Time Motors Limited v. Minister of National Revenue, 69 DTC 5149, [1969] CTC 190, [1969] S.C.R. 501

PIGEON, J. (all concur) :—Appellant is a used car dealer also selling new cars to a limited extent. Credit notes are sometimes given in partial payment of used cars acquired for resale. In such case, the cash payment and the amount of the credit note are stated in the bill of sale. The note is signed by both parties and the conditions are set forth on its face. These are that:

1. It is not transferable;

2. It is valid only within a stated delay, usually between one and two years;

3. It is good only for the purchase of a car of not less than a stated value.

Sometimes the credit note would be good for the purchase of a new car but generally it was good for the purchase of any used car owned by the appellant of not less than a specified value. The price of the cars offered for sale was posted but, of course, bargaining was not excluded. In appellant’s accounts credit notes outstanding were treated as current liabilities.. If they were not redeemed, the amount at expiration was removed from accounts payable and treated as a profit.

In 1965, the Minister took the view that the outstanding credit notes were not existing liabilities and should be disallowed for tax purposes as being contingent. On that basis, re-assessments were issued whereby additional tax was levied for appellant’s 1961, 1962 and 1963 taxation year disallowing $4,415, $9,870 and $1,615 in those years respectively. By judgment dated December 23, 1966 signed by Maurice Boisvert, the Tax Appeal Board allowed the taxpayer’s appeal. This judgment was reversed by Gibson, J. on further appeal to the Exchequer Court (March 13, 1968).

On the appeal to this Court, counsel for the Minister contended that when appellant issued each credit note there was not, in fact, created any contract or agreement which would give rise to any liability or obligation because, in particular, there was no agreement as to the price or the model of car which could be purchased by the customer upon presentment of the credit note. This contention cannot be upheld. The credit note should not be considered apart from the transaction out of which it arises. It is part of the consideration for an executed contract, the purchase of a used car. Under that contract, appellant became obliged to pay a stated sum of money, a part only of that sum was paid in cash, the balance remaining due was stipulated payable in merchandise of a stated kind. While the contract is spelled out in two separate documents, the bill of sale and the credit note, the latter cannot be considered otherwise than as evidence of the conditions of the obligation to pay the balance of the purchase price. That obligation must be considered as subsisting until satisfied or expired. No special reason was advanced, no authority was cited to support the contention that the credit note should be considered otherwise.

The fact that the merchandise to be obtained by virtue of a credit note was not specified does not mean that appellant’s customer had no enforceable obligation for the balance due. He could select any of the cars offered for sale coming within the general description in his credit note and require delivery by tendering the note and cash to make up the posted price. Appellant could not have evaded this obligation by posting inflated prices. This would have been a fraud against which the credit note holder would have been entitled to a remedy.

Even if the credit notes were to be considered by themselves they could not be considered as unenforceable for indefiniteness. It should be noted that Viscount Dunedin’s dictum in May & Butcher v. The King (Feb. 22, 1929, reported [1934] 2 K.B. 17) :

To be a good contract there must be a concluded bargain, and a concluded contract is one which settles everything that is necessary to be settled and leaves nothing to be settled by agreement between the parties.

was explained in a later decision of the House of Lords, Hillas & Co. v. Arcos Ltd., [1932] All E.R. 494. Reversing a judgment of the Court of Appeal based on it Lord Wright said (at pp. 507-508) :

When the learned lord justice speaks of essential terms not being precisely determined, 1.e., by express terms of the contract, he is, I venture with respect to think, wrong in deducing as a matter of law that they must, therefore, be determined by a subsequent contract; he is ignoring, as it seems to me, the legal implication in contracts of what is reasonable, which runs throughout the whole of modern English law in relation to business contracts. To take only one instance, in Hoadly v. McLaine, Tindal C.J. (after quoting older authority), said (10 Bing. at p. 487) :

“What is implied by law is as strong to bind the parties as if it were under their hand. This is a contract in which the parties are silent as to price, and therefore leave it to the law to ascertain what the commodity contracted for is reasonably worth.”

That decision was relied on by Estey, J. in Dawson v. Helicopter Exploration Co. Ltd., [1955] S.C.R. 868 at 878.

Respondent’s second contention is that because appellant’s obligation was conditional it should not, until the condition was realized, be treated for purposes of income tax as a current liability but as an amount properly to be entered in a contingent account. As a result, the deduction would be prohibited by Section 12(1) (e) of the Income Tax Act:

12. (1) In computing income, no deduction shall be made in respect of

(e) an amount transferred or credited to a reserve, contingent account or sinking fund except as expressly permitted by this Part,

The wording of that provision clearly refers to accounting practice. The only expression applicable to the present case is not “contingent liability” but ‘‘contingent account’’. This means that the provision is to be construed by reference to proper accounting practice in a business of the kind with which one is concerned. In the present case, the only evidence of accounting practice is that of appellant’s auditor, a chartered accountant. His testimony shows that in appellant’s accounts credit notes are treated according to standard practice as current liabilities until they are redeemed or expired. They are not classed as eontingent liabilities. When asked why he considered the obligation under a credit note as current liability and the obligation under a warranty as contingent, he said:

. . . the credit note, while it is a liability, is also an existing obligation today. A warranty may be a liability in the future. It may be determinable in the future but isn’t an existing obligation until the future. At least, this is my interpretation of the difference.

With respect, Gibson, J. was in error in holding that whether or not appellant’s financial statements were drawn up according to generally accepted accounting principles they could be disregarded. On the contrary, the wording of the relevant provision of the Income Tax Act implies that this is the essential question.

The appeal should be allowed and the judgment of the Exchequer Court set aside, with costs both in this Court and in the Court below; and it should be ordered that the re-assessments of the taxation years 1961, 1962 and 1963 be referred back to the Minister of National Revenue for re-assessments and adjustments in accordance with these reasons.