THORSON,
P.:—These
two
appeals
were
heard
together.
The
first
is
an
appeal
by
the
taxpayer
against
its
income
tax
assessment
for
1945
and
its
excess
profits
tax
assessment
for
1945,
1946
and
1947.
The
second
is
an
appeal
by
the
Minister
from
the
decision
of
the
Income
Tax
Appeal
Board,
sub
nom
No.
90
V.
M.N.R.
(1953),
8
Tax
A.B.C.
161,
dated
March
6,
1953,
allowing
the
taxpayer’s
appeals
against
its
income
tax
assessments
for
1946,
1947
and
1948.
At
the
request
of
counsel
for
the
taxpayer
the
proceedings
were
held
in
camera,
pursuant
to
Section
68
of
the
Income
War
Tax
Act,
R.S.C.
1927,
c.
97,
which
provides
as
follows
:
1'68.
Proceedings
before
the
Exchequer
Court
hereunder
shall
be
held
in
camera
upon
request
made
to
the
Court
by
any
party
to
the
proceedings.”
But
while
this
section
gives
a
party
the
right
to
have
the
proceedings
before
the
Court
held
in
camera
it
does
not
entitle
him
to
the
cloak
of
anonymity.
The
section
is
in
derogation
of
the
fundamental
principle
that
court
proceedings
are
open
to
the
public
and
its
operative
effect
should
not
be
extended
beyond
the
permission
of
its
express
terms.
It
does
not
entitle
the
taxpayer
to
hide
behind
a
number
or
conceal
the
fact
that
he
has
appealed
against
his
assessment.
All
that
it
gives
him
is
the
right
to
have
the
proceedings
before
this
Court
held
in
camera.
He
is
not
entitled
to
any
other
secrecy.
Consequently,
in
the
case
of
an
appeal
directly
to
this
Court
against
an
income
tax
assessment
the
taxpayer’s
name
remains
in
the
style
of
cause
of
the
proceedings
and
in
the
case
of
an
appeal
to
this
Court
from
a
decision
of
the
Income
Tax
Appeal
Board
where
the
Board
has
substituted
a
number
for
the
name
of
the
taxpayer
in
its
reasons
for
judgment
it
is
the
practice
of
this
Court
to
restore
the
name
of
the
taxpayer
to
the
style
of
cause
and
keep
it
there.
These
appeals
present
a
novel
and
difficult
problem.
While
the
issue
in
both
of
them
is,
of
course,
whether
the
assessments
levied
against
the
taxpayer
for
the
years
in
dispute
are
correct,
and
there
is
a
statutory
presumption
of
their
validity
until
they
are
shown
to
be
erroneous
either
in
fact
or
in
law,
the
appeals
involve
consideration
of
the
appropriateness
of
the
instalment
system
of
accounting
to
the
taxpayer’s
business
and
the
computation
of
its
income.
There
are
two
questions
for
determination,
the
first
being
whether
the
instalment
system
of
accounting
is
appropriate
to
the
taxpayer’s
business
and
accurately
reflects
its
income
and
profit
position,
and
the
second
whether
there
is
any
provision
in
the
governing
Income
War
Tax
Act,
R.S.C.
1927,
c.
97,
that
either
expressly
or
by
implication
prohibits
its
use.
That
is
the
difficulty
of
the
situation.
Its
novelty
is
that
this
is
the
first
occasion
on
which
this
Court
has
been
called
upon
to
consider
the
appropriateness
and
legality
of
the
instalment
system
of
accounting.
The
facts
are
not
in
dispute.
The
taxpayer
carries
on
its
business
in
Toronto
and
Vancouver,
has
its
head
office
at
Toronto
and
is
the
Canadian
subsidiary
of
Publishers
Guild
Incorporated,
a
United
States
corporation
having
its
head
office
in
New
York.
Its
business
is
the
selling
of
books
and
magazines
through
door
to
door
canvassers.
Through
them
it
makes
three
kinds
of.
combination
offers
to
its
intended
customers,
one
for
$29.90
and
two
for
$21.60
each.
The
terms
of
the
offers
are
similar
but,
for
convenience,
I
shall
refer
only
to
the
$29.90
offer.
For
this
amount
it
offers
three
books
from
a
specified
list
and
subscriptions
to
three
magazines
also
from
a
specified
list.
The
terms
of
the
offer
are
that
the
customer
will
pay
$3
to
the
canvasser
on
signing
the
order,
$2.90
and
delivery
charges
on
the
delivery
of
the
books,
and
the
balance
of
$24
in
weekly
instalments
of
$1
each.
A
person
is
not
listed
as
a
customer
until
the
$2.90
and
delivery
charges
have
been
paid.
Thereafter,
a
delivery
report
is
made
showing
the
name
of
the
canvasser,
the
name
of
the
customer,
the
amount
of
the
sale,
the
$3
deposit
and
the
$2.90
delivery
payment,
and
the
various
commissions
paid.
The
taxpayer
also
keeps
a
ledger
account
for
each
customer
showing
the
name
of
the
canvasser,
the
books
and
magazines
covered,
the
payments
made,
and
the
number
of
notices
sent
out.
The
taxpayer
sends
all
details
to
its
parent
in
New
York
which
keeps
a
duplicate
set
of
books.
The
books
sold
on
a
$29.90
order
vary
in
their
cost
to
the
taxpayer
but
their
average
cost
is
about
$5.50.
The
magazine
subscriptions
cost
about
$2.50
so
that
the
cost
of
the
merchandise
content
of
each
$29.90
sale,
meaning
thereby
the
cost
of
the
books
and
the
magazine
subscriptions,
is
about
$8.
Thus,
its
gross
profit
from
the
$29.90
sale,
over
and
above
the
cost
of
the
merchandise
content,
is
about
$21.90
which,
in
round
figures,
is
70
per
cent
of
the
sale
price.
This
percentage
was
used
in
the
course
of
the
hear-
ing
and
I
shall
continue
to
use
it,
although
it
was
actually
somewhat
higher,
varying
in
amount
according
to
the
cost
of
the
books
and
the
magazine
subscriptions
selected
by
the
customer.
The
gross
profit
referred
to
is,
of
course,
calculated
on
the
assumption
that
the
full
amount
of
the
sale
price
is
paid.
The
books
come
out
of
the
taxpayer’s
stock.
They
are
bought
by
its
parent
from
the
publishers
and
the
taxpayer
pays
its
parent
for
them.
The
magazine
subscriptions
are
not
ordered
until
after
the
$2.90
and
delivery
charges
c.o.d.
payment
has
been
made.
Thus,
all
the
cost
of
the
merchandise
content
of
the
$29.90
sale
has
been
either
actually
laid
out
and
expended
or
incurred
before
any
of
the
$24
instalments
have
been
received.
The
direct
selling
costs
are
high.
On
each
$29.90
sale
the
canvasser
gets
a
direct
commission
of
$5.50,
the
sales
manager
an
over-riding
commission
of
$2.40,
the
branch
manager
a
commission
of
90
cents,
and
the
sales
manager
an
additional
expense
allowance
of
$1.50,
making
a
total
direct
selling
cost
of
$10.30.
When
this
is
added
to
the
cost
of
the
merchandise
the
total
merchandise
and
direct
selling
cost
comes
to
$18.30
leaving
a
gross
profit
on
the
$29.90
sale
of
$11.60.
But
this
is
subject
to
deduction
for
handling
and
shipping
costs
and
general
overhead
and
office
expenses
including
heavy
expenses
for
the
collection
of
overdue
accounts
and
other
correspondence
relating
to
the
sales,
such
as
letters
about
damaged
books,
magazine
subscriptions,
changes
of
address,
complaints
and
other
matters.
Approximately
80
per
cent
of
the
taxpayer’s
total
office
expenses
is
due
to
its
intensive
efforts
to
collect
the
unpaid
instalments.
The
evidence
is
conclusive
that
the
accounts
are
poor
paying
accounts.
The
merchandise
is
sold
without
any
enquiry
as
to
the
customer’s
credit
rating.
No
security
is
given
for
the
fulfilment
of
the
promise
to
pay
the
balance
of
$24
except
that
the
taxpayer
retains
title
to
the
books
until
the
account
is
paid
in
full,
but
this
right
is
of
little
value
for,
in
practice,
the
books
are
not
worth
repossessing,
since
used
books
cannot
be
delivered
to
a
customer,
and
they
are
not
repossessed
on
failure
to
pay.
The
accounts
are
of
an
uncertain
character
and
difficult
to
collect.
Many
of
the
orders
are
signed
by
housewives
whose
husbands
repudiate
them.
And
it
is
the
exception
rather
than
the
rule
that
the
instalment
payments
are
made
as
promised.
Moreover,
the
collections
made
by
the
taxpayer
are
due
to
its
intensive
collection
efforts.
About
80
per
cent
of
its
office
staff
of
from
10
to
17
persons
is
engaged
on
collections.
It
has
over
40
form
letters
in
its
series
of
dunning
letters
and
also
about
30
others
of
various
types.
It
continues
its
dunning
efforts
as
long
as
there
seems
any
possibility
of
collection.
In
addition,
it
gives
inducements
in
the
form
of
an
addi
tional
book,
such
as
an
Atlas,
which
costs
$2.65,
for
what
is
called
^cashing-up”
the
remaining
payments.
The
evidence
of
Mr.
S.
R.
E.
Wilner,
the
taxpayer’s
general
branch
manager
at
Toronto,
was
illuminating.
He
analysed
200
consecutive
accounts
in
its
ledger
to
illustrate
the
extent
to
which
dunning
letters
have
to
be
sent
out
in
order
to
effect
payments.
Of
these
15
per
cent
*
"
cashed-up
”
as
the
result
of
the
inducements
held
out,
20.5
per
cent
were
good
paying
accounts
requiring
only
from
1
to
4
dunning
letters,
20
per
cent
required
from
5
to
9
letters,
18.5
per
cent
from
10
to
20
letters,
16.5
per
cent
from
21
to
29
letters
and
9.5
per
cent
30
letters
and
over.
Even
with
this
intensive
dunning
40
of
the
200
accounts
referred
to
remained
unpaid.
After
the
taxpayer
has
exhausted
its
own
efforts
to
collect
from
its
customers
it
sends
its
delinquent
accounts
to
the
Guardian
Credits
Corporation
for
collection.
It
charges
50
per
cent
on
what
it
collects
but
it
handles
the
taxpayer’s
accounts
only
when
it
has
no
other
accounts
to
process.
They
are
its
poorest
accounts
for
collection.
It
collects
less
than
10
per
cent
of
the
accounts
handed
to
it.
The
taxpayer’s
unpaid
accounts
are
not
of
the
kind
that
can
be
discounted.
Mr.
R.
H.
Soren,
the
owner
and
manager
of
Guardian
Credits
Corporation,
said
that
he
did
not
know
any
finance
company
that
would
discount
the
taxpayer’s
unpaid
accounts
with
a
100
per
cent
recourse
to
it.
He
would
not
pay
anything
for
the
accounts
turned
over
to
him
and
would
not
go
far
beyond
15
or
20
per
cent
for
all
its
unpaid
accounts.
On
his
cross-examination
he
expressed
the
opinion
that
a
bank
would
not
loan
money
on
the
accounts
and
this
opinion
was
concurred
in
by
Mr.
