T-2523-71
Canadian Glassine Co. Ltd. (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Heald J.—Ottawa, December 20,
1973 and January 7, 1974.
Income tax—Expenses incurred in constructing pipelines—
Deductible as expense for purpose of earning income—
Income Tax Act, s. 12(1Xa).
The appellant company entered into an agreement with A
company under which the latter company constructed steam
and pulp pipelines, which remained the property of A com
pany and were used by the appellant company in the course
of its business. Toward the cost of construction, the appel
lant company paid A company the sum of $268,623 over a
period of 25 years and deducted 1/25 of the total sum from
income for each year. The Minister disallowed the
deductions.
Held, 1. The retention by A company of the possession of
subject pipelines disentitled the appellant from claiming cost
allowance based on a leasehold interest under section
11(1)(a) of the Income Tax Act, and section 1100(1Xb) of
the Regulations.
2. The expenditure did not constitute moneys expended
for a franchise under the provisions of section 11(1Xa) of
the Income Tax Act and section 1100(1)(c) of the Regula
tions, under which the company could claim capital cost
allowance. M.N.R. v. Kirby Maurice Co. [1958] C.T.C. 41,
followed.
3. The expenditure on the subject contracts was made for
the purpose of, and resulted in, saving the appellant substan
tial amounts in raw material costs within the exception
provided in section 12(1Xa) of the Income Tax Act. It was
not an addition to appellant's fixed capital so as to be
ineligible for deduction under section 12(1Xb). British
Insulated and Helsby Cables, Ltd. v. Atherton [1926] . A.C.
205; Anglo-Persian Oil Co. v. Dale [1932] 1 K.B. 124; The
Queen v. F. H. Jones Tobacco Sales Co. [1973] F.C. 825,
applied.
4. To defer the writing-off of subject expenditure over a
reasonable period of years was in accordance with proper
accounting practices. M.N.R. v. Tower Investment Inc.
[1972] F.C. 454, followed.
The assessments of the appellant for the 1966 to 1969
taxation years were referred back to the Minister for
reassessment.
INCOME tax appeal.
COUNSEL:
R. deWolfe MacKay, Q.C., and Brian A.
Crane for appellant.
André Gauthier for respondent.
SOLICITORS:
Duquet, MacKay & Co., Montreal, for
appellant.
Deputy Attorney General of Canada for
respondent.
HEALD J.—This is an appeal from the income
tax assessments of the appellant by the respond
ent for the taxation years ending in February of
1966, 1967, 1968 and 1969.
The sole issue in the appeal is a determination
of the true nature of an expenditure by the
appellant in the sum of $268,623.48 in 1953,
which expenditure the appellant, in filing its
income tax returns, amortized over a period of
twenty-five years, thus deducting 1 / 2 5 of said
total sum from income in respect of the above
mentioned taxation years. The respondent
denies that said deductions are proper and
accordingly disallowed them in the assessment
of the appellant's tax returns for the years under
review.
At the commencement of the trial, counsel for
both parties filed an Agreement as to Facts to
which is attached a number of Exhibits. The
Agreement of Facts reads as follows:
With respect to the appeal from the assessments of tax for
the Appellant's 1966, 1967, 1968 and 1969 taxation years,
the Appellant and the Respondent, for the purposes of this
appeal only, admit the following facts:
1. The Appellant was incorporated in 1952 under the
Canada Corporations Act.
