The respondent company was in the business of rebuilding automobile engines for sale to car dealers. The company required the car dealers, on purchasing a rebuilt engine, to supply it with another rebuildable engine as well as paying the invoice price. A dealer who did not supply a rebuildable engine was required to pay a cash deposit, about three times the market value of the used engine. This deposit was refundable when the dealer supplied a rebuildable engine, which happened 96 per cent of the time. The unredeemed deposits held by the respondent company at the end of 1958 were added by the Minister to the respondent's declared income for that year. The Exchequer Court allowed the respondent's appeal, and the Minister appealed to this Court.
Held (Abbott and Judson JJ. dissenting): The appeal by the Minister should be dismissed.
Per Cartwright, Martland and Ritchie JJ.: In stating what its profit was for the year in question, the respondent could not truthfully have included these unredeemed deposits. It knew that it might not be able to retain any part of that sum and that the probabilities were that 96 per cent of it would be returned to the depositors in the near future. The circumstance that the company became the legal owner of the moneys deposited and that they did not constitute a trust fund in its hands was irrelevant. There was no basis, having regard to the realities of the situation, on which these deposits could properly be treated as ordinary trading receipts of the respondent which it was entitled to include in calculating its profits for the year. There was nothing in the Income Tax Act requiring these deposits to be treated as profits of the respondent.
Per Abbott and Judson JJ., dissenting: The deposits were of an income nature arising in the ordinary course of the respondent's trading transactions. There was no liability to refund until the rebuildable engine was actually delivered. The probability that the taxpayer would be required to refund the greater portion of the deposits does not permit their deduction. They would be deductible in the year in which they were refunded. Furthermore the amount, shown as a liability, was an amount transferred or credited to a reserve within the provisions of s. 12(1)(e) of the Income Tax Act.
Cartwright, Abbott, Martland, Judson and Ritchie JJ. S.C.R.
[19671