F.
Findley,
the
manager
of
the
King
and
York
branch
of
the
Imperial
Bank
of
Canada.
A
chartered
bank
would
not
discount
the
accounts
or
lend
money
on
them
although
it
would
consider
them
in
ascertaining
the
worth
of
their
owner.
Prior
to
1945
the
taxpayer
kept
its
accounts
and
made
its
income
tax
and
excess
profits
tax
returns
on
what
is
known
as
the
accrual
basis
system
of
accounting
and
computing
profit.
Under
this
system
transactions
are
recorded
in
the
accounts
as
they
occur;
as
sales
are
made
their
amounts
are
included
in
the
profit
and
loss
account,
whether
they
are
received
in
the
year
or
not,
with
a
provision
for
an
allowance
for
debts
of
a
doubtful
nature,
and
expenses
are
brought
into
account
as
a
charge
against
income
as
they
are
incurred,
whether
they
are
laid
out
or
expended
in
the
year
or
not.
This
means,
in
the
case
of
the
taxpayer,
that
as
soon
as
a
customer
paid
the
$2.90
and
delivery
charges
on
the
delivery
of
the
books,
the
$24
balance
which
he
owed
was
brought
into
the
taxpayer’s
income
for
the
year,
regardless
of
whether
any
instalment
was
payable
or
received
in
the
year,
and,
on
the
other
hand,
all
expenses
were
charged
as
expenditures
for
the
year
regardless
of
whether
they
had
been
actually
laid
out
or
expended
or
not.
For
a
good
many
years
prior
to
1945
the
taxpayer’s
parent
had
kept
its
accounts
and
made
its
United
States
income
tax
returns
on
what
is
known
as
the
instalment
system
of
accounting
and
computing
profit
and
the
taxpayer
desired
to
adopt
a
similar
method.
Before
doing
so
its
tax
consultant,
Mr.
J.
K.
Punchard,
consulted
Mr.
A.
H.
McLachlin,
the
Minister’s
supervisor
in
the
corporation
assessment
section
of
the
Department’s
Toronto
office,
and
then,
on
December
17,1945,
wrote
to
the
Inspector
of
Income
Tax
at
Toronto
as
follows
:
"‘Dear
Sir:
Attention:
Mr.
A.
H
.
McLachlin
Re:
Publishers
Guild
of
Canada
Limited
Relative
to
our
discussion
today
regarding
the
basis
of
accounting
used
by
this
company,
we
wish
to
state
that
the
officers
of
the
company
are
desirous
of
using
the
instalment
method
of
accounting
in
place
of
the
accrual
method
in
use
to
December
31,
1944.
To
be
consistent
with
the
practice
of
the
parent
organization
in
the
U.S.A,
and
in
accordance
with
the
regulations
provided
by
American
taxing
authorities,
the
company
now
seeks
your
approval
to
use
the
instalment
method
of
accounting
from
January
1,
1945.
As
we
pointed
out
to
you,
the
company
is
in
the
business
of
selling,
by
door
to
door
canvass,
magazine
subscriptions
together
with
a
book
as
a
premium.
Payments
receivable
on
the
instalment
basis
usually
spread
over
a
twelve
month
period.
In
this
class
of
business
the
risks
are
great
and
the
possibility
of
recovery
of
the
goods
is
limited.
We
refer
you
to
our
letter
of
June
22,
1945,
relative
to
Encyclopedia
Library
of
Canada
Limited
to
which
was
attached
a
summary
showing
the
effect
of
the
use
of
this
basis
on
the
accounts
of
the
company.
Both
companies
are
comparable
and
to
be
consistent
with
American
practice
could
readily
adopt
the
instalment
basis
of
accounting
to
which
we
have
referred.
We
should
appreciate
your
examining
this
matter
and
advising
us
of
your
approval
for
the
year
1945
and
subsequently.
The
company
is
prepared
to
follow
this
practice
continuously.
We
should
be
glad
to
discuss
the
matter
further
with
you.
Yours
very
truly,
J.
K.
Punchard
VARDON,
PUNCHARD
&
CO.”
and,
on
December
20,1945,
the
Toronto
Inspector
of
Income
Tax,
per
J.
Roberts,
the
chief
auditor
for
corporations,
replied
as
follows
:
"
ATTENTION.-
MR.
J.
K.
PEN
CH
ARD,
C.A.
Dear
Sirs
:
Re:
Publishers
Guild
of
Canada,
Limited
Your
letter
of
Dec.
17,
1945,
relative
to
the
basis
of
accounting
used
by
the
above
company
is
acknowledged.
It
is
noted
that
the
company
desires
to
change
the
basis
from
the
accrual
method
to
a
basis
of
taking
profits
on
sales
into
revenue
account
only
as
instalment
payments
are
received
and
that
this
proposed
method
is
in
line
with
the
practice
of
the
parent
organization
in
the
U.S.A.
As
the
company
is
prepared
to
follow
this
practice
continuously
this
office
will
recommend
that
it
be
accepted
for
tax
purposes,
and
applicable
to
the
period
ending
Dec.
31,
1945.
Yours
truly,
INSPECTOR
OF
INCOME
TAX
Per:
J.
Roberts
Chief
Auditor,
Corporations.
On
the
receipt
of
this
reply
Mr.
Punchard
advised
the
taxpayer’s
parent
in
New
York
that
the
instalment
system
of
accounting
was
to
be
recommended
and
he
recommended
that
the
taxpayer
should
change
its
accounting
system
accordingly.
His
recommendation
was
adopted
and
the
taxpayer’s
income
tax
and
excess
profits
tax
returns
for
the
years
1945
to
1948
were
based
on
the
instalment
system
of
accounting
and
computing
profit.
I
shall
describe
the
operation
of
this
system
later.
At
the
moment,
it
is
sufficient
to
say
that
under
it
the
taxpayer,
subject
to
what
I
shall
point
out
later,
took
into
income
for
the
year
only
the
gross
profit
content
of
the
instalment
payments
actually
received
by
it
in
the
year,
or,
to
put
it
negatively,
and
more
precisely,
it
excluded
from
its
computation
of
income
for
the
year
the
unrealized
gross
profit
content
of
the
instalments
that
remained
unpaid
at
the
end
of
the
year.
When
the
Minister
assessed
the
taxpayer
for
the
years
in
dispute
he
put
its
accounts
back
on
the
accrual
basis
of
accounting
on
which
it
had
made
its
tax
returns
for
the
years
prior
to
1945.
This
appears
from
the
notices
of
assessment,
dated
March
14,
1951.
For
example,
for
1945
he
added
to
the
amount
of
taxable
income
reported
by
the
taxpayer
the
sum
of
$74,071.93
as
unrealized
gross
profit
and
deducted
$14,816.85
as
his
allowance
for
bad
debts
making
a
net
addition
of
$59,255.08.
The
sum
of
$74,071.93
represented
the
unrealized
gross
profit
content
of
the
instalments
in
respect
of
the
taxpayer’s
1945
sales
that
remained
unpaid
at
the
end
of
1945
after
it
had
written
off
$52,879.50
for
bad
debts,
which
amount
the
taxpayer
had
excluded
from
its
computation
of
income
for
the
year,
and
the
sum
of
$14,816.85
was
15
per
cent
of
$98,778.97,
which
was
the
amount
of
the
taxpayer’s
unpaid
instalments
in
respect
of
its
1945
sales
at
the
end
of
1945
after
its
write-off
for
bad
debts.
The
Minister
followed
a
similar
course
in
assessing
the
taxpayer
for
1946,1947
and
1948
and
it
is
not
necessary
to
set
out
his
figures
for
each
of
the
years.
The
taxpayer
appealed
to
the
Minister
against
the
income
tax
assessment
for
1945
and
the
excess
profits
tax
assessments
for
1945,
1946
and
1947,
but
he
affirmed
them
and
the
taxpayer
then
appealed
to
this
Court.
The
taxpayer
also
objected
to
the
income
tax
assessments
for
1946,
1947
and
1948
but
the
Minister
confirmed
them
and
the
taxpayer
appealed
to
the
Income
Tax
Appeal
Board
which
allowed
its
appeals
and
set
aside
the
assessments.
From
this
decision
the
Minister
appealed
to
this
Court.
The
issues
in
each
case
are
the
same
and
it
was
accordingly
ordered
that
the
appeals
be
heard
together.
In
order
to
determine
whether
the
assessments
appealed
against
are
correct
it
is
desirable
to
ascertain
the
manner
in
which
the
taxpayer
kept
its
accounts
under
the
instalment
system
of
accounting
and
how
it
differed
from
the
accrual
basis
system.
Evidence
relating
to
the
instalment
system
was
given
by
Mr.
F.
A.
M.
Hutchison,
a
chartered
accountant
of
25
years
standing
and
a
Toronto
resident
partner
of
the
international
accounting
firm
of
Peat,
Marwick,
Mitchell
and
Company,
and
by
Mr.
J.
K.
Punchard,
a
chartered
accountant
of
25
years
standing
and
the
senior
partner
of
the
Toronto
accounting
firm
of
Punchard,
Grant
and
Company,
who
was
the
taxpayer’s
tax
consultant
and
prepared
or
supervised
the
making
of
its
tax
returns.
Mr.
Hutehison
stated
that
the
essential
feature
of
the
instalment
system
of
accounting
and
computing
profit
as
adopted
by
the
taxpayer
is
that
the
gross
profit
content
of
the
payments
made
by
purchasers
of
the
taxpayer’s
books
and
magazine
subscriptions
is
taken
into
income
for
the
year
only
as
the
payments
are
received
but
the
expenses
of
carrying
on
the
business
are
charged
against
the
income
as
they
are
incurred.
Mr.
Punehard
put
its
essential
feature
negatively
and,
in
my
opinion,
more
precisely,
when
he
said
that
the
instalment
system
excludes
from
the
computation
of
income
for
the
year
the
unrealized
gross
profit
content
of
the
instalments
remaining
unpaid
at
the
end
of
the
year.
The
application
of
the
instalment
system
to
the
taxpayer’s
business
was
illustrated
by
reference
to
a
single
sale
for
$29.90
in
respect
of
which
only
$5.90
had
been
paid
in
the
year,
the
balance
of
$24
payable
in
weekly
instalments
of
$1
each
remaining
unpaid.
If
the
gross
profit
in
the
sale,
if
the
price
was
all
paid,
would
be
70
per
cent
of
the
sale
price
then
all
that
is
taken
into
income
in
respect
of
the
$5.90
received
is
70
per
cent
of
it,
namely,
$4.13.
All
the
payments
received
by
the
taxpayer
in
the
year
are
treated
in
the
same
way,
that
is
to
say,
only
70
cents
of
each
dollar
received
is
taken
into
income.
This
is
so
whether
the
payment
is
the
initial
one
of
$5.90
or
an
instalment
and
whether
the
sale
in
respect
of
which
it
is
made
was
made
in
the
year
of
the
payment
or
previously.
Thus,
the
total
of
the
amounts
of
the
gross
profit
content
of
the
payments
received
by
the
taxpayer
in
the
year
is
taken
as
the
income
for
the
year.
To
put
it
negatively,
as
Mr.
Punchard
did,
the
taxpayer
excludes
from
its
computation
of
income
for
the
year
the
estimated
gross
profit
content
of
the
instalments
that
are
not
paid
in
the
year
and,
consequently,
not
received
by
it.
