The Queen v. AEL Microtel Ltd., 86 DTC 6348, [1986] 2 CTC 108 (FCA)

Mahoney, J.:—These are three appeals and cross appeals from judgments of the Trial Division, [1984] C.T.C. 387; 84 D.T.C. 6374, respecting the re- spondent's income tax assessments for its 1975, 1976 and 1977 taxation years. The respondent concedes that the issue as to investment tax credits has been effectively disposed of by this Court's decision in Her Majesty v. B.C. Forest Products, [1986] 1 C.T.C. 1; 85 D.T.C. 5577; and that the appeal on that issue must succeed. What remains is the respondent's contention, by way of cross appeal, that the amount of the development incentives received by it ought not to be taken into account at all under subsection 13

(7.1) of the Income Tax Act in determining the capital cost of depreciable property acquired by it with those proceeds and the appellant’s contention that not only the portion of the incentives calculated with reference to the capital cost of property but that calculated with reference to job creation is to be taken into account under subsection 13(7.1).

The respondent is the successor, by amalgamation, of GTE Lenkurt Electric (Canada) Ltd., hereafter "Lenkurt". Lenkurt was paid a development incentive in the amount of $466,800 in respect of a new manufacturing plant it built at Saskatoon. That amount was calculated as follows:

Approved capital cost:

$1,173,000 x 20%	— $234,600
Jobs to be created:
$154.8 new jobs @ $1,500	— $232,200

Lenkurt also was paid a development incentive in the amount of $595,217 in respect of a new manufacturing facility at Winnipeg. That amount was calculated as follows:

Approved capital cost:

$1,628,752 x 25%	— $407,188
Approved wages and salaries:
$1,253,527 x 15%	— $188,029

There is no significance for purposes of these appeals in the different approaches taken in the calculation of the “job creation" portions of the incentives as distinct from their “‘capital cost” portions.

The incentives were paid under the authority of the Regional Development Incentives Act, R.S.C. 1970, c. R-3. That Act provides:

12. An amount payable to an applicant on account of a development incentive under this Act is exempt from income tax.

The Income Tax Act provides:

81.(1) There shall not be included in computing the income of a taxpayer for a taxation year,

(a) an amount that is declared to be exempt from income tax by any other enactment of the Parliament of Canada;

The respondent's position on the cross appeal is that the intention of Parliament to exempt the amount of a development incentive from income tax is frustrated by taking the amount into account under subsection 13(7.1) of the Income Tax Act. The appellant says that taking the incentive into account under subsection 13(7.1) merely avoids a second tax-free receipt of an equivalent amount. That provision, as it stood in the taxation years in issue, Was:

13. (7.1) For the purposes of this Act, where a taxpayer has received or is entitled to receive assistance from a government, municipality or other public authority in respect of, or for the acquisition of, depreciable property, whether as a grant, subsidy, forgiveable loan, deduction from tax, investment allowance or as any other form of assistance other than

(a) an amount authorized to be paid under an Appropriation Act and on terms and conditions approved by the Treasury Board in respect of scientific research expenditures incurred for the purpose of advancing or sustaining the technological capability of Canadian manufacturing or other industry, or

(b) an amount deducted as an allowance under section 65,

the capital cost of the property to the taxpayer shall be deemed to be the amount by which the aggregate of

(c) the capital cost thereof to the taxpayer, otherwise determined, and

(d) such part, if any, of the assistance as has been repaid by the taxpayer pursuant to an obligation to repay all or any part of that assistance,

exceeds

(e) the amount of the assistance.

The exceptions of paragraphs (a) and (b) are not in play.

Assuming a profitable business, the reduction of the capital cost of its depreciable property by the amount of the incentive will, of course, result in reduced capital cost allowance, increased taxable income and a greater amount of tax payable over a period of time. However, the tax will not have been imposed in respect of the incentive but in respect of future earnings in an amount equal to the incentive. Taking the incentive into account does not effectively avoid its exemption from taxation, it merely ensures that an equal amount of future earnings, not exempted from tax, will not escape taxation by virtue of capital cost allowance. The validity of the appellant’s position may be readily appreciated if one postulates an incentive being immediately spent in the acquisition of property depreciable at 100 per cent, a concept not entirely foreign to the Income Tax Act, vide. property classes 12, 23 and 25. The recipient would not only exclude the incentive from the calculation of its taxable income in the first place, it would be entitled to deduct an equal amount by way of additional capital cost allowance from its taxable income otherwise calculated, all in the same taxation year.

In my opinion, the cross appeal fails and should be dismissed with costs.

