January 27, 2012

Argus Holdings Limited (Appellant) v. Her Majesty the Queen (Respondent)

2000 DTC 6681
Federal Court of Appeal
November 10, 2000

(Court File No. A-216-99.)

Recognition of income — Income deferrals — Corporate taxpayer operating a racquetball club and charging its new members a one-time initiation fee upon joining the club — Taxpayer treating such initiation fees as coming into income on a straight-line basis month to month over 10 years from the date on which a particular member paid the fee — Minister reassessing taxpayer on the basis that the whole of any particular initiation fee to be included in its income for the year of receipt, without any amortization thereof — Whether Minister’s approach the correct one — Whether Minister also entitled to insist that the unamortized balance of the fees not previously included in taxpayer’s income in the year of receipt be included in its income for one year under reassessment — Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended, ss. 12(1)(a), 12(1)(e), 12(1)(i), 18(1)(e) and 20(1)(m).

The corporate taxpayer operated a racquetball club and charged its new members a one-time initiation fee upon joining the club. The taxpayer treated such initiation fees as coming into income on a straight-line basis month to month over 10 years from the date on which a particular member paid the fee. The Minister reassessed the taxpayer for 1992 to 1994 on the basis that the whole of any particular initiation fee was to be included in its income for the year of receipt, without any amortization thereof. On appeal to the Tax Court of Canada, the taxpayer pursued only one issue, i.e., the Minister’s addition to its income for 1992 of $441,154 as “initiation fees deferred from prior years”. In dismissing the taxpayer’s appeal (99 DTC 597), the Tax Court concluded, inter alia: (i) that the initiation fees in issue were earned in the year of receipt, so that there was no basis for the amortization thereof; (ii) that, in excluding from income a portion of such fees, the taxpayer had, in effect, deducted a reserve under paragraph 20(1)(m) of the Act; and (iii) that the balance remaining in the taxpayer’s “Deferred Initiation Fee” account (i.e. $441,154) was thus required to be included in its income for 1992 under paragraph 12(1)(e) of the Act as a reserve deducted in a previous year. The taxpayer appealed to the Tax Court of Canada, but conceded that amortizing the initiation fees in issue over a 10-year period was inappropriate.

Held: The taxpayer’s appeal was allowed. The Tax Court judge made no palpable and overriding error in finding, as a fact, that the taxpayer had deducted a reserve under paragraph 20(1)(m) of the Act. However, applying the “accurate picture of income” doctrine established by the Supreme Court of Canada in Canderel Limited v. The Queen, [1998] 1 S.C.R. 147, it would be a gross distortion of the taxpayer’s income picture if the entire balance remaining in its “Deferred Initiation Fee” account were to be taxed in its 1992 taxation year. Part of that balance had been earned in tax years prior to 1992, and the taxpayer had not earned or received the entire $441,154 in question in its 1992 taxation year. Hence, the Tax Court judge erred in seeking to rectify the taxpayer’s under reported income from 1982 to 1991 by adding those amounts to its income for 1992. The Tax Court judge’s judgment was therefore set aside, and the Minister was ordered to reassess on the basis that the initiation fees in issue were taxable in the year of receipt.