The taxpayer, an aircraft producer, received advances from its customers, which the taxpayer applied as payments on partially complete contracts. In accordance with a US accounting standard which it followed in preparing its financial statements, it deducted the advances received from the contract costs incurred by it, in arriving at the "net" asset shown on its balance sheet in respect of the contracts, rather than recording the advances instead as a liability (although the full amount of the advances was disclosed in the notes to its financial statements). This accounting method also conformed with Canadian GAAP. The Minister argued that the advances should be included under the taxpayer's taxable capital for the purpose of s. 181.2, given that, legally speaking, they remained advances until the contract was concluded with transfer of ownership to the customer.
Based on the principle in Ford Credit that "subsection 181(3) of the Act requires that the accounting characterization or definition of the terminology appearing on the balance sheet be used in order to determine a corporation's capital," (para. 33) Létourneau JA found that the balance sheet treatment of the advances governed, so that they were not included in the taxpayer's capital. He also stated (at para.36):
To accept the submission by counsel for the appellant amounts to allowing the transaction's legal reality to prevail over its GAAP-required commercial reality and to eliminate the effects of the percentage-of-completion accounting method legitimately used by the respondent in keeping with GAAP.