October 07, 2011

Odyssey Industries Incorporated (Appellant) v. Her Majesty the Queen (Respondent)

97 DTC 498
Tax Court of Canada
March 22, 1996

(Court File No. 92-2854(IT)G.)

Deductions — Reserves — Disposition by corporate taxpayer during 1985 of certain assets resulting in reserves and in recaptured capital cost allowance (“CCA”) — Proceeds of disposition of said assets not due for two years — Whether taxpayer entitled to paragraph 20(1)(n) reserve for 1985 in respect of the uncollected profit from the said sale of its assets — Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended, ss. 13(1), 20(1)(n) and 40(1)(a).

During its 1985 taxation year, the corporate taxpayer disposed of certain assets used in its freezer processing and warehousing business. Since the proceeds of disposition exceeded both the adjusted cost base and the undepreciated capital cost of the assets involved, recaptured CCA and capital gains resulted. A portion of the proceeds of disposition of the assets, however, were not due to the taxpayer until more than two years following the sale thereof. In assessing the taxpayer for 1985, the Minister permitted its deduction, under subparagraph 40(1)(a)(iii) of the Act, of a reserve in respect of the portion of the capital gain involved which had not been received during 1985. However, the Minister disallowed the taxpayer’s attempt to deduct, under paragraph 20(1)(n) of the Act, a reasonable reserve in respect of the portion of the profit on the sale of the assets not received before the end of 1985. The taxpayer appealed to the Tax Court of Canada.

Held: The taxpayer’s appeal was dismissed. Applying Andreychuk v. M.N.R. (T.C.C.), the recaptured CCA in issue (which was the “excess” of the proceeds of disposition of the assets over their undepreciated capital cost) was not a “profit” for purposes of the deductible reserve provisions of paragraph 20(1)(n) of the Act. The Minister’s assessment, disallowing the reserve claimed by the taxpayer, was affirmed accordingly.