T-4537-78
Oxford Shopping Centres Ltd. (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Thurlow A.C.J.—Edmonton, Sep-
tember 11; Ottawa, November 30, 1979.
Income tax — Income calculation — Deductions — Plain
tiff paid city an amount in lieu of possible local improvement
taxes — Minister disallowed deduction of that amount and in
its place allowed a deduction of 5% of the amount as an
eligible deduction under s. 14 of the Income Tax Act —
Whether or not the amount was an outlay of capital or a
deductible expense — If deductible, whether or not plaintiff
was required to amortize it over a number of years, deducting
only an appropriate portion in the taxation year in question —
Income Tax Act, S.C. 1970-71-72, c. 63, s. 14.
This is an appeal under the Income Tax Act from a reassess
ment of tax for 1973. The Minister disallowed as being an
outlay of capital a deduction claimed by plaintiff of an amount
paid by plaintiff to the City of Calgary pursuant to a contract
and in its place allowed a deduction of five per cent of that
amount as an eligible deduction under section 14 of the Income
Tax Act. The amount in question was paid to the City in lieu of
local improvement taxes that could be assessed following the
street improvements which enhanced plaintiffs position as a
shopping centre. The issues in the appeal are (1) whether the
amount was an outlay of capital or an expense deductible in
computing income for tax purposes and (2) whether, if the
amount was deductible as an expense, the plaintiff was required
to amortize it over a period of years deducting only an appro
priate portion of it in the taxation year in question.
Held, the appeal is allowed. The nature of the advantage to
be gained, more than any other feature of the particular
situation, points to the proper characterization of the expendi
ture as one of capital or revenue expense. The need or occasion
for the expenditure arose out of and was incidental to the
carrying on of the plaintiffs business rather than to the prem
ises on which the business was carried on. This expenditure was
just one of a broad range of needs or demands which arise in
the course of running such a business and which, for the success
of the operation, must be met out of the revenues of the
business. The returns, if any, would be from enhanced rental
revenues of the business as a result of the street improvements.
The intangible advantage to be realized suggests the revenue
nature of the expenditure, while the use of three lump sum
payments indicates a capital outlay. The predominant criteria,
however, point to the conclusion that, from a practical and
business point of view, the expenditure is more appropriately
classified as a revenue expense and not as an outlay of capital.
Although accepted accounting principles recognize plaintiffs
amortizing the amount in question for corporate purposes, and
while deducting the whole amount in one year would distort the
profit for that year, judicial authorities indicate that the
amount, a running expense not referable or related to any
particular item of revenue, is deductible only in the year in
which it was paid. The "matching principle" does not apply to
the running expense of a business. The Minister, therefore, is
not entitled to insist on an amortization of the expenditure or
on plaintiff spreading the deduction in respect of it over a
period of years.
British Columbia Electric Railway Co. Ltd. v. Minister of
National Revenue [1958] S.C.R. 133, applied. Minister of
National Revenue v. Algoma Central Railway [1968]
S.C.R. 447, applied. Canada Starch Co. Ltd. v. Minister
of National Revenue [1969] 1 Ex.C.R. 96, applied. B.P.
Australia Ltd. v. Commissioner of Taxation of the Com
monwealth of Australia [1966] A.C. 224, considered. Sun
Newspapers Ltd. v. The Federal Commissioner of Taxa
tion (1938-39) 61 C.L.R. 337, considered. Commissioner
of Taxes v. Nchanga Consolidated Copper Mines Ltd.
[ 1964] A.C. 948, considered. Ounsworth v. Vickers, Ltd.
[1915] 3 K.B. 267, considered. Minister of National
Revenue v. Tower Investment Inc. [1972] F.C. 454, con
sidered. Minister of National Revenue v. Canadian Glas-
sine Co., Ltd. [1976] 2 F.C. 517, considered. Associated
Investors of Canada Ltd. v. Minister of National Revenue
[1967] 2 Ex.C.R. 96, considered.
INCOME tax appeal.
COUNSEL:
N. W. Nichols and R. Miller for plaintiff.
W. Lefebvre and H. Gordon for defendant.
SOLICITORS:
Milner & Steer, Edmonton, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
THURLOW A.C.J.: This is an appeal under the
Income Tax Act, S.C. 1970-71-72, c. 63, from a
reassessment of tax for the year 1973. In making
the assessment the Minister disallowed as being an
outlay of capital a deduction claimed by the plain
tiff of an amount of $490,050 paid by the plaintiff
to the City of Calgary under the terms of a
contract in writing. In its place the Minister
allowed a deduction of about five per cent of that
amount as an eligible deduction under section 14
of the Income Tax Act.
The issues in the appeal are (1) whether the
amount was an outlay of capital or an expense
deductible in computing income for tax purposes
and (2) whether, if the amount was deductible as
an expense, the plaintiff was required to amortize
it over a period of years deducting only an appro
priate portion of it in the taxation year in question.
That the amount was expended for the purpose of
gaining or producing income from business or
property is admitted.
