E. R. Squibb & Sons Ltd. (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Cattanach J.—Montreal, P.Q.,
January 31; Ottawa, February 22, 1973.
Income tax—Business income, computation of—Portion
of land used by company for business purposes—Municipal
taxes—Whether proportion only deductible.
In 1952 appellant company purchased a 52 acre farm to
meet its future requirements for expansion. In 1954 it
constructed buildings and facilities which occupied 16% of
the total area. In assessing appellant to income tax the
Minister allowed a deduction of only 16% of the municipal
taxes paid by appellant in respect of such land.
Held, the whole of the municipal taxes paid were properly
deductible as a current expense of appellant's business.
INCOME tax appeal.
COUNSEL:
Bruce Verchère and Richard Pound for
appellant.
Robert Cousineau and Yvon Brisson for
respondent.
SOLICITORS:
Stikeman, Elliott, Tamaki & Co., Montreal,
for appellant.
Deputy Attorney General of Canada for
respondent.
CATTANACH J.—These are appeals from
assessments to income tax made by the Minister
with respect to the appellant's 1963, 1964, 1965
and 1966 taxation years.
The appellant, which is a wholly owned sub
sidiary of a foreign company, was incorporated
under the laws of Canada in 1925 and since that
time has carried on the business of manufactur
ing and selling pharmaceutical products.
Prior to 1952 the appellant carried on the
business from rented premises in the more
densely populated area of Montreal, Quebec.
In 1952 the appellant's business had expand
ed to the extent that the rented premises were
inadequate so the appellant decided to construct
its own premises in Montreal for the conduct of
its own research, manufacturing and marketing.
With this objective in view the appellant pur
chased a farm consisting of approximately 52
acres in the parish of St. Laurent, Quebec which
is on the outskirts of Montreal and which area
was rural in character at that time.
In 1954 the appellant began the construction
of the appropriate buildings and facilities for its
purposes which were completed and occupied
by the appellant in May 1955. These buildings
and facilities utilized approximately 16%® of the
total area of 52 acres.
In the taxation years under review the appel
lant was assessed for and paid municipal and
school taxes.
In computing its income for the taxation years
in question the appellant deducted the municipal
and school taxes paid by it in the respective
years.
The Minister allowed 16% of the amounts of
municipal and school taxes paid by the appellant
as a deduction in the respective taxation years
but disallowed as a deduction 84% of the
amounts so paid and claimed by the appellant.
He allowed the 16% of the total amount
claimed as a deduction on the ground that only
16% of the total area of the land was used by
the appellant and he disallowed the balance of
84% of the amount on the ground that 84% of
the total area of land was left unused and vacant
and accordingly only 16% of the taxes so paid
by the appellant was an outlay or expense made
or incurred by the appellant for the purpose of
gaining or producing income from its property
or business within the meaning of section
12(1)(a) of the Income Tax Act and the balance
of 84% was not an outlay or expense within
section 12(1)(a) but was rather an outlay or
payment on account of capital within the mean
ing of section 12(1)(b).
The paragraphs referred to read as follows:
12. (1) In computing income, no deduction shall be made
in respect of
(a) 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,
(b) an outlay, loss or replacement of capital, a payment
on account of capital or an allowance in respect of
depreciation, obsolescence or depletion except as express
ly permitted by this Part,
The first matter to be determined in deciding
whether an outlay or expense is outside the
prohibition of section 12(1)(a) is whether it was
made or incurred by the taxpayer in accordance
with the ordinary principles of commercial trad
ing or well accepted principles of business prac
tice. Of this there can be no doubt. Payment of
taxes is obligatory.
The next step is to consider whether the
deduction of the taxes so paid by the appellant
herein is prohibited by section 12(1)(a) or falls
within its expressed exception. The mere fact
that outlay or expense was made or incurred by
the taxpayer in accordance with good business
practice does not automatically make it deduct
ible for income tax purposes.
The essential limitation expressed in section
12(1)(a) is that the outlay should have been
made by the taxpayer "for the purpose of gain
ing or producing income from the business".
While taxes imposed on income are not
expenses incurred for the purpose of producing
that income but on that income when earned,
nevertheless, there are types of taxes which, if
paid, are deductible as having been incurred in
the course of the income earning process. There
is no doubt that a taxpayer engaged in business
pays municipal and 'school tax on real property
owned in the capacity of a taxpayer but he also
pays those taxes in the capacity of a trader
because those taxes are paid to enable him to
carry on business from the premises on which
the taxes are imposed and if the tax was not
paid there are procedures available to the
municipality to remedy non-payment of the tax
which, if enforced, would make it impossible for
the taxpayer to carry on business from those
premises.
In B.C. Electric Railway Co. Ltd. v. M.N.R.
[1958] S.C.R. 133, Mr. Justice Abbott said 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 com
pute income tax liability it must next be ascer
tained whether the disbursement is an income
expense or a capital outlay.
