T-3111-75
Richard Robert Easton (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Collier J.—Ottawa, March 22 and
April 1, 1976.
Income tax—Income calculation—Plaintiff having accounts
receivable at end of 1971 which, under cash method, had not
been brought into calculation—Claiming s. 23(3)(a) of Income
Tax Application Rules not in force in 1971, not deducting any
amount thereunder—Interpretation of ITAR section 23—
Income Tax Act, R.S.C. 1952, c. 148, s. 85F; S.C. 1970-71-72,
c. 63, s. 34(1)(b)—Income Tax Application Rules 1971, ss. 9,
23(1)-(4).
Plaintiff, a lawyer, had accounts receivable at the end of
1971, which, under his cash method of calculation, had not
been brought into income for 1971 and previous years. He did
not deduct any amount under Income Tax Application Rules,
section 23(3)(a)(i), claiming that paragraph (a) was not in
force in 1971. Under his interpretation of section 23(3)(a)(i),
the amount to deduct in respect of 1971 must be "nil", whether
the taxpayer had been on the cash or accrual system; the
"lesser" referred to in section 23(3)(a) must always be "nil".
He argued further that for 1972, the amount deductible under
paragraph (a) is, by paragraph (b), deemed to be the 1971
receivables. And, he argued, that as (a) was not in force, no
amount had been deducted, so nothing is to be added into
income under paragraph (c). Defendant submitted that on the
plain meaning of the words, the deemed amount in section
23(3)(b) refers to the amount in section 23(3)(a)(i).
Held, the action is dismissed. While it might be wished that
paragraph (3)(b) had specifically referred to subparagraph
(a)(i), rather than to the whole of paragraph (a), it makes no
difference to the plain meaning of paragraphs (a) and (b) when
read together. The amount referred to in subparagraph (a)(i)
is, for 1972, deemed to be the 1971 receivables, and the amount
in subparagraph (a)(ii) is investment interest at the end of
1972. Here, the lesser amount is plaintiff's investment interest;
this is the amount deductible under paragraph (a). Paragraph
(c), when section 23 is read as a whole, can again only refer to
the amount in subparagraph (a)(i). Here, it is deemed to be the
1971 receivables.
INCOME tax appeal.
COUNSEL:
R. R. Easton, Q.C., for himself.
N. A. Chalmers, Q.C., for defendant.
SOLICITORS:
R. R. Easton, Q.C., Windsor, for himself.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
COLLIER J.: The plaintiff is a barrister and
solicitor. In 1972 and prior years he practised his
calling in Windsor, Ontario. His business was and
is "a profession"'. In the taxation years previous
to January 1, 1972, he had elected to compute his
income on the cash method, as he was entitled to
do under the old Acte. Under that method he did
not bring into income for a particular year any
professional fees billed but unpaid (accounts
receivable) as of the end of his taxation year.
Under an accrual system of computing income,
one would normally bring accounts receivable into
the calculation.
By paragraph 34(1)(b) of the new Act accounts
receivable are now to be included'. That provision
is applicable for the 1972 and subsequent taxation
years 4 . It is not retrospective.
The dispute between the plaintiff and the Minis
ter of National Revenue is as to how the plaintiff
must compute his income for the taxation year
1972. It arises out of the fact the plaintiff had
accounts receivable, as of the end of 1971, which
under his cash method of computation had not
been brought into the calculation for 1971 and
previous years. The issue is to be resolved by the
proper interpretation to be given to ITAR section
23. I set out that section, except subsection (5):
23. (1) There may be deducted in computing a taxpayer's
income for the 1972 taxation year from a business that is a
profession the aggregate of amounts payable by him in respect
See subsection 34(1) of the Income Tax Act, R.S.C. 1952,
c. 148 as amended by S.C. 1970-71-72, c. 63, s. 1. I shall use in
these reasons the expressions "old Act" or "former Act" and
"new Act" or "amended Act".
2 See section 85F of the old Act.
3 Paragraph 34(1)(d) seems to imply that a "professional"
must also include, for the purposes of computing his income, an
amount in respect of work in progress, unless he elects not to do
so.