The agreement was made on December 21,
1972. For some years prior to that the plaintiff,
then Chinook Shopping Centre Limited, had
owned and operated a large shopping centre situat
ed on a rectangular area of land in the City of
Calgary bounded eastwardly by MacLeod Trail,
southwardly by Glenmore Trail, westwardly by
Meadow View Road and northwardly by 60th
Avenue. Across 60th Avenue was another shop
ping centre known as Southridge Shopping Centre
owned by Chinook-Ridge Expansion Limited and
Oxlea Investment Limited and located on land
bounded southwardly by 60th Avenue and west-
wardly by 5th Street S.W. 5th Street S.W. was not
straight but followed an "S" shaped course. Its
northern end, however, was in line with the prolon
gation northwardly of Meadow View Road. Both
the MacLeod Trail and Glenmore Trail were
arterial roads and traffic congestion at their inter
section and at the intersection of Meadow View
Road and Glenmore Trail presented problems both
for the City and for the plaintiff.
In 1969, preliminary plans had been developed
by the City for a clover-leaf type of interchange at
the MacLeod-Glenmore intersection which, if con
structed, would have taken a considerable portion
of the plaintiff's parking area and would have
made it necessary for the plaintiff to find other
parking space, either by constructing a parking
garage or otherwise, in order to fulfill its commit
ments to its tenants with respect to the provision of
adequate parking. The plaintiff objected to the
proposal on several grounds, including that of
safety of access to and egress from the Chinook
Shopping Centre, and succeeded in persuading the
City to join with it in having a study made by
traffic consultants. As a result of this, the plan for
a clover-leaf interchange was abandoned in favour
of what was referred to as a "tight-diamond"
interchange.
The earlier City plans had included a proposal,
to which objection was not taken, for the construc
tion of a "fly-over" to accommodate traffic moving
eastwardly on Glenmore Trail and wishing to turn
left into Meadow View Road and thence into the
shopping centre. At the time the agreement was
signed, this "fly-over" was still part of the overall
plans and there were also plans for realigning and
straightening 5th Street S.W. to connect it with
Meadow View Road, and to close and convey to
the owners of the shopping centres, both of which
by this time were controlled by Oxlea, most of
60th Avenue S.W. and the curved southern portion
of 5th Street S.W. to accommodate plans of the
owners for the expansion of the combined shopping
centre and its parking area.
The particular agreement, under which the
amount in question in these proceedings was paid,
was but one of six written agreements forming a
single transaction relating to the proposed
changes. In the first of these, it is recited, inter
alla, that:
AND WHEREAS Chinook, Chinook-Ridge and Oxlea desire to
undertake an expansion and a connection of the shopping
centres and require certain lands from the City for this purpose;
AND WHEREAS the City desires to undertake the widening of
Glenmore Trail, the realignment of 5th Street South West and
the construction of a traffic interchange, all as hereinafter
defined and requires certain lands from Chinook and Oxlea for
this purpose;
The agreement went on to provide for the sale by
the plaintiff and Chinook-Ridge and Oxlea to the
City at an agreed price of $85,000 per acre of
portions of their lands required for the widening
and alterations of the streets and for the sale by
the City to the plaintiff and Oxlea at the same
price per acre of the portions of 60th Avenue S.W.
and 5th Street S.W. and of a laneway north of
60th Avenue S.W. which were no longer to be
required as streets. The City also agreed to con
struct the realignment of 5th Street S.W. and the
interchange at the MacLeod-Glenmore intersec
tion.
Another agreement related to the demolition by
the plaintiff of an existing service station on its
premises and the construction of a new one at a
different location in consideration of $235,000 to
be paid by the City. Another related to the con
struction of the "fly-over" and gave the plaintiff
the right, during an option period, to require the
City to construct the "fly-over" on certain agreed
terms as to payments to be made by the plaintiff.
Another agreement conferred on the City an
option to buy from the plaintiff at an agreed price
per acre, equal to that in the first mentioned
agreement, land of the plaintiff that would be
required for the construction of the "fly-over". By
a further agreement, Oxlea agreed to donate to the
City a parcel of land to the westward of the
realigned 5th Street S.W.
