRED TO:
British Columbia Telephone Co. v. Canada, A-390-91,
Walsh D.J., judgment dated 17/1/92, F.C.A., not yet
reported; Ken Steeves Sales Ltd. v. Minister of National
Revenue, [1955] Ex.C.R. 108; [1955] C.T.C. 47; (1955),
55 DTC 1044.
COUNSEL:
P. J. Boyle and Suzanne C. Michaelson for
appellant (plaintiff).
S. Patricia Lee and C. Coderre for respondent
(defendant).
SOLICITORS:
Fraser & Beatty, Toronto, for appellant (plain-
tiff).
Deputy Attorney General of Canada for respon
dent (defendant).
The following are the reasons for judgment ren
dered in English by
MACGUIGAN J.A.: This case deals with an issue of
tax timing similar to that recently decided by this
Court in West Kootenay Power and Light Co. v.
Canada, [1992] 1 F.C. 732, but raises for resolution
questions which as a matter of judicial economy were
not found necessary for decision in West Kootenay.
On this much the parties agreed, but they disagreed
as to the additional matters to be decided. For the
appellant the Court needs merely to apply the 1983
amendment to paragraph 12(1)(b) of the Income Tax
Act [S.C. 1970-71-72, c. 63 (as am. by S.C. 1980-81-
82-83, c. 140, s. 4)] ("the Act"). For the respondent
the Court must consider the purport of section 9 and
subsection 12(2) of the Act. At stake is the question
of whether year-end amounts which the taxpayer
included in its 1985 income should, as the respondent
argued, be included in its 1984 taxation year (and
similarly for the year-end of 1985 in relation to
1986).
The relevant provisions of the Act, at the relevant
time, were as follows, with the 1983 amendment
highlighted in italics [ss. 9(1), 12(1)(b)(i),(ii) (as am.
by S.C. 1980-81-82-83, c. 140, s. 4), (2), 34(1) (as
am. idem, s. 16), (a) (as am. by S.C. 1973-74, c. 14, s.
8), (b),(c)(i),(ii),(iii),(d)]:
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 services
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.
34. (1) In computing the income of a taxpayer for a taxation
year from a business that is the professional practice of an
accountant, dentist, lawyer, medical doctor, veterinarian or chi
ropractor, the following rules apply:
(a) paragraph 12(1)(b) is not applicable;
(b) every amount that becomes receivable by him in the year
in respect of property sold or services rendered in the course
of the business shall be included;
(c) for the purposes of paragraph (b), an amount shall be
deemed to have become receivable in respect of services
rendered in the course of the business on the day that is the
earliest of
(i) the day upon which the account in respect of the ser
vices was rendered,
(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, and
(iii) the day upon which the taxpayer was paid for the ser
vices; and
(d) where the taxpayer so elects in his return of income
under this Part for the year, no amount shall be included in
respect of work in progress at the end of the taxation year,
except as otherwise provided by this section.
I
The appellant provides telephone and other telecom
munications services to customers throughout Nova
Scotia. It bills its customers on a monthly basis, but
not all at the same time of the month. In fact, there
are nine separate billing groups, billed approximately
three days apart, each bill being for services rendered
up to the date of the billing.
Until 1984, the first of the two taxation years in
issue, the appellant did its accounting for income tax
purposes on the basis of the "earned" method, esti
mating the amount of revenue earned by year-end (its
fiscal year coinciding with the calendar year), even
though some customers had not yet been billed for
those amounts. Its financial statements were prepared
in the same way, both for reporting to its sharehold
ers and for review by the Nova Scotia Board of Com
missioners of Public Utilities.
However, as of the 1984 taxation year, the appel
lant changed its method of accounting for income tax
purposes, adopting a "billed" method of reporting
income, but retaining the "earned" method for its
financial statements. This change in its tax reporting,
as Reed J. found at trial [[19911 1 C.T.C. 28], was
made on the advice of its accountants, who relied on
what they considered to be the meaning of the 1983
amendment to paragraph 12(1 )(b).
