Edmonton Plaza Hotel (1980) Ltd. v. The Queen, 87 DTC 5371, [1987] 2 CTC 153 (FCTD)

Jerome A.C.J.:—The plaintiff appeals the defendant's reassessment of its 1980 and 1981 taxation years. At issue is the taxpayer's deduction from its taxable income of an amount paid to the City of Edmonton in connection with the taxpayer's application for a development permit. Specifically, the plaintiff was required by the City to pay a sum of $216,000 in satisfaction of the parking requirement for the permit. The defendant has assessed this amount as an eligible capital expenditure. The plaintiff claims that it is either a current revenue expense or part of the capital cost of the building which was the subject of the development permit. The matter came on for hearing before me at Edmonton, Alberta on February 19, 1987.

The plaintiff owns and operates a hotel in the City of Edmonton. When the main part of the hotel was built in 1974, the owners contemplated that if business was good an extension would probably be added. Provision was accordingly made in the foundations for a future addition. In 1974 a parking garage was built under the hotel containing 120 parking spaces. This garage was considered to be sufficient for the purposes of the main building and the future addition. In case of overflow parking, however, the plaintiff contributed one-half the cost of an underground pedway built by the City which joined the hotel to the parkade of the public library across the street. Like other members of the public, hotel patrons were free to use the parking provided at the library. All of the revenue from patrons parking in the public garage was collected by the hotel and remitted to the City.

In 1978 the hotel's business was sufficient to justify the construction of the new extension. Accordingly, an application was made for a permit to build an additional 72-room tower on the hotel site. The City planners reviewed the application and determined that the hotel had insufficient parking facilities to accommodate the extension. By applying a formula known only to themselves, the planners deduced that 27 additional parking stalls would be required. Unfortunately, it was impossible to build any more parking space under the hotel. An easement for the construction of a Light Rapid Transit route passed directly under the hotel and prevented further extension of the parking garage below its existing level.

After negotiations with the City and the approval of the Development Appeal Board, it was agreed that the hotel could satisfy the requirement for extra parking by paying a sum equivalent to the cost of constructing the 27 spaces. The City set this price at $8,000 per stall, for a total of $216,000. An agreement was drawn up and dated October 9, 1979. It provided:

1. In the event that a Development Permit is granted by the City for the construction of the said extension to the Edmonton Plaza Hotel, the Company shall, on or before March 31, 1980, pay to the City the sum of Two Hundred and Sixteen Thousand ($216,000) Dollars, which the City shall use for the construction of twenty seven (27) additional stalls in excess of the City’s requirements in the Trade and Convention Centre or other nearby projects containing City parking facilities, such stalls to be clearly marked in such manner as may from time to time be satisfactory to the City as being for the exclusive use of guests or patrons of the Edmonton Plaza Hotel and, upon making the payment aforesaid, the Company shall be deemed to have satisfied its requirements for the provision of additional parking facilities. The Company shall lease the twenty seven (27) parking stalls from the City on a monthly basis at a rate to be determined from time to time by the City as being, in the reasonable opinion of the City, necessary to cover the costs to the City of operating and maintaining the stalls but not, in any case, to exceed the regular monthly rates prevailing from time to time.

2. From the completion of the extension to the Edmonton Plaza Hotel until completion of the City parking garage in the Trade and Convention Centre or other nearby facility, the City shall make available to the Company, for use by hotel guests, during the hours of 4:30 P.M. and 8:00 A.M. up to the twenty seven (27) parking stalls in the Library Parking Garage, to be paid for as used at normal rates.

3. Notwithstanding anything hereinabove set out, if the Company, prior to March 31, 1980, enters into an agreement satisfactory to the Commission Board of the City of Edmonton leading to the construction of twenty seven (27) additional parking stalls within one quarter ( A) mile of the Edmonton Plaza Hotel which would otherwise not be built, which stalls shall be clearly marked as being for the exclusive use of guests or patrons of the Edmonton Plaza Hotel, the Company shall be deemed to have satisfied its requirements for the provision of additional parking facilities and shall be relieved of its obligations to the City under paragraph 1 herein, and the City shall be relieved of its obligations under paragraph 2 herein.

On the signing of this agreement, the development permit was issued and construction of the addition began. Under the agreement, payment of the $216,000 was to have been made by March 31, 1980, but the plaintiff asked for an extension beyond that date.

The plaintiff's officers were very skeptical at that time that the City would honour its promise to build the 27 parking stalls. One reason was that, had the City been serious about providing more parking, the logical move would have been to designate 27 spaces for the hotel's use in the library parkade, which was underutilized and already connected to the hotel by a pedway. The City made no move to do this, nor did they begin construction of 27 new Stalls. As a result, the plaintiff began negotiations with other developers in the area to reach an arrangement which would satisfy paragraph 3 of the agreement. Its officers by this time viewed the $216,000 as a penalty or levy for which they would receive nothing in return. They did not themselves believe that the hotel needed additional parking. However, to get out of paying the $216,000, they were prepared to pay up to twice that amount for Space in nearby parking facilities. At least they would then be receiving something in return for their money.