I come now to the remaining agreement. The
parties to it were the plaintiff, Chinook-Ridge,
Oxlea and the City and it recited that:
WHEREAS pursuant to an agreement made even date here
with between the parties hereto, Chinook and Oxlea have sold
to the City and the City has sold to Chinook and Oxlea certain
lands and premises for the widening of Glenmore Trail, the
realignment of 5th Street South West and for the construction
of a traffic interchange, all as hereinafter defined, and as a
result thereof the City has agreed at the request of Chinook,
Chinook-Ridge and Oxlea to make certain changes to lands and
roads adjoining the Chinook Shopping Centre and the South-
ridge Shopping Centre so as to facilitate the use of such lands
and the proposed expansion as hereinafter defined;
AND WHEREAS the cost of such changes as aforesaid might
result in Chinook and Oxlea being liable to the City for local
improvement rates and taxes arising by reason of such changes
and in lieu of making payment of such local improvement rates
and taxes that might be payable Chinook and Oxlea have
agreed to pay to the City the sums of money and at the times
hereinafter provided;
AND WHEREAS the City has agreed to pay Chinook certain
moneys to assist in defraying certain costs which will be
incurred by Chinook arising out of the construction of the
interchange;
Its provisions included:
2. The City, in consideration of the moneys to be hereafter
paid to it by Chinook and Oxlea in lieu of local improvement
rates and taxes that might be payable by Chinook and Oxlea by
reason of any works and improvements undertaken by the City
herein, will
(a) construct the realignment north of 60th Avenue as
shown on City of Calgary Plan File No. DD-3-14;
(b) construct the realignment south of 60th Avenue, includ
ing the cost of providing access to the Chinook Shopping
Centre, as shown on City of Calgary Plan File No. DD-3-14;
(c) construct an entrance or access to the Chinook Shopping
Centre accommodating all turns from and to the MacLeod
Trail opposite 61st Avenue South West, the same to include
a traffic control signal to be located thereat, all as shown on
City of Calgary Plan File No. DD-4-03;
(d) make those certain improvements to MacLeod Trail
between Glenmore Trail and 60th Avenue South West as
shown on City of Calgary Plan File No. DD-4-03, except the
60th Avenue South West improvements shall be deferred to
a time that is mutually acceptable to Chinook, Oxlea and the
City.
3. In consideration of the City undertaking the works and
improvements at the request of Chinook and Oxlea as provided
in clause 2 hereof, Chinook and Oxlea in lieu of any assessment
of local improvement rates and taxes that might arise there
from will pay to the City the aggregate sum of Four Hundred
Eighty-eight Thousand, Five Hundred Seventy-five Dollars
($488,575.00) at the times and in the manner hereinafter set
forth:
(a) on December 31, 1972, Chinook shall pay to the City the
sum of Twenty-one Thousand Dollars ($21,000.00);
(b) on March 31, 1973, Oxlea shall pay the City the sum of
Thirty Thousand Dollars ($30,000.00);
(c) on March 31, 1973, Chinook shall pay to the City the
sum of Four Hundred Thirty-seven Thousand, Five Hundred
Seventy-five Dollars ($437,575.00);
'which payments shall be deemed to be payment and satisfac
tion in full of any and all local improvement rates and taxes
which might be payable by Chinook and Oxlea as a result of
the works and improvements undertaken by the City as afore
said. Provided, however, if the 60th Avenue South West
improvements referred to in clause 2(d) hereof are made,
Chinook will pay to the City a further sum of Nine Thousand
Dollars ($9,000.00) plus interest at Eight and One-half per cent
(8 1 / 2 %) per annum compounded annually calculated from
January 1, 1973, to date of payment, such payment to be in lieu
of any local improvement rates or taxes that might be payable
by Chinook to the City therefor.
4. It is understood and agreed that payments made by Chinook
and Oxlea to the City as provided for in this Agreement shall
not be deemed to be payments for any local improvements that
may be undertaken by the City in the vicinity of the Chinook
Shopping Centre or the Southridge Shopping Centre or the
Chinook-Ridge Centre at any time in the future.
5. The City shall, on March 31, 1973, pay to Chinook the sum
of Thirty-seven Thousand Dollars ($37,000.00) to assist Chi-
nook in defraying any costs that may be incurred by it arising
out of the construction by the City of the interchange and any
related works.
The amount of $490,050 in question is the sum
of the three payments referred to in paragraph 3
plus an adjustment of $1,475 resulting from
agreed changes in the plans and the rounding off
of acreage figures.
The plaintiff's case is that this amount was paid
in lieu of local improvement taxes; that such taxes,
if assessed, would have been an income expense;
and that the amount in question was of the same
nature. Counsel supported his position by pointing
out that no new asset had been acquired for the
payment and that it resulted in no change or
improvement in the structure of the plaintiff's
business or of its premises.
The defendant's case is that the expenditure was
made to protect the capital assets of the business,
that is to say, the shopping centre premises against
the threat represented by the City's initial plan for
a clover-leaf interchange and to protect as well the
goodwill attaching to the location of the shopping
centre. Counsel sought support for this position by
submitting that this was an extraordinary and
non-recurring expenditure and not one made in the
ordinary course of the plaintiff's business.
I do not adopt either position in its entirety.
In my view, the plaintiff's enjoyment of its
premises was in no way threatened by any of the
proposed plans except that for a clover-leaf inter
change and by the time the agreements were made
that proposal had been abandoned in favour of the
better proposal for a "tight-diamond" interchange
recommended by the traffic planning consultants.
The amount in question was not the fees of the
consultants for making the survey which produced
the better plan and got rid of the threat of the
earlier plan. Nor was it an expense incurred for
that purpose. Save that the earlier proposal for a
clover-leaf interchange indicates that there was a
traffic problem calling for a solution and was the
occasion for a survey to find a better solution it
has, in my view, nothing to do with the question to
be resolved.
