Befega Inc. (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Walsh J.—Montreal, February 1;
Ottawa, April 17, 1972.
Income tax—Emphyteutic lease of 99 years at high rent—
Expenditures for finding lessee and for legal and accounting
fees—Capital expenditures—Not a "leasehold interest"—
Capital cost allowances not claimable.
In 1965 appellant company granted an emphyteutic lease
of land in Quebec for a term of 99 years at an annual rent of
$110,000 more or less. It paid $45,000 to a trust company
for finding the lessee and spent an additional $15,730 on
lawyers' and accountants' fees in connection with the lease.
Held, (1) The emphyteutic lease resulted in a benefit or
advantage of an enduring nature for appellant and the above
payments were therefore of a capital nature and under
section 11(1)(a) of the Income Tax Act prohibited from
deduction in computing appellant's income.
Cohen v. M.N.R. [1967] C.T.C. 254; B.C. Electric Rly.
Co. v. M.N.R. [1958] S.C.R. 133; British Insulated &
Helsby Cables Ltd. v. Atherton [1926] A.C. 205; Mon-
treal Light, Heat & Power Consolidated v. M.N.R.
[1942] S.C.R. 89; Regent Oil Co. v. Strick [1966] A.C.
295; M.N.R. v. Algoma Central Rly. [1968] S.C.R. 447;
M.N.R. v. Dominion Natural Gas Co. [1941] S.C.R. 19;
M.N.R. v. Kellogg Co. of Can. [1943] S.C.R. 58; Hud-
son's Bay Co. v. M.N.R. [1947] Ex.C.R. 130, referred
to.
(2) Appellant's interest as lessor in the emphyteutic lease
was not a "leasehold interest", which term denotes the
lessee's interest and appellant was therefore not entitled
under regulation 1100(1)(h) and class 13 of the Income Tax
Regulations to capital cost allowances in respect of the
above expenditures.
Gateway Lodge Ltd. v. M.N.R. [1967] 2 Ex.C.R. 326,
referred to.
INCOME tax appeal.
Jean Marc Poulin for appellant.
Roger Roy and Gaetan Drolet for respondent.
WALSH J.—This is an appeal from a decision
of the Tax Appeal Board dated December 16,
1969, confirming the assessment made on Octo-
ber 24, 1966, as slightly modified by re-assess
ment dated February 29, 1968, of appellant's
income tax for the year 1965 whereby the sum
of $59,730.12 claimed by appellant as expenses
in the said year was disallowed, resulting in a
profit being shown in the amount of $14,660.19
instead of a loss of $45,069.93 as shown in
appellant's tax return. By the subsequent re
assessment a further sum of $380.72 shown in
appellant's return as costs of incorporation was
also disallowed with the result that the taxable
income was increased to $15,040.91 on which
taxation in the amount of $1,654.50 was
assessed. In the present appeal appellant aban
dons its objections to the disallowance of the
costs of incorporation. The amount of $59,-
730.12 of disallowed expenses with which the
appeal is now concerned was made up of three
items: commission payable to Morgan Trust Co.
$45,000.00, professional fees paid to Rodolphe
Paré $10,230.12 and professional fees paid to
Samson Bélair $4,500.00. Mr. Paré being appel
lant's legal adviser and Samson Bélair its audi
tors. The commission of $45,000 was paid to
Morgan Trust Company as its charges, at a
reduced rate, for finding a lessee and arranging
an emphyteutic lease from appellant to the
lessee of 99 years duration for certain property
of which it acquired the ownership simulta
neous to the leasing of same. Payment of the
three accounts under dispute was made during
the fiscal year of the company ending on July
31, 1965 for services terminating in August
1964 when the emphyteutic lease was signed.
While the services of Morgan Trust Company,
were confined to finding a lessee who would
lease the property in question by way of a long
term emphyteutic lease and arranging the terms
of same, the services of the company's auditor
and solicitor also related to certain other agree
ments made simultaneously which are inextric
ably associated with the lease. It is necessary,
therefore, to refer to these other agreements.