Negotiations to obtain alternate parking arrangements proved unsuccessful and the plaintiff resolved at a director's meeting on October 22, 1980 to pay the $216,000 plus accrued interest to the City. The minutes indicate that this payment was to be made “as an assessment under Section 150(2) of the Municipal Taxation Act of the City of Edmonton which payment would be in lieu of and in full satisfaction of the obligations of the Company under the parking agreement”. The plaintiff's solicitor was instructed to tender the amount on that basis. His covering letter dated October 31, 1980 reads:

We are enclosing herewith cheque in favour of the City for the sum of $238,795.40 in payment of a Special Local Benefit Assessment under Section 150 of the Municipal Taxation Act in view of the fact that the hotel has been unable to provide additional parking within a quarter of a mile of the hotel as referred to in agreement dated October 9, 1979 between the City and Leamar Developments Ltd. These funds are being forwarded to you in trust on the condition that they will be applied to this purpose.

The City replied as follows:

We acknowledge receipt of a cheque in the amount of $238,795.00, as required in the special agreement between the City of Edmonton and Leamar Developments.

In accepting this payment, we do not necessarily agree that it is in payment of a special local benefit assessment under Section 150 of the Municipal Taxation Act but rather that it is required by the aforementioned agreement.

Following this exchange, the plaintiff's solicitor, Mr. Bishop, undertook extensive negotiations with the City's legal department to try to convince them to issue a special local benefit assessment for the amount tendered by the plaintiff. In the end he was unsuccessful. The application for a by-law enacting the special assessment was withdrawn.

On its financial statements for 1980 the plaintiff treated the total payment of $238,795 ($216,000 plus interest) as part of the capital cost of the building addition. On the plaintiff's income tax return for that year, however, this and other costs were treated as “capitalization of expense items into building construction costs in 1980” and deducted from both income and the cost of the addition. The payment was not included in the plaintiff’s local taxes and insurance for the year.

The issue in this appeal is the correct classification for tax purposes of the amount paid to the City. There are three possible solutions to this problem:

1. The amount in question could be an “eligible capital expenditure" as defined in subsection 14(5) of the Act. This is the Minister's position. If that were the case, one half of the amount would go into the taxpayer's cumulative eligible capital account and be depreciated at a rate of ten per cent per year (see paragraphs 14(1)(a) and 20(1)(b)). By subparagraph 14(5)(b)(i), the payment cannot be in this category if it is deductible in computing the taxpayer's income from his business.

2. The amount could be a deductible business expense under subsection 18(1) of the Act. This is the plaintiff's first position. In that case, of course, the entire amount would be deductible from the taxpayer's income for the year in which the expenditure was made.

3. The amount could be part of the capital cost of the taxpayer's depreciable property, as defined in paragraph 20(1)(a) and Schedule II of the Act. This is the plaintiff's alternate position. The expenditure would then be excluded from each of the first two categories by the operation of sections 14(5)(b)(iii) and 18(1)(b). Under this option, the whole amount would be added to the taxpayer's undepreciated capital cost for the appropriate class and depreciated at a rate of five per cent per year.

The relevant statutory provisions are as follows:

14(5)(b) “eligible capital expenditure” of a taxpayer in respect of a business means the portion of any outlay or expense made or incurred by him, as a result of a transaction occurring after 1971, on account of capital for the purpose of gaining or producing income from the business, other than any such outlay or expense

(i) in respect of which any amount is or would be, but for any provisions of this Act limiting the quantum of any deduction, deductible (otherwise than under paragraph 29(1)(b)) in computing his income from the business, or in respect of which any amount is, by virtue of any provision of this Act other than paragraph 18(1)(b), not deductible in computing such income,

(ii) made or incurred for the purpose of gaining or producing income that is exempt income or

(iii) that is the cost of, or any part of the cost of,

(A) tangible property of the taxpayer,

(B) intangible property that is depreciable property of the taxpayer,

(C) property in respect of which any deduction (otherwise than under paragraph 20(1)(b)) is permitted in computing his income from the business or would be so permitted if his income from the business were sufficient for the purpose, or

(D) an interest in, or right to acquire, any property described in any of clauses (A) to (C),

but, for greater certainty and without restricting the generality of the foregoing does not include any portion of

(iv) any amount paid or payable, as the case may be, to any creditor of the taxpayer as, on account or in lieu of payment of any debt or as or on account of the redemption, cancellation or purchase of any bond or debenture,

(v) where the taxpayer is a corporation, any amount paid or payable, as the case may be, to a person as a shareholder of the corporation, or,

(vi) any amount that is the cost of, or any part of the cost of,

(A) an interest in a trust,

(B) an interest in a partnership,

(C) a share, bond, debenture, mortgage, hypothec, note, bill or other similar property, or

(D) an interest in, or right to acquire, any property described in any of clauses (A) to (C).