4 Income Tax Application Rules 1971, section 9 (Part III of
the amending Act). I shall refer to those provisions as ITAR.
of the business at the end of the 1971 fiscal period of the
business, to the extent that they were not deductible in comput
ing his income from the business for that year but would have
been so deductible if he had paid them in that year.
(2) Where a taxpayer has not elected under paragraph
34(1)(d) of the amended Act in respect of his income from a
business that is a profession for his 1972 taxation year, work in
progress in respect of the business at the commencement of the
1972 fiscal period of the business shall be valued at the same
amount at which it was valued at the end of the 1971 fiscal
period of the business for the purpose of computing his income
from that business for the 1971 taxation year.
(3) For the purposes of computing the income of a taxpayer
for a taxation year ending after 1971 from a business that is a
profession, the following rules apply:
(a) there may be deducted such amount as he may claim,
not exceeding the lesser of
(i) the amount deducted under this paragraph in comput
ing the taxpayer's income from the business for the
immediately preceding taxation year, and
(ii) the taxpayer's investment interest in the business at
the end of the year;
(b) where the taxation year is the taxpayer's 1972 taxation
year, the amount deducted under paragraph (a) in comput
ing the taxpayer's income for the immediately preceding
taxation year from the business shall be deemed to be an
amount equal to the taxpayer's 1971 receivables in respect of
the business;
(c) there shall be included the amount deducted under para
graph (a) in computing the taxpayer's income for the
immediately preceding taxation year from the business; and
(d) there shall be included amounts received by the taxpayer
in the year on account of debts in respect of the business that
were established by him to have become bad debts before the
end of the 1971 fiscal period of the business.
(4) Paragraph (3)(a) does not apply to allow a deduction in
computing the income of a taxpayer from a business that is a
profession
(a) for the taxation year in which the taxpayer died, or
(b) for any taxation year, if
(i) in the case of a taxpayer who at no time in that year
was resident in Canada, the taxpayer ceased to carry on
the business, or
(ii) in the case of any other taxpayer, the taxpayer ceased
to be resident in Canada
at any time in that year or the immediately following year.
The disagreement between the parties is best
recounted by first setting out the methods of calcu
lation asserted by the taxpayer on the one hand,
and the Minister on the other. The actual figures
used in each computation, to arrive at a final
result, are agreed.
The Plaintiff's Computation
I. Net income from professional business for
1972 as per section 34 etc. $17,164.46
2. Paragraph (a) of ITAR section 23(3)
Deduct the lesser of:
(i) Amount deducted under this paragraph
(a) in computing income for the 1971 taxa
tion year—as this paragraph (a) was not in
force for the 1971 taxation year (see ITAR
section 9) this amount is— Nil
(ii) 1972 investment interest as defined in
ITAR section 23(5)(a)(î)— $ 9,765.18
The lesser of (i) and (ii) is Nil
3. Paragraph (b) of ITAR section 23(3)
Deduct:
An amount equal to the plaintiffs 1971
receivables (as defined in ITAR section
23(5)(c)(i)—this paragraph deems, for the
1972 taxation year only, that the Nil
amount, deducted under paragraph (a) in 2.
above, to instead be 14,702.01
$ 2,462.45
4. Paragraph (c) of ITAR section 23(3)
Add the amount deducted—as in 2. above—
under paragraph (a) of ITAR 23(3) in com
puting income for the 1971 taxation year—
once again as paragraph (a) was not in force
for the 1971 taxation year the amount to be
added is— Nil
1972 SOLE PROPRIETORSHIP NET INCOME FOR
TAX PURPOSES $ 2,462.45
The Minister's Computation
Net Income from Professional Business $17,164.46
Deduct:
Pursuant to ITAR 23(3)(a) the lesser of:
(i) "1971 receivables" $14,702.01
(ii) "investment interest" at end of 1972
taxation yr. 9,765.18 9,765.18
Add:
Pursuant to ITAR 23(3)(c) "1971
receivables" $14,702.01 14,702.01
1972 Sole Proprietorship Net Income from
Professional Business for tax purposes $22,101.29
In support of his calculation, the plaintiff ana
lyzes, or interprets, subsection 23(3) as follows: the
deduction under paragraph (a) is the lesser of
subparagraph (i) or subparagraph (ii); the plaintiff
did not deduct, in computing his 1971 income, any
amount under subparagraph (a)(i). The simple
reason, agreed here by counsel, is that paragraph
(a) was not in force in 1971 5 . The arithmetical
answer to subparagraph (a)(i) according to the
plaintiff is, therefore, "nil".