Against
the
income
thus
computed
the
taxpayer
charges,
subject
to
what
I
shall
point
out
later,
its
expenses
for
the
year,
whether
laid
out
or
incurred,
including
commissions
on
the
sales
made
in
the
year,
handling
and
shipping
costs,
and
general
overhead
and
office
expenses
including
collection
costs.
The
statement
that
only
the
gross
profit
content
of
the
payments
received
by
the
taxpayer
is
taken
into
income
for
the
year
requires
clarification.
What
is
meant
is
that
the
full
amount
of
each
payment
is
taken
into
account
but
there
is
charged
against
it
the
cost
of
the
merchandise
content
proportionate
to
it.
Thus,
if
$8
was
the
cost
of
the
merchandise
content
of
the
$29.90
sale,
so
that
the
gross
profit
would,
in
round
figures,
be
70
per
cent
of
the
sale
price,
then
the
cost
of
its
merchandise
content
would,
in
round
figures,
be
30
per
cent.
Consequently,
30
per
cent
of
the
$9.90
received,
or
$1.77,
is
charged
against
it
leaving
the
gross
profit
content
of
$4.13
above
referred
to.
There
is
a
similar
charge
against
the
amount
of
each
payment
received
of
the
cost
of
the
merchandise
content
proportionate
to
it.
It
follows,
of
course,
that
since
the
unpaid
instalments
are
not
taken
into
account
in
the
year
the
cost
of
the
merchandise
content
proportionate
to
them
is
not
charged
against
the
income
for
the
year.
Thus,
for
example,
out
of
the
$8
cost
of
the
merchandise
content
of
the
$29.90
sale
there
remains
$6.23
which,
although
actually
paid
or
incurred,
is
not
charged
as
an
expense
against
the
income
for
the
year.
It
remains
really
as
inventory.
It
is,
of
course,
disclosed
in
the
balance
sheet
that
the
accounts
are
kept
on
the
instalment
system
of
accounting
and
the
unpaid
instalments
appear
in
it
as
an
asset
valued
at
the
cost
of
the
merchandise
content
proportionate
to
them.
The
unpaid
instalments
are
the
taxpayer’s
accounts
receivable
but
their
amount
is
reduced
in
value
to
the
inventory
cost
of
the
merchandise
content
proportionate
to
them.
Thus,
in
the
illustration
referred
to,
the
$24
instalments
remaining
unpaid
at
the
end
of
the
year
are
valued
at
$6.23
and
appear,
in
effect,
on
the
balance
sheet
at
such
value.
All
the
payments
remaining
unpaid
at
the
end
of
the
year
are
valued
in
the
same
way.
In
effect,
it
is
said
that
the
accounts
receivable,
that
is
to
say,
the
instalments
remaining
unpaid,
are
worth
the
cost
of
the
merchandise
content
proportionate
to
their
amount
and
it
is
at
this
valuation
that
they
are
included
in
the
taxpayer’s
computation
of
income
for
the
year.
While
there
is
no
specific
reference
to
this
valuation
in
the
taxpayer’s
profit
and
loss
statement
and
there
is
no
actual
appraisal
in
it
of
the
value
of
the
accounts
receivable
at
this
amount,
it
is
really
included
in
its
income
in
the
manner
described.
Thus,
in
the
example
used,
since
$6.23
has
already
been
paid
or
incurred
by
the
taxpayer
for
the
merchandise
content
of
the
unpaid
$24
instalments
but
has
not
been
charged
as
an
expense
against
the
income
for
the
year
it
remains
in
the
income
over
and
above
the
gross
profit
content
of
the
$5.90
payment
received.
In
this
way
the
$24
account
receivable
is
brought
into
account
at
the
cost
of
the
merchandise
content
proportionate
to
it,
namely,
$6.23,
which
works
out
at
about
25
per
cent
of
its
full
amount.
All
the
instalments
remaining
unpaid
at
the
end
of
the
year
are
dealt
with
in
the
same
way.
Thus,
it
may
be
said
that
a
valuation
is
made
of
the
taxpayer’s
accounts
receivable
and
that
they
are
brought
into
account
and,
therefore,
included
in
income
at
the
cost
of
the
merchandise
content
proportionate
to
their
amount.
This
cost
is,
of
course,
taken
into
account
in
the
year
in
Which
the
sale
is
made
and
the
taxpayer
becomes
entitled
to
the
account
receivable.
Thus,
the
taxpayer’s
income
for
the
year
includes
the
gross
profit
content
of
the
payments
received
by
it
in
the
year
and
the
valuation
of
its
accounts
receivable
at
the
end
of
the
year
at
the
cost
of
the
merchandise
content
proportionate
to
their
amount.
Thus,
it
will
be
seen
that
the
instalment
system
of
accounting
differs
from
the
accrual
basis
system
only
in
its
computation
of
income.
Instead
of
taking
into
income
for
the
year
the
full
amount
of
the
sale
price
as
soon
as
a
sale
is
made,
as
the
accrual
basis
system
does,
even
although
the
instalments
are
not
payable
in
the
year
and
regardless
of
whether
they
are
collectible
or
not,
the
instalment
system
takes
into
income
for
the
year
only
the
gross
profit
content
of
the
instalments
actually
received
in
the
year,
that
is
to
say,
the
full
amount
of
such
payments
less
the
cost
of
the
merchandise
content
proportionate
to
them.
There
is
also
the
further
fact
that,
while
the
instalment
payments
remaining
unpaid
at
the
end
of
the
year
are
not
taken
into
income
at
their
face
amounts,
a
valuation
is
placed
on
them
at
the
cost
of
the
merchandise
content
proportionate
to
them
and
the
amount
of
such
valuation
is,
in
effect,
included
in
the
income
in
the
manner
described.
Mr.
Punchard
stated
the
difference
between
the
two
accounting
systems
more
simply.
As
he
put
it,
the
instalment
system
differs
from
the
accrual
basis
system
only
in
that
it
excludes
from
the
computation
of
income
for
the
year
the
unrealized
gross
profit
content
of
the
accounts
receivable,
that
is
to
say,
the
unrealized
gross
profit
content
of
the
instalments
remaining
unpaid
at
the
end
of
the
year.
That
is
essentially
the
only
difference
between
the
two
systems.
Apart
from
this
exclusion
of
unrealized
gross
profit
content
the
two
systems
of
accounting
are
similar.
I
should
also
refer
to
the
manner
in
which
write-offs
of
bad
debts
and
recoveries
of
bad
debts,
previously
written
off,
are
dealt
with
under
the
taxpayer’s
accounting
system.
An
analysis
of
its
bad
debts
was
prepared
by
Mr.
Punchard
and
filed
as
Exhibit
27.
This
showed
for
each
year
the
amounts
of
the
sales,
the
bad
debts
written
off,
the
recoveries
and
the
outstanding
receivables.
The
amount
of
the
write-off
is
fixed
at
the
end
of
each
year
as
the
accounts
are
determined
to
be
bad
after
a
conference
between
the
parent’s
auditor
at
New
York
and
its
accounting
officials
there.
They
are
not
written
off
the
record
at
the
taxpayer’s
offices
at
Toronto
and
Vancouver
and
it
continues
its
efforts
to
collect
them.
There
was
some
confusion
implied
in
the
questions
put
by
counsel
for
the
Minister
to
the
taxpayer’s
witnesses
which
should
be
cleared
up.
The
taxpayer’s
income
for
each
year
was
not
reduced
by
the
amount
of
the
bad
debts
written
off
in
that
year,
notwithstanding
the
suggestion
to
the
contrary
by
counsel
for
the
Minister.
He
did
not
appear
to
understand
the
situation.
The
bad
debts
were
written
off
against
the
gross
sales
of
the
year
and
not
against
the
income
for
the
year.
Of
that
fact
there
can
be
no
dispute.
For
example,
the
amount
of
the
bad
debts
written
off
in
1945
was
$52,879.50.
This
was
the
amount
of
the
unpaid
instalments
at
the
end
of
the
year
that
were
determined
to
be
bad
debts
by
reason
of
their
being
overdue
for
too
long
a
time.
But
the
income
for
1945
was
not
reduced
by
that
amount.
All
that
was
charged
against
it
was
$13,220.36.
This
was
the
cost
of
the
merchandise
content
proportionate
to
the
amount
of
the
accounts
written
off.
The
reason
for
this
being
the
only
amount
charged
against
the
income
is
that
it
was
the
only
amount
that
had
been
brought
into
account
in
respect
of
the
accounts
when
it
was
included
in
the
income
in
the
first
place
in
the
manner
I
have
described.
Similarly,
in
1946
the
amount
of
the
write-off
of
bad
debts
was
$84,428.78
but
the
income
for
the
year
was
reduced
by
only
$23,515.62,
that
being
the
cost
of
the
merchandise
content
proportionate
to
$84,428.78.
And
similarly
in
1947,
in
respect
of
the
$62,567.61
written
off
only
$16,228.37
was
charged
against
the
income
for
the
year.
And
in
1948,
while
$63,659.67
was
written
off,
the
income
for
the
year
was
reduced
by
only
$18,376.69.
Counsel
for
the
respondent
was
thus
in
error
in
suggesting
in
his
cross-
examination
of
the
accountancy
experts
that
the
taxpayer’s
income
was
reduced
in
each
year
by
the
amount
of
bad
debts
written
off.
It
was
reduced
only
by
the
amount
of
the
cost
of
the
merchandise
content
proportionate
to
such
amount
for,
as
already
explained,
that
was
the
only
amount
that
had
been
included
in
income
as
already
described.
I
should
also
add
that
there
is
no
merit
in
counsel’s
suggestion
that
the
taxpayer
could
have
worked
out
a
percentage
for
an
annual
allowance
for
bad
debts.
Any
such
attempt
would
have
led
to
as
arbitrary
a
figure
as
the
Minister’s
allowance
of.
15
per
cent.
As
for
the
recoveries
made
in
respect
of
accounts
that
had
previously
been
written
off
the
payments
received
by
the
taxpayer
in
respect
of
such
accounts
were
treated
in
the
same
way
as
any
other
payments
received
by
it.
Their
gross
profit
content
was
taken
into
the
income
of
the
year
in
which
the
recoveries
were
made.
I
now
come
to
the
opinions
of
the
accountancy
experts.
Mr.
Hutchison
explained
the
operation
of
the
instalment
system
of
accounting
as
I
have
described
it
and
stated
that
it
was
a
recognized
and
accepted
method
of
accounting
and
computing
income.
In
his
opinion,
it
was
a
suitable
system
to
apply
to
the
taxpayer’s
business
and
produced
a
more
accurate
computation
of
its
income
than
any
other
system
would
do.
His
reasons
for
his
opinion
may
be
summarized.
The
taxpayer’s
accounts
receivable
for
its
unpaid
instalments
are
different
in
kind
from
ordinary
trade
accounts
receivable
where
the
credit
period
is
for
30
days
and
also
different
in
kind
from
accounts
receivable
for
unpaid
instalments
on
such
articles
as
automobiles
or
radios
or
television
sets
where
there
is
a
valuable
lien
right
and,
in
the
case
of
automobiles,
a
protection
by
insurance,
and
the
risks
of
collection
are
slight.
