Bonner
J.T.C.C.:
—
This
is
an
appeal
from
an
assessment
of
income
tax
for
the
1987
taxation
year.
Booth
Dispensers
Limited
(“Booth”)
carried
on
the
business
of
manufacturing
soft
drink
dispensers.
During
its
1986
taxation
year
Booth
“accrued”
management
bonuses
of
$1,694,300
and
deducted
that
amount
in
computing
income
for
the
year.
During
its
1987
taxation
year
a
$105,276
part
of
those
bonuses
was
paid
and
the
indebtedness
with
respect
to
the
remaining
$1,589,024
was
extinguished
without
cost
to
Booth.
In
its
domestic
financial
statements
for
1987
Booth
reversed
the
unpaid
accrued
bonuses.
It
entered
the
amount
forgiven
as
“other
revenue”
in
its
statement
of
earnings
for
the
year.
However,
for
purposes
of
income
tax,
it
deducted
the
$1.589
million
as
“section
80
settlement
of
debt”
in
the
reconciliation
of
income
per
financial
statements
with
net
income
for
tax
purposes.
The
Minister
of
National
Revenue
(“Minister”)
assessed
tax
for
the
1987
taxation
year
on
the
basis
that
the
cancelled
bonus
formed
part
of
the
appellant’s
income
for
the
year
by
virtue
of
section
9
of
the
Income
Tax
Act
(“Act”)
and
that
section
80
did
not
apply
by
virtue
of
paragraph
80(1
)(f).
The
issue
in
this
case
is
whether,
as
a
consequence
of
the
cancellation
of
the
obligation
to
pay
bonus,
the
$1.589
million
must
be
applied
in
the
manner
laid
down
in
paragraphs
80(1
)(a)
and
(b)
of
the
Act
or
whether
those
provisions
are
inapplicable
by
reason
of
paragraph
80(1)(f).
Section
80
reads
in
part:
(1)
Where
at
any
time
in
a
taxation
year
a
debt
or
other
obligation
of
a
taxpayer
to
pay
an
amount
is
settled
or
extinguished
after
1971
without
any
payment
by
him
or
by
the
payment
of
an
amount
less
than
the
principal
amount
of
the
debt
or
obligation,
as
the
case
may
be,
the
amount
by
which
the
lesser
of
the
principal
amount
thereof
and
the
amount
for
which
the
obligation
was
issued
by
the
taxpayer
exceeds
the
amount
so
paid,
if
any,
shall
be
applied
(a)
to
reduce,
in
the
following
order,
the
taxpayer’s
(i)
non-capital
losses,
(1.1)
farm
losses,
(ii)
net
capital
losses,
and
(iii)
restricted
farm
losses,
for
preceding
taxation
years,
to
the
extent
of
the
amount
of
those
losses
that
would
otherwise
be
deductible
in
computing
the
taxpayer’s
taxable
income
for
the
year
or
a
subsequent
year,
and
(b)
to
the
extent
that
the
excess
exceeds
the
portion
thereof
required
to
be
applied
as
provided
in
paragraph
(a),
to
reduce
in
prescribed
manner
the
capital
cost
to
the
taxpayer
of
any
depreciable
property
and
the
adjusted
cost
base
to
him
of
any
capital
property,
unless
(f)
the
excess
is
otherwise
required
to
be
included
in
computing
his
income
for
the
year
or
a
preceding
taxation
year
or
to
be
deducted
in
computing
the
capital
cost
to
him
of
any
depreciable
property,
the
adjusted
cost
base
to
him
of
any
capital
property
or
the
cost
amount
to
him
of
any
other
property,
It
was
the
position
of
the
respondent
that
generally
accepted
accounting
principles
(“GAAP”)
require
the
inclusion
of
the
forgiven
bonuses
in
computing
profit
for
purposes
of
section
9
of
the
Act.
Accordingly,
it
was
said,
the
cancelled
debt
must
be
included
in
computing
income
for
1987.
Paragraph
80(1
)(f)
applies
to
oust
the
rules
set
out
in
paragraphs
80(1
)(a)
and
(b).
It
was
common
ground
that
Booth
“accrued”
the
management
bonuses
in
its
1986
taxation
year.