18.(1) In computing the income of a taxpayer from a business or property 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 the business or property;

(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 expressly permitted by this Part;

20.(1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation;

The regulation mentioned in paragraph 20(1)(a) is Schedule II of the Regulations which sets out the classes of depreciable property. The relevant portion of that Schedule is Class 3 which includes:

Class 3 (5 per cent)

Property not included in any other class that is

(a) a building or other structure, including component parts such as electric wiring, plumbing, sprinkler systems, air-conditioning equipment, heating equipment, lighting fixtures, elevators and escalators;

One of the requirements for this expenditure to be deductible under any of these categories is that it have been incurred for the purpose of gaining or producing income from the business. There is no dispute between the parties that the requirement is fulfilled with respect to this payment.

I will deal first with the second option, that is, that this is a current revenue expense arising in the normal operation of the taxpayer's business. I have great sympathy for the taxpayer, who appears to have been somewhat victimized by the City. As a result I gave very favourable consideration to the plaintiff's position on this issue and carefully reviewed all of the tests in the jurisprudence cited during counsel's persuasive argument. [See Sun Newspapers Ltd. et al v. Fed. Com. of Taxation (1938), 61 C.L.R. 337 per Dixon, J.; Canada Starch Co. Ltd. v. M.N.R., [1969] 1 Ex. C.R. 96; [1968] C.T.C. 466; 68 D.T.C. 5320, per Jackett, J.; B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia, [1966] A.C. 224; [1965] 3 All E.R. 209 per Lord Pearce; Commissioner of Taxes v. Nchanga Consolidated Copper Mines, [1964] A.C. 948; [1964] 2 W.L.R. 339 per Lord Radcliffe; British Columbia Electric Railway Limited v. M.N.R., [1958] S.C.R. 133; [1958] C.T.C. 21; 58 D.T.C. 1022 per Abbott, J.; Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946), 72 C.L.R. 634 per Dixon, J.; and Oxford Shopping Centres Ltd. v. The Queen, [1980] C.T.C. 7; 79 D.T.C. 5458 (F.C.T.D.) affirmed [1981] C.T.C. 128; 81 D.T.C. 5065 (F.C.A.).] Nevertheless, I cannot conclude that this is a business expense. In the final analysis, it has nothing to do with the operation of the hotel business as it was before the extension was planned. The most favourable construction that can be put on this expense is that it was a disguised tax or levy, or a cost of acquiring the building permit. But neither of those characterizations would change the fundamental fact that this payment arose only as a consequence of the decision to expand. The expense was incurred for the purpose of producing an income-earning facility — the 72-room addition. It cannot be said that this expenditure answered one of the needs which arise in the course of running the hotel's business. Were it not for the proposed extension, the need for the expenditure would never have arisen. From a practical, business point of view, this payment was calculated to effect a goal of a purely capital nature. There is, plain and simply, no basis for a determination that this is part of the plaintiff's business expense for the operation of the original hotel in 1980 and 1981.

Since this is a capital expenditure made to produce income, the question that remains is whether it should be considered an eligible capital expenditure under paragraph 14(5)(b) or a part of the capital cost of the building addition under paragraph 20(1)(a). In my opinion, the issue is resolved by the wording of paragraph 14(5)(b). By clauses (iii) (A) and (B) of that section, the cost of the taxpayer's tangible property and the cost of his intangible depreciable property are specifically excluded from the eligible capital account. The payment in question here was clearly made either as a requirement of obtaining the building permit or as the price of the exclusive use or leasehold interest in the parking spaces promised by the City. In either case, it was a cost directly connected to and associated with the capital cost of the extension. I favour the interpretation that it formed part of the cost to the taxpayer of acquiring tangible property. If I am wrong in that conclusion, it was certainly an expenditure to acquire depreciable intangible property. In either case, the amount is excluded from the operation of paragraph 14(5)(b) and does not form part of the taxpayer's eligible capital property.

The plaintiff reported to its shareholders in its 1980 financial statements that this was a part of the capital cost of the extension. I have no reason to conclude that this statement was not in accordance with generally accepted accounting principles (GAAP). In The Queen v. Metropolitan Properties Co. Ltd, [1985] 1 C.T.C. 169; 85 D.T.C. 5128, my colleague Walsh, J. had occasion to examine the use of GAAP in attributing an expenditure to the capital cost of an asset. In that case, the taxpayer, a land developer, agreed with the municipality to install municipal services at no direct cost to the city. For financial statement purposes, the taxpayer reported the cost of these services as additions to the cost of its land inventory, in accordance with GAAP. Walsh, J. found that GAAP should normally be applied for taxation purposes, as representing the true picture of a corporation's loss or profit for a given year. They should not be departed from unless the Income Tax Act requires it. Consequently, the correct allocation of the cost of installing the services was to take it into account in determining the capital cost of the taxpayer's inventory of building lots at the end of the taxation year. This was true even though the expenditures in question were made on portions of land which would thereafter be deeded to the municipality and no longer available for sale by the taxpayer. Thus the indirect nature of the contribution made by these costs to the development of the lots for sale did not prevent their being included in the capital cost of the lots. The same result should apply in this case.

The appeal is allowed and the plaintiff’s tax assessments for 1980 and 1981 are referred back to the Minister for reassessment in accordance with the terms of this judgment, with costs.

Appeal allowed.