Mr.
Hutchison
expressed
the
opinion
that
while
the
instalment
system
is
accepted
by
accountants
and
could
be
applied
in
all
cases
where
articles
are
sold
for
a
price
payable
in
instalments
it
is
not
the
most
appropriate
system
to
apply
to
the
sale
of
such
articles
as
automobiles
to
which
the
accrual
basis
system
is
ordinarily
applicable.
But
it
is
more
appropriate
than
the
accrual
basis
one
in
cases
where
the
period
of
payment
of
the
instalments
is
protracted,
where
collection
of
the
instalments
is
uncertain
and
the
cost
of
collection
high,
where
the
accounts
are
of
such
doubtful
value
that
they
cannot
be
discounted
or
readily
sold
and
where
there
are
no
valuable
rights
of
repossession
of
the
articles
sold.
All
these
conditions
exist
in
the
taxpayer’s
case.
Consequently,
the
instalment
system
of
accounting
is
very
appropriate
to
its
business
and
its
use
results
in
an
accurate
computation
of
its
profit.
Mr.
Punchard,
with
his
greater
knowledge
of
the
taxpayer’s
method
of
conducting
its
business,
was
more
explicit
in
his
reasons
for
his
opinion.
He
considered
that
the
accrual
basis
system
of
accounting
was
not
appropriate
to
the
kind
of
business
conducted
by
it
and
the
nature
of
its
accounts
receivable
and
was
strongly
of
the
opinion
that
the
instalment
system
would
produce
the
most
accurate
computation
of
its
income
and
most
nearly
accurately
reflect
its
profit
position.
He
agreed
with
the
reasons
put
forward
by
Mr.
Hutchison
but
added
to
them.
One
additional
reason
for
considering
the
accrual
basis
system
inappropriate
to
the
taxpayer’s
business
was
that
there
was
a
large
interest
content
due
to
the
delay
between
the
incurring
of
the
expenses
of
the
business
and
the
receiving
of
the
instalment
payments,
which
interest
content
it
improperly
disregarded.
And
he
particularly
stressed
the
fact
that
the
value
of
the
taxpayer’s
accounts
receivable
at
the
end
of
the
year
was
contingent
on
the
success
of
its
collection
efforts
in
the
following
year
or
years.
I
shall
refer
to
his
reasons
in
greater
detail
later.
Mr.
Punchard
also
went
farther
than
Mr.
Hutchison
in
his
general
approval
of
the
instalment
system.
In
his
opinion,
it
would
be
appropriate
in
all
cases
of
articles
sold
for
a
price
payable
in
instalments.
The
expert
opinions
expressed
by
Mr.
Hutchison
and
Mr.
Punchard
were
supported
by
reference
to
recognized
accountancy
authorities
and
excerpts
from
their
works
were
filed
as
exhibits.
I
enumerate
them
as
follows
:
namely,
Statement
dealing
with
the
instalment
system
of
accounting
in
the
course
of
instruction
for
chartered
accountants
prepared
by
chartered
accountants
designated
by
the
Institute
of
Chartered
Accountants
and
handled
by
Queen’s
University,
Exhibit
9;
H.
A.
Finney
on
Principles
of
Accounting—Advanced,
at
p.
89,
Exhibit
10
;
R.
H.
Montgomery
on
Auditing,
at
p.
429,
Exhibits
11
and
20;
Smails
on
Auditing,
at
pp.
91-92,
Exhibit
16;
C.
T.
Devine
on
Inventory
Valuation
and
Periodic
Income,
at
p.
11,
Exhibit
17;
H.
A.
Finney
on
Principles
of
Accounting—Advanced,
at
pp.
78
to
75,
Exhibit
18
;
S.
Gilman
on
Accounting
Concepts
of
Profit,
at
pp.
602-603,
Exhibit
19;
Dickinson
Lectures
on
Developments
in
Accounting
Theory,
at
pp.
99-100,
Exhibit
21;
W.
A.
Paton
on
Essentials
of
Accounting,
at
pp.
600-601,
Exhibit
22
;
R.
Kester
on
Advanced
Accounting,
at
p.
502,
Exhibit
23
;
H.
R.
R.
Hatfield
on
Accounting,
at
p.
251,
Exhibit
24
;
and
W.
A.
Staub
on
Auditing
Developments
During
the
Present
Century,
at
p.
26,
Exhibit
25.
Mr.
Punchard
made
it
clear
that
his
concurrence
with
the
opinions
expressed
by
these
authorities
was
with
their
general
trend,
rather
than
with
every
detail
of
them.
There
is
a
general
recognition
by
the
accountancy
authorities
that
instalment
sales
raise
special
accounting
problems.
For
example,
H.
A.
Finney
in
his
work
on
Principles
of
Accounting—
Advanced
points
out,
as
appears
from
Exhibit
18,
that
instalment
sales
may
be
subject
to
greater
collection
losses
and
expenses
than
are
incurred
on
regular
sales,
that
collection
losses
are
likely
to
be
heavy
because
the
opportunity
to
purchase
luxuries
on
the
instalment
plan
appeals
to
people
Who
are
not
in
a
financial
position
to
pay
or
them
outright,
and
who,
in
many
cases,
are
unable
to
pay
for
them
even
in
instalments,
and
that
expenses
are
also
likely
to
be
heavy
since
the
instalment
method
involves
additional
collection
and
accounting
costs.
Then
Finney
points
out,
and
his
remark
is
particularly
pertinent
in
the
present
case,
that
the
expenses
applicable
to
the
sale
are
incurred
in
accounting
periods
subsequent
to
the
period
of
sale.
This
led
him
to
the
following
statement
:
"‘The
accounting
procedure
must
be
based
upon
a
recognition
of
this
fact,
as
it
would
be
incorrect
accounting
to
take
up
all
the
profit
during
the
period
of
sale
without
making
provision
for
expenses
to
be
incurred
in
subsequent
periods.’’
Then
he
recognizes
the
fact
that,
because
losses
and
expenses
incident
to
instalment
selling
are
incurred
in
large
amounts
in
periods
subsequent
to
the
period
of
sale,
there
is
considerable
difficulty
in
devising
a
method
of
taking
up
profits
in
a
logical
and
conservative
way.
According
to
him
two
methods
have
been
used.
One
is
that
all
the
profits
should
be
taken
up
in
the
period
of
sale
and
that
reserves
should
be
set
up
for
losses
on
bad
debts,
collection
expenses
and
costs
of
reconditioning
repossessed
merchandise
and
the
other
that
the
profits
should
be
taken
up
in
instalments
on
the
basis
of
cash
collections.
The
latter
method
involves
accounting
by
the
instalment
system.
I
think
that
I
may
safely
say
that
it
is
generally
recognized
by
the
authorities
that
the
instalment
system
of
accounting
is
preferable
to
other
systems
in
the
case
of
instalment
sales
where
the
down
payment
is
small
and
the
collection
risk
is
substantial.
Finney
refers
to
three
forms
of
instalment
systems
showing
the
manner
in
which
the
cash
collections
are
dealt
with
:
"
(a)
The
first
collections
are
considered
a
return
of
cost
and
no
profit
is
taken
until
the
collection
exceeds
the
cost.
(b)
The
first
collections
are
considered
profit
and
the
last
collections
are
considered
a
return
of
cost.
(c)
Each
collection
is
regarded
as
including
profit
and
a
return
of
cost
in
the
same
proportion
that
these
two
elements
are
included
in
the
total
selling
price.”
These
three
ways
of
dealing
with
the
payments
received
in
respect
of
instalment
sales
are
also
referred
to
by
Kester
in
his
work
on
Advanced
Accounting,
at
p.
502,
as
set
out
in
Exhibit
23.
Montgomery
on
Auditing
prefers
the
first
form
of
the
instalment
method
in
cases
where
the
collection
risk
is
extreme.
At
p.
429,
as
appears
from
Exhibit
20,
he
says:
"‘When
the
collection
risk
is
considered
to
be
extreme
it
is
good
practice
to
defer
the
recognition
of
profituntil
the
entire
cost
has
been
recovered.’’
In
the
case
of
the
$29.90
sale,
which
I
have
been
using
by
way
of
illustration,
this
would
mean
that
no
portion
of
the
sale
price
would
be
taken
into
income
until
after
the
full
amount
of
the
cost
of
the
merchandise
content
of
the
sale,
that
is
to
say,
$8
had
been
paid.
Mr.
Hutchison
stated
that
in
pure
theory
this
form
of
the
instalment
system
could
be
followed
but
he
agreed
with
Finney
and
Kester
that
it
would
be
too
conservative
and
he
referred
to
the
form
of
the
system
which
the
taxpayer
adopted,
which
was
the
third
one
mentioned
by
Finney,
as
a
compromise.
This
is
not
a
precisely
accurate
statement.
What
he
meant
was
that
it
is
a
middle
form
of
the
instalment
system
between
the
other
two
forms,
both
of
which
are
extreme,
one
too
conservative
and
the
other
too
optimistic.
At
this
stage
it
would,
I
think,
be
appropriate
to
make
some
remarks
of
a
general
nature
regarding
the
role
of
accountancy.
experts
in
income
tax
cases.
The
accountancy
profession
is
not
a
static
one
and
the
system
of
accounting
which
accountants
should
apply
to
the
accounts
of
the
businesses
in
which
they
are
called
upon
to
act
are
not
immutable.
A
system
of
accounting
that
would
be
appropriate
to
one
kind
of
business
is
not
necessarily
appropriate
to
a
different
kind.
Only
an
arbitrary
minded
person
would
contend
that
there
is
only
one
system
of
accounting
of
universal
applicability.
No
reasonable
person
would
do
so.
But
while
accountants
devise
changes
in
systems
of
accounting
to
meet
the
changing
conditions
in
the
business
world
and
neW
ways
of
conducting
business
their
guiding
principle
must
always
be
the
same.
Accounting
is
really
the
recording
in
figures,
instead
of
words,
of
the
financial
implications
of
the
transactions
of
the
business
to
which
it
is
applied.
The
accountant
is
thus
the
narrator
of
the
transactions,
his
narrative
being
in
the
form
of
figures
instead
of
words.
His
narrative
should
be
such
as
to
disclose
to
persons
understanding
his
language
of
figures
the
true
position
of
his
client’s
business
at
any
given
time
or
for
any
given
period.
The
accountant
cannot
fulfil
the
duty
thus
required
of
him
unless
he
has
carefully
considered
the
manner
in
which
his
client
carries
on
his
business
and
has
applied
to
it
the
system
of
accounting
that
is
appropriate
to
it
and
most
nearly
accurately
reflects
its
financial
position,
including
its
income
position,
at
the
time
or
for
the
period
required.
But
the
Court
must
not
abdicate
to
accountants
the
function
of
determining
the
income
tax
liability
of
a
taxpayer.
That
must
be
decided
by
the
Court
in
conformity
with
the
government
income
tax
law.
It
is
an
established
principle
of
such
law
in
this
Court
that
there
is
a
statutory
presumption
of
validity
in
favour
of
an
income
tax
assessment
until
it
is
shown
to
be
erroneous
and
that
the
onus
of
doing
so
lies
on
the
taxpayer
attacking
it.