2. By Agreement dated August 15, 1951 (Exhibit no. 1),
between Deerfield Glassine Company Inc. and Anglo
Canadian Pulp and Paper Mills Ltd., Deerfield Glassine
Company Inc. undertook, inter alia, to procure the incorpo
ration of the Appellant, and Anglo Canadian Pulp and Paper
Mills Ltd. undertook to:
a) Supply to the Appellant 10% of the money from time
to time required by the Appellant to complete the con
struction of its plant and the acquisition of all the ma
chinery and equipment needed for the manufacture of
glassine grease-proof papers and other light-weight spe
cialty papers;
b) Sell to the Appellant a certain parcel of land in the City
of Quebec;
c) Enter into an agreement (hereinafter called the "Con-
struction Agreement") with the Appellant, whereby Anglo
Canadian Pulp and Paper Mills Ltd. would agree to com
plete, at its own expense, the construction of two under
ground pipelines from the plant of the Appellant, one for
the purpose of carrying the slush pulp to be deliverable
from time to time by Anglo Canadian Pulp and Paper
Mills Ltd. to the Appellant, the other for the purpose of
carrying to the plant of the Appellant the steam to be
deliverable from time to time by Anglo Canadian Pulp and
Paper Mills Ltd. to the Appellant;
d) Enter into an agreement (hereinafter called the "Pulp
Contract') with the Appellant for the supply of slush pulp
for a period of 20 years under certain terms and condi
tions more fully described in the said agreement;
e) Enter into an agreement (hereinafter called the "Steam
Contract") with the Appellant for the supply of steam for
an initial period of 5 years and subsequently for succes
sive renewal periods of one year each.
4. On April 25, 1952 (Exhibit no. 2), the Appellant entered
into an agreement (Construction Agreement) with Anglo
Canadian Pulp and Paper Mills Ltd. under, inter alia, the
following terms:
a) Anglo Canadian Pulp and Paper Mills Ltd. was to
complete, at its own expense, the construction of two
underground pipelines from the plant of Anglo Canadian
Pulp and Paper Mills Ltd. to the plant of the Appellant,
one for the purpose of carrying the slush pulp to be
deliverable by Anglo Canadian Pulp and Paper Mills Ltd.
to the plant of the Appellant and the other one for the
purpose of carrying the steam to be deliverable by Anglo
Canadian Pulp and Paper Mills Ltd. to the plant of the
Appellant;
b) Anglo Canadian Pulp and Paper Mills Ltd. was to have,
free of cost, all necessary rights of access to the property
of the Appellant for the construction, repair and mainten
ance of the two pipelines referred to in the preceding
paragraph;
c) Title to the said pipelines was to remain vested in
Anglo Canadian Pulp and Paper Mills Ltd.;
d) The Appellant was not to reimburse Anglo Canadian
Pulp and Paper Mills Ltd. for the cost of the pulp pipeline
and no charge for depreciation of the steam and pulp
pipelines was to be charged to the Appellant;
5. On the same date, (Exhibit no. 3) Anglo Canadian Pulp
and Paper Mills Ltd. agreed to sell and deliver to' the
Appellant sulphite pulp and slush to be required by it for a
period of 20 years subject to automatic extension for
successive periods of 5 years each. (Pulp Contract).
6. On April 25, 1952, (Exhibit no. 4) Anglo Canadian Pulp
and Paper Mills Ltd. agreed to sell and deliver to the
Appellant such steam to be required by it at a determinable
price for a period of 5 years subject to automatic extension
for successive periods of one year. (Steam Contract)
7. On June 22, 1952, (Exhibit no. 5) Anglo Canadian Pulp
and Paper Mills Ltd. suscribed (sic):
a) 100,000 fully paid and non-assessable Class B shares
without nominal or par value of the capital stock of the
Appellant at an aggregate price of $171,518.22; and,
b) 5% Notes of the Appellant in the aggregate principal
amount of $281,250.00; the whole for and in consider
ation of the sum of $452,768.22 made up as follows: the
sum of $150,922.74 representing each of the advances
already made by Anglo Canadian Pulp and Paper Mills
Ltd. to the Appellant and the sum of $301,845.48, repre
senting the value of
i) a land in the City of Quebec transferred by Anglo
Canadian Pulp and Paper Mills Ltd. to the Appellant;
ii) the agreement made by Anglo Canadian Pulp and
Paper Mills Ltd. to complete, at its own expense, the
construction of a "steam pipeline" and a "pulp pipe
line" subject to the condition that the cost of the steam
pipeline be reimbursed to Anglo Canadian Pulp and
Paper Mills Ltd. by the Appellant, and
iii) the execution by Anglo Canadian Pulp and Paper
Mills Ltd. of the "Pulp Contract" and the "Steam
Contract".