The amount of the development incentives was manifestly assistance received by a taxpayer from a government. To fall within the contemplation of subsection 13(7.1), it must have been received "in respect of, or for the acquisition of, depreciable property”. The learned trial judge found that the approved capital cost portions of the payments in issue did have to be taken into account under the subsection but that the job creation portions did not. The appellant says he erred in excluding the latter because, although its amount is calculated in part with reference to job creation, the whole of a development incentive is paid and received “in respect of, or for the acquisition of, depreciable property”.

The Regional Development Incentives Act is the short title of

An Act to provide incentives for the development of productive employment opportunities in regions of Canada determined to require special measures to facilitate economic expansion and social adjustment.

Its pertinent provisions follow:

2. In this Act,

(e) “development incentive” means a primary development incentive, a secondary development incentive, or a special development incentive described in section 4;

(f) “facility” means the structures, machinery and equipment that constitute the necessary components of a manufacturing or processing operation, other than an initial processing operation in a resource-based industry;

(h) “operation” means,

(i) in relation to a facility, the manufacturing or processing operation of

which the facility constitutes the necessary components, and

4. Upon application therefor to the Minister by an applicant proposing to establish a new facility or to expand or modernize an existing facility in a designated region, the Minister may authorize the provision to the applicant, subject to this Act and upon such terms and conditions as are prescribed by the regulations of

(a) a primary development incentive by way of financial assistance to the applicant

for the establishment, expansion or modernization of the facility;

(b) in the case of a proposal to establish a new facility or to expand an existing facility to enable the manufacturing or processing of a product not previously manufactured or processed in the operation, a secondary development incentive by way of additional financial assistance to the applicant for the establishment of the new facility or the expansion of the existing facility for that purpose; and

(c) a special development incentive by way of financial assistance to the applicant

for the establishment, expansion or modernization of the facility.

5.(1) The amount of a primary development incentive shall be based on the approved capital costs of establishing, expanding or modernizing the facility in respect of which the primary development incentive is authorized and shall not exceed

(a) 20% of those approved capital costs, or

(b) $6,000,000

whichever is the lesser amount.

(2) The amount of a secondary development incentive shall be based on the approved capital costs of establishing or expanding the facility in respect of which the secondary development incentive is authorized and on the number of jobs created directly in the operation and shall not exceed

(a) 5% of those approved capital costs, plus

(b) $5,000 for each job determined by the Minister to have been created directly in the operation.

(3) The amount of a special development incentive shall be based

(a) on the approved capital costs of establishing, expanding or modernizing the facility in respect of which the special development incentive is authorized, or

(b) where such incentive is authorized in respect of a new facility or for the expansion of an existing facility to enable the manufacturing or processing of a product not previously manufactured or processed in the operation, on the approved capital costs of establishing or expanding the facility and on the number of jobs created directly in the operation,

and shall not exceed,

(c) in a case to which paragraph (a) applies and to which paragraph (b) does not apply, 10% of those approved capital costs, or

(d) in a case to which paragraph (b) applies,

(i) 10% of those approved capital costs,

plus

(ii) $2,000 for each job determined by the Minister to have been created directly in the operation.

(4) No development incentive or combination of development incentives authorized in respect of a new facility or for the expansion of an existing facility to enable the manufacturing or processing of a product not previously manufactured or processed in the operation shall exceed the lesser of

(a) $30,000 for each job determined by the Minister to have been created directly in the operation, or

(b) /2 of the capital to be employed in the operation.

10. When the Minister is satisfied that a facility for the establishment, expansion or modernization of which a development incentive has been authorized, the amount of which was based on

(a) the approved capital costs of establishing, expanding or modernizing the facility, or

(b) the approved capital costs of establishing or expanding the facility and the number of jobs created directly in the operation,

has been brought into commercial production or, in the case of a facility for the expansion or modernization of which a development incentive has been authorized, the expanded or modernized facility has been brought into commercial production, the Minister shall pay to the applicant an amount on account of the development incentive not exceeding 80% of the amount estimated by the Minister to be the amount of the development incentive, and the remainder of the incentive shall be paid in such amounts and within such period, . . . as are prescribed by the regulations.

The Governor in Council made the Regional Development Incentives Regulations, P.C. 1969-1571 as amended, pursuant to the authority of section 15 of the Act, providing, inter alia:

5.(1) The number of jobs created directly in an operation shall be determined to be the number of man days, or fractions thereof, paid by the applicant with respect to the employment of employees in or based upon the facility during the second and third years after the date on which the facility is brought into commercial production divided by the number of days that the facility is in operation during those years, and adjusted to take into account any abnormal or temporary circumstances.