But
while
the
Court
must
be
mindful
of
this
principle
it
must
in
its
effort
to
apply
the
law
objectively
keep
a
watchful
eye
on
arbitrary
assumptions
on
the
part
of
the
tax
authority
such
as,
for
example,
that
it
is
within
its
competence
to
permit
or
refuse
any
particular
system
of
accounting
and
that
its
decision
in
the
matter
is
conclusive.
I
cannot
express
too
strongly
the
opinion
of
this
Court
that,
in
the
absence
of
statutory
provision
to
the
contrary,
the
validity
of
any
particular
system
of
accounting
does
not
depend
on
whether
the
Department
of
National
Revenue
permits
or
refuses
its
use.
What
the
Court
is
concerned
with
is
the
ascertainment
of
the
taxpayer’s
income
tax
liability.
Thus
the
prime
consideration,
Where
there
is
a
dispute
about
a
system
of
accounting,
is,
in
the
first
place,
whether
it
is
appropriate
to
the
business
to
Which
it
is
applied
and
tells
the
truth
about
the
taxpayer’s
income
position
and,
if
that
condition
is
satisfied,
whether
there
is
any
prohibition
in
the
governing
income
tax
law
against
its
use.
If
the
law
does
not
prohibit
the
use
of
a
particular
system
of
accounting
then
the
opinion
of
accountancy
experts
that
it
is
an
accepted
system
and
is
appropriate
to
the
taxpayer’s
business
and
most
nearly
accurately
reflects
his
income
position
should
prevail
with
the
Court
if
the
reasons
for
the
opinion
commend
themselves
to
it.
That,
in
my
opinion,
is
the
situation
in
the
present
case.
Mr.
Hutchison
and
Mr.
Punchard
were
exhaustively
and
vigorously
cross-examined
by
counsel
for
the
Minister
but
he
was
unable
to
weaken
their
opinion.
Indeed,
his
cross-examination
served
to
strengthen
it.
It
is,
I
think,
noteworthy
that
their
opinion
was
not
contradicted.
Counsel
for
the
Minister
did
not
call
any
witnesses.
It
could,
therefore,
be
held,
even
on
the
brief
summary
of
the
reasons
given
by
the
accountancy
experts
which
I
have
set
out,
that
the
instalment
system
of
accounting
as
adopted
by
the
taxpayer
is
an
acceptable
system,
is
appropriate
to
the
taxpayer’s
business
and
more
accurately
reflects
its
income
position
than
any
other
system
of
accounting
would
do.
But
in
view
of
the
importance
of
the
question
it
would,
I
think,
be
desirable
to
amplify
the
reasons
that
have
led
me
to
this
finding.
Taxable
income
is
defined
by
Section
3
of
the
Income
War
Tax
Act,
in
part,
as
follows
:
"3.
For
the
purposes
of
this
Act,
‘income”
means
the
annual
net
profit
or
gain
.
.
.
directly
or
indirectly
received
by
a
person
from
.
.
.
any
trade,
manufacture
or
business
.
.
.”’
And
Section
9
provides
that
it
is
upon
the
income
during
the
preceding
year
that
the
tax
is
to
be
assessed.
Consequently,
in
respect
of
each
of
the
years
in
question
the
taxpayer
is
subject
to
income
tax
on
the
net
profit
received
by
it
from
its
business
during
such
year.
That
statement
is
substantiated
by
the
decision
of
the
Supreme
Court
of
Canada
in
Capital
Trust
Corporation
Limited
v.
M.N.R.,
[1937]
S.C.R.
192;
[1985-37]
C.T.C.
267,
where
it
was
held
that
a
sum
received
by
the
executor
of
an
estate
was
all
assessable
for
tax
in
the
year
of
its
receipt
because
it
had
been
received
during
such
year,
notwithstanding
the
fact
that
it
had
been
earned
over
a
period
of
years.
The
test
of
taxability
of
income
fixed
by
this
decision
is
whether
the
income
was
received
by
the
taxpayer
during
the
taxation
year.
If
it
was,
it
is
subject
to
tax
regardless
of
when
it
was
earned.
It
must,
I
think,
follow
from
the
decision
that
if
the
income,
meaning
thereby
‘‘the
net
profit
or
gain,’’
was
not
received
by
the
taxpayer
during
the
taxation
year
he
is
not
subject
to
income
tax
in
respect
of
it.
And
it
follows
that
he
is
then
not
subject
to
excess
profits
tax
for
such
year.
It
is
clear
that
in
assessing
the
taxpayer
the
Minister
rejected
the
instalment
system
of
accounting
on
which
it
had
based
its
tax
returns.
This
appears
from
an
examination
of
its
tax
returns
and
the
notices
of
assessment.
For
example,
for
1945
the
Minister
added
to
the
amount
of
taxable
income
reported
by
it
the
sum
of
$74,071.93,
less
an
allowance
of
$14,816.85
for.bad
debts,
or
a
net
addition
of
$59,255.08.
The
amount
of
$74,071.93
represents
the
difference
between
$98,778.87,
the
total
amount
of
the
taxpayer’s
accounts
receivable
in
respect
of
its
1945
sales
at
the
end
of
that
year,
after
it
had
written
off
$52,879.50
as
bad
debts,
and
$24,706.94,
the
cost
of
the
merchandise
content
proportionate
to
$98,778.87.
This
$74,071.93
is
the
amount
that
would
have
been
the
gross
profit
content
of
the
instalments
of
$98,778.87
if
they
had
been
received
by
the
taxpayer
in
1945,
but
which
it
excluded
from
its
computation
of
income
for
1945,
as
being
the
unrealized
gross
profit
content
of
the
instalments
remaining
unpaid
at
the
end
of
that
year,
and,
therefore,
not
profit
received
by
it
in
1945.
But
the
Minister’s
net
addition
of
$59,255.08
to
the
taxpayer’s
reported
taxable
income
is,
in
effect,
an
assertion
by
him
that
the
taxpayer’s
accounts
receivable,
amounting
to
$98,778.87,
after
the
write-off
for
bad
debts,
constituted
a
"‘net
profit”
of
$59,255.-
08
“received”
by
it
during
1945,
over
and
above
the
amount
of
taxable
income
reported
by
it.
Thus
the
issue,
so
far
as
1945
is
concerned,
is
whether
the
defendant’s
accounts
receivable
at
the
end
of
1945,
meaning
thereby
the
amount
of
the
unpaid
instalments
in
respect
of
its
1945
sales,
constituted
a
receipt
by
it
during
1945
of
$59,255.08
over
and
above
the
amount
of
taxable
income,
meaning
thereby
“net
profit
or
gain,”
reported
by
it
for
that
year.
I
have
no
hesitation
in
finding,
on
the
evidence
before
me
and
the
opinions
of
the
accounting
experts,
that
the
taxpayer
did
not
in
1945
receive
the
additional
profit
or
$59,255.08
which
the
Minister’s
assessment
thus
ascribed
to
it
and
that
his
assessment
for
that
year
is
to
that
extent,
erroneous
in
fact.
There
are
several
reasons
for
this
finding.
It
is
important
to
take
a
realistic
view
of
the
facts
rather
than
the
arbitrary
one
taken
by
the
Department.
In
the
first
place,
the
evidence
is
conclusive
that
the
taxpayer’s
accounts
receivable
at
the
end
of
the
year,
meaning
thereby
the
instalments
in
respect
of
sales
remaining
unpaid,
were
quite
different
in
character
from
ordinary
trade
accounts
receivable
which
are
likely
to
be
paid
within
the
short
period
of
credit
allowed
to
them
without
any
considerable
risk
of
loss
or
expense
being
incurred
to
effect
their
collection.
The
situation
in
the
taxpayer’s
case
was
basically
different.
For
example,
its
gross
sales
in
1945
amounted
to
$467,170.80
but
only
$315,519.13
was
collected
in
that
year
leaving
$151,651.67
unpaid
at
the
end
of
it.
In
1946
there
was
a
further
collection
of
$77,788.-
66
in
respect
of
the
1945
sales
but
at
the
end
of
1946
$73,863.01
still
remained
unpaid
in
respect
of
them.
In
view
Of
these
undisputed
facts
it
is
unrealistic
and
untrue
to
say
that
the
taxpayer’s
accounts
receivable
at
the
end
of
1945
for
its
instalments
then
remaining
unpaid,
amounting
to
$98,778.87,
after
the
write-
off
of
$52,877.50
for
bad
debts,
constituted
a
receipt
of
profit
by
it
during
1945
of
$59,255.05.
I
say,
as
emphatically
as
possible,
that
it
did
not.
The
Minister
seems
to
have
admitted,
although,
perhaps
inadvertently,
the
inappropriateness
of
the
accrual
basis
system
of
accounting,
as
it
is
ordinarily
understood,
to
the
taxpayer’s
business
for
he
did
not
fully
apply
it.
If
he
had
done
so
he
would
have
added
a
much
larger
amount
than
$59,255.05,
namely,
the
difference
between
$151,651.67,
being
the
amount
of
the
taxpayer’s
accounts
receivable
at
the
end
of
the
year,
before
its
write-off
of
$52,879.50
for
bad
debts,
and
the
cost
of
the
merchandise
content
proportionate
to
it,
less
an
allowance
of
15
per
cent
of
$151,651
for
bad
debts,
which
amount
would
have
been
in
excess
of
$90,000.
It
might,
perhaps,
not
be
fair
to
say
that
in
adding
$74,071.93
to
the
taxpayer’s
income
less
his
allowance
of
$14,778.87
rather
than
the
larger
sum
referred
to
the
Minister
recognized
the
propriety
of
the
taxpayer’s
write-off
of
$52,879.50
for
bad
debts,
but
that
is
the
effect
of
what
he
did
and,
to
that
extent,
the
Minister
applied
a
modification
of
the
accrual
basis
system
of
accounting
to
the
taxpayer’s
business.
But
even
this
modification
shows
a
profit
for
the
year
that
the
taxpayer
did
not,
in
fact,
receive
during
such
year.
I
now
proceed
to
refer
in
greater
detail
than
I
have
done
to
the
reasons
that
led
Mr.
Punehard
to
his
opinion
that
the
accrual
basis
system
of
accounting
is
not
appropriate
to
the
taxpayer’s
business
and
its
accounts.
He
drew
attention
to
the
fact
that
in
each
year
the
taxpayer
incurred
costs
in
the
purchase
of
merchandise
and
paid
commission
in
respect
of
its
sales
but
had
to
wait
a
long
time
before
the
instalment
payments
equalled
the
amount
of
its
merchandise
cost
and
commission
payments.
There
was
thus
an
interest
cost
that
ought
to
be
charged
as
an
expense
but
the
accrual
basis
system
of
accounting
disregarded
this
interest
factor.
The
system
was
also
defective
in
that
it
showed
in
respect
of
the
taxpayer’s
accounts
receivable
at
the
end
of
the
year
a
so-called
profit
by
reason
of
the
nature
of
the
accounts
cannot
fairly
be
described
otherwise
than
as
an
anticipated
profit.
And,
as
Mr.
Punehard
put
it,
"‘the
accountant,
as
a
matter
of
principle—
which
is
very
much
a
part
of
his
training—abhors
any
anticipation
of
profit.”
This
is
as
it
should
be.