Three individuals, namely Bernard Dupuis,
Gaston Dupuis and Fernand Lareau, owned
between them all the shares of Lucerne Motel
Co. Ltd., and 50% of the shares of Reveillon
Restaurant Inc., which was operated by it, the
other 50% of the shares of Reveillon Restau
rant Inc. being owned by the said Lucerne
Motel Co. Ltd. These two corporations are
referred to in the agreement as "the compa
nies". By virtue of a purchase offer made to the
said shareholders on July 9, 1964 and accepted
on July 17, 1964, Dobie Holdings Corporation,
with whom we are not concerned in the present
case, purchased all the shares owned by the
said Messrs. Dupuis and Mr. Lareau in the said
Lucerne Motel Co. Ltd. and Reveillon Restau
rant Inc. (except for 150 preferred non-voting
shares of Lucerne Motel Co. Ltd. which were
to be redeemed) for the price of $1,420,000. It
was made a condition of the sale of the shares,
however, that the companies would then sell to
the vendors or their nominee all the bare and
naked land owned by them but not including
any buildings or constructions thereon for the
sum of $1,596,050 (clause 8 of purchase agree
ment). It was made a further condition of the
sale of the shares that the vendors should then
execute in favour of the companies a lease-back
of the said land by way of an emphyteutic lease,
the terms of which were set out in detail in
clause 11 of the said agreement.
The conditions of the said lease, which was to
be for 99 years, may be summarized as follows.
For the first six months from the date of the
closing no rent was to be payable, following
which rental would be paid in monthly instal
ments at the rate of $110,000 per annum for 26
years and 6 months. Commencing on the 28th
year and for the next ten years the rent would
be varied upwards or downwards on the basis
of the cost of living index of Statistics Canada
in accordance with the increase or decrease of
the rate from the time of the closing, such
increase or decrease not to exceed 25% of
$110,000. Thereafter, every ten years rent
would be subject to a further escalation or
diminution on the basis of the base rental for
the preceding ten year period, similarly
increased or decreased on the basis of the cost
of living index from the rate at the time of the
closing but with the increase or decrease to be
limited to 10%.
In addition to the rental, the lessee undertook
(as is required in an emphyteutic lease) to make
specific improvements to the property by the
construction of five additional motel rooms
before July 1967 to a value of at least $55,000.
The lessee is to pay all taxes and assessments,
keep the premises insured and at the end of the
lease give up the land leased with all buildings
erected or to be erected thereon without any
compensation whatsoever (again, this is a
requirement of an emphyteutic lease). The
lessee has the right to transfer and assign the
lease to a transferee or assignee who under
takes to assume all the obligations of the lessee
under the said emphyteutic lease. By virtue of
clause aa, in the event of the sale or transfer of
the property under lease or the emphyteutic
lease rights of the lessors, the lessees shall have
-the prior right to purchase same under the same
conditions offered by a bona fide purchaser.
The fact that the three agreements (i.e. the
sale of the shares of Lucerne Motel Co. Ltd.
and Reveillon Restaurant Inc. to Dobie Hold
ings Corporation, the sale of the naked land by
Lucerne Motel Co. Ltd. to the appellant Befega
Inc. (which was incorporated by Messrs.
Dupuis and Mr. Lareau for the purpose of
carrying out this transaction), and the lease-
back of this naked land by the said Befega Inc.
to Lucerne Motel Co. Ltd. by emphyteutic
lease) must be considered as part and parcel of
the same transaction is further emphasized by
clause 21 of the agreement, the first paragraph
of which reads as follows:
The vendors warrant and agree that in the event that the
sale of the naked land herein described by the companies to
the vendors or their nominee under the conditions herein set
forth, is subjected to an income tax or taxes by the appro
priate governmental authorities, instead of being considered
as a capital gain, then in such case, at the option of the
purchaser, the vendors shall keep the purchaser and the
companies indemnified and/or exonerated from payment of
any such tax or taxes which are assessed, in default of
which, and subject to and conditional upon repayment by
the vendors as hereinafter stated, the present agreement of
sale of shares shall be deemed cancelled and all of the said
shares of the companies shall be returned to the vendors
who shall be obliged to take back the same. The purchaser
agrees that in such case and providing the vendors effect
repayment as hereinafter set forth, the sale of land by the
companies to the vendors herein may be cancelled, and the
emphyteutic leaseback shall thereupon be deemed terminat
ed, subject however to such rights as may exist of lessees
holding separate emphyteutic leases which have been
apportioned as contemplated herein, and which leases shall
be respected by the owners off the land;
In order to carry out this basic agreement
appellant, Befega Inc., was incorporated and by
deed dated July 31, 1964 Lucerne Motel Co.
