The Queen v. Marchand, 78 DTC 6507, [1978] CTC 763 (FCTD), aff'd [1979] CTC xvii (FCA)

Addy, J:—In 1972 the defendant purchased 400 shares at $5 each in the Caisse d’entraide économique de Grand’Mère (hereinafter referred to as “the Caisse de Grand’Mère’’).

The by-laws of each of the Caisses d’entraide in Quebec provide that a sum equal to 4 /2% of each amount subscribed for the purchase of shares must be paid to the Caisse in addition to the purchase price. In accordance with these provisions the defendant paid the sum of $90, in addition to the purchase price of $2,000.

The issue in the case at bar is whether, under paragraph 18(1)(b) of the Income Tax Act, this sum constitutes an expenditure in the nature of a capital outlay and is not deductible, as the plaintiff maintains, or whether, as the defendant claims, the outlay was made for the purpose of earning income in the form of taxable interest, and is in the nature of an income outlay, and therefore by this very fact deductible from gross income.

Counsel for both parties stated that despite the small amount in dispute, the case is of considerable importance for the numerous Caisses d’entraide in the Province of Quebec and their subscribers, and will constitute a test case.

The Caisses d’entraide in Quebec belong to a federation known as the “Federation des caisses d’entraide économique du Québec” (hereinafter referred to as “the Federation”). They are established and operate under the Savings and Credit Unions Act (RSQ 1964, c 293). It is interesting to note that in 1974 the Caisses d’entraide économique Act (SQ 1974, c 68) was passed. This Act adopts several of the by-laws under which the Caisses d’entraide and the Federation were operating and provides that, except as otherwise provided by the Act, the Caisses d’entraide économique and the Federation will continue to be governed by the Savings and Credit Unions Act. The 1974 Act does not of course apply to the case at bar since here we are concerned with an assessment for the 1972 taxation year, but counsel for the parties both seemed to be of the view that this Act would in no way affect the dispute even if it were applicable.

The findings that follow are based in part on the internal management provisions governing the co-operative caisses found in the Savings and Credit Unions Act and in part on the by-laws of the Caisse de Grand’Mère and on the other facts admitted by counsel for the parties or established in evidence at the trial. The facts themselves are not in dispute and the plaintiff did not lead any evidence but merely cross-examined the defendant’s only witness.

The Caisse de Grand’Mère is a co-operative that has been affiliated with the Federation since 1968. Like all caisses d’entraide, it has a well-defined territorial jurisdiction and all members must reside within the limits of its territory. If a member changes his place of residence he ceases to be a member of that caisse and can join only the Caisse d’entraide in the territory in which his new residence is located, by purchasing shares in it.

One of the chief characteristics that distinguish the Caisses d’entraide from the Caisses populaires is that the members of the Caisses populaires d’épargne can buy only one share each, whereas the members of the Caisses d’entraide can purchase an indefinite number. In addition the Caisses d’entraide, unlike the Caisses populaires, do not operate savings accounts. The Caisse de Grand’Mère thus did not provide any banking service in 1972. The 4 /2% of the amount paid for each share purchase is never reimbursed unless the member claims a refund for his shares within 30 days after he purchased them. The amount is therefore paid only once, each time shares are purchased. The defendant’s application for membership form (Exhibit D-1) dated November 1, 1972 contains the words, and I quote: “I agree to pay in addition 4 /2% of my subscription in non-refund- able admission fees.” A member can claim a refund for his shares at any time. These are not subject to any appreciation of capital or, except in the event of bankruptcy, any capital depreciation. Of the 41/2% of the total amount, 2% is paid into the general revenue fund of the Caisse and the other 2 /2% is used for recruitment, administration, establishment of a stabilization fund and other objectives of the Caisse and the Federation.

The annual rate of interest payable on the shares is determined each year by resolution of the general meeting of the members of the Caisse d’entraide. Each member has only one vote at the meeting, regardless of the number of shares he owns. When a member of a caisse leaves its territory and moves to an area under the jurisdiction of another caisse, he may purchase the same number of shares in this caisse without again paying the 4 /2% in question. These shares are not transferable without the consent of the Board of Directors of the Caisse and are not negotiable. In the event of death the amount paid by the member for his shares is reimbursable to his heirs. There is no income guaranteed to the member but the amount of interest payable on the shares out of the revenue has in fact always exceeded 10% per annum.

As Thorson, P of the former Exchequer Court said in G K Daley v MNR, [1950] CTC 254; 50 DTC 877, where he altered somewhat his earlier interpretation of the Act as set out in Imperial Oil v MNR, [1947] CTC 353; 3 DTC 1090, paragraphs 6(a) and 6(b) of the 1927 Act RSC 1927, c 97 (now paragraphs 18(1 a)(a) and 18(1 )(b) of the present Act) are sections worded in a negative or prohibitory manner, and the fact that deduction of an amount from income is not prohibited under these sections does not in itself mean that it can be deducted for tax purposes. Although the wording of paragraphs 18(1)(a) and 18(1)(b) is not identical to that of paragraphs 6(a) and 6(b) of the 1927 Act, I am of the opinion that a taxpayer can now deduct an amount from income only on two conditions: first, that it would be normal practice according to generally accepted accounting principles to deduct this sum from an income account, and secondly, that the prohibitory provisions of subsection 18(1) do not prevent such a deduction.