When
an
accountant
shows
a
profit
from
a
business
there
ought
to
be
something
to
show
for
the
profit
shown
that
is
worth
somewhere
within
reach
of
the
amount
shown,
so
that
it
can
be
used
for
the
purposes
for
which
a
profit
is
ordinarily
used.
The
Minister’s
addition
of
$59,255.08
to
the
amount
reported
by
the
taxpayer
does
not
meet
this
requirement.
It
was
not
an
existing
profit
in
1945
but
only
an
anticipated
one.
Liabilities
cannot
be
met
or
dividends
paid
with
such
an
anticipated
profit
consisting
of
accounts
receivable
of
uncertain
value
that
cannot
be
discounted.
I
again
use
the
example
of
the
$29.90
sale
by
way
of
illustration.
The
evidence
is
that
in
the
year
of
the
sale
$8
is
paid
or
incurred
for
its
merchandise
content
and
$10.30
by
way
of
commissions
making
a
total
of
$18.30
and
leaving
$11.60
which
amount
is
subject
to
its
proportion
of
shipping
and
delivery
costs
and
overhead
and
office
expenses
including
the
cost
of
collection.
The
$18.30
for
merchandise
and
commissions
is
all
paid
or
incurred
before
the
weekly
instalments
are
received
and
there
cannot
be
any
profit
in
respect
of
the
sale
available
for
any
purpose
until
after
sufficient
instalment
payments
have
been
made
to
cover
the
cost
of
the
merchandise
content
of
the
sale,
the
commissions
paid
for
its
acquisition
and
the
proper
proportion
of
the
costs
and
expenses
referred
to.
But
the
evidence
shows
that
this
does
not
happen
in
the
year
of
the
sale.
For
example,
as
I
have
pointed
out,
in
respect
of
the
sales
of
$467,170.80
in
1945,
the
sum
of
$151,651.67
remained
unpaid
at
the
end
of
the
year
and
the
sum
of
$73,863.01
still
remained
unpaid
at
the
end
of
1946.
How
then
could
it
fairly
be
said
that
the
amount
of
$151,651.67,
or
$98,778.-
87
after
the
write-off
of
$52,878.50,
represented
an
item
of
taxable
income,
meaning
thereby
net
profit
or
gain,
received
by
the
taxpayer
in
1945,
which
it
had
improperly
excluded
from
its
tax
returns
for
that
year
?
The
question
answers
itself
in
the
negative.
There
was
certainly
no
existing
profit
out
of
which
it
could
pay
income
tax
if
it
were
called
upon
to
do
so
and
it
ought
not
to
be
required
to
borrow
money
to
pay
income
tax
on
what
was
at
the
time
only
an
anticipated
profit
realizable
in
the
future
only
to
the
extent
of
the
success
that
might
attend
the
taxpayer’s
efforts
to
collect
the
unpaid
instalments.
But
Mr.
Punehard’
s
basic
reasons
for
his
opinion
seem
to
me
to
be
conclusive.
The
evidence
establishes
that
the
taxpayer’s
accounts
receivable
are,
at
the
time
of
their
receipt,
of
uncertain
value.
They
cannot
be
discounted
and
they
are
saleable
only
for
a
small
percentage
of
their
face
amounts.
Mr.
Soren
said
that
he
would
not
pay
more
than
15
to
20
per
cent
for
all
of
them.
Moreover,
and
this
is
a
most
important
factor,
such
value
as
they
may
have
in
the
future
is
contingent
on
the
success
of
the
taxpayer’s
intensive
and
costly
efforts
to
collect
them.
And
it
is
certain
that
if
its
collection
efforts
were
not
made
or
should
be
relaxed
the
instalment
payments
would
cease
or
fall
off.
Approximately
80
per
cent
of
the
taxpayer’s
office
expense
is
incurred
in
the
collection
of
its
unpaid
instalments.
While
the
large
cost
of
collection
is,
no
doubt,
taken
into
account
as
a
factor
in
the
determination
of
the
sale
price,
this
factor
should
also
be
taken
into
account
in
determining
the
real
profit
content
of
the
unpaid
instalments.
A
profit
shown
by
taking
the
amount
of
the
gross
sales
into
income
and
deducting
therefrom
the
costs
incurred
up
to
the
date
of
the
sale
without
taking
into
account
the
cost
of
collecting
the
unpaid
instalments
necessarily
incurred
after
the
date
of
the
sale
is
not
a
true
profit.
There
are
really
two
aspects
of
the
problem.
If,
for
example,
the
taxpayer
had
ceased
business
at
the
end
of
1945
its
accounts
receivable
would
have
had
little,
if
any,
value.
They
could
not
have
been
discounted
and
it
is
extremely
doubtful
that
anyone
would
have
bought
them
at
all.
Mr.
Soren's
statement
that
he
would
not
pay
more
than
15
or
20
per
cent
for
all
the
taxpayer’s
accounts
would
not
be
applicable
to
the
assumed
situation.
It
would
be
astonishing
if
they
would
have
been
worth
more
than
the
amount
of
the
cost
of
the
merchandise
content
proportionate
to
them
which
the
taxpayer
left
in
its
income
for
1945
in
the
manner
described
earlier.
How
then
could
it
possibly
have
been
said
that
the
taxpayer’s
accounts
receivable
at
the
end
of
1945
constituted
a
receipt
by
it
during
the
year
of
$59,255.05
of
net
profit
or
gain
over
and
above
the
amount
reported
by
it?
It
certainly
did
not.
The
negative
answer
becomes
even
more
emphatic
when
it
is
remembered
that
of
the
$151,651.67
of
accounts
receivable
at
the
end
of
1945
only
$77,788.66
was
collected
in
1946,
and
then
only
by
reason
of
the
collection
effort
made
in
1946,
and
$73,863.01
remained
uncollected.
Now
let
us
look
at
the
other
aspect
of
the
problems
with
the
taxpayer
continuing
in
business
after
1945.
Then
its
accounts
receivable
at
the
end
of
1945
would
acquire
value
but
only
by
reason
of
its
intensive
efforts
to
collect
them.
But
such
value
would
be
acquired
in
a
year
subsequent
to
that
of
their
receipt
and
as
the
result
of
collection
efforts
involving
a
substantial
expenditure
in
such
subsequent
year.
Thus
it
is
apparent
that
the
gross
profit
content
of
the
instalments
in
respect
of
1945
sales
remaining
unpaid
at
the
end
of
1945
is
contingent
on
the
success
of
expensive
collection
efforts
to
be
made
subsequently
to
1945.
It
seems
to
me
that
if
a
system
of
accounting
is
to
produce
a
true
computation
of
the
profit
of
a
business
such
as
that
of
the
taxpayer
it
ought
to
take
the
factor
which
I
have
just
referred
to
into
proper
account.
The
accrual
basis
system
does
not
do
so.
The
real
fact
is
that
the
taxpayer
is
engaged
in
two
activities
;
it
sells
books
and
magazine
subscriptions
at
a
price
which
has
taken
into
account
the
risky
factors
of
such
a
business
and
it
runs
an
intensively
organized
collection
office.
Its
profits
on
the
sale
of
its
merchandise
is
contingent
on
the
success
of
its
collection
efforts.
Without
such
success
there
would
not
be
any
profil
from
the
sale
of
the
merchandise.
On
this
point
the
evidence
is
conclusive.
This
led
Mr.
Punehard
to
his
statement
that
he
could
not
reconcile
with
good
accounting
the
practice
of
giving
full
value
to
the
amount
of
the
taxpayer’s
accounts
receivable
at
the
end
of
the
year
when
it
was
plain
that
such
value
as
they
might
have
was
contingent
on
the
success
of
the
taxpayer’s
collection
efforts
to
be
made
subsequently
to
the
year
of
their
receipt
and
necessarily
involving
a
substantial
expenditure
in
the
year
of
its
efforts
and
also
subject
to
considerable
loss
even
after
its
intensive
and
costly
collection
efforts.
Thus,
in
respect
of
the
taxpayer’s
sales
in
1945,
it
would
be
more
reasonable
and
more
consistent
with
sound
accounting
to
take
the
gross
profit
content
of
the
instalments
remaining
unpaid
at
the
end
of
the
year,
that
is
to
say,
the
amount
of
the
payment
less
the
cost
of
the
merchandise
content
proportionate
to
them,
into
income
for
the
year
in
which
they
were
received
by
the
taxpayer
as
the
result
of
its
successful
efforts
to
collect
them
and
in
which
its
costs
of
collection
were
incurred,
rather
than
to
take
them
into
income
for
1945
when
their
profit
content
was
contingent
on
the
success
of
future
collection
efforts
and
its
amount
could
not
be
determined
with
any
substantial
certainty.
I
am,
therefore,
in
complete
agreement
with
Mr.
Punchard’s
opinion
that
the
accrual
basis
system
of
accounting
is
inappropriate
to
the
taxpayer’s
business.
Its
use,
if
applied
for
1945,
would
take
the
amount
of
the
taxpayer’s
gross
sales
in
the
year
into
income
for
the
year,
deduct
therefrom
the
amount
of
its
expenses
laid
out
or
incurred
during
the
year
and
show
the
balance,
less
an
arbitrary
allowance
of
15
per
cent
for
bad
debts,
as
the
net
profit
received
by
it
during
the
year.
But
the
system
would
fail
to
take
into
account
the
nature
of
the
taxpayer’s
business,
the
uncertain
nature
and
contingent
and
doubtful
value
of
its
accounts
receivable,
the
delay
in
the
payment
of
the
instalments,
the
intensive
and
costly
efforts
necessary
to
collect
them
in
a
year
or
years
subsequent
to
1945,
and
the
certainty
of
substantial
loss,
notwithstanding
such
efforts.
Thus,
the
use
of
the
system
would
show
a
profit
for
the
year
that
did
not
in
fact
exist.
Certainly,
it
would
not
represent
a
profit
received
by
the
taxpayer
during
the
year.
What
I
have
said
applies
also
to
the
modification
of
the
accrual
basis
system,
which
the
Minister
applied
when
he
made
his
assessment.
I
am
also
in
agreement
with
the
opinion
of
the
accountancy
experts
that
the
instalment
system
of
accounting
is
appropriate
to
the
taxpayer’s
business.
In
respect
of
the
sales
in
1945
it
properly
excludes
from
the
computation
of
income
for
1945
the
unrealized
gross
profit
content
of
the
instalment
payments
remaining
unpaid
at
the
end
of
the
year
and
takes
such
profit
content
as
may
be
realized
subsequently
to
1945
into
income
for
the
year
in
which
the
instalments
are
successfully
collected
as
the
result
of
the
taxpayer
‘s
collection
efforts,
and
their
gross
profit
content
may
fairly
be
regarded
as
profit
received
by
it
during
such
year.
It
follows,
of
course,
that
under
the
instalment
system
only
the
gross
profit
content
of
the
payments
received
by
the
taxpayer
during
1945
is
taken
into
income
for
the
year,
subject,
of
course,
to
the
fact
that
the
amount
of
the
cost
of
the
merchandise
content
proportionate
to
the
amount
of
the
instalment
payments
remaining
unpaid
at
the
end
of
the
year
after
the
write-off
for
bad
debts
against
the
amount
of
the
unpaid
instalments
remains
included
in
the
income
for
the
year
in
the
manner
described.