8. On June 25, 1953, Class B shares of the Appellant and
5% notes of the Appellant, representing an aggregate value
of $301,845.48, were issued to Anglo Canadian Pulp and
Paper Mills Ltd.
9. The land referred to in sub-paragraph (i) was valued by
the Appellant at $33,221.00, and the cost of the steam
pipeline in the amount of $71,882.00 was reimbursed by the
Appellant to Anglo Canadian Pulp and Paper Mills Ltd.
In addition, Mr. John W. Monaghan, the
comptroller of the appellant gave evidence at
the trial. He testified that construction on the
appellant's plant at Quebec City started in 1952
and was completed, with all machinery and
equipment installed, in 1953 when the plant
became operational. At said plant, the appellant
became engaged in the manufacture and sale of
glassine paper, a glossy, translucent paper
resistant to air, water or oil.
Mr. Monaghan confirmed that the various
contracts referred to in paragraph 2 of the
Agreement of Facts were executed and were
adhered to by the parties. He said that the pulp
and steam contracts are still in full force and
effect.
The pulp mill of Anglo-Canadian Pulp and
Paper Mills Ltd., (hereafter Anglo-Canadian) is
situated about 1 mile to the south of appellant's
plant in Quebec City. The tunnel housing the
steam pipeline and the pulp pipeline begins on
Anglo-Canadian's land, goes underneath a
public boulevard, then enters appellant's plant.
The two lines run parallel with each other in the
tunnel. The pipelines were completed by
approximately the end of 1952. The pulp pipe
line is connected to a washer in appellant's
plant. The slush pulp is pumped over to the
appellant's plant through the pulp pipeline at a
consistency of about 2% of fibre to 98% of
water where it is washed and the pulp fibre
removed. The pulp pipeline is used every day
that appellant's plant is in operation. Situated
near the beater room in appellant's plant is a
direct phone line to Anglo-Canadian by which
the appellant informs Anglo-Canadian when to
commence and when to cease pumping the slush
pulp through the pipeline. These pumping opera
tions will occur nine to ten times in a normal
operating day. The pipeline is full of slush pulp
at all times and is used only by the appellant.
The amount of pulp being sold by Anglo-
Canadian to the appellant is metered as it leaves
the Anglo-Canadian mill.
The steam pipeline bringing steam from
Anglo-Canadian's mill to the appellant's plant is
turned on at the beginning of a week's operation
and remains on at all times. A steady supply of
steam is necessary for the operation of appel
lant's plant because the machinery therein is
operated by steam turbines. While the pulp is
metered at its point of exit from Anglo-Canadi-
an's mill, the steam is metered as it enters the
appellant's plant.
Appellant is billed monthly by Anglo-Canadi-
an for both the pulp and the steam. Because the
pulp is metered as it leaves Anglo-Canadian's
mill, the appellant is charged for all slush pulp in
the pipeline at the end of the month. The appel
lant pays for the costs of maintenance, repairs
and inspection of the pipelines which are
inspected weekly. The actual work involved in
maintenance, repairs and inspection is per
formed by Anglo-Canadian's employees but
Anglo-Canadian is reimbursed by the appellant
for the full cost thereof.
The price paid by the appellant for the pulp
has, at all times, been calculated in accordance
with the provisions of paragraph 5 of the Pulp
Agreement, i.e.,—the announced price from
time to time in effect on sales made east of the
Mississippi River in the United States less a
discount or reduction equal to 50% of the cost
of freight from Quebec City to Monroe Bridge,
Massachusetts, U.S.A. (the plant site of appel
lant's parent company in the United States,
hereafter described as Deerfield).