Ltd. sold it the land in question for $1,596,050.
By lease dated the same date, appellant then
leased the land in question to Lucerne Motel
Co. Ltd. on the terms already agreed to.
By agreement, the evidence given by wit
nesses testifying before the Tax Appeal Board
was made part of the record in this Court, no
further evidence being adduced. In his evi
dence, Mr. Marcel Mercier, the companies'
auditor, was very frank in admitting that the
procedure adopted was done so because of cer
tain tax advantages, pointing out that if Lucerne
Motel and Reveillon Restaurant had sold their
assets as such to Dobie Holdings then there
would have been provincial sales tax on about
$500,000 worth of movable property so sold,
consisting of the furnishings and equipment of
the motel and restaurant and also a problem in
connection with the transfer of the name of
Lucerne Motel and Reveillon Restaurant, both
of which are well known. The method adopted
resulted in obtaining for the Messrs. Dupuis and
Mr. Lareau a sort of annuity of $110,000 a year
escalating with the cost of living and guaranteed
on the property. This is why they refused to sell
the assets of the two companies as such and
insisted instead on a long term lease.
Appellant contends that the expenditure of
$59,730.12, which has been disallowed, was an
expense laid out "for the purpose of gaining or
producing income from property or a business
of the taxpayer" within the meaning of section
12(1)(a) of the Income Tax Act. Alternatively,
and without prejudice to this contention, appel
lant claims to have the right to amortize these
expenditures over a period of forty years com
mencing with the year 1965 by virtue of Regu
lation 1100(1)(b) and section 11(1)(a) of the
Income Tax Act, read in conjunction with
Schedule B, class 13, and Schedule H dealing
with leasehold interests. The Minister, for his
part, contends that no deductions can be made
for these expenditures by virtue of section
12(1)(b) of the Act which prohibits such deduc
tions in respect of "an outlay, loss or replace
ment of capital, a payment on account of capital
or an allowance in respect of depreciation
obsolescence or depletion except as expressly
permitted by this Part", arguing that these
expenditures were an outlay or payment on
account of capital within the meaning of section
11(1)(a), and further that Regulation 1100(1)(b)
does not permit any such allowance in respect
of depreciation or depletion.
It would be well at this point to consider the
juridical nature of an emphyteutic lease, this
being a term not used in the Income Tax Act,
but being a type of contract frequently used in
the Province of Quebec where the property in
question is situated. The basis of the contract is
set out in articles 567 and 568 of the Quebec
Civil Code which read as follows:
567. Emphyteusis or emphyteutic lease is a contract by
which the proprietor of an immoveable conveys it for a time
to another, the lessee subjecting himself to make improve
ments, to pay the lessor an annual rent, and to such other
charges as may be agreed upon.
568. The duration of emphyteusis cannot exceed ninety-
nine years and must be for more than nine.
While the lease in question contains these
essential elements there is a derogation in it
from the provisions of article 569 which reads:
569. Emphyteusis carries with it alienation; so long as it
lasts, the lessee enjoys all the rights attached to the quality
of a proprietor....
in that the lessor retains the right to alienate the
property itself, always subject to the prior
offering of same to Dobie Holdings Corporation
on the same conditions.
The effects of an emphyteutic lease, although
in an entirely different context, were considered
by Noël J., as he then was, in the case of Cohen
v. M.N.R. [1967] C.T.C. 254, in which the
lessee was held to be entitled to claim capital
cost allowance under class 3 (buildings) at the
rate of 5% instead of under class 13 (leasehold
interests) at the annual rate of one-fortieth of its
capital cost on a building already on property
acquired by the appellants at a time when the
99 year emphyteutic lease still had 58 years to
run. In that case, after referring to various
articles of the Quebec Civil Code relating to
emphyteusis, the judgment states at page 259:
From the above it appears that the emphyteutic lessee in
Quebec has not only a right "in personam" in the immove
able leased (as an ordinary lessee has) but a real right
although this real right is a partial one only (un droit réel
démembré). This right does not, however, make him the
owner of the land or give him complete ownership even of
the plantations or constructions erected thereon.