Counsel for the Minister during argument did
not concede that the payment of municipal and
school taxes herein was for the purpose of
gaining or producing income from the appel
lant's business. As I understood his refusal to so
concede it was predicated upon his position that
payment of taxes with respect to the unoc
cupied land should not be regarded as an
income expense but rather because the payment
of taxes was with respect to an anticipated
building expansion thereon the payments should
be considered as capital outlays.
In my view there is a patent inconsistency in
such submission. It would seem to me that if his
position were accepted that the payment of
taxes with respect to the 84% unoccupied land
were capital outlays because of anticipated
building expansion thereon, then the same con
tention would be applicable with stronger force
in connection with the taxes paid by the appel
lant on 16% of the occupied land on which
buildings had been erected. Those taxes were
paid on acknowledged capital assets.
Furthermore this position is inconsistent with
the pleadings. In paragraph 5(c) of his statement
of defence the Minister alleges that he allowed
the deduction of 16% of taxes paid on the
assumption that they were outlays or expenses
incurred for the purpose of gaining or producing
income from its business whereas in paragraph
5(d) he alleges that he disallowed 84% of the
taxes paid and claimed by the appellant on the
assumption that they were not outlays or
expenses for the purpose of gaining or produc
ing income from its business but rather they
were outlays of a payment made by the appel
lant on account of capital within the meaning of
section 12(1)(b) of the Act.
Lord Morris of Borth-Y-Gest in Regent Oil
Co. Ltd. v. Strick [1966] A.C. 295, said that
there is a difference between the profit yielding
subject and the cost of operating it. There is no
question that in the present case the real estate
on which the buildings were constructed and
these buildings are capital assets and as such are
a "profit yielding subject". The payment of
municipal taxes thereon is akin to the mainte
nance costs of that subject and as such is, in my
view, likewise a cost incurred in the process of
operating that subject and so made for the pur
pose of gaining or producing income, within the
meaning of section 12(1)(a).
However different considerations may apply
with respect to the taxes on the 84% of the
vacant land. It is the position of the Minister
that the vacant land could not be a profit yield
ing subject. On the other hand the position of
the appellant is that the acquisition of land
surplus to its immediate needs was in accord
ance with well accepted principles of business
practice and that it was a sound and foresighted
policy to provide for future expansion the
foreseeability of which had been demonstrated
to the appellant and its parent by past
experience.
It is not a condition of the deductibility of a
disbursement or expense that it may have been
made in vain. Rather, the question is whether
the expenditure was in the course of the current
operation of the business as part of the policy of
the taxpayer in conducting its operations in a
business-like way.
This question is, in my view, one of fact and
the onus of establishing that fact is upon the
appellant.
Prior to trial counsel by their respective coun
sel agreed upon the following statement of facts
together with the exhibits appended thereto as
indicated.
AGREED STATEMENT OF FACTS
1. THAT the appellant acquired a certain property from
Dame Rose-Anna Crevier, wife of Jean Baptiste Lacroix, by
Deed of Sale executed before Notary Eugène Poirier on
November 19, 1952, at a cost of $302,321.23
2. THAT the property contained approximately 2,232,500
square feet, which amounts to approximately fifty acres.
3. THAT on or about March 22, 1954, a section of land on
the Western side of the property, running its entire length,
was sold to the City of St. Laurent for the sum of $1.00 in
order to permit the construction of rue Deslauriers.
4. THAT the net book loss from this transaction was $7,-
907.82, which was treated as a capital loss in the books of
the appellant.
5. THAT on March 1, 1956, 5z city lots adjoining the proper
ty described in paragraph (1) hereof were purchased by the
appellant at a cost of $13,362.80.
6. THAT in September 1956 the appellant agreed to permit
the Metropolitan Corporation to use a triangular section of
land across the South end of the property for utilities and
other services relating to the construction of Cote de Liesse.
7. THAT in October 1956 a portion of the property which
had been affected by an homologated line at the time of its
purchase was expropriated by the City of St. Laurent for
use as a highway.
8. THAT the proceeds of the expropriation referred to in
paragraph (7) hereof amounted to $37,572.92 and were
treated as a capital gain by the appellant.
9. THAT on April 28, 1958 the appellant purchased two
small lots connecting the rear portion of its plant to rue
Gagnon on the East side of the property described in
paragraph (1) hereof at a cost of $12,202.63.
10. THAT during the fall of 1963 the City of St. Laurent
attempted to expropriate two sections of the property
described in paragraph (1) hereof for the purposes of con
structing two streets.
11. THAT the appellant objected strenuously to the proposed
expropriation.
12. THAT Exhibit ASF I attached hereto is a true copy of a
letter dated September 26, 1963, sent by the Vice-President
and Managing Director of the appellant to the then General
Counsel of the appellant.