Mr. Monaghan said that "the announced price
from time to time" is the current price at which
sulphite pulp is being sold in Eastern Canada
and the Eastern United States. The invariable
practice in the industry is for the vendor or pulp
manufacturer to pay the full cost of freight to
the destination, thus the freight is included in
the "announced price". Thus, in the Pulp Con
tract between Anglo-Canadian and appellant,
Anglo-Canadian's saving of freight, because of
the existence of the pipeline, in the case of its
sales to the appellant, as compared to its sales
to other customers, is in effect shared equally
with the appellant by the above described
reduction. It seems clear from the agreement
between the appellant, appellant's parent and
Anglo-Canadian, that one of the advantages
accruing to all of the parties, by the construc
tion of the appellant's plant in Quebec City, was
the savings effected in freight charges by
removing the need to ship the raw pulp required
in Deerfield's manufacturing process to Deer-
field's plant in Massachusetts. The Pulp Con
tract provides that this saving in freight costs be
shared equally between the appellant and
Anglo-Canadian. Mr. Monaghan produced a
detailed tabulation of the savings accruing to the
appellant under the Pulp Contract with Anglo-
Canadian (Exhibit A-4).
Exhibit A-4 establishes that the appellant
saved, during the period 1955 to 1972, some
$802,000 by virtue of the reduced price it paid
for slush pulp under the Pulp Contract with
Anglo-Canadian (i.e., the rebate of the freight
cost). This figure is arrived at by taking the total
number of tons of slush pulp purchased from
Anglo-Canadian; the current market price which
appellant would have to pay for said slush pulp
from anyone other than Anglo-Canadian; and,
by deducting therefrom the actual cost of pulp
under the Pulp Contract.
The Pulp Contract was for an original term of
20 years, renewable for further periods of 5
years by the consent of both parties. The Steam
Contract was for an original term of 5 years,
renewable for further periods of one year by the
consent of both parties. Both contracts are still
in full force and effect, having been renewed in
accordance with the respective terms of each
contraçt.
The expenditure of $268,623.48 being exam
ined here is arrived at by taking the figure of
$301,845.48 referred to in paragraph 7b) of the
Agreement of Facts and deducting therefrom
the value of the land in the sum of $33,221
referred to in paragraph 7b)i) and paragraph 9
of said Agreement.
Thus, according to the agreements, and as per
the agreed facts, appellant paid to Anglo-
Canadian the said sum of $268,623.48 for the
following:
1. The agreement by Anglo-Canadian to con
struct, at its own expense, the steam and pulp
pipelines subject to the condition that the cost
of the steam pipeline be reimbursed to Anglo-
Canadian (which reimbursement has in fact
been made—see paragraph 9 of Agreement of
Facts).
2. The execution by Anglo-Canadian of the
Pulp Contract and the Steam Contract.
Both pipelines remain the property of Anglo-
Canadian under the agreements.
The appellant makes three alternative submis
sions in respect of said expenditure of $268,-
623.48. Its first submission is that said expendi
ture constitutes the cost of the right of using the
steam and slush pulp pipelines and is, therefore,
a leasehold interest on which capital cost allow
ance could be claimed under section 11(1)(a) of
the Act and section 1100(1)(b) of the
Regulations.
After a consideration of both the Steam Con
tract and the Pulp Contract, I have concluded
that these agreements do not contain all of the
essential characteristics of a lease so as to
confer upon the appellant "a leasehold interest"
within the usual meaning of that term.
The Living Webster Dictionary defines a lease
as:
. A contract authorizing the use and possession of land
and/or buildings for a fixed time and fee, usually payable in
installments; ... [Italics mine.]
The Shorter Oxford Dictionary defines a lease
holder as "... one who possesses property".
Furthermore, Article 1612(1) of the Quebec
Civil Code makes delivery of possession of the
thing leased an essential characteristic of a
lease. On the facts of this case, Anglo-Canadian
is required, under the Pulp and Steam Contracts
to deliver the pulp and the steam to appellant's
plant and for this purpose, continued possession'
of the pipeline in the hands of Anglo-Canadian
is necessary in order to enable it to discharge
said delivery obligations.