The judgment then goes on to consider, how
ever, in what respects the emphyteutic lease in
that case derogated from the general rules. The
original lessee under the emphyteutic lease had
specifically assigned to the appellants not only
the right, title and interest in the lease but also
the ten storey stone and brick building erected
on the property, and Noël J. therefore con
cludes at pages 261-62:
It therefore appears to me that whatever are the rights of
an ordinary emphyteutic lessee in Quebec or whatever
difficulties there may be in the common law provinces
because ownership of the land carries with it whatever is
built thereon, I cannot, on the documents as they stand
herein, reach any other conclusion but that the appellants
were the proprietors of the building erected on the land
owned by the Seminary.
And states further on page 262:
Having reached the conclusion that they have a right of
proprietorship in this building and not a leasehold interest,
they should and are entitled to depreciate their property as a
building.
This seems to be almost the converse of the
present case where, by derogation from the
ordinary rules of emphyteutic leases, the lessors
have themselves retained the right to alienate
the property subject to the lease and thus have
clearly retained ownership of the property. It is
of some interest to note, however, that in that
case the Minister had recognized that the
emphyteutic lease conferred a leasehold interest
on the lessees, permitting them to claim capital
cost allowance spread over 40 years by virtue
of Regulation 1100(7) (which was repealed in
1964 and the present Regulation 1100(1)(b),
which appellant attempts to use in its alterna
tive argument, substituted therefor).
Appellant's contention is based on the argu
ment that the commission to the real estate
agent and other expenses were incurred with a
view to earning income from rental of the prop
erty and that the mere fact that the income so
earned will continue from year to year for 99
years and thus be of lasting or enduring benefit
should not of itself convert these expenses into
capital expenditures since, unlike the situation
in most of the jurisprudence referred to by
counsel for the respondent, they were not laid
out to acquire a capital asset but rather as
expenses in connection with the obtaining of a
long term revenue-producing contract. Counsel
for the respondent contended that the lease
itself has an existence as a capital asset even
though it is not set up in the books of appellant
as such, quite separate and apart from the prop
erty which is leased and which does appear on
the books of the company at its purchase price
of $1,596,050.
The fact that an expenditure is made for the
purpose of gaining or producing income does
not of itself necessarily make it an income
expense as distinct from a capital outlay, how
ever. This is clearly brought out in the judgment
of Abbott J., concurred in by Kerwin C.J. and
Fauteux J., in B.C. Electric Rly. Co. v. M.N.R.
[1958] S.C.R. 133 where he states at page 137:
Since the main purpose of every business undertaking is
presumably to make a profit, any expenditure made "for the
purpose of gaining or producing income" comes within the
terms of s. 12(1)(a) whether it be classified as an income
expense or as a capital outlay.
Once it is determined that a particular expenditure is one
made for the purpose of gaining or producing income, in
order to compute income tax liability it must next be ascer
tained whether such disbursement is an income expense or
a capital outlay. The principle underlying such a distinction
is, of course, that since for tax purposes income is deter
mined on an annual basis, an income expense is one
incurred to earn the income of the particular year in which
it is made and should be allowed as a deduction from gross
income in that year. Most capital outlays on the other hand
may be amortized or written off over a period of years
depending upon whether or not the asset in respect of which
the outlay is made is one coming within the capital cost
allowance regulations made under s. 11(1)(a) of The Income
Tax Act.
In that case the appellant under agreement with
certain municipalities operated a railway pro
viding both passenger and freight service. It
wished to drop the passenger service which was
unprofitable and replace it with a bus service,
and in order to be relieved of objections to this
by the municipalities it agreed to pay $220,000
to them for the improvement of roads, which it
attempted to write off as operating expenses
over a ten year period. The judgment did not
permit this. Locke J. and Cartwright J., having
concluded that the payment in question was to
obtain relief from the obligation to maintain a
passenger service which they considered as a
payment on account of capital in order to be
relieved of part of the obligations of the fran
chise, the acquisition of which had in the first
instance been a capital acquisition, and hence a
deduction not permitted by section 12(1)(b) of
the Act, therefore found it unnecessary to con
sider whether the payment was made "for the
purpose of gaining or producing income from a
property" within the meaning of section
12(1)(a). The judgment of Abbott J., concurred
in by Kerwin C.J. and Fauteux J., concluded
that the payment was made in connection with
appellant's profit-making operations, since by
being relieved of its obligation to operate the
unprofitable passenger service while retaining
the profitable freight service it was increasing
its profits and that therefore the payment was
made for the purpose of gaining or producing
income within the meaning of section 12(1)(a).