I
am
convinced
that
the
instalment
system
of
accounting
produces
a
much
more
nearly
accurate
computation
of
the
taxpayer’s
profit
than
the
accrual
basis
system
would
do.
For
these
reasons
I
have
come
to
the
conclusion
that
the
Minister’s
assessment
of
the
taxpayer
for
1945
was
erroneous
in
fact.
It
would
be
unrealistic,
and
contrary
to
fact,
to
say
that
the
amount
of
$59,255.08
which
the
Minister
added
to
the
amount
of
taxable
income
reported
by
the
taxpayer
for
1945
represented
a
profit
received
by
it
during
that
year
within
the
meaning
of
Section
3
of
the
Income
War
Tax
Act.
The
added
amount
was,
therefore,
improperly
included
in
the
assessment.
What
I
have
said
about
the
assessment
for
1945
applies,
mutatis
mutandis,
to
the
assessments
for
1946,
1947
and
1948.
For
reasons
similar
to
those
which
I
have
stated
I
find
them
all
erroneous
in
fact.
These
findings
really
dispose
of
the
appeals
herein
in
favour
of
the
taxpayer
unless
there
is
some
provision
in
the
Income
War
Tax
Act
or
some
rule
of
income
tax
law
that
in
a
case
such
as
the
present
prohibits
the
use
of
the
instalment
system
of
accounting
and
compels
the
use
of
the
accrual
basis
system.
Before
dealing
with
the
legal
contentions
put
forward
by
counsel
I
should
refer
briefly
to
some
matters
of
a
particular
nature.
It
was
urged
by
counsel
for
the
Minister
that
the
result
produced
by
the
instalment
system
of
accounting
as
applied
by
the
taxpayer
was
anomalous
in
that
it
showed
a
loss
by
the
taxpayer
of
$12,014.04
for
1945
whereas
it
had
had
a
profit
of
$23,203.09
for
1944,
notwithstanding
the
fact
that
it
did
more
business
in
1945
than
it
had
done
in
1944,
namely,
that
its
gross
sales
in
1945
amounted
to
$467,170.80
whereas
in
1944
they
had
come
to
only
$362,888.26.
The
answer
to
the
comment
is
obvious,
namely,
that
for
1944
the
taxpayer
had
made
its
tax
returns
according
to
the
accrual
basis
system
of
accounting
whereas
for
1945
it
based
them
on
the
instalment
system.
There
was
bound
to
be
a
difference
of
result
due
to
the
fact
that
in
1944
the
taxpayer
had
taken
into
income
for
1944
items
that
ought
to
have
been
excluded
from
its
computation
of
income
for
1944
and
included
in
its
computation
of
income
for
1945.
If
the
taxpayer
had
changed
over
to
the
instalment
system
in
1944
instead
of
in
1945
it
would
have
excluded
from
its
computation
of
income
for
that
year
the
unrealized
gross
profit
content
of
the
instalments
remaining
unpaid
at
the
end
of
1944
in
respect
of
its
1944
sales
instead
of
including
it,
as
it
did
under
the
accrual
basis
system,
and
paying
income
tax
on
a
profit
which
it
had
not
in
fact
received
during
1944.
Moreover,
the
result
in
1945
would
have
been
that
the
taxpayer
would
have
taken
into
income
for
that
year
not
only
the
gross
profit
content
of
the
payments
received
by
it
during
the
year
in
respect
of
its
1945
sales
but
also
the
gross
profit
content
of
the
payments
received
by
it
during
the
year
in
respect
of
its
1944
sales.
The
result
in
such
case
would
have
been
that
in
1944
its
taxable
income
would
have
been
less
than
that
on
which
it
had
paid
tax
and
that
in
1945
it
would
have
had
a
taxable
income
instead
of
a
loss.
The
fact
is
that
the
taxpayer
had
paid
tax
for
1944
on
a
so-called
profit
that
it
had
not
received
in
1944
but
had
in
part
received
in
1945.
The
fair
way
to
look
at
the
matter
is
to
do
so
over
a
period
of
years.
The
results
of
the
application
of
the
system
for
1946
illustrate
what
I
mean.
During
that
year
the
taxpayer
received
a
profit
of
$15,516.86
whereas,
as
I
have
mentioned,
it
had
a
loss
of
$12,014.04
for
1945,
notwithstanding
the
fact
that
it
did
less
business
in
1946
than
it
had
done
in
1945,
namely,
that
its
gross
sales
in
1946
amounted
to
$399,521.40
whereas
in
1945
they
had
come
to
$467,170.80.
Here
again
the
reason
is
clear,
namely,
that
in
1946
the
taxpayer
took
into
income
for
the
year
not
only
the
gross
profit
content
of
the
payments
received
by
it
during
the
year
in
respect
of
its
1946
sales
but
also
the
gross
profit
content
of
the
$77,788.66
of
payments
received
by
it
during
the
year
in
respect
of
its
1945
sales
which
were
the
result
of
its
successful
efforts
in
1946
to
collect
such
payments.
There
is
thus
no
merit
in
the
contention
of
counsel
based
on
the
result
shown
for
1945
by
the
instalment
system
as
compared
with
that
shown
for
1944
by
the
accrual
basis
system.
N
or
is
there
any
substance
in
the
suggestion
by
counsel
for
the
Minister
in
the
course
of
his
cross-examination
of
the
accountancy
experts
that
the
application
of
the
instalment
system
of
accounting
to
the
taxpayer’s
business
and
its
accounts
would
reduce
the
amount
of
its
income
tax
liability.
If
it
should
do
so
by
reason
of
the
fact
that
the
system
more
nearly
accurately
reflects
the
taxpayer’s
income
position
than
the
accrual
basis
system
or
the
Minister’s
modification
of
it
would
do
there
could
not
be
any
lawful
objection
to
such
a
result.
But
the
fact
is
that
the
use
of
the
system
does
not
produce
any
such
result.
There
is
no
diminution
of
the
taxpayer’s
taxable
income
by
reason
of
its
application
of
the
instalment
system
of
accounting.
Mr.
Punchard
was
emphatic
in
his
statement
to
that
effect.
And
Mr.
Hutchison
made
it
clear
that
all
that
happens
is
a
change
in
the
timing
of
the
incidence
of
the
applicable
tax.
How
this
happens
has
really
been
already
fully
explained.
For
example,
in
accordance
with
the
principles
of
the
system,
the
taxpayer
excluded
from
its
computation
of
income
for
1945
the
unrealized
gross
profit
content
of
its
accounts
receivable
at
the
end
of
1945,
but,
as
I
have
pointed
out,
brought
into
income
for
1946
the
gross
profit
content
of
the
$77,788.66
of
payments
received
by
it
during
1946
in
respect
of
its
1945
sales
and
into
income
for
1947
the
gross
profit
content
of
the
payments
received
by
it
during
1947
in
respect
of
its
1946
or
1945
sales,
and
so
on.
In
other
words,
the
gross
profit
content
of
payments
received
by
the
taxpayer
during
the
year
is
taken
into
income
for
the
year
in
which
they
are
received,
regardless
of
whether
the
sales
in
respect
of
which
the
payments
were
made
were
sales
made
in
the
year
of
the
payment
or
in
a
previous
year.
This,
in
my
opinion,
is
as
it
should
be,
for
the
gross
profit
content
of
the
payment
received
was
an
item
of
taxable
income
received
by
the
taxpayer
in
the
year
of
the
receipt
of
the
payment,
within
the
meaning
of
Section
3
of
the
Income
War
Tax
Act,
and
was
not
an
item
of
taxable
income
received
by
it
during
any
previous
year.
Thus,
the
use
of
the
system
does
not
reduce
the
amount
of
the
taxpayer’s
income.
All
that
it
does
is
to
allocate
it
to
the
year
in
which
it
properly
belongs
as
being
net
profit
or
gain
received
by
the
taxpayer
during
such
year
within
the
meaning
of
the
governing
Act.
And
there
cannot
be
a
valid
objection
to
the
instalment
system
of
accounting
on
the
ground
that
its
use
in
Canada
is
new
and
that
this
is
the
first
case
in
which
the
appropriateness
of
its
application
in
the
computation
of
the
taxable
income
falls
to
be
considered.
The
system
is
not
new
in
the
United
States.
There
its
use
has
been
recognized
since
1924.
Section
453(a)
of
the
Internal
Revenue
Code
of
1954
of
the
United
States
provides:
*
‘453.
(a)
Dealers
in
Personal
Property—Under
regulations
prescribed
by
the
Secretary
or
his
delegate,
a
person
who
regularly
sells
or
otherwise
disposes
of
personal
property
on
the
instalment
plan
may
return
as
income
therefrom
in
any
taxable
year
that
portion
of
the
instalment
payments
actually
received
in
that
year
which
the
gross
profit,
realized
or
to
be
realized
when
payment
is
completed,
bears
the
total
contract
price.”
It
will
be
seen
that
the
use
of
the
instalment
system
of
accounting
recognized
for
all
sales
of
personal
property
for
a
price
payable
by
instalments.
The
evidence
is
that
the
taxpayer’s
parent
in
New
York
had
used
the
instalment
system
for
some
years
so
that
it
was
not
unreasonable
that
the
taxpayer
should
desire
to
keep
its
accounts
according
to
the
same
system
and,
as
I
have
stated,
it
decided
to
do
so
after
Mr.
Punchard
had
recommended
the
change-over
after
he
had
discussed
the
matter
with
the
Toronto
Office
of
the
Department.
While
it
is
true
that
the
taxpayer
is
the
only
person
that
has
adopted
the
system
in
Canada,
it
was
Mr.
Punchard
’s
opinion
that
the
Department’s
opposition
to
the
system
has
discouraged
its
use
and
that,
if
there
had
not
been
such
opposition,
other
persons
would
have
adopted
it.
Counsel
for
the
Minister
took
objection
to
the
taxpayer’s
exclusion
of
the
amounts
of
its
accounts
receivable
from
its
computation
of
income
for
the
year
on
the
ground
that
it
constituted
the
setting
up
of
a
reserve
or
contingent
account
contrary
to
the
prohibition
of
Section
6(d)
of
the
Income
War
Tax
Act.
In
his
cross-examination
of
the
accountancy
experts
he
attempted
to
obtain
an
admission
from
them
that
the
deferring
of
the
accounts
receivable
as
income
was
a
reserve
but
both
Mr.
Hutchison
and
Mr.
Punchard
were
clearly
of
the
opinion
that
there
was
no
question
of
any
reserve
or
contingent
account.
They
were,
in
my
opinion,
clearly
right.
Section
6(1)
(d)
of
the
Act
provides
as
follows
:
"‘6.
In
computing
the
amount
of
the
profits
or
gains
to
be
assessed,
a
deduction
shall
not
be
allowed
in
respect
of
(d)
Amounts
transferred
or
credited
to
a
reserve,
contingent
account
or
sinking
fund,
except
such
amount
for
bad
debts
as
the
Minister
may
allow
and
except
as
otherwise
provided
in
this
Act;”
The
section
does
not
apply
to
what
the
taxpayer
did.
What
it
prohibits
is
the
deduction
from
what
would
otherwise
be
assessable
profits
or
gains
of
any
amount
transferred
or
credited
to
a
reserve,
contingent
account
or
sinking
fund,
except
as
permitted.
Here
there
was
no
such
transfer
or
credit.