Accordingly, I am satisfied that Anglo-
Canadian has retained possession of subject
pipelines, and, since a delivery of possession to
the lessee is an essential characteristic of a
lease, there is no lease and consequently no
leasehold interest accruing to the appellant. I
therefore reject the appellant's right to claim a
capital cost allowance based on a leasehold
interest.
The appellant's second alternative submission
is that said expenditure constitutes monies
expended for a franchise under the provisions
of section 11(1)(a) of the Act and section
1100(1)(c) of the Regulations on which capital
cost allowance could be claimed.
Section 1100(1)(c) reads as follows:
1100. (1) Under paragraph (a) of subsection (1) of section
11 of the Act, there is hereby allowed to the taxpayer, in
computing his income from a business or property, as the
case may be, deductions for each taxation year equal to
(c) such amount as he may claim in respect of property of
class 14 in Schedule B not exceeding the lesser of
(i) the aggregate of the amounts for the year obtained
by apportioning the capital cost to him of each property
over the life of the property remaining at the time the
cost was incurred, or
(ii) the undepreciated capital cost to him as of the end
of the taxation year (before making any deduction
under this subsection for the taxation year) of property
of the class;
Then, Class 14 in Schedule B reads:
Property that is a patent, franchise, concession or license for
a limited period in respect of property ... .
I am of the opinion that, on the facts of this
case, even assuming that the appellant has
acquired a franchise, said franchise has not
been acquired for "a limited period" as required
by Class 14 of Schedule B. In the case at bar,
the Pulp Contract was for 20 years, the Steam
Contract for 5 years. Each contract provided
for automatic renewals for further periods of 5
years and 1 year respectively unless and until
such initial or extended term shall be terminated
by either party by written notice to the other
party. Thus, the period is unlimited, rather than
limited'. Accordingly, I have concluded that the
appellant is not entitled to claim capital cost
allowance on subject expenditure as a franchise.
The appellant's third alternative submission is
that subject expenditure constitutes an outlay or
expense incurred by it for the purpose of earn
ing income from its business and, as such, is
deductible under section 12(1)(a) of the Act
properly amortized over the lifetime of the Pulp
and Steam Contracts in accordance with proper
accounting practice in a business of the kind
with which the taxpayer is concerned. Respond
ent, on the other hand, submits that subject
For a similar view on similar facts see the Exchequer
Court Judgment of Cameron J. in M.N.R. v. Kirby Maurice
Co. Ltd. [1958] C.T.C. 41.
expenditure was made in consideration of the
undertaking by Anglo-Canadian to construct
underground steam and pulp pipelines, and to
execute the "Pulp Contract" and the "Steam
Contract", and that such an undertaking consti
tutes an intangible capital asset in respect of
which no capital cost allowance can be deduct
ed because such an allowance is not permitted
by any of the income tax regulations. Respond
ent further submits that even if said expenditure
is determined to be a deductible expenditure,
that it should have been deducted from income
in the taxation year in which it was incurred,
namely 1953, and that the appellant is not en
titled, for income tax purposes, to defer to sub
sequent years an expense incurred in 1953.
I will deal initially with the question of wheth
er subject expenditure is an outlay or expense
incurred by the appellant for the purpose of
earning income from its business and as such, is
deductible from income.
It seems clear that subject payment made by
the appellant to Anglo-Canadian is one which
falls within the exception provided in paragraph
(a) of section 12(1) 2 in that it was in fact made
for the purpose of gaining or producing income
from the appellant's business. The evidence
establishes that said expenditure actually result
ed in the appellant having some $802,000 more
in net income over the period 1955-1972 than it
would have had but for the existence of the
Pulp Contract. The only question for determina
tion is whether said payment falls within para
graph (b) of section 12(1) 3 as an outlay or
payment on account of capital as is contended
by respondent's counsel.
