Canada v. Huang and Danczkay Ltd.
T-2463-93
Wetston J.
5/6/98
16 pp.
Appeal from Tax Court decision allowing defendant's appeal from assessments for 1981, 1983 and 1985 taxation years-Defendant carrying on practice of consulting engineer and business of real estate development and property management-In 1979, limited partnership, defendant and promoters entered into important real estate development agreement under which partnership issued promissory note in amount of $3,107,300 (purchase money note) to defendant-Note provided for principal to be paid over six years, together with interest at rate of 11 1/2% per annum-Note also included right to set-off in event defendant defaulting on its obligations under development agreement-In 1980, defendant entered into similar agreement under which another limited partnership issued promissory note in amount of $4,044,000 to defendant, and agreed to deliver to defendant mortgages for remainder of cost-Note providing for principal to be paid over period of 7 years, together with interest at rate of 12% per annum-In addition, note including right to set-off in event defendant defaulting on its obligations under agreement-In 1981, another project, another promissory note, in amount of $3,599,000-Wrap-around mortgage-Note providing principal to be paid over six years, together with interest at rate specified by formula-In addition, note including right to set-off in event of defendant defaulting on its obligations under agreement-In computing its net income for 1980, 1981, 1982 and 1983 taxation years, defendant deducted uncollected portion of first two purchase money notes-In computing its net income for 1983 taxation year, defendant deducted uncollected portion of last purchase money note-For each of 1981, 1982, 1983 and 1985 taxation years, defendant included in computing its income amount deducted in computing its income for immediately preceding year in respect of each of purchase money notes-By notices of reassessment in 1988, MNR disallowed defendant's deduction and included in income full amount of each of purchase money notes in year each of said notes received, on basis that Act, ss. 3, 9(1) precluded defendant claiming deduction in respect of uncollected portion of each of said notes-Defendant further argued that wrap-around mortgages given by two of limited partnerships should be given same treatment for tax purposes as defendant gave to purchase money notes-At issue: whether uncollected portions of notes and wrap-around mortgages "receivable" within meaning of Act, s. 12(1)(b)-Minister argued that notes and mortgages earned by defendant in years in question and must be included in computation of defendant's income for tax purposes pursuant to Act, ss. 9, 12 and in accordance with generally accepted accounting principles (GAAP)-Minister saying defendant confusing recognition of income in taxation year in which it is earned with situation where defendant may be entitled to reserve for amounts not received or for contingent future payments-Further arguing that, as notes and mortgages consideration received by defendant upon sale of properties in question, properly included by defendant as receivables in years in which these sales took place-Minister acknowledging defendant undertook potential future obligations which might or might not have resulted in expenditures by it in future years-Minister submitting these conditional expenditures not deductions of kind which could be subject of reserve under Act, s. 20(1)-Minister arguing obligations undertaken by defendant in relation to notes and mortgages properly characterized as "contingent payables", which cannot be considered expense incurred in current year, pursuant to Act, s. 18(1)(e)-Minister arguing defendant in effect attempting to transform contingent payable, i.e. amount which may become payable in future under one of obligations attached to notes or mortgages, into unearned income, rather than current deduction, such as reserve, which it had originally attempted to do-Defendant arguing notes and mortgages receivable only in accordance with payment schedules set out in development agreements, and then only if defendant continued to meet its obligations under each development agreement-Also arguing did not have immediate, absolute and unconditional right to sue for uncollected portion of notes and mortgages in any of taxation years in issue-Defendant submitting that most accurate picture of its income, for any of years in issue, one in which notes and mortgages not regarded as receivables, until such time as defendant has immediate, absolute and unconditional right to collection of amounts as stipulated in payment schedule provided under notes and mortgages-Also arguing role of defendant as real estate developer must be addressed prior to arriving at proper accounting analysis with respect to revenue recognition criteria applicable herein-Appeal dismissed-Cash flow guarantee obligation did not have character of contingent payable, as suggested by Minister-As result of ongoing obligations, defendant did not have immediate, absolute and unconditional right to sue for uncollected portion of notes and mortgages in any of particular taxation years-Therefore, not "receivable" within meaning of Act, s. 12(1)(b), and should not have been included in income in any of taxation years, until such time as conditions precedent attached to each development agreement had been satisfied-Defendant's proposed method of accounting for notes and mortgages consistent with Act and established principles contained within case law-Income Tax Act, S.C. 1970-71-72, c. 63, ss. 3 (as am. by S.C. 1977-78, c. 42, s. 1; 1984, c. 1, s. 2), 9 (as am. by S.C. 1984, c. 1, s. 4), 12(1)(b) (as am. by S.C. 1980-81-82-83, c. 140, s. 4), 18(1)(e), 20(1).