The Lategan Case: The Accrual Principle – Then and Now
In 1926, the landmark Lategan case was the first case to determine the meaning of the words “accrued to or in favour of” in the definition of gross income as defined in section 1 of the Income Tax Act. According to the decision in that case, income generally accrues to a person when that person is entitled to an amount (the timing rule), but the amount to which the taxpayer is entitled to must be valued to determine the value of the accrual to be included in gross income. The valuation of the accrual is determined by discounting the accrual to its present value at year end (and not the face value). The valuation part of the judgment was legislatively nullifi ed in 1990 with retrospective effect to 1962, and the face value of the amount to which the taxpayer is entitled is the amount that has accrued.
The timing rule violates both the canons of equity and of convenience. The timing rule also causes undue hardship to taxpayers by taxing amounts before they have been received. It is submitted that it may be time to test the timing rule constitutionally. It is also submitted that the valuation rule would pass constitutional muster. However, as far as the retrospective legislative amendments in respect of the valuation of the accrual are concerned, it is further submitted that there is little chance of successfully challenging such legislative amendments.
Keywords: Accrual, Canons of Taxation, “Due and Payable”, “Entitled to”, Income Tax Act, Retrospective Amendments, Timing Rule, Valuation Rule