It then went on, however, to apply the principle
enunciated by Viscount Cave in British Insulat
ed and Helsby Cables Ltd. v. Atherton [1926]
A.C. 205 at 214 to the effect that the test of
whether an expenditure is one made on account
of capital is whether it was made "with a view
of bringing into existence an advantage for the
enduring benefit of the appellant's business"
and decided that on the facts of the case before
them this was so and that therefore it was a
capital expenditure. This judgment was referred
to with approval by Kerwin J. in Montreal
Light, Heat & Power Consolidated v. M.N.R.
[1942] S.C.R. 89 where he says at pages
105-06:
What happened, in my view, is that there was an application
of the profits of a certain year to prevent an annual expense
arising thereafter and brings the cases within Viscount
Cave's criterion in British Insulated and Helsby Cables
Limited v. Atherton ([1926] A.C. 205 at 213) of an expendi
ture made with a view of bringing into existence an advan
tage for the enduring benefit of the appellants' business.
The expenditures are outlays or payments on account of
capital ... 1
If we were to substitute the words "obtain an
annual revenue" for the words "prevent an
annual expense" then Kerwin J.'s judgment
would be applicable to the present case.
The dictum of Viscount Cave in the British
Insulated and Helsby Cables Ltd. v. Atherton
ease (supra) has been discussed at length and
the effect of it limited in many subsequent
cases. In Regent Oil Co. y. Strick [1966] A.C.
295, Lord Morris of Borth-y-Gest stated at
pages 328-29:
The well-known words of Viscount Cave L.C. in his speech
in British Insulated and Helsby Cables v. Atherton ([1926]
A.C. 205, 213) are perhaps so often quoted because in a
single sentence reference is made to a number of features or
attributes. Some of these may be valuable as pointers some
of the time provided it is not assumed that all are useful all
the time. It may in some cases be of some significance that
a payment is made "once and for all." This thought was
earlier expressed by the Lord President (Lord Dunedin) in
Vallambrosa Rubber Co. Ltd. v. Farmer, ([1910] S.C. 519,
525) when he said that
"in a rough way" (the words denote that he was speaking
in general terms) "I think it is not a bad criterion of what
is capital expenditure, as against—what is income expen-
diture—to say that capital expenditure is a thing that is
going to be spent once and for all, and income expendi
ture is a thing that is going to recur every year."
The notion of a payment being made "once and for all"
may perhaps in some cases suggest the payment of the price
of something of a capital nature but like any other individu
al phrase it must be of only limited application and helpful
ness. It must be remembered also, as Lord Dunedin pointed
out in the Vallambrosa case, (ibid 524) that it would be
wrong to say that each year must be taken absolutely by
itself and that nothing could ever be deducted as an expense
unless it was purely and solely referable to a profit reaped
within the year. The necessary annual outgoing to cover the
necessary annual weeding of a rubber estate would seem
essentially to be of the nature of a revenue outgoing.
It may further be of some significance, as Viscount Cave
pointed out, if as a result of a payment, something is
brought into existence which is an "asset or an advantage"
and if it is "for the enduring benefit of a trade."
In the same case, at pages 343-44, Lord Upjohn
states:
Of the cases which I must discuss, the first in point of time
is British Insulated and Helsby Cables v. Atherton, ([1926]
A.C. 205, 213, 214) where Viscount Cave L.C. made his
celebrated statement that if an asset or an advantage is
brought into existence "for the enduring benefit of a trade
... there is very good reason (in the absence of special
circumstances to an opposite conclusion) for treating such
an expenditure as properly attributable ... to capital." In
many cases this will be a valuable criterion, but it does not
help in this case for it only invites the further question, how
long does it take to be an "enduring benefit" if you are
dealing with a purely long-term trading agreement? I am
sure that Lord Cave when he made these observations did
not have in mind anything in the nature of a long-term
trading agreement. Therefore, I gain no real assistance from
that case.
In the case of Anglo-Persian Oil Co. v. Dale, 16
T.C. 253 Lord Hanworth M.R. said at 268:
Lord Cave's test that where money is spent for an enduring
benefit it is capital, seems to leave open doubts as to what is
meant by `enduring'.
In Montreal Light, Heat & Power Consolidated
v. M.N.R. (supra) Duff C.J. stated at page 92:
I think, moreover, that these disbursements were made
for a purpose which falls within the principle enunciated by
Lord Cave in the British Insulated and Helsby Cables Ltd.
v. Atherton ([1926] A.C. 205 at 212); that is to say, the
expenditures were made with a view to securing an endur
ing benefit, the reduction of the cost of borrowed capital
over a period of at least fifteen years.