Under the plaintiff's interpretation of subpara-
graph (a)(i) the amount, in respect of the 1972
year only, must always be "nil" whether the tax
payer in question had been on the cash or accrual
system; for all professionals computing income for
1972, the "lesser" referred to in the opening lines
of paragraph (a) must inexorably be "nil".
The plaintiff then goes to paragraph (b). He
argues that it was obviously recognized that the
amount which, in 1972, might be claimed as a
deduction under paragraph (a) would, as demon
strated above, in every case be "nil". The plaintiff
then says that, for 1972 only, the amount to be
deducted under paragraph (a) (not subparagraph
(a)(i)) is deemed to be the 1971 receivables; that,
it is said, is what paragraph (b) means. Put
another way, the plaintiff contends that for the
1972 taxation year one is not concerned with
whether something is less than something else; the
amount which may be deducted pursuant to para
graph (a) is, according to the plain meaning of
paragraph (b), the 1971 receivables.
The plaintiff then turns to paragraph (c). He
argues: paragraph (a) was not in force for the
1971 taxation year; no amount had been deducted,
pursuant to the rules set out in that paragraph, by
any professional in computing his 1971 income;
the arithmetical result is, again, "nil". The amount
therefore to be added into income is "nil", not the
amount earlier deducted pursuant to paragraph
(a) by reason of the deeming provision of para
graph (b).
The defendant does not, as can be seen from the
computation earlier set out, agree with that anal
ysis or interpretation of section 23. Counsel for the
Minister contends that on the plain, ordinary and
5 Section 23 as a whole seems to me to cover all professionals
regardless of which system they had used prior to 1972, i.e.,
cash or accrual. Some particular portions of section 23 may
apply only to one particular method or taxpayer.
grammatical sense and meanings of the words and
phrases used, the deemed amount in paragraph (b)
obviously refers to the amount described in sub-
paragraph (a)(i). I agree with that submission.
One could perhaps wish that paragraph (b) had
made specific reference to subparagraph (a)(i)
rather than to the whole of paragraph (a). I do not
think that makes any difference to the plain,
grammatical meaning of paragraphs (a) and (b),
when read together. In my view the Minister's
interpretation and computation is correct. The
amount referred to in subparagraph (a) (i) is, for
the year 1972, deemed to be the 1971 receivables.
The amount referred to in subparagraph (a)(ii) is
the investment interest at the end of 1972. On the
facts of this appeal, the lesser amount is the tax
payer's investment interest and that is the amount
he may deduct under paragraph (a).
The plaintiff's interpretation of paragraph (c) is,
to my mind, not quite logical. He contends, on his
analysis, that he is entitled to deduct, for 1972,
under paragraph (a) the amount of the 1971
receivables but, when he comes to paragraph (c),
he does not include "the amount deducted under
paragraph (a)" but some other amount which he
says must always, for 1972, be "nil".
Counsel for the defendant submits, and I agree,
that paragraph (c) (when one reads section 23 as a
whole) can again only refer to the amount
described in subparagraph (a)(i); in this particular
case, and for the year 1972 only, that amount is
deemed to be the 1971 receivables.
In summary, I agree with the analysis and inter
pretation of section 23 as a whole put forward by
the defendant. In my opinion there is no ambigui
ty, or gaps, in section 23 as it relates to the facts of
this case. The ordinary grammatical sense to be
given to the words, phrases, paragraphs and sub-
paragraphs, as I see it, supports the interpretation
advanced by the defendant.
The action is dismissed. The assessment by the
Minister is confirmed.
Counsel for the defendant indicated, at the close
of argument, that if the defendant were successful,
she would not ask for costs. Accordingly, there will
be no order as to costs.
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.