On the other hand, the expenditure was not a
payment of taxes. Nor was it an expenditure that
can be characterized precisely as being in the
nature of a payment of taxes. For while the
amount was described in the agreement as being in
lieu of taxes in respect of the road improvements,
in my view it takes its nature not from this word
ing but from the consideration given by the City
for it, that is to say, the promise of the City to
construct the improvements and the implied prom
ise not to assess the plaintiff for local improvement
taxes in respect of the cost of such improvements.
If, for some reason, the City had never carried out
the improvements a right to recover the amount on
a failure of consideration would have arisen. Such
a right is not characteristic of a payment of taxes.
On the other hand, the $490,050 does not repre
sent the cost of the street improvements and
should not be regarded as having purchased them.
Though evidence on the point is lacking, or
sketchy at best, it seems likely that the amount
represented only a part of their cost. I regard the
amount, therefore, as a contribution toward the
costs to be incurred by the City.
I turn now to the tests by which the question
may be resolved. In British Columbia Electric
Railway Company Limited v. M.N.R. 1 , Abbott J.
put the position under the former provisions of the
Income Tax Act, which are not materially differ
ent from the relevant provisions presently in effect,
as follows:
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 ascertained
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 determined 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.
' [1958] S.C.R. 133, at pages 137-138.
The general principles to be applied to determine whether an
expenditure which would be allowable under s. 12(1)(a) is of a
capital nature, are now fairly well established. As Kerwin J., as
he then was, pointed out in Montreal Light, Heat & Power
Consolidated v. Minister of National Revenue [[1942]
S.C.R. 89 at 105, [1942] 1 D.L.R. 596, [1942] C.T.C. 1,
affirmed [1944] A.C. 126, [1944] 1 All E.R. 743, [1944] 3
D.L.R. 545], applying the principle enunciated by Viscount
Cave in British Insulated and Helsby Cables, Limited v.
Atherton [[19261 A.C. 205 at 214, 10 T.C. 155], the usual test
of whether an expenditure is one made on account of capital is,
was it made "with a view of bringing into existence an advan
tage for the enduring benefit of the appellant's business".
Ten years later in M.N.R. v. Algoma Central
Railway 2 , Fauteux J. (as he then was), speaking
for the Court, put the matter thus [at pages
449-450]:
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 determination and agree with the
view expressed, in a recent decision of the Privy Council, B.P.
Australia Ltd. v. Commissioner of Taxation of the Common
wealth of Australia [[1966] A.C. 224], 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 consideration may
point so clearly that it dominates other and vaguer indica
tions in the contrary direction. It is a commonsense apprecia
tion of all the guiding features which must provide the
ultimate answer.
In Canada Starch Co. Ltd. v. M.N.R. 3 Jackett
P. (as he then was) after citing the Algoma case
summarized the distinction thus:
For the purpose of the particular problem raised by this
appeal, I find it helpful to refer to the comment on the
"distinction between expenditure and outgoings on revenue
account and on capital account" made by Dixon J. in Sun
Newspapers Ltd. et al. v. Fed. Com. of Taxation [(1938) 61
C.L.R. 337] at page 359, where he said:
The distinction between expenditure and outgoings on
revenue account and on capital account corresponds with the
distinction between the business entity, structure, or organi
zation set up or established for the earning of profit and the
2 [1968] S.C.R. 447.
3 [1969] 1 Ex.C.R. 96 at pages 101-102.
process by which such an organization operates to obtain
regular returns by means of regular outlay, the difference
between the outlay and returns representing profit or loss.
In other words, as I understand it, generally speaking,
(a) on the one hand, an expenditure for the acquisition or
creation of a business entity, structure or organization, for
the earning of profit, or for an addition to such an entity,
structure or organization, is an expenditure on account of
capital, and
(b) on the other hand, an expenditure in the process of
operation of a profit-making entity, structure or organization
is an expenditure on revenue account.
Applying this test to the acquisition or creation of ordinary
property constituting the business structure as originally creat
ed, or an addition thereto, there is no difficulty. Plant and
machinery are capital assets and moneys paid for them are
moneys paid on account of capital whether they are
(a) moneys paid in the course of putting together a new
business structure,
(b) moneys paid for an addition to a business structure
already in existence, or
(c) moneys paid to acquire an existing business structure.
In my opinion, however, from this point of view, there is a
difference in principle between property such as plant and
machinery on the one hand and goodwill on the other hand.
Once goodwill is in existence, it can be bought, in a manner of
speaking, and money paid for it would ordinarily be money paid
"on account of capital". Apart from that method of acquiring
goodwill, however, as I conceive it, goodwill can only be
acquired as a by-product of the process of operating a business.
Money is not laid out to create goodwill. Goodwill is the result
of the ordinary operations of a business that is so operated as to
result in goodwill. The money that is laid out is laid out for the
operation of the business and is therefore money laid out on
revenue account.