The usual test applied to determine whether a
payment is one made on account of capital in a
case like the present is stated by Viscount Cave
2 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 deprecia
tion, obsolescence or depletion except as expressly per
mitted by this Part,
in British Insulated and Helsby Cables, Ltd. v.
Atherton [1926] A.C. 205 as follows at page
213:
But when an expenditure is made, not only once and for
all, but with a view to bringing into existence an asset or an
advantage for the enduring benefit of a trade, I think that
there is very good reason (in the absence of special circum
stances leading to an opposite conclusion) for treating such
an expenditure as properly attributable not to revenue but to
capital.
Applying that test to the case at bar, I am of the
view that subject expenditure cannot properly
be said to have brought into existence an advan
tage for the "enduring benefit" of the appel
lant's trade within the meaning of that expres
sion as above quoted. The ordinary dictionary
meaning of "enduring" is "permanent" or "last-
ing" (The Living Webster Dictionary, page 325).
The meaning of said expression is discussed in
the case of Anglo-Persian Oil Co. v. Dale [1932]
1 K.B. 124 by Lawrence L.J. at page 142 where
he equates the expression "enduring benefit"
with a "permanent advantage". The facts of that
case were in many respects similar to those in
the case at bar. In that case, the taxpayer com
pany had entered into a 10 year agreement with
an agent company, under which the agent com
pany was to manage the taxpayer company's oil
business in Persia and the East. Since the remu
neration payable to the agent company had
proved to be larger and more onerous than had
been anticipated by the taxpayer, the taxpayer
decided to terminate the agency contract and
thenceforth to do its own agency work in the
East. Accordingly, after 8 years of the 10 year
agreement, the taxpayer company and the agent
company agreed to terminate the agency in
return for the taxpayer paying to the agent
company the sum of £300,000. Taxpayer com
pany treated said payment as a revenue pay
ment and charged same to revenue in instal
ments of £60,000 for 5 years. The English
Court of Appeal held that said sums were ad
missible deductions. At page 139, Lord Hans-
worth M.R. said:
The payment is to put an end to an expensive method of
carrying on the business which remains the same whether
the distributive side is in the hands of the respondents
themselves, or of their agents.
Then, Lawrence L.J. at pages 139 and 140 said:
It is not open to doubt that under ordinary circumstances
where a trader in order to effect a saving in his working
expenses dispenses with the services of a particular agent or
servant, and makes a payment for the cancellation of the
agency or service agreement, such a payment is properly
chargeable to revenue; it does not involve any addition to or
withdrawal from fixed capital; it is purely a working
expense.
In the case at bar, subject expenditure was
made for the purpose of and resulted in saving
the appellant substantial amounts in raw ma
terial costs. Appellant's business is the manu
facture and sale of glassine paper. One of the
raw materials used in said manufacture is raw
pulp. But, for the existence of subject Pulp and
Steam Contracts, appellant would have been
required to pay a larger amount for its raw pulp.
Thus, by entering into subject contracts, appel
lant was able to save some $802,000 in "work-
ing expenses" over the years. The appellant's
business remains the same, whether the pulp is
obtained from Anglo-Canadian, or some other
source. Subject expenditure did not add any
thing to appellant's fixed capital. In my view,
the facts in this case come clearly within the
principles enunciated in the Anglo-Persian case
(supra).
It should also be observed that subject con
tracts were for fixed terms, and can be renewed
on the agreement of both parties. Up to this
point in time, they have been so renewed. How
ever, Anglo-Canadian is able to terminate the
Steam Contract any year and the Pulp Contract
in 1977 or at the expiration of any further 5
year term thereafter. Such benefits can hardly
be said to be enduring or permanent benefits as
those terms are usually understood.