In the recent case of M.N.R. v. Algoma Cen
tral Rly. [1968] S.C.R. 447 Fauteux J., as he
then was, states at pages 449-50:
Parliament did not define the expressions "outlay ... of
capital" or "payment on account of capital". There being no
statutory criterion, the application or non-application of
these expressions to any particular expenditures must
depend upon the facts of the particular case. We do not
think that any single test applies in making that determina
tion and agree with the view expressed, in a recent decision
of the Privy Council, B.P. Australia Ltd. v. Commissioner
of Taxation of the Commonwealth of Australia ([1966] A.C.
224, (1965) 3 All E.R. 209) by Lord Pearce. In referring to
the matter of determining whether an expenditure was of a
capital or an income nature, he said, at p. 264:
The solution to the problem is not to be found by any
rigid test or description. It has to be derived from many
aspects of the whole set of circumstances some of which
may point in one direction, some in the other. One consid
eration may point so clearly that it dominates other and
vaguer indications in the contrary direction. It is a com-
monsense appreciation of all the guiding features which
must provide the ultimate answer.
This case upheld the deduction allowed by
Jackett P., as he then was, of expenditures
made by a railway company for geological sur
veys which it hoped would encourage industry
to locate along a rail line which had proved to
be unprofitable. The judgment in the Exchequer
Court had made a distinction between the infor
mation gathered as a direct result of the
expenditure, which was not of itself an advan
tage for the enduring benefit of the taxpayer's
business, and the subsequent exploitation of
that knowledge. The headnote ([1967] C.T.C.
130) reads in part:
In the cases cited in which an expenditure was held to be a
payment on account of capital the advantage characterized
as productive of an enduring benefit was the thing contract
ed for or otherwise anticipated by the taxpayer as the direct
result of the expenditure. In the present case the informa
tion received in consequence of the expenditure was not in
itself such an advantage and the appeal was accordingly
allowed.
In order for an item of expenditure to be
considered as a capital expenditure it is not
necessary that it should have been made in
order to acquire a tangible asset, itself of a
depreciable nature. In the case of M.N.R. v.
Dominion Natural Gas Co. [1941] S.C.R. 19, in
which the taxpayer attempted to deduct legal
expenses incurred in a successful defence of an
attack on his franchise rights, Duff C.J., in
applying the criterion of Viscount Cave, held at
page 24:
The settlement of the issue raised by the proceedings
attacking the rights of the respondents with the object of
excluding them from carrying on their undertaking within
the limits of the City of Hamilton was, I think, an enduring
benefit within the sense of Lord Cave's language. As Lord
Macmillan points out in Van den Berghs Ld. v. Clark
([1935] A.C. 431 at 440):
Lord Atkinson indicated that the word "asset" ought
not to be confined to "something material" and, in further
elucidation of the principle, Romer L.J. has added that the
advantage paid for need not be "of a positive character"
and may consist in the getting rid of an item of fixed
capital that is of an onerous character: Anglo-Persian Oil
Co. v. Dale [1932] 1 K.B. 146.
To the same effect see the judgment of Kerwin
J. in Montreal Light, Heat & Power Consolidat
ed v. M.N.R. (supra)?
The Dominion Natural Gas Co. judgment
was distinguished subsequently by the Supreme
Court in M.N.R. v. Kellogg Co. of Canada
[1943] S.C.R. 58. In rendering judgment, Duff
C.J. said at pages 60-61:
As regards this payment, the question in issue was wheth
er or not the registered trade marks of the plaintiffs in the
action were valid trade marks, or, in other words, whether
or not the present respondents, The Kellogg Company, and
all other members of the public were excluded from the use
of the words in respect of which the complaint was made.
The right upon which the respondents relied was not a right
of property, or an exclusive right of any description, but the
right (in common with all other members of the public) to
describe their goods in the manner in which they were
describing them.
It was pointed out in M.N.R. v. Dominion Natural Gas
Co., supra, at p. 25, that in the ordinary course legal
expenses are simply current expenditures and deductible as
such. The expenditures in question here would appear to
fall within this general rule.
Again, in the case of Hudson's Bay Co. v.