I
take
that
to
mean
that
in
1986
Booth
became
legally
obliged
to
pay
to
the
three
members
of
management
named
in
the
evidence
bonuses
totalling
$1.694
million.
Booth
did
deduct
the
amount
accrued
in
computing
its
income
for
1986.
The
cancellation
of
the
obligation
to
pay
the
bonuses
arose
from
an
agreement
to
sell
the
shares
of
Booth.
All
of
the
outstanding
shares
were
owned
by
the
three
persons
who
were
entitled
to
receive
the
bonuses.
In
1987
they
reached
a
tentative
agreement
to
sell
the
shares
to
Alco
Standard
Corporation.
That
agreement
was
set
out
in
a
letter
of
intent
dated
November
24,
1987
which
provided
in
part:
(a)
Shareholders/employees
shall
forgive
accrued
bonuses
from
prior
years
(totalling
approximately
$1,600,000)
and
such
accruals
shall
be
reversed
back
into
the
company’s
income;
The
evidence
was
silent
on
the
exact
manner
in
which
the
forgiveness
was
effected
but
it
was
common
ground
that
it
did
happen
in
1987.
The
appellant
was
formed
in
1988
by
the
amalgamation
of
Booth
and
another
company.
Counsel
for
the
respondent
attempted
to
support
the
assessment
on
the
basis
that
the
inclusion
of
the
cancelled
bonus
accrual
in
the
income
of
the
appellant
for
1987
was
in
accordance
with
GAAP,
that
such
inclusion
resulted
in
an
accurate
statement
of
Booth’s
profit
for
that
year
in
accordance
with
GAAP,
that
the
computation
of
income
should
be
in
accordance
with
GAAP
unless
a
specific
provision
of
the
Act
provides
otherwise
and
that
the
amount
reversed
was
properly
included
in
the
appellant’s
income
for
1987
both
for
financial
statement
purposes
and
for
income
tax
purposes
in
accordance
with
sections
3
and
9
of
the
Act.
No
doubt
Booth’s
domestic
financial
statements
were
prepared
in
accordance
with
GAAP
but
that
is
beside
the
point.
Subsection
9(1)
of
the
Act
provides:
Subject
to
this
Part,
a
taxpayer’s
income
for
a
taxation
year
from
a
business
or
property
is
his
profit
therefrom
for
the
year.
In
the
determination
of
profit
for
purposes
of
section
9
it
is
ordinary
commercial
principles
which
govern,
not
GAAP.
What
constitutes
ordinary
commercial
principles
is
a
matter
of
law.
A
complete
summary
of
the
law
on
this
point
is
set
out
in
Ikea
Ltd.
v.
R.
(sub
nom.
Ikea
Ltd.
v.
Canada),
[1994]
1
C.T.C.
2140,
94
D.T.C.
1112
at
page
2147-48
(D.T.C.
1117)
and
it
need
not
be
repeated
here.
The
question
which
must
be
addressed
is
whether
any
statutory
rule
or
principle
of
law
requires
the
inclusion
of
the
cancelled
bonuses
in
the
computation
of
the
appellant’s
profit
for
purposes
of
section
9.
Counsel
for
the
appellant
argued
that
at
“common
law”,
debt
settlement
gains
were
considered
to
be
capital
gains
unless
they
related
to
income
obligations
incurred
in
the
same
year
as
the
settlement
itself.
His
primary
authority
for
this
proposition
was
British
Mexican
Petroleum
Co.
v.
Commissioners
of
Inland
Revenue
(sub
nom.
British
Mexican
Petroleum
Co.
v.
Jackson),
(1932)
16
T.C.
570
(U.K.
H.L.)
which
held
that
income
is
determined
on
a
year-to-year
basis
and
adjustments
that
arise
from
events
in
subsequent
years
do
not
affect
the
income
of
either
the
original
or
the
subsequent
year.
Counsel
noted
that
the
decision
in
British
Mexican
was
followed
by
the
Exchequer
Court
in
J.D.
Stirling
Ltd.
v.
Minister
of
National
Revenue,
[1969]
C.T.C.
418,
69
D.T.C.
5259.
He
referred
to
page
423,
(D.T.C.