Reed J. also found that the earned method gives a
truer picture of the taxpayer's income for the year
than the billed method, and held that the taxpayer
was consequently required to report in that way. This
"truer picture" approach was adopted by this Court in
West Kootenay.
On the factual question the learned Trial Judge said
(at page 30):
It is clear from the evidence that both methods of accounting
are in accordance with generally accepted accounting princi
ples (GAAP). 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" picture of the company's income for the year in ques
tion than does the billed method. The plaintiff is engaged in
providing a continuing service which by its very nature results
in revenue accruing daily.
On the Kathy K standard, this finding of fact could be
upset only in the presence of palpable and overriding
error: Stein et al. v. The Ship "Kathy K" et al., [1976]
2 S.C.R. 802. The appellant did succeed in showing
that there is evidence going both ways, but was una
ble to establish an error of the requisite magnitude.
The appeal can, therefore, succeed only if the
appellant can establish, as it contended, that the 1983
amendment to paragraph 12(1)(b) must change the
result.
II
Whatever the 1983 amendment may mean, its lan
guage makes clear that it applies only to the provision
of services. It is common ground that it is services,
i.e., telecommunications services, that the appellant
supplies to its customers, and so the amendment
prima facie applies. West Kootenay did not have to
consider this issue because the taxpayer there sup
plied electricity, which, it was held, is properly clas
sified as a good rather than a service.
In elucidating the background of the 1983 amend
ment, the appellant drew our attention to section 34
of the Act, which for some years previously had pro
vided a special regime for professional taxpayers,
allowing them to make use of a billed method of
reporting their income.
It will be noted that, in addition to specifying the
actual billing date as an option under subparagraph
34(1)(c)(i), another option is an imputed billing date
where there has been undue delay in rendering the
account (subparagraph (ii)). Both options (but not
subparagraph (iii)) have been carried over into para
graph 12(1)(b) in the 1983 amendment.
The appellant said that the purpose of the 1983
amendment was to extend this section 34 benefit
from the specified professional providers of services
to all those in the business of rendering services. The
effect was said to be to create an exception for those
engaged in the providing of services from the normal
rules with respect to tax timing, by allowing them to
account for their receivables only as of the date of
billing.
Stated in more detail, the appellant's position was
as follows. The general rule of paragraph 12(1)(b) is
that a taxpayer is required to include any amount
receivable in respect of property sold or services ren
dered in the year, notwithstanding that the amount
may not be due until the next year. West Kootenay
held that a reasonable estimate of the amount earned
at a year-end is sufficiently ascertainable to be an
amount receivable, but that case dealt with the pass
ing of goods, whereas the 1983 amendment makes a
specific exception with respect to the providing of
services. This new deeming provision, it was argued,
must therefore be conclusive in determining whether
an amount for telecommunications services rendered
is an amount receivable for purposes of the general
rule; in other words, amounts relating to the provi
sion of all services should be conclusively deemed
not to be amounts receivable for the purposes of para
graph 12(1)(b). Subsection 12(2) cannot be inter
preted to frustrate the obvious meaning of paragraph
12(1)(b), especially since it long predates the 1983
amendment.
In my opinion, and as the respondent argued, such
an interpretation could not be accepted without first
locating paragraph 12(1)(b), including the amend
ment to it, in the scheme of the Act.
The determinative provision for the definition of
income is section 9, which equates income for a year
with profit for a year. It was common ground that the
purpose of section 12 of the Act was only to specify
what should be included in income, but there was no
agreement between the parties as to whether exclu-
sions from income were created in the course of the
delineating of inclusions in. subsection 12(1).
In my view, the statutory language and structure
support the respondent's position. That is particularly
true of subsection 12(2), which explains that the pur
pose of subsection 12(1) is only to provide greater
certainty, obviously by specifying with more exacti
tude what is to be included in income, and which
clearly forbids any construction that would have the
effect of excluding income that would otherwise be
included. This interpretation is also confirmed by
subsection 12(1) itself, which begins with the words
"there shall be included in computing the income of a
taxpayer for a taxation year ...." [Emphasis added.].