13. THAT Exhibit ASF 2 attached hereto is a true copy of a
Motion to Extend Delays dated October 3, 1963, together
with a supporting Affidavit and Notice served on the City of
St. Laurent as part of the contestation of the proposed
expropriation referred to in paragraph 10. hereof.
14. THAT Exhibit ASF 3 attached hereto is a true copy of a
letter dated October 25, 1963, sent by registered mail to the
City of St. Laurent by the appellant with respect to the
proposed expropriation.
15. THAT as a result of the opposition by the appellant to the
proposed expropriation a compromise was reached, where
by only one of the two proposed expropriations took place,
being that portion of the property furthest from the part of
the property described in paragraph (1) hereof occupied by
the appellant's plant.
16. THAT Exhibit ASF 4 attached hereto is a true copy of an
historical net sales analysis of the appellant for the years
1949 through 1971, inclusive.
17. THAT Exhibit ASF 5 attached hereto is a true copy of an
analysis of taxes affecting the property described in para
graph (1) hereof, for the years 1954 through 1971 inclusive.
18. THAT the appellant sold a total of 1,280,116 square feet
of the property described in paragraph (1) hereof, as
follows:
(a) 425,261 square feet by Deed of Sale dated August 18,
1970, to Black and White Holdings Ltd.;
(b) 233,045 square feet by Deed of Sale dated August 17,
1971, to Black and White Holdings Ltd.; and
(c) 621,810 square feet by Deed of Sale dated September
15, 1971, to Black and White Holdings Ltd.
19. THAT the appellant still retains 716,670 square feet of
the property described in paragraph (I) hereof, together with
the additional small pieces of property subsequently
acquired as described in paragraphs (5) and (9) hereof.
20. THAT all municipal and school taxes incurred by the
appellant have been deducted by it for the purposes of
computing its income.
These facts were supplemented by those
adduced in oral evidence.
The sale of a small portion of the land by the
appellant referred to in paragraph 3 was to
accommodate the municipality in constructing a
street adjacent to the property. This did not
detrimentally affect the property as a whole for
the appellant's purposes but was an advantage
to it.
The same considerations were applicable to
the use of the small portion of land referred to
in paragraph 6 and to the land referred to in
paragraph 7 which was expropriated.
The purchase of 51 city lots referred to in
paragraph 5 and the two lots referred to in
paragraph 9 were first to complete or round out
the area of the property and second to give
access to a rear street.
Those sales and purchases are consistent with
the avowed purpose of the appellant that it
intended to use the entire area for the business
although the use of a portion might be delayed.
The opposition by the appellant to the expro
priation of certain portions of its lands by the
municipality for the construction of streets is in
confirmation of the appellant's proposed use of
the total area for the construction of plant for
use in its business. The proposed streets would
divide the land into three segments. The con
struction of those streets would increase the
value of the land for purposes of sale but would
destroy its efficacy for the appellant's contem
plated use. The compromise eventually reached
between the appellant and the municipality
eliminated the construction of one street which
would bisect the property, but the construction
of the street agreed upon between them was at
the extreme rear of the property, served only a
small area and still left a substantial area for
expansion by the appellant.
The appellant, one of the largest manufactur
ers of pharmaceuticals in Canada, is the wholly
owned subsidiary of E. R. Squibb Inc., a compa
ny incorporated under the laws of one of the
States of the United States of America which
conducts a world wide business in pharmaceuti
cals through subsidiary companies in forty
countries and through licensees in sixty
countries.
From its incorporation in 1925 the appellant's
sales grew to $1,453,000 in 1950. At the same
time the sales of the parent company had grown
to $84,000,000. At that time the decision was
taken by the parent to expand its international
operation.
In 1952 the appellant operated from rented
quarters which were overcrowded and
unsatisfactory.
At this time the parent company merged with
Mathieson Chemical Co. each of which compa
nies had annual sales of $125,000,000 and when
combined the annual sales would be
$250,000,000.
In 1952 the sales of the appellant had
increased to $2,188,000.
In that year the parent company gave approv
al to the expansion of the appellant by the
conduct of injectible and other operations, the
resultant products of which processes had been
imported previously.
It was in this year that the property here in
question was acquired by the appellant for these
purposes.
Construction of facilities on the land acquired
was completed in 1954 with an area 21 times
greater than that of the rented premises and
with modern production facilities.
Also in 1954, the parent company which had
merged with Mathieson Chemical Co. was
merged again, this time with Olin Industries.
The total annual sales of the resultant merged
corporation were $500,000,000.
The policy of this new conglomerate, (Olin
Industries manufactured a great variety of
wares different from pharmaceuticals and
chemicals) was an aggressive penetration in
international markets for all products utilizing
the existing Squibb pharmaceutical international
operation as an entry into those markets.