5262)
where
Jackett,
P.
stated:
Clearly,
the
release
of
a
debt
...
does
not
of
itself
give
rise
to
revenue
from
the
debtor’s
business
even
though
the
amount
released
is
a
debt
that
has
been
taken
into
account
as
an
expense
of
that
business.
and
cited
British
Mexican
as
authority.
Counsel
for
the
appellant
argued
further
that
section
80
of
the
Act
creates
a
statutory
scheme
for
the
treatment
of
forgiven
debts
which
supersedes
common
law
rules
otherwise
applicable
in
the
computation
of
profit
for
purposes
of
section
9.
He
noted
that
the
paragraph
80(1
)(f)
exclusion
applies
to
amounts
“otherwise
required
to
be
included
in
computing
(the
taxpayer’s)
income
for
the
year”
but
took
the
position
that
by
virtue
of
the
British
Mexican
and
Stirling
decisions,
the
amount
forgiven
in
this
case
must
be
viewed
as
capital
and
therefore
falling
outside
the
words
of
the
exception.
British
Mexican
was
a
case
in
which
the
taxpayer
was
a
company
carrying
on
the
business
of
a
dealer
in
oil.
It
built
up
a
very
large
debt
for
oil
supplied
to
it.
Its
creditors
agreed
to
a
partial
remission
of
the
debt
in
order
to
permit
the
taxpayer
to
continue
in
business.
The
revenue
sought
to
bring
the
amount
forgiven
into
income
for
the
year
in
which
the
debt
was
incurred
or
alternatively
for
the
period
in
which
the
debt
was
forgiven.
It
was
held
that
the
accounts
of
the
earlier
year
in
which
the
oil
was
purchased
were
closed
and
could
not
be
reopened.
It
was
observed
in
response
to
an
alternative
argument
which
was
not
seriously
pressed
that
a
release
from
liability
was
not
a
trading
receipt
for
the
year
in
which
it
was
granted.
It
is
clear
that
the
1987
reversal
of
the
liability
for
the
accrued
and
unpaid
bonus
cannot,
consistently
with
British
Mexican,
be
taken
into
account
in
computing
the
appellant’s
1986
income
and,
of
course,
the
Minister
has
not
attempted
to
do
that.
But
what
is
much
less
clear
is
whether
British
Mexican
or
any
other
case
requires
a
finding
that
the
release
in
1987
of
the
liability
incurred
in
1986
forms
a
receipt
on
capital
account
in
1987.
In
contrast
to
British
Mexican
this
is
not
a
case
in
which
the
release
of
the
liability
was
in
any
way
intended
to
shore
up
the
shaky
financial
structure
of
the
taxpayer.
Here
the
forgiveness
was
a
consequence
of
a
term
in
a
letter
of
intent
which
required
that
the
accrued
bonuses
“be
reversed
back
into
the
company’s
income”.
The
creditor’s
objective
is
relevant
in
cases
such
as
this.
In
a
leading
Canadian
text
on
income
tax
law
the
author
notes
:
If
a
taxpayer
incurs
a
debt
in
connection
with
his
acquisition
of
a
fixed
asset
and
the
debt
is
later
forgiven
in
whole
or
in
part,
the
forgiveness
is
not
a
revenue
gain
to
him.
If
a
debt
was
incurred
in
connection
with
the
acquisition
of
inventory
in
a
particular
taxation
year
and
is
forgiven,
in
whole
or
in
part,
in
the
same
year,
the
forgiveness
will
probably
be
treated
as
business
revenue,
regardless
of
what
the
creditor’s
motive
was
in
forgiving
a
debt.
If
the
forgiveness
occurs
in
a
later
year
and
the
creditor’s
motive
clearly
was
to
save
the
debtor
from
what
would
otherwise
be
probable
bankruptcy,
the
creditor
is
seeking
to
preserve
the
continued
existence
of
the
debtor’s
business
(which
is
part
of
the
debtor’s
capital
assets),
and
the
forgiveness
therefore
is
a
capital
transaction
for
the
debtor.