In my opinion, subsection 12(1) operates so as to
expand subsection 9(1)'s ambit of inclusion. Obvi
ously, at the boundary line of inclusion there may
logically be some exclusions, but the joint thrust of
section 9 and subsection 12(1) is to include, not
exclude, and subsection 12(2) has the effect of ensur
ing, at the very least, that nothing clearly included in
section 9 is henceforth excluded.
This interpretation is, I believe, supported by the
only extrinsic evidence available. ] The technical note
accompanying the 1983 amendment reads as follows:
1982 TN—Paragraph 12(1)(b) of the Act requires any amount
receivable in respect of property sold or services rendered in
the course of a business in a year to be included in that year's
income. This paragraph is amended to add a provision that
treats an amount as having become receivable for services per
formed on the day the account would have been rendered had
there been no undue delay in rendering the account for the ser
vices. This rule, which previously applied only to services ren-
1 In the case at bar, unlike in this Court's recent decision in
British Columbia Telephone Co. v. Canada, decided January
17, 1992 (A-390-91, Walsh D.J., not yet reported), the extrin
sic evidence supports the intrinsic, but in any event greater
weight should be given to the latter.
dered in the course of a professional business under section 34
of the Act, has been expanded to apply to all services.
Not only is there no suggestion in the note of such a
major change in the law as would completely exempt
all services from the application of the earned method
of computation, but the emphasis of the note is
entirely upon subparagraph 12(1)(b)(ii), relating to an
imputed billing date where there is undue delay. This
suggests to me that the principal intention of the
amendment was to prevent undue extension of billing
times in rendering accounts for services rather than to
establish any exclusion from income.
From the time of the decision in Ken Steeves Sales
Ltd. v. Minister of National Revenue, [1955] Ex.C.R.
108, it has been clear that receivables are included in
income under section 9. In Silverman, Harry v. Min
ister of National Revenue, [1961] Ex.C.R. 19, at page
23, Thurlow J., as he then was, said:
[Slince what is declared to be the income from a business is
the profit therefrom for the year, the method adopted must be
one which accurately reflects the result of the year's opera
tions, and where two different methods, either of which may be
acceptable for business purposes, differ in their results, for
income tax purposes the appropriate method is that which most
accurately shows the profit from the year's operations.
In this light the factual finding by the Trial Judge
that the earned method gives a truer picture of the
taxpayer's income therefore assumes capital impor
tance, and leads immediately to her conclusion (at
page 32):
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....
The 198[3] amendment was not intended to allow or require
taxpayers to change their method of accounting for profit from
the earned to the billed method and thereby accomplish a sig
nificant deferral of taxes. It seems clear the amendment's pur
pose was entirely the opposite. It was intended to require tax
payers who report on a billed method, when there is undue
delay in billing, to account for the income which has not yet
been billed.
I am in full agreement with her conclusion. The pur
pose of paragraph 12(1)(b) is to ensure that income
from a business is computed on the accrual basis, not
a cash basis, with certain specified exceptions. It
applies in cases where profit is not otherwise required
to be computed on the accrual basis. In the present
case, it has no application, because of the Trial
Judge's factual finding that the earned method was
the appropriate accounting method for this taxpayer.
The appellant's earned revenues to the end of each
taxation year were receivables in law, and therefore
income for the ending year. As I pointed out in West
Kootenay, supra at page 744, footnote 1, the case at
bar is a weaker case for the taxpayer than that of the
taxpayer in West Kootenay, because the appellant's
records indicate the exact times at which its services
were rendered, making the amounts more readily
quantifiable at year-end. The receivables already
being recognized as profit under subsection 9(1), sub
section 12(2) requires that that status be maintained.
The appeal must therefore be dismissed with costs.
HEALD J.A.: I concur.
LINDEN J.A.: I agree.
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.