In the B.P. Australia case, Lord Pearce had
cited [at page 261] as "a valuable guide to the
traveller in these regions" the discussion in Sun
Newspapers Ltd. v. The Federal Commissioner of
Taxation'', in which Dixon J. said:
There are, I think, three matters to be considered, (a) the
character of the advantage sought, and in this its lasting
qualities may play a part, (b) the manner in which it is to be
used, relied upon or enjoyed, and in this and under the former
head recurrence may play its part, and (c) the means adopted
to obtain it; that is, by providing a periodical reward or outlay
to cover its use or enjoyment for periods commensurate with
the payment or by making a final provision or payment so as to
secure future use or enjoyment.
(1938-39) 61 C.L.R. 337 at pages 363, 362.
and
the expenditure is to be considered of a revenue nature if its
purpose brings it within the very wide class of things which in
the aggregate form the constant demand which must be
answered out of the returns of a trade or its circulating capital
and that actual recurrence of the specific thing need not take
place or be expected as likely.
Lord Pearce also cited [at page 262] the follow
ing passage from the judgment of Viscount Rad-
cliffe in Commissioner of Taxes v. Nchanga Con
solidated Copper Mines Ltd. 5 :
Again, courts have stressed the importance of observing a
demarcation between the cost of creating, acquiring or enlarg
ing the permanent (which does not mean perpetual) structure
of which the income is to be the produce or fruit and the cost of
earning that income itself or performing the income-earning
operations. Probably this is as illuminating a line of distinction
as the law by itself is likely to achieve, but the reality of the
distinction, it must be admitted, does not become the easier to
maintain as tax systems in different countries allow more and
more kinds of capital expenditure to be charged against profits
by way of allowances for depreciation, and by so doing recog
nise that at any rate the exhaustion of fixed capital is an
operating cost. Even so, the functions of business are capable of
great complexity and the line of demarcation is sometimes
difficult indeed to draw and leads to distinctions of some
subtlety between profit that is made "out or' assets and profit
that is made "upon" assets or "with" assets.
Later in his reasons, Lord Pearce expressed the
view cited by Fauteux J. (as he then was) in the
Algoma case and then proceeded [at page 264]:
Although the categories of capital and income expenditure are
distinct and easily ascertainable in obvious cases that lie far
from the boundary, the line of distinction is often hard to draw
in border line cases; and conflicting considerations may produce
a situation where the answer turns on questions of emphasis
and degree. That answer:
depends on what the expenditure is calculated to effect from
a practical and business point of view rather than upon the
juristic classification of the legal rights, if any, secured
employed or exhausted in the process:
per Dixon J. in Hallstroms Pty. Ltd. v. Federal Commissioner
of Taxation [(1946) 72 C.R.L. 634, 648]. As each new case
comes to be argued felicitous phrases from earlier judgments
are used in argument by one side and the other. But those
phrases are not the deciding factor, nor are they of unlimited
application. They merely crystallise particular factors which
may incline the scale in a particular case after a balance of all
the considerations has been taken.
5 [1964] A.C. 948 at page 960.
Lord Pearce then went on to consider the three
matters referred to by Dixon J., in the Sun News
papers case. The first of these was the character of
the advantage sought, including its lasting quali
ties and that of recurrence as well as the nature of
the need or occasion for it. Under this head, he
considered as well the test of whether the expendi
ture was from fixed or from circulating capital,
how the expenditures should be treated on the
ordinary principles of commercial accounting and
whether the amounts were spent on the structure
within which the profits were to be earned. He also
considered the manner in which the benefit was to
be used, the second of the matters suggested by
Dixon J., and the third, that is to say, the method
of payment.
I have summarized all this because it seems to
me to point up some of the many facets of a
complex situation that it may be necessary to take
into account and weigh in reaching a conclusion in
a case that does not readily or clearly fall into the
one category or the other but exhibits characteris
tics some of which point in one direction and
others in the other direction.
In the present case, the plaintiffs business, as I
appreciate it, on such materials as are before the
Court, consists in the letting of shops on its prem
ises to tenants who carry on their businesses there
in, the provision of parking areas for use by the
tenants' customers and perhaps the provision of
some services to the tenants. The returns consist of
rentals which are in part calculated on the reve
nues of the tenants' businesses. The success of the
plaintiff's business is thus very much dependent on
the popularity of its premises as a place for its
tenants' customers to do their shopping.
In such a business, it seems to me that while
money spent by the plaintiff to enlarge or improve
the shopping centre premises or the buildings
thereon or in organizing the business structure
would be expenditures of capital, annual expendi
tures for taxes on the premises, including assess
ments for local street improvements, as well as
moneys spent to popularize the centre as a place
for customers to do their shopping, whether by
way of advertising or gimmicks of one kind or
another or otherwise, not resulting in the acquisi-
tion of additional plant or machinery for use in the
business, would be revenue expenses.
