If the taxpayer paid a logging contractor in full upon delivery to it of cut wood, it would be subject to liability to the workers' compensation board to the extent of unpaid workers' compensation contributions of the contractor. Accordingly, pursuant to terms in its contracts with the contractors, the taxpayer withheld from the payments made to them amounts (e.g., $0.50 per metric tonne of cut wood) that were estimated to be at least equal to the contribution liabilities of the contractors.
Reassessments that treated portion of contract payments that had been held back as not being deductible until paid, were ordered to be reversed. Sharlow J.A. found that a legal obligation to pay the full contract amounts came into existence when the contractual obligation (delivery of wood) had been performed. Before noting the evidence that in some cases contractors never claimed the holdback amounts, she stated that "an obligation to pay a certain amount does not become a contingent obligation merely because events may occur that result in a reduction in the quantum of the liability", and later also indicated that (notwithstanding statements of Desjardins J.A. in the Newfoundland Light case to the contrary), a "legal obligation to pay an amount may exist even if there is some risk that the actual payment may be set off against potential counter claims".