It is recognized that the burden of proof is always on the taxpayer (in this case the defendant) when an assessment for tax purposes is being challenged. I find that on the evidence presented, the defendant has not discharged this burden, since he has not established that the outlay was of the type which, according to generally accepted accounting principles, would be chargeable to income account, and in particular, that it would be chargeable to this account as an expenditure attributable to income for 1972.

In case this first finding should be incorrect or erroneous, it might be useful to consider the scope of the prohibitory provisions of section 18 having regard to the particular circumstances of this case. The two main prohibitions in this section may be summarized as follows: an outlay is not deductible from income for tax purposes (1) when it is not for the purpose of gaining income (paragraph 18(1)(a)), or (2) when it represents a payment of capital nature (paragraph 18(1 )(b)).

I will pass over the first of these two propositions for the moment, and consider only the second, namely a payment on account of capital. Fauteux, CJ, formerly of the Supreme. Court of Canada, stated in MNR v Algoma Central Railway, [1968] SCR 447; [1968] CTC 161; 68 DTC 6154, that it was not possible to resolve the issue of whether the expressions . . outlay . . . of capital or payment on account of capital . . .” applied simply by using a formula or rule of interpretation: it could only be resolved by considering the particular circumstances and facts of each case.

It seems clear that a particular sum may be deductible against the income of the person who paid it out while being attributable as capital to the person to whom the payment was made. The converse is also true.

In the case at bar, despite the fact that 40% of the membership fees (that is, 2% of the amount paid for the shares) is paid into the general. revenue fund of the Caisse, the defendant has no right to claim in kind or otherwise reimbursement of any part of this sum. He has no enforceable right to any specific part of the latter.. It is the Caisse, at a general meeting of the members, which alone determines annually the amount of interest on the shares’to be paid to the members out of all the revenues of the Caisse. It thus follows that, contrary to the allegations of counsel for the defendant, what the Caisse d’entraide does with this sum is really of no help in determining whether the payment by the defendant of membership fees is attributable to capital or to income in calculating the latter’s fiscal operations.

One of the principal characteristics of receipts or outlays on capital account is that, generally speaking, they are of a more or less permanent nature, whereas income accounts represent receipts and disbursements of a more or less transitory and periodic nature. Capital receipts and outlays on the other hand, generally speaking, all possess an existence, an effect or a scope that, if not permanent, is at least . of long duration. Income accounts, on the other hand, represent receipts

and outlays with an existence, effect or scope that is more or less transitory and periodic. It is not necessary that the capital asset be capable of either depreciating or increasing in value, nor is it essential that one be able to dispose of it for value, despite the fact that one or other of these characteristics is usually found in a capital asset.

What the shareholder gains by paying the 4 Z?% to the Caisse d’entraide is the benefit of investing his capital and deriving an income from it for a good number of years. It would not make any sense for him to pay 4 /2% for the privilege of drawing only one year’s gross interest of approximately 10%. Therefore, it would equally not make sense to enter it on the books as an expenditure against the income of only one year. The expense cannot be considered to be attributable against the income of any one year in particular, since the 4 /2% can be used for the rest of the member’s life and for as long as he wishes to leave his capital invested in the Caisse. As the members of the Privy Council stated in BP Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia, [1966] AC 224:at 252, in citing with approval Lord Reid’s judgment in Hinto v Maden & Ireland Ltd, [1959] 1 WLR 875:

. . . that . . . expenses which relate to the earnings of the year are revenue outgoings but that expenses which produce assets which survive beyond the year are capital expenses because the assets must: show in the balance sheet as capital assets. The rights in the present case were for three years or more, mostly five years or more, and accordingly the value of the ties should apear in the. balance sheet as capital assets at the end of the accounting period; . . .

[The italics are mine.]

The 4V2% outlay in the case at bar could never be a periodic payment or one that was likely to be repeated periodically. On the contrary, it was clearly stipulated that the defendant would never have to repeat it as long as he maintained his investment in the Caisse de Grand’Mère. Even if he were to move he could reinvest this money in another Caisse d’entraide with territorial jurisdiction over his new place of residence. He could then purchase the same number of shares without paying further membership fees.

In the case at bar, as moreover, in many similar cases, it seems evident that the outlay in question was made by the taxpayer for the purpose of gaining or producing income, but the deduction must nevertheless be refused since this can only be considered to be an outlay on account of capital or of a capital nature in view of its scope and its permanent as opposed to periodic effect, and in view of the fact that it cannot logically be attributed or charged to a definite accounting period.

Since in the case at Bar the membership fees have all these characteristics and fall under the prohibition in paragraph 18(1)(b), it is not necessary for me to consider the effect of paragraph 18(1 )(a).

The appeal is therefore allowed. The decision of the Tax Review Board is reversed and the defendant’s assessment by the Minister of National Revenue in the amount of $90 for the membership fees in question for the 1972 taxation year is restored.

The plaintiff will be entitled to her costs.