Turning now to the several matters to be con
sidered, in my view, it is the nature of the advan
tage to be gained which more than any other
feature of the particular situation will point to the
proper characterization of the expenditure as one
of capital or of revenue expense. That the pay
ments viewed by themselves were in a sense made
once and for all is apparent. But so is almost any
item which in isolation may be somewhat unusual
inÏone way or another. That the advantage, what
ever it was, was expected to be of a lasting or more
or less permanent nature is also apparent. This is
perhaps the strongest feature suggesting that the
expenditure was capital in nature. But the advan
tage is no more permanent in nature than that
expected to be realized from the geological survey
which had been made in the Algoma case. In the
test of "what the expenditure is calculated to
effect from a practical and business point of view"
such features, while carrying weight, are not
conclusive.
For if, as I think, the expenditure can and
should be regarded as having been laid out as a
means of maintaining, and perhaps enhancing, the
popularity of the shopping centre with the tenants'
customers as a place to shop and of enabling the
shopping centre to meet the competition of other
shopping centres, while at the same time avoiding
the imposition of taxes for street improvements,
the expenditure can, as it seems to me, be regarded
as a revenue expense notwithstanding the once and
for all nature of the payment on the more or less
long term character of the advantage to be gained
by making it.
Nor do I think the question is resolved and the
expenditure characterized as capital simply
because the agreement was one of several related
agreements some of which plainly dealt with mat
ters of a capital nature and which altogether made
up a single complex transaction. If there had been
but a single agreement in which the expenditures
were not segregated or severable, the easily recog
nizable capital nature of what was involved in the
other agreements might well have served to char
acterize the whole. But I do not think that the
same result follows where the particular expendi-
ture has been carefully segregated in a separate
agreement which demonstrates what the particular
expenditure was for.
Moreover, while the undesirable effects of traf
fic congestion on the popularity of the shopping
centre and on its prospects for competing with a
rival shopping centre might conceivably have led
to some other whole or partial solution involving
an outlay of a capital nature, such as to restruc
ture the shopping centre or its buildings or its
means of access, and egress, (and some such out
lays may indeed have been made), this is not what
the expenditure here in question was for. The
money was not paid for changes in or additions to
the plaintiffs premises or the buildings thereon or
in connection with the structure of the plaintiffs
business. Rather, it was paid to induce the City to
make changes on City property that could be
beneficial to the plaintiff in achieving its object of
promoting its business by enhancing the popularity
of its shopping centre.
In Ounsworth v. Vickers, Limited 6 , in somewhat
comparable circumstances, the cost of a new facili
ty on property not belonging to the taxpayer but
for use in the plaintiffs business was held to be an
expenditure of capital. But here the improvements
while beneficial in helping the flow of traffic on
the streets adjoining the shopping centre and in the
process making it easier for tenants' customers to
gain access to and egress from the centre and as
well making it unnecessary for them to look for
easier alternative routes, were not, as I view them,
improvements for use in carrying on the plaintiffs
business. They were improvements for use by the
public in general, both for those entering or leav
ing the shopping centre and for those simply pass
ing it.
The need or occasion for the expenditure, in my
view, was the undesirable effects which traffic
congestion was causing and could be expected to
cause on the popularity of the shopping centre and
on its prospects for competing with a rival shop
ping centre to be constructed some three miles
distant. It thus appears to me to have arisen out of
and to be incidental to the carrying on of the
6 [1915j 3 K.B. 267.
plaintiff's business rather than to the premises on
which the business was carried on. It was, as I see
it, just one of the broad range of needs or demands
which arise in the course of running such a busi
ness and which, for the success of the operation,
must be met or provided for out of the revenues of
the business.
Moreover, there would never be any return on or
of the amount save, bit by bit, in enhanced rental
revenues of the business that might result from the
construction by the City of the street improve
ments. This, as it seems to me, also points to the
expenditure being one chargeable to circulating
capital, rather than fixed capital.
With respect to how the expenditure should be
treated according to the principles of commercial
accounting, I see no reason to doubt that what was
done by the plaintiff in its accounts in charging the
expenditure to revenue and writing off the amount
over a fifteen-year period so as not to distort the
profit and loss results in the year of payment,
rather than treating the advantage as an asset and
charging depreciation in respect of it was in
accordance with such principles, in particular as
no asset was acquired for the payment and all that
it could ever produce for the business was an
intangible advantage to be realized in enhanced
revenues of the business, the duration of which
could only be estimated and then not with preci
sion. Moreover, it seems to me that the intangible
advantage to be realized for the expenditure would
have made an odd sort of entry as a capital asset in
a balance sheet. This consideration as well, there
fore, appears to me to suggest the revenue nature
of the expenditure.
I see nothing in the manner in which the advan
tage was to be enjoyed, save that it could only be
realized in revenue receipts, that assists in classify
ing the expenditure as capital or as a revenue
expense. With respect to the means by which the
advantage was to be obtained, that is to say, by
three lump sum payments rather than by periodic
payments in some way referable to the extent of
the advantage for the period, the indication is that
the expenditure was more like a capital outlay
than a revenue expense.