M.N.R. [1947] Ex.C.R. 130, Angers J., after a
very thorough analysis of both the British and
Canadian jurisprudence, permitted the deduc
tion of legal expenses incurred by a company in
the protection of its name by injunction pro
ceedings against a trade competitor who had
adopted a similar name, holding at page 176:
The legal expenses and costs laid out by the appellant to
protect its trade name, business and reputation were not
incurred with the object of creating or acquiring any new
asset but were incurred in the ordinary course of protecting
and maintaining its already existing assets. On the other
hand, I do not believe that these expenses and costs can be
considered as being a capital outlay or loss.
Counsel for respondent submitted that the appellant, by
means of the proceedings instituted in the United States,
had obtained an enduring asset. I cannot agree with this
proposition. There was no new asset brought into existence
by these proceedings. The expenses were incurred in the
ordinary course of maintaining the already existing assets of
the company.
In the light of the foregoing jurisprudence,
therefore, I have reached the conclusion that
although the commission paid to the Morgan
Trust Co. to introduce the tenant and complete
the negotiations which led to the emphyteutic
lease, and the professional fees paid to appel
lant's legal and accounting advisers in connec
tion with this lease and the other agreements
inextricably associated with it, were undoubted
ly laid out by the taxpayer for the purpose of
gaining or producing income within the meaning
of section 12(1)(a) of the Act, the emphyteutic
lease, whether or not it itself can be considered
as forming part of appellant's capital assets
nevertheless resulted in a benefit or advantage
of an enduring nature for appellant and the
expenses incurred in connection with obtaining
this advantage were expenses of a capital
nature and, as such, cannot, by virtue of section
11(1)(a) of the Act be deducted in computing
appellant's income save to the extent that this
may be allowed by the Regulations.
This then brings us to appellant's alternative
argument that Regulation 1100(1)(b), which is
headed "Leasehold Interest", should be
applied. This Regulation reads as follows:
1100. (1) Under paragraph (a) of subsection (1) of sec
tion 11 of the Act, there is hereby allowed to a taxpayer, in
computing his income from a business or property, as the
case may be, deductions for each taxation year equal to
(b) such amount, not exceeding the amount for the year
calculated in accordance with Schedule H, as he may
claim in respect of the capital cost to him of property of
class 13 in Schedule B;
Class 13 of Schedule B is the class applying to
property that is leasehold interest and refers to
certain exceptions which would not be appli
cable in the present case. Schedule H sets out at
some length the manner of calculating the
allowance for a leasehold interest and, in par
ticular, Schedule H reads, in part, as follows:
1. For the purpose of paragraph (b) of subsection (1) of
section 1100, the amount that may be deducted in comput
ing the income of a taxpayer for a taxation year in respect
of the capital cost of property of class 13 in Schedule B is
the lesser off
(a) the aggregate of each amount determined in accord
ance with section 2 of this Schedule that is a prorated
portion of the part of the capital cost to him, incurred in a
particular taxation year, of a particular leasehold interest;
or
2. Subject to section 3 of this Schedule, the prorated
portion for the year of the part of the capital cost, incurred
in a particular taxation year, of a particular leasehold inter
est is the lesser of
(a) one-fifth of that part of the capital cost; or
(b) the amount determined by dividing that part of the
capital cost by the number of 12-month periods (not
exceeding 40 such periods) falling within the period com-
mencing with the beginning of the particular taxation year
in which the capital cost was incurred and ending with the
day the lease is to terminate.
It is on the basis of this that appellant claims
that it should be allowed to amortize the capital
cost of the expenses incurred to obtain this
lease over a period of forty years, charging
one-fortieth each year against the rental reve
nue for the first forty years of the lease.
In order to apply Schedule H, however, the
property must fall within class 13 of Schedule
B. It would appear that the term "leasehold
interest" would include the rights acquired by a
lessee in Quebec by virtue of an emphyteutic
lease. This was the Minister's contention in the
case of Cohen v. M.N.R. (supra) and although
the judgment held that the building should not
be depreciated as a leasehold interest under
class 13 but rather as a building under class 3,
since in view of the terms of the lease the
appellants' interest was not that of a leaseholder
but that of an owner, this case is not authority
for the proposition that an emphyteutic lease
does not confer rights in the nature of a lease
hold interest. The definitions in various English-
French dictionaries, while not binding on the
Court, lend credence to the view that an
emphyteutic lease creates a leasehold interest
for the lessee. Harrap's Standard French &
English Dictionary, (1955) Vol. 2, English-
French, page 696 defines "leasehold" in French
as:
a) tenure à bail, esp. tenure en vertu d'un bail
emphytéotique;
b) propriété, immeuble loués à bail.
