Digests

Urbandale Realty Corp. v. Canada

A-449-97

Noël and Robertson JJ.A (dissenting)

10/2/00

25 pp.

Appeal from trial judgment ((1997), 97 DTC 5353) dismissing appeal from Tax Court judgment dismissing appeal from reassessment for 1986--Appellant buys undeveloped land, subdivides it into building lots, services lots, sells them to builders--Regional development charge (RDC) introduced in 1985 as one-time payment to finance costs incurred by Regional Municipality of Ottawa-Carleton of providing various municipal services related to general urban expansion--RDC payable following registration of subdivision plan--Municipalities agreed not to issue building permits unless applicant producing certificate establishing RDC paid--RDC computed by reference to rate based on type of dwelling contemplated by subdivision plan--Rates phased in over three years--To avoid rate increase, appellant paid $2.9 million RDC in late 1986 with respect to land for which draft plan of subdivision filed--RDC paid not related to 1986 land sales--In 1986 return appellant deducted RDC in computing profit from land development business--Minister disallowed deduction--Maintained disallowance on reassessment, relying on assumption Generally Accepted Accounting Principles (GAAP) not authorizing deduction of RDC--Tax Court denying appeal--Federal Court Trial Division holding RDC not deductible in 1986 because could not be "matched" against revenues in that year from land--Relying on F.C.A. opinion in Canada v. Canderel Ltd., [1995] 2 F.C. 232 that matching principle of accounting elevated to status of legal principle, and on Toronto College Park Ltd. v. Canada, [1996] 3 F.C. 858 (C.A.) holding issue not which accounting method giving truer picture of profit, but whether expense can be matched with specific source of revenue--Subsequent to Trial Division decision herein, Supreme Court of Canada reversing F.C.A. decisions in Canderel, Toronto College Park holding "matching principle" not elevated to rule of law; goal in determining profit under Act to obtain accurate picture of taxpayer's income, true financial position for year and not necessarily to apply "matching principle" or any other method of accounting even though required by GAAP--Per Robertson J.A. (Strayer J.A. concurring): appeal allowed, having regard to intervening decisions of Supreme Court, reversing F.C.A.'s decisions on which Trial Division relied--Under Act, case law real estate taxes, interest expenses paid by trader with respect to raw land held in inventory can be deducted in computation of profits as normal operating expenses of land trader--However, where raw land undergoing development, GAAP requiring all expenses incurred from that point on be added to cost of land--Once recognized land being developed, GAAP requiring RDC be added to cost of land--(1) RDC deductible as expense to earn income from business--Income Tax Act, s. 18(1)(a) prohibiting deduction of expenses in computing income from business except to extent incurred for purpose of gaining or producing income from business or property--While expense only deductible if made in year, need not be traceable to revenues generated in year--Must be made for purpose of gaining or producing income from business--RDC payment made in course of appellant's income earning process, and bona fide business expense in year in which made--Decision to make lesser payment to turn land inventory to account earlier sensible from business perspective--(2) RDC deductible in computing income for taxation year in which paid--In case of ordinary trading business, money used to acquire inventory not usually appearing in profit and loss account because that money replaced by inventory purchased--Background for calculation of profit for taxation year from business of buying and selling practice, which has hardened into rule of law, of computing profit for year by valuing "inventory" at beginning and at end of period at cost or market, whichever lower--Thus when inventory sold in year of acquisition, "cost" deducted from sale price to determine profit; but when, without being sold, value below cost before end of acquisition year, fall in value charged in year of acquisition and when sold in next year, only remainder of cost deducted in computing profit for that year--A fortiori decrease in traders non-capital property resulting from payment actually made in year may be reflected in that year--In this instance, no asset received to fill hole left by payment of RDC in appellant's non-capital assets--Upon assumption supporting Minister's assessment being proven to be indeterminate, burden of demonstrating reassessment should be upheld on Minister--Only way Minister could have discharged burden by showing fair market value of land at close of year greater than amount shown in financial statements by amount of RDC--Minister leading no evidence on point--(3) S. 18(9)(a)(ii) prohibiting deduction in respect of expense incurred on account of taxes in respect of period after end of year--Not prohibiting deduction of RDC as s. 18(9)(a)(i) restricted to payments, liability for which accruing over time--RDC, being one-time tax, not payment of this nature--Payment of RDC required to obtain land severance approval--Made in 1986 to avoid rate increases--Only period in respect of which outlay made period during which appellant chose to make it i.e. 1986--Per Robertson J.A. (dissenting): Leaving aside Trial Judge's reliance on decisions no longer good law, question whether taxpayer entitled to deduct $2.9 million prepayment as current expense under Income Tax Act, s. 9 having regard to principles set out in Canderel i.e. taxpayer free to choose any method of determining profit not inconsistent with provisions of Act, established principles or rules developed from case law, and well-accepted business principles--Well-accepted business principles including, but not limited to GAAP which themselves are not rules of law but interpretative aids--Taxpayer arguing under well-accepted business principles property taxes deductible as current expense, notwithstanding GAAP, and development charge in question property tax--Result mandated by GAAP which most closely accords with ordinary commercial principles that when raw land reaching development stage, all expenses incurred from that moment forward to be added to cost of land--Taxpayer, having failed to adduce any evidence that calculation of profit consistent with Act, case law, well-established business principles, not satisfying onus--No evidence accurate picture of income for year derived by deducting $2.9 million prepaid development expense rather than adding it to cost of undeveloped land in respect of which paid--Onus not shifting to Minister to show another method of computation would provide more accurate picture--Analogy between RDC, property taxes levied inappropriate--Development charge tax on property, but not following that both should receive identical treatment for income tax purposes--Property taxes recurring and annual expense inevitably paid within each taxation year--RDC one-time payment integrally connected to development of lands in question--Another reason why Minister may be prepared to accept deductibility of annual property taxes at pre-development stage that taxes on raw land relatively much lower than on developed land--Even if real property taxes deductible under well-accepted business principle, no basis for inferring RDC should receive same accounting treatment--Taxpayer unable to benefit from rules relating to inventory valuation--RDC must be added to cost of taxpayer's land inventory--Cannot be taken into account in computing profit until land sold or found to have value less than cost--In absence of any evidence as to value of land, cannot conclude value of land in respect of which $2.9 million paid not enhanced by expenditure--Unfair to impose obligation on Minister to establish value of land enhanced by expenditure when taxpayer not even claiming loss under s. 10(1)--No evidence in appeal record to support understanding s. 10(1) argument raised either before Tax Court or Trial Division--Income Tax Act, S.C. 1970-71-72, c. 63, ss. 9(1), 10(1), 18(1)(a), (9)(a)(ii) (as am. by S.C. 1980-81-82-83, c. 48, s. 9).