After having considered these matters at length,
it appears to me that the predominant criteria
point to the conclusion that from a practical and
business point of view, the expenditure is more
appropriately classified as a revenue expense and
not as an outlay of capital.
I turn now to the question whether in computing
its income for tax purposes, the plaintiff was
required to apportion the expenditure of the $490,-
050 over a period of years. That is what the
plaintiff did in computing its profit for corporate
purposes. In its balance sheet dated March 31,
1973, it showed as an asset an item described as
"deferred charges" which included the $490,050.
At that time though the amount had been paid to
the City, the construction work had not yet been
done. A note to the balance sheet states that the
$490,050 will be amortized over fifteen years com
mencing in 1974. But for income tax purposes, the
plaintiff deducted the whole $490,050 as an
expense of the year 1973.
The plaintiff did this because, in 1964, deduc
tions claimed in 1961, 1962 and 1963 of amortized
portions of a smaller but similar expenditure
incurred and paid in 1961 were disallowed by the
Minister and the plaintiff was required to compute
its income by taking the deduction of the full
amount in the 1961 taxation year., A similar posi
tion appears to have been taken on behalf of the
Minister in M.N.R. v. Tower Investment Inc.'
where, however, Collier J. concluded that in
respect of expenditures totalling $153,301 made in
1963, 1964 and 1965, for advertising the taxpay
er's apartments, the taxpayer was not required to
deduct particular amounts in the year in which the
expenditure was made but in accordance with
accounting principles could defer an appropriate
part of the deduction to a later year.
In M.N.R. v. Canadian Glassine Co., Ltd. 8 , Le
Dain J., after concluding in a dissenting opinion
that the expenditure in question was a revenue
expense, said at page 536:
In Associated Investors of Canada Limited v. M.N.R.
[1967] 2 Ex.C.R. 96, at page 100 (note), Jackett P. expressed
the opinion that the principle affirmed by Thorson P. was not
"applicable in all circumstances", and that "there are many
types of expenses that are deductible in computing profit for
the year 'in respect or which they were paid or payable." In the
Tower Investment case Collier J. concluded [at pages 461-4621:
7 [1972] F.C. 454.
8 [1976] 2 F.C. 517.
"In my view, the distinctions made by Jackett P. are applicable
in a case such as this. The advertising expenses laid out here
were not current expenditures in the normal sense. They were
laid out to bring in income not only for the year they were
made but for future years."
I agree with the learned Trial Judge that this conclusion is
equally applicable to the expenditure in this case. The opinion
of Thorson P. is not a conclusion that is dictated by the terms
of section 12(1)(a) but a principle deduced from "the general
scheme of the Act", and as such it should be subject to
necessary qualification for cases such as the present one in
which its application would seriously distort rather than fairly
and reasonably reflect the taxpayer's position with respect to
income and expenditure. Indeed, in this Court counsel for the
appellant did not dispute the right to apply the "matching
principle" to the present case, assuming that the expenditure
was found to be one that was deductible in determining income.
In the present case, the position taken on behalf
of the Crown was that, if the amount was not a
capital expenditure, it was incumbent on the tax
payer to amortize it over a period of years and
claim only a part of it as deductible each year.
Counsel contended that, except where the Income
Tax Act makes a specific provision, the recognized
principles of commercial accounting apply for the
purpose of determining the income from a business
for the year and that to deduct the whole amount
in the year 1973, rather than to amortize and
deduct it over a period of years, distorts and
unduly reduces the income for 1973. He made no
attack on the accounting method adopted by the
plaintiff in computing its profit for corporate pur
poses by amortizing the amount over a fifteen-year
period.
In Associated Investors of Canada Limited v.
M.N.R. 9 Jackett P. (as he then was) in a footnote
at pages 100-101 said:
A submission was also made that section 12(1)(a) of the
Income Tax Act, which reads 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,
9 [1967] 2 Ex.C.R. 96.
must be interpreted as prohibiting the deduction in the compu
tation of profit from a business for a year of any outlay or
expense not made or incurred in that year. In support of this
submission, reliance was placed on Rossmor Auto Supply Ltd.
v. M.N.R., [1962] C.T.C. 123, per Thorson P. at page 126,
where he said, "As I view Section 12(1)(a), the outlay or
expense that may be deducted in computing the taxpayer's
income for the year ... is limited to an outlay or expense that
was made or incurred by the taxpayer in the year for which the
taxpayer is assessed" (the italics are mine). If this view were a
necessary part of the reasoning upon which the decision in that
case was based, I should feel constrained to follow it although,
in my view, it is not based on a principle that is applicable in all
circumstances. In that case, however, the loan was clearly not
made in the course of the appellant's business and the President
so held. In my view, while certain types of expense must be
deducted in the year when made or incurred, or not at all, (e.g.,
repairs as in Naval Colliery Co. Ltd. v. C.I.R., (1928) 12 T.C.
1017, or weeding as in Vallambrosa Rubber Co., Ltd. v.