Associate Chief Justice Noël had occasion to
consider a situation somewhat similar to the
case at bar in The Queen v. F. H. Jones Tobacco
Sales Co. Ltd. [1973] F.C. 825. In that case, the
defendant taxpayer sold processed tobacco to
cigarette manufacturers. In 1963, one of the
defendant's largest customers was in financial
difficulties. Arrangements were made for
another cigarette manufacturing company to
purchase the shares of the customer and the
defendant undertook to guarantee the loan
necessary to finance this purchase in exchange
for the purchaser's undertaking to buy tobacco
from the defendant. The defendant's new cus
tomer had considerable success in selling a new
cigarette resulting in a substantial increase in
defendant's tobacco sales. However, the new
customer failed to pay excise duties as required
and Federal Government officials seized all the
company's property in 1966 at which time the
defendant was called upon to pay about $115,-
000 under its guarantee. The Associate Chief
Justice held that said loss was deductible as an
operating loss and not on capital account. He
held that the loan guarantee was an undertaking
that was very much a part of the defendant's
normal operations and one which would enable
it to increase its sales of tobacco. At page 834
of the judgment, he said:
For some years, however, our courts have been inclined
to accept certain expenses or losses as deductible, consider
ing not so much the legal aspect of the transaction, but
rather the practical and commercial aspects.
The facts here are similar to the Jones Tobacco
case (supra) in that, here also, the Pulp Contract
and the Steam Contract, involved as they were
in the day by day delivery of raw products to
appellant's plant, were undertakings that were
very much a part of the defendant's normal
operations.
Turning now to the final question for determi-
nation—whether the appellant is entitled, for
income tax purposes, to defer subject expendi
ture to subsequent years since the expense was
incurred in 1953. In support of this submission,
the appellant called as an expert witness, Mr.
Jacques Gunn, a chartered accountant and resi
dent partner at Quebec City in the firm of
Riddell, Stead & Co. Mr. Gunn testified that, in
his opinion, it was in accordance with proper
accounting practices and principles to amortize
or write-off subject expenditure over a reason
able period of years. He said his opinion was
based on the fact that revenues are normally
matched with expenditures and that since sub
ject expenditure has permitted the appellant to
reduce its cost of production in each subsequent
year, that therefore the expenditure was proper
ly amortized. He also gave as his opinion that in
the circumstances here, a reasonable period for
such amortization was 25 years inasmuch as the
term of the contract was for 20 years, renew
able for further 5 year periods. He explained
that normal accounting practice called for
amortization of leasehold improvements or fran
chise costs over the period of the lease or
franchise plus one renewal and that with a con
tract such as the Pulp Contract, a similar proce
dure should be followed.
The latest decision dealing with this matter is
the decision of Mr. Justice Collier in the case of
M.N.R. v. Tower Investment Inc. [1972] F.C.
454.n that case, Mr. Justice Collier held that
there 'was no prohibition in the Income Tax Act
against the matching system. In that case, the
taxpayer, in conjunction with its construction of
several large apartment buildings, had launched
an advertising campaign to secure tenants and
sought to defer some portion of the amounts
expended into subsequent years in accordance
with ordinary commercial principles or well-
accepted principles of business and accounting
practice. Collier J. concluded that said system
of deferring expenses more accurately set forth
the taxpayer's true income position because the
advertising expenses were not current expendi
tures in the normal sense. They were laid out to
bring in income not only for the year they were
made but for future years. He thus held that
said system was permissible.
The rationale of the Tower Investment case
(supra) applies equally to the situation here. The
expert witness, Mr. Gunn, gave his opinion that,
in the circumstances of this case, the matching
system here used, was in accordance with
proper accounting practices and principles. No
contrary evidence was adduced by the respond-
ent. As in the Tower Investment case (supra),
subject expenditure here was not a current ex
penditure in 1953 in the normal sense, said
expenditure in 1953 had the effect of reducing
appellant's raw product cost for future years for
the duration of the contract.
I have accordingly concluded that the appel
lant's treatment of subject expenditure in this
case was proper and not prohibited by the
Income Tax Act.
The appeal will therefore be allowed with
costs. The assessments of the appellant for the
taxation years ending in February of 1966,
1967, 1968 and 1969 are referred back to the
Minister for reassessment not inconsistent with
these reasons.
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.