Minister of National Revenue v. Atlantic Engine Rebuilders Ltd.

J. (dissenting) :-The Minister, in assessing the respondent's income for its 1958 taxation year, included in income the sum of $38,213 shown on its balance sheet as a current liability entitled "Customers' Deposits". The Exchequer Court' allowed an appeal from this assessment and the Minister appeals now to this Court.

The company was in the business of rebuilding Ford engines. It sold these to Ford dealers, but in order to stay in business, it needed a regular supply of rebuildable engines. Therefore, when it sold an engine to a dealer, it required that dealer to supply it with another rebuildable engine of the same model. If the dealer did not supply the rebuildable engine, he had to pay a deposit to be held by the company until he did supply such an engine. When he did, he got his deposit back. It is these unredeemed deposits held by the company to the amount of $38,213 which the Minister has assessed for income. The amount of the deposit was usually about three times the market value of the old used engine. It was deliberately set at this high figure in order to ensure that an old engine would be delivered as soon as possible.

Other details of the arrangement between the company and its customers were that the engine on a visual inspection had to be rebuildable. If parts of the engine were missing or if there were defects which were visual or apparent on inspection, the deposit was not refunded in full but was reduced. If the engine on a visual inspection was not rebuildable, the dealer only got the scrap value of the engine as a credit.

The company did not keep these deposits separate from other monies received by it from its sale of rebuilt engines. There is no question here of any trust attaching to the deposit monies. It was argued before the Tax Appeal Board in another case that there was such a trust. This was rejected and no appeal was ever taken from this decision. Western Engine Works Limited v. Minister of National Revenue'. In my opinion, this case was correctly decided. The learned trial judge in setting aside the assessment held that the company was entitled to a deduction in re- J. spect of its liability to refund the deposits, that this liability was not a contingent liability, and that the amount necessary to provide for their retirement was not a reserve, contingent amount, or sinking fund within the prohibition of s. 12(1) (e) of the Income Tax Act. The liability, he said, was not one that arose on delivery of the engine but existed from the time of receipt of the deposit. It became due and payable when the engine was actually delivered.

The evidence seems to show that in most cases only a short time elapsed between the payment of the deposit and its redemption by the delivery of a rebuildable engine. It also shows that about 96 per cent of the deposits were redeemed.

The judgment of the Exchequer Court is obviously founded upon the finding that the deposits were of an income nature arising in the ordinary course of the company's trading transactions. With this, I agree.

In this Court, the Crown has two points in its appeal based on ss. 12(1) (a) and 12(1) (e) of the Act,

(1) that the amounts necessary to provide for the retirement of these liabilities which at the end of the year had "not become due or recoverable by the dealer" were neither outlays or expenses made or incurred during the year (s. 12(1) (a)), and

(2) that such amounts would be in respect of a reserve or contingent account and, as such, prohibited by s. 12(1) (e).

Sections 12(1) (a) and 12(1) read:

The Minister's position is that unless there is an express provision in the Act, the taxpayer is prohibited by these paragraphs from making these deductions. He says there are no such other provisions.

. It is obvious that there was no outlay or expense made until the deposit was refunded. But the judgment under appeal holds that the outlay or expense was incurred when the deposit was made because the liability to refund was immediate and not contingent. In this I think there is error. There was no liability to refund until the rebuildable engine was actually delivered. The taxpayer was not definitely committed in the year of income to make this disbursement or outlay or expense until the rebuildable engine was delivered. And even then, as I have pointed out above, there were several potential adjustments to be made depending on the state of the rebuildable engine as disclosed by a visual inspection.

The probability, in this case 96 per cent, that the taxpayer would be required to refund the greater portion of the deposits does not permit their deduction. They are deductible in the year in which they are made.

I also think that the company fails under s. 12(1) (e). This amount, shown as a liability, is an amount transferred or credited to a reserve. It may be good commercial or accountancy practice to make provision for these liabilities but this is subject to the express provisions of the Act and the Act does make an express provision here.

The main argument of the taxpayer in this case was directed to the nature of the receipt. He argued that the consideration for the sale of a rebuilt engine is the catalogue price plus the delivery of a rebuildable engine of the same model, and that the deposit is a refundable deposit which at the time of its receipt is not the absolute property of the respondent. I cannot accept this submission. No one else had any property interest in the deposit except the taxpayer. It became part of his funds. It was not a trust. Its receipt merely gave rise to an obligation to repay when something further was done by the person who made the deposit. There was no immediate liability to repay. These deposits are chargeable against income for the year when they are refunded.

I do not think that s. requires any consideration for the determination of this appeal.