If
the
creditor’s
motive
was
to
make
the
debtor’s
business
more
profitable
than
it
otherwise
would
be
or
to
reduce
or
eliminate
losses
that
the
debtor
would
otherwise
suffer
(assuming
that
bankruptcy
was
not
imminent),
this
motive
would
relate
to
the
debtor’s
trading
activity
rather
than
to
his
capital
assets,
and
the
forgiveness
would
be
business
revenue
to
him.
Counsel
for
the
respondent
argued
that
the
release
of
the
debt
which
has
been
properly
deducted
in
a
prior
year
is
analogous
to
the
recovery
of
an
expense
of
a
prior
year
or
to
a
receipt
of
compensation
for
loss
of
profits
and
that,
on
the
principles
laid
down
in
Johnson
&
Johnson
Inc.
v.
R.,
[1994]
1
C.T.C.
244,
94
D.T.C.
6125
(F.C.A.)
and
in
Mohawk
Oil
Co.
v.
R.
(sub
nom.
Canada
v.
Mohawk
Oil
Co.),
[1992]
1
C.T.C.
195,
92
D.T.C.
6135
(F.C.A.)
the
amount
released
must
be
included
in
the
computation
of
a
profit.
In
Johnson
&
Johnson
the
court
dealt
with
a
case
in
which
the
taxpayer
had
paid
Federal
Sales
Tax
on
goods
manufactured
and
distributed
by
it.
It
contested
its
liability
to
pay
the
sales
tax
and
ultimately
it
was
held
that
the
goods
were
exempt.
The
tax
paid
in
prior
years
was
refunded.
The
question
then
arose
whether
the
sales
tax
refund
was
re-
quired
to
be
included
in
computing
the
taxpayer’s
income.
It
was
held
that
there
was
a
distinction
between
a
case
in
which
it
was
recognized
by
the
original
payee
that
he
should
never
have
had
the
money
in
the
first
place
and
the
case
“...
of
the
recovery
of
expenses
in
the
ordinary
business
sense
of
attempting
to
recoup
what
one
has
laid
out
by
what
one
can
get
in.”
In
course
of
its
reasons
the
court
summarized
its
earlier
decision
in
Mohawk
as
follows
page
249-250,
(D.T.C.
6130):
That
case
simply
decided,
amongst
other
things,
that
that
part
of
compensation
for
damages
for
breach
of
contract
which
included
both
lost
profits
and
expenditures
thrown
away
was
to
be
included
in
the
computation
of
a
business’s
taxable
income.
The
question
of
timing
was
not
addressed
at
all,
but
if
it
had
been
I
do
not
think
the
Court
would
have
had
any
difficulty
in
concluding
that
the
year
of
receipt
was
the
relevant
year
for
computation
purposes.
Expenditures
thrown
away
and
then
recouped
as
damages
do
not
lose
their
original
character.
[Emphasis
added.
I
In
light
of
the
decision
in
Mohawk
the
release
of
liability
to
pay
the
bonuses
cannot
be
treated
as
having
changed
the
character
of
the
liability.
Furthermore
I
will
observe
that
the
assertion
that
the
forgiveness
of
the
bonus
is
a
capital
transaction
is
clearly
illogical.
If
the
creation
of
an
enforceable
obligation
to
pay
bonus
results
in
a
cost
which
diminishes
profit
so
also
must
the
receipt
of
a
waiver
intended
to
boost
profit
by
eradicating
that
same
obligation
result
in
an
increase
in
profit.
A
common
sense
commercial
view
of
the
matter
must
be
taken.
(See
Minister
of
National
Revenue
v.
Enjay
Chemical
Co.
Ltd.,
[1971]
C.T.C.
535,
71
D.T.C.
5293.)
It
is
in
my
view
contrary
to
common
sense
to
assert
that
the
passage
of
a
year
end
effects
some
sort
of
a
magical
conversion
of
executive
compensation
operations
from
current
account
transactions
to
capital
account
transactions.
I
have
therefore
concluded
that
ordinary
commercial
principles
require
that
the
release
transaction
be
reflected
in
the
computation
of
income.
The
only
year
in
which
it
can
conceivably
be
so
reflected
is
the
year
in
which
the
release
was
effected,
that
is
to
say,
1987.
It
follows
that
paragraph
80(1
)(f)
of
the
Act
applies.
Appeal
dismissed.