(4) For the purpose of determining the amount of any development incentive, the number of jobs created directly in an operation shall not, unless the Minister otherwise determines, exceed by more than 15% the number of jobs specified and approved in the authorization by the Minister.

Subsection (2) provides for the exclusion of certain persons and subsection

(3) provides for the inclusion of certain persons in the calculation of number of employees. They need not be recited.

16. It is a condition of any development incentive that is based in part on the number of jobs created in the operation that, if during the second and third years immediately following the date on which the facility is brought into commercial production, the number of jobs created directly in the operation is less than the estimated number of jobs on which payments on account of the development incentive are based, the applicant shall repay to Her Majesty the amount paid on account of the development incentive that was related to the number of jobs that were not so created.

I do not question the conclusion of the learned trial judge as to the purpose of Parliament in providing for development incentives under the Regional Development Incentives Act. As he said:

The intention of Parliament is overwhelmingly clear from the pertinent section of the Statutes of which mention has been made that its primary purpose and objective is to improve the lot of the population of designated areas by correcting the inadequacy of opportunities for productive employment by enticing substantive stable and long range industries to locate in those areas to improve those opportunities for productive employment and access to them.

That is the clear and paramount purpose sought to be achieved by the development incentive grant consequent upon which economic expansion and social adjustment beneficial to the designated area will result.

I, likewise, fully agree with his analysis of the way Parliament has chosen to achieve that purpose:

The inducement of industry to locate in the designated areas is the means to that end.

The means to that inducement is development incentive grants.

And how is the amount of these grants to be arrived at.

Very simply.

In these appeals that amount is based on two factors:

(1) development incentive based on approved capital costs, and

(2) a development incentive based on the number of eligible jobs available.

However, his concluson that the method of calculation results in “two incentives [which] combine for a total development incentive” requires examination.

It seems to me clear that when, in subsection 5(4) of the Act, Parliament speaks of a “combination of development incentives”, it is speaking of a combination of two or three of a primary development incentive, a secondary development incentive and a special development incentive, all as defined in section 4. It is not, in my respectful opinion, speaking of a combination of a development incentive based on approved capital costs and one based on job creation. It likewise seems clear that the secondary and special development incentives defined by subsection 5(2) and paragraph 5(3)(b) are each a single development incentive, the amount of which is required to be based on two components: approved capital costs of the facility and number of jobs created by the operation of which, by definition, the facility constitutes the necessary components. In defining what the Minister may authorize by way of each type of development incentive, section 4 is precise; it is financial assistance for one or more of the establishment of the facility, the expansion of the facility or the modernization of the facility. Finally, by section 10, the entire amount of the incentive becomes payable, albeit in stages, upon fulfilment of a single condition. There are no separate criteria for the payment of development incentives directly referable to job creation. At the time of payment what is necessary is that the facility, for “the establishment, expansion or modernization of which” the development incentive was authorized, be in production.

I agree with the learned trial judge that the principal purpose of the Act is the creation of jobs. However, the method prescribed by which that purpose is to be achieved is, in my view, clearly and exclusively by the provision of financial assistance for the establishment, expansion or modernization of facilities. That is not affected by anything in the Regulations although a repayment under section 16 would, of course, bring paragraph 13(7.1)(d) of the Income Tax Act into play.

Dickson, J., as he then was, in Nowegijick v. The Queen, [1983] C.T.C. 20; 83 D.T.C. 5041, observed:

The words “in respect of” are, in my opinion, words of the widest possible scope. They import such meanings as “in relation to”, “with reference to” or “in connection with”. The phrase “in respect of” is probably the widest of any expression intended to convey some connection between two related subject matters.

The “facility in respect of which the . . . development incentive is authorized” is the phrase used in each of subsections 5(1), (2) and (3) of the Regional Development Incentives Act. That is the provision that governs the amount of every development incentive. The phrase in subsection 13(7.1) of the Income Tax Act is “assistance . .. in respect of, or for the acquisition of, depreciable property”. By definition, “facility” in the former Act is limited to structures, machinery and equipment. That leads to the conclusion that a facility necessarily consists entirely of depreciable property.

On a fair reading of the pertinent provisions of the Regional Development Incentives Act and the regulations, I conclude that although the amount of each incentive in issue was calculated on the basis of two components: approved capital costs and number of jobs created, each was a single development incentive paid in respect of a new facility established by the respondent and that the entire amount thereof is required to be taken into account in determining the capital cost of the facility to which it pertained by reason of subsection 13(7.1) of the Income Tax Act. I would allow the appeals with a single set of costs here and in the Trial Division. I would set aside the judgments of the Trial Division and restore the assessments in issue.

Appeals allowed.