L. C. Clifton et A. Grimaux—Nouveau Diction-
naire Anglais-Français et Français-Anglais
defines "leasehold" as:
tenure par bail à terme—tenure par bail emphytéotique.
Th. A. Quemner Dictionnaire Juridique Anglais-
Français (1955) defines "leasehold" as:
bien-fonds loué à bail—tenure en vertu d'un bail
emphytéotique.
It would appear, however, that the term
"leasehold interest" as used in the heading of
Regulation 1100(1)(b) and in Schedule B, class
13, and Schedule H, refers to the leasehold
interest of the lessee in the property. In this
interpretation the lessor has granted a lease of
the property to the lessee but it is only the
lessee who has a "leasehold interest" in the
property. All of the jurisprudence cited deals
with claims by a lessee for capital cost allow
ance in connection with its leasehold interest.
For example, in the case of Gateway Lodge
Ltd. v. M.N.R. [1967] 2 Ex.C.R. 326, although
the judgment dealt with another point, namely
the claim for terminal allowance on surrender
of the lease under section 1100(2) of the Regu
lations, Jackett P., as he then was, stated at
page 334:
In the first place, having regard to the definition of the
relevant classes, it seems clear that the appellant's leasehold
interest in the land, of which the buildings formed, in the
view of the law, a part, falls within prescribed class 13 and
not within prescribed class 6. Class 6 extends only to
property "not included in any other class" that is a building
and the appellant's leasehold interest clearly falls within
class 13.
Here the leasehold interest referred to was that
of the lessee. See also Reitman v. M.N.R.
[1967] C.T.C. 368 in which the lessee, under a
99 year lease, was found by Dumoulin J. to hold
only an interest in a lease and not an interest in
a building, and that his interest therefore fell to
be depreciated as class 13 property, amortizable
over 40 years, and not as class 3 property. This
case discussed the judgment of Noël J. in
Cohen v. M.N.R. (supra) and agreed with it in
view of the differences between the Quebec
laws of emphyteusis under which it was decid
ed, and the common law which was applicable
to the long-term lease in issue before Dumoulin
J. See also McLean v. M.N.R. [1965] C.T.C.
530 in which Gibson J., in an estate tax case,
dealt with the value of a leasehold interest to a
lessee.
If any further indication were required to
establish that leasehold interest is not some
thing which vests in the lessor but only in the
lessee, it is interesting to note the French trans
lation of Regulation 1102(5), which regulation is
not applicable in the present case, but in which
the words "where the taxpayer has a leasehold
interest in a property" have been translated in
the French version as "lorsque le contribuable
est locataire à bail de biens" (italics mine), thus
indicating that the term "leasehold interest" has
reference to the interest of a lessee.
This alternative ground of appeal must there
fore also fail, and there is no other regulation by
virtue of which expenditures incurred by appel
lant in connection with the emphyteutic lease
can be written off against the revenue obtained
from it. While in its practical consequences this
is unfortunate from the point of view of the
appellant, many instances can be found of capi
tal expenditures which cannot be written off
under any sections of the Act or Regulations,
despite the fact that they contribute to earning
income over a long period of time for the
taxpayer.
Appellant's appeal is therefore dismissed,
with costs.
1 It should be noted that this judgment was made under
the provisions of section 6(b) of the Income War Tax Act;
the provisions of this section were substantially similar to
those of the present section 12(1)(b) off the Income Tax Act,
R.S.C. 1952, c. 148, with which we are dealing here.
2 While it should be pointed out that these two judgments
were rendered at a time when the section in question,
namely section 6(a) of the Income War Tax Act, prohibited
deductions of "disbursements or expenses not wholly,
exclusively and necessarily laid out or expended for the
purpose of earning the income", whereas the present sec
tion 12(1)(a) prohibits "an outlay or expense except to the
extent that it was made or incurred by the taxpayer for the
purpose of gaining or producing income from property or a
business of the taxpayer", which is somewhat broader, a
close reading of these judgments does not indicate that they
turned on this point or would have been any different under
the present section.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.