Farmer, (1910) 5 T.C. 529), there are many types of expendi
ture that are deductible in computing profit for the year "in
respect of" which they were paid or payable. (Compare sections
11(1)(c) and 14 of the Act.) This is, for example, the effect of
the ordinary method of computing gross trading profit (pro-
ceeds of sales in the year less the amount by which opening
inventories plus cost of purchases in the year exceeds closing
inventories) the effect of which (leaving aside the possibility of
market being less than cost) is that the cost of the goods sold in
the year is deducted from the proceeds of the sale of those
goods even though the goods were acquired and paid for in an
earlier year. This is, of course, the only sound basis for comput
ing the profits from the sales made in the year. Compare I.R.C.
v. Gardner Mountain & D'Ambrumenil, Ltd., (1947) 29 T.C.
per Viscount Simon at page 93: "In calculating the taxable
profit of a business ... services completely rendered or goods
supplied, which are not to be paid for till a subsequent year,
cannot, generally speaking, be dealt with by treating the tax
payer's outlay as pure loss in the year in which it was incurred
and bringing in the remuneration as pure profit in the subse
quent year in which it is paid, or is due to be paid. In making
an assessment ... the net result of the transaction, setting
expenses on the one side and a figure for remuneration on the
other side, ought to appear ... in the same year's profit and
loss account, and that year will be the year when the service
was rendered or the goods delivered." (Applied in this Court in
Ken Steeves Sales Ltd. v. Minister of National Revenue,
[1955] Ex. C.R. 108, per Cameron J. at page 119.) The
situation is different in the case of "running expenses". See
Naval Colliery Co. Ltd. v. C.I.R., supra, per Rowlatt J. at page
1027: "... and expenditure incurred in repairs, the running
expenses of a business and so on, cannot be allocated directly to
corresponding items of receipts, and it cannot be restricted in
its allowance in some way corresponding, or in an endeavour to
make it correspond, to the actual receipts during the particular
year. If running repairs are made, if lubricants are bought, of
course no enquiry is instituted as to whether those repairs were
partly owing to wear and tear that earned profits in the
preceding year or whether they will not help to make profits in
the following year and so on. The way it is looked at, and must
be looked at, is this, that that sort of expenditure is expenditure
incurred on the running of the business as a whole in each year,
and the income is the income of the business as a whole for the
year, without trying to trace items of expenditure as earning
particular items of profit". See also Riedle Brewery Ltd. v.
Minister of National Revenue, [1939] S.C.R. 253. With regard
to the flexibility of method permitted under the Income Tax
Act for computing profit, see Cameron J. in the Ken Steeves
case, supra, at pages 113-4.
I think it follows from this that for income tax
purposes, while the "matching principle" will
apply to expenses related to particular items of
income, and in particular with respect to the com
putation of profit from the acquisition and sale of
inventory 10 , it does not apply to the running
expense of the business as a whole even though the
deduction of a particularly heavy item of running
expense in the year in which it is paid will distort
the income for that particular year. Thus while
there is in the present case some evidence that
accepted principles of accounting recognize the
method adopted by the plaintiff in amortizing the
amount in question for corporate purposes and
there is also evidence that to deduct the whole
amount in 1973 would distort the profit for that
year, it appears to me that as the nature of the
amount is that of a running expense that is not
referable or related to any particular item of reve
nue, the footnote to the Associated Investors case
and the authorities referred to by Jackett P., and
in particular the Vallambrosa Rubber case and the
Naval Colliery case, indicate that the amount is
deductible only in the year in which it was paid.
All that appears to me to have been held in the
Tower Investment case and by the Trial Judge and
Le Dain J. in the Canadian Glassine case is that it
was nevertheless open to the taxpayer to spread
the deduction there in question over a number of
years. It was not decided that the whole expendi-
10 Compare Neonex International Ltd. v. The Queen [ 1978]
CTC 485 at page 497.
ture might not be deducted in the year in which it
was made, as the earlier authorities hold. And
there is no specific provision in the Act which
prohibits deduction of the full amount in the year
it was paid. I do not think, therefore, that the
Minister is entitled to insist on an amortization of
the expenditure or on the plaintiff spreading the
deduction in respect of it over a period of years.
There is another aspect of the matter. The fif-
teen-year period chosen has not much relation to
the expected life of the street improvements. They
may well last much longer. The period was prob
ably selected for no better reason than that it is the
period which the City would have used. On the
other hand, it is not the expected life of the street
improvements that should be considered. What, if
anything, should be considered for such a purpose
is the expected duration of the benefits to the
popularity of the shopping centre that were expect
ed to arise from the improvements and this, com
pounded as it is by the prospect of another shop
ping centre three miles away, and possibly other
developments affecting the popularity of the plain
tiffs shopping centre in a rapidly growing City, is
imponderable. This confirms me in the view that
the whole amount is deductible in the year of
payment.
The appeal, therefore, succeeds and it will be
allowed with costs and the reassessment will be
referred back to the Minister for reassessment,
accordingly.
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