For several years there was a plateau in
growth of the pharmaceutical branch of the
business because the merged corporation con
centrated capital expenditures on an aluminum
operation which drained the capital that would
have otherwise been available for pharmaceuti
cal expansion. However, even at this time of
arrested expansion of the pharmaceutical busi
ness, there was under very active consideration
the construction of a very large antibiotic plant
on the Canadian site. This plant was eventually
built in Southern Ireland because of the numer
ous incentives offered by the government of
that country to locate the plant in a depressed
area which were so advantageous that it was
uneconomic to build elsewhere. This plant occu
pies 20 acres.
In 1968 the pharmaceutical operations which
were conducted by the Squibb organization
were "spun off". This resulted in the cessation
of the drain of capital for the aluminum opera
tion and a substantial increase in pharmaceutical
sales which increase, in turn, triggered active
and aggressive expansion plans.
It is not realistic that the appellant should be
considered in isolation. It was part of a larger
overall organization. Its shares were wholly
owned by the parent corporation and the policy
of the whole organization was necessarily that
of the appellant. The pragmatic or practical
approach clearly points to the policy and inten
tion of the parent corporation as relevant to the
policy and intention of the appellant. In fact
they were coincidental.
There was a capital appropriation committee
of the parent organization the function of which
was to decide upon the acquisition and disposal
of capital properties by the subsidiaries through
out the world. Naturally this committee would
consider recommendations of local managers
but because of its knowledge of the overall
policy in the organization as a whole, divorced
from local interest, it follows that the decisions
of the committee were final. If a recommenda
tion of a local manager for an acquisition of
property was acceptable and in accordance with
the expansion policy of which the committee
was fully cognizant, then one of its development
experts would view the proposed site to deter
mine its suitability. The capital appropriation
committee worked in close liaison with a corpo
rate development committee and a technical
committee as well as budgeting and planning
committees.
The parent organization frequently had plans
for the expansion of a subsidiary by the devel
opment of new products or other long range
planning of which the management of the sub
sidiary might be unaware. It was the parent that
dictated the policy of the subsidiaries, including
the appellant, and the parent would often
require the subsidiary to expand in ways the
subsidiary never contemplated.
The parent organization was well aware of the
certain future development and that of its sub
sidiaries. There were numerous instances given
where large areas of land were acquired far in
excess of the immediate need but all of which
were eventually occupied and proven not suffi
cient for the expansion that occurred and still
further land had to be acquired.
The fifty acre site acquired by the appellant
was acquired with the concurrence of the capi
tal appropriations committee with a view to
expansion thereon for which plans were
formulated.
It was the capital appropriations committee
that resisted the proposed expropriation of part
of the appellant's property in 1963 for the con
struction of streets.
In 1966 the organization policy for expansion
in Canada did not permit of disposing of any
property owned by the appellant. The local
management of the appellant received substan
tial offers for the land not then occupied by it.
These offers were communicated to the capital
appropriations committee with a recommenda
tion for their acceptance. The appellant was
advised to put any prospective sale "on the
back burner".
The foregoing evidence leads me to the inevi
table conclusion that the fifty acre site was
acquired by the appellant with the view of
future expansion thereon to the full area of the
site and that the portion of the site which was
not built on in 1959 was retained for the pur
pose of expanding thereon and furthermore that
possibility of the unoccupied land being used
for expansion was realistic.
In 1970 and 1971 the capital appropriations
committee authorized the appellant to dispose
of 1,200,000 square feet of the unoccupied land
while retaining approximately 700,000 square
feet for actual and future use. There was
approximately 400,000 square feet occupied by
buildings so that 300,000 square feet were
retained for future use.
The decision to sell 1,200,000 square feet was
dictated by two sound reasons. The site, while
originally rural and in a sparsely populated area,
was now surrounded by the city. By-laws had
been enacted which prevented the site being
used for fermentation and other plants in con
templation. This is the first reason for the sale.
With the urbanization of this formerly predomi
nant rural area the municipal taxes rose
astronomically. In 1954 the municipal and
school taxes had been $242. In 1966 they had
risen to $34,112 an increase of approximately
13,600%. In 1968 the municipal and school
taxes on the property had increased to $89,629
an increase of more than 250% over the 1966
figure. In 1970 the taxes had increased to $105,-
000. With the municipal taxes escalating at such
an alarming rate it was no longer economically
feasible to retain the land in that area for expan
sion purposes. This is the second reason for
sale.
In view of the foregoing facts it is my view
that the appellant has discharged the onus cast
upon it of establishing that the vacant land was
retained in the reasonable expectation of future
expansion for which that land would be utilized.
That being so it follows that the payment of
municipal and school taxes was an expenditure
on revenue account and as such was laid out for
the purpose of gaining or producing income
within the meaning of section 12(1)(a).
The appeals are, therefore, allowed with costs
to the appellant.
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.