What
the
taxpayer
did
was
to
exclude
from
its
computation
of
income
for
the
year
the
unrealized
gross
profit
of
its
accounts
receivable
at
the
end
of
the
year
on
the
ground
that
such
gross
profit
did
not
constitute
income
for
the
year
that
could
enter
into
the
computation
of
profits
or
gains
to
be
assessed.
It
was
not
a
case
of
deduction
from
income
at
all.
The
excluded
unrealized
gross
profit
content
was
not
income
for
the
year.
Both
Mr.
Hutchison
and
Mr.
Punchard
were
clearly
of
the
opinion
that
there
was
no
transfer
or
credit
of
anything
to
a
reserve
or
contingent
account
and
I
am
in
full
agreement
with
them.
Moreover,
as
Mr.
Punchard
explained,
there
is
no
place
in
the
instalment
system
of
accounting
for
any
reserve
or
contingent
account
for
bad
debts.
The
two
ideas
are
inconsistent
with
one
another.
There
cannot
be
any
provision
in
the
system
for
setting
aside
any
amount
for
bad
debts,
for
the
unpaid
instalments,
which
might
become
bad
debts,
are
not
taken
into
income
at
all,
except
that
the
cost
of
the
merchandise
content
proportionate
to
them,
by
not
being
charged
as
an
expense,
is
left
included
in
income
in
the
manner
earlier
described.
What
happens
with
regard
to
bad
debts,
as
I
have
already
explained,
is
that
after
certain
debts
have
been
determined
to
be
bad
their
amount
is
written
off
against
the
amount
of
the
gross
sales
for
the
year
and
all
that
is
written
off
against
income
for
the
year
is
the
amount
of
the
cost
of
the
merchandise
content
proportionate
to
the
amount
of
the
bad
debts
written
off,
for
that
is
all
that
was
left
included
in
the
income
proportionately
to
the
amount
of
the
accounts
before
they
were
written
off
as
bad.
Thus,
I
find
that
the
taxpayer’s
use
of
the
instalment
system
did
not
result
in
any
violation
of
the
prohibitions
of
Section
6(d).
But
the
main
argument
of
counsel
for
the
Minister
was
that
the
taxpayer
should
have
applied
the
accrual
basis
system
of
accounting
to
its
accounts
and
the
computation
of
its
taxable
income.
His
submission,
as
I
summarize
it,
was
that
the
expression
‘‘net
profit
or
gain
.
.
.
received”,
as
used
in
Section
3
of
the
Income
War
Tax
Act,
was
wide
enough
to
include
receivables
as
well
as
receipts,
that
since
the
inception
of
the
Act
in
1917
tax
returns
had
been
made
to
the
Department
according
to
the
accrual
basis
system
of
accounting
and
that
prior
to
1945
the
taxpayer
had
made
its
returns
according
to
that
system,
that
the
Department
had
accepted
that
system
and
its
long
practice
in
doing
so
lends
validity
and
a
measure
of
law
to
the
fact
that
the
accrual
basis
system
is
a
proper
and
the
most
appropriate
one
to
use
to
determine
net
profit,
unless,
as
counsel
conceded,
the
taxpayer
can
satisfy
the
Court
that
he
has
used
a
more
appropriate
system,
that
the
taxpayer
ought,
therefore,
to
have
brought
into
income
for
the
year
the
full
amount
of
the
instalments
in
respect
of
its
sales
in
the
year,
that
over
a
period
of
years
it
knew
or
should
have
known
the
percentage
of
its
likely
loss
from
bad
debts
and
could
have
protected
itself
in
respect
of
its
accounts
receivable
by
deducting
the
appropriate
amount
for
bad
debts
to
the
extent
that
the
Minister
would
allow
such
deduction,
and
that
it
could
also
work
out
an
estimate
of
the
collection
expenses
that
would
have
to
be
incurred
to
collect
the
unpaid
instalments.
There
are
several
flaws
in
the
argument
thus
put
forward.
It
it
not
strictly
correct
to
say
that
generally
tax
returns
have
been
made
to
the
Department
according
to
the
accrual
basis
system,
for
they
have
been
made
in
a
great
many
cases,
possibly
the
majority,
on
the
cash
basis
system.
It
is
mainly
in
the
case
of
trade
accounts
that
the
accrual
basis
has
been
used
but,
as
Lord
Greene,
M.R.,
pointed
out
in
W.
S.
Try,
Ltd.
v.
Johnson,
[1946]
1
All
E.R.
532
at
539,
it
is
really
an
exception
to
the
general
rule
that
tax
is
collected
on
the
basis
of
the
receipts
of
a
business
that
trade
debts
are
brought
into
income.
The
general
rule
is,
as
put
by
Rowlatt,
J.,
in
Leigh
v.
C'.I.R.
(1927),
11
T.C.
590
at
595,
that,
"
"
receivability
without
receipt
for
the
purpose
of
Income
Tax
is
nothing
at
all”:
Vide
also
Dewar
v.
C.I.R.
(1935),
19
T.C.
561
at
577,
to
the
same
effect.
Moreover,
the
Department
has
not
hesitated
to
depart
from
the
accrual
basis
system
when
it
has
suited
its
purpose
to
do
so
:
vide,
for
example
such
cases
as
Capital
Trust
Corporation
Limited
V.
M.N.R.,
[1937]
S.C.R.
192;
[1935-
37]
C.T.C.
267;
Trapp
V.
M.N.R.,
[1946]
Ex.
C.R.
245;
[1946]
C.T.C.
30.
But
even
if
its
practice
had
been
uniform
that
would
not
have
determined
the
matter.
There
has
been
too
much
thinking
on
the
part
of
the
Department
that
its
permission,
even
in
the
absence
of
statutory
authority,
is
necessary
to
the
validity
of
a
particular
system
of
accounting.
What
is
basically
to
be
determined
under
the
Income
War
Tax
Act
is
the
amount
of
"‘net
profit
or
gain
.
.
.
received”
by
the
taxpayer
during
the
year.
It
was
established
by
the
House
of
Lords
in
Sun
Insurance
Office
V.
Clark,
[1912]
A.C.
443,
that
“the
question
of
what
is
or
is
not
profit
or
gain
must
primarily
be
one
of
fact,
and
of
fact
to
be
ascertained
by
the
tests
applied
in
ordinary
business”.
Thus,
what
is
to
be
determined
here
is,
not
whether
the
Department
has
accepted
the
accrual
basis
system
of
accounting
and
rejected
the
instalment
system,
but
rather
Which
system
more
nearly
accurately
reflects
the
taxpayer’s
income
position.
I
have
already
answered
this
question
in
detail.
The
Court
is
not
called
upon
in
this
case
to
express
any
opinion
on
the
appropriateness
of
the
accrual
basis
of
accounting
to
the
business
of
an
ordinary
trader
and
ordinary
trade
accounts.
But
that
is
not
the
situation
here.
Here,
as
the
evidence
substantiates,
the
taxpayer’s
accounts
were
very
different
from
ordinary
trade
accounts.
And
the
Court
has
had
the
benefit
of
the
uncontradicted
opinions
of
two
chartered
accountants
of
experience,
carefully
expressed
and
exhaustively
tested
on
cross-examination,
that
the
accrual
basis
system
of
accounting
is
inappropriate
to
the
taxpayer’s
business
and
its
accounts
and
that
the
instalment
system
is
appropriate
and
more
accurately
reflects
the
taxpayer’s
income
position
than
any
other
system
would
do.
I
have
already,
earlier
in
these
reasons,
stated
that
there
is
no
merit
in
the
submission
made
by
counsel
regarding
the
steps
that
the
taxpayer
might
have
taken
to
protect
itself
against
loss
in
respect
of
its
accounts
receivable.
That
also
applies
to
the
suggestion
that
the
taxpayer
could
estimate
its
collection
costs.
At
best,
the
estimates
thus
suggested
would
have
been
of
a
speculative
and
arbitrary
nature
and
subject
to
adverse
comment
similar
to
that
made
by
Lord
Greene,
M.R.,
in
the
W.
S.
Try
Lid.
case
(supra)
in
respect
of
the
amount
there
discussed.
In
support
of
his
argument
counsel
for
the
Minister
relied
upon
the
decision
in
Kent
v.
M.N.R.
(1952),
6
Tax
A.B.C.
181,
in
which
Mr.
Fisher
accepted
and
adopted,
inter
alia,
the
following
statement,
taken
from
Mr.
R.
G.
H.
Smail’s
work
on
Accounting
Principles
and
Practice
:
"‘Income
is
realized
just
as
fully
when
an
asset
is
sold
for
a
promise
of
cash
as
when
it
is
sold
for
cash
down.
’
’
Mr.
Hutchison
did
not
agree
that
this
statement
was
applicable
in
the
case
of
sales
such
as
those
made
by
the
taxpayer
and
Mr.
Punchard
also
disagreed
with
it.
My
comment
on
it
will
be
brief.
It
may
well
be
that
the
statement
is
justifiable
in
cases
where
the
promise
to
pay
is
readily
convertible
into
cash,
as
appears
to
have
been
done
in
the
Kent
case,
but
to
say
that
it
is
applicable
to
the
kind
of
promises
to
pay
made
to
the
taxpayer
in
the
present
case
is,
to
put
it
bluntly,
to
make
a
statement
that
is
wholly
devoid
of
reality
and
quite
untrue.
Counsel
for
the
Minister
was
in
error
in
assuming
that
under
the
instalment
system
of
accounting
the
taxpayer
excluded
from
income
for
the
year
the
whole
amount
of
its
accounts
receivable
at
the
end
of
the
year
as
not
having
any
value.
That
is
not
correct.
What
was
excluded
was
the
unrealized
gross
profit
content
of
the
unpaid
instalments.
But,
as
I
have
explained
earlier,
the
unpaid
instalments
at
the
end
of
the
year
were
valued
at
the
amount
of
the
cost
of
the
merchandise
content
proportionate
to
them
and
the
amount
of
such
valuation
was
included
in
the
taxpayer’s
income
for
the
year
in
the
manner
which
I
have
fully
described.
That
is
certainly
not
far
from
their
value
at
the
end
of
the
year.
Certainly,
it
is
more
than
anyone
would
then
have
paid
for
them.
This
brings
me
to
my
conclusion.
I
have
not
been
able
to
find
any
prohibition,
express
or
implied,
in
the
I
n-come
War
Tax
Act
against
the
use
by
the
taxpayer
of
the
instalment
system
of
accounting
in
the
computation
of
its
income.
In
my
opinion,
its
use
results
in
a
more
nearly
accurate
computation
of
the
taxpayer’s
taxable
income,
within
the
meaning
of
Section
3
of
the
governing
Act,
than
the
system
applied
by
the
Minister
would
do.
It
follows
that
the
assessments
appealed
against
must
be
set
aside.
There
will,
therefore,
be
judgment
that
the
taxpayer’s
appeals
against
its
income
tax
assessment
for
1945
and
its
excess
profits
tax
assessments
for
1945,
1946
and
1947
are
allowed
and
that
the
Minister’s
appeal
from
the
decision
of
the
Income
Tax
Appeal
Board
is
dismissed.
The
taxpayer
will
be
entitled
to
its
costs
of
the
appeals
but
since
they
were
heard
together
there
Will
be
only
one
counsel
fee.
J
udgment
accordingly.