Tobias v. The Queen, 78 DTC 6028, [1978] CTC 113 (FCTD)

Cattanach, J:—These appeals by the plaintiff from the assessments by the Minister of National Revenue for the plaintiff’s 1969 and 1970 taxation years, arise from the plaintiff’s search for pirate treasure rumoured to have been buried on Oak Island off the shore of Nova Scotia but, because of the course which the hearing of these appeals took, the romantic aspect of the appeals, reminiscent of Robert Louis Stevenson’s Treasure Island, became subservient and secondary to the more mundane consideration of what assumptions the Minister made in assessing the plaintiff as he did and the legal consequences which follow upon the determination of the exact assumptions so made.

To appreciate the consequences so involved it is expedient to reproduce the pertinent allegations in the statement of claim and the statement of defence.

In the statement of claim the plaintiff alleges the following facts:

1. In or about 1962, the Plaintiff entered into an agreement with the owner of the real property known as Oak Island in the Province of Nova Scotia whereby he obtained the right to explore for and take any valuables which he was able to locate. During subsequent years, including the 1969 and 1970 taxation years, this agreement was extended and modified.

2. During the period from 1962 to about April 1969 inclusive, the Plaintiff carried on, as a business venture, a program of exploration whereby he actively explored for, dug for and drilled for, buried treasure on Oak Island.

3. During the period from 1962 to 1 April 1969, the Plaintiff expended. the following sums in furtherance of the business of exploration carried out by him:

1962	$ 6,500.00
1963	1,122.09
1964	908.96
1965	6,257.07
1966	19,811.09
1967	60,795.80
1968	6,953.95
1969	2,862.05
1970	1,208.60
	$106,019.61

4. On or about 1 April 1969, the Plaintiff relinquished all right, title and interest granted to him pursuant to the agreement or agreements referred to in paragraph one and in the course of relinquishing these rights he terminated the business venture in question.

5. The Plaintiff has claimed that, in computing his income for the 1969 taxation year, he is entitled to deduct the aggregate of $106,019.61 being comprised of expenses incurred by him during the period from 1962 to on or about 1 April 1969 inclusive, in the course of carrying on the business.

6. By notices of assessment, the Minister of National Revenue allowed the deduction of the amounts of $2,862.05 and $1,208.60 for each of the 1969 and 1970 taxation years respectively. The Minister of National Revenue has refused to allow the Plaintiff to deduct expenses incurred by him with respect to the Oak Island project in excess of the amounts of $2,862.05 and $1,208.60.

7. The assessments for the 1969 and 1970 taxation. years were confirmed by the Minister of National Revenue on 14 June 1974.

At the advent of the trial, counsel for the plaintiff moved to amend the total of the sums alleged to have been expended by him in the furtherance of the search for buried treasure in paragraph 3 and in paragraph 5 from $106,019.61 to $105,598 which amendment was consented to by counsel for the defendant.

This represents a difference of $421.61 and this amount was deducted from the amount alleged to have been expended by the plaintiff in the year 1967 and accordingly that figure of $60,795.80 for that year in paragraph 3 was amended to read $60,374.19. Being in a year antecedent to the years 1969 and 1970, this amendment has no effect on the deductions allowed by the Minister as. recited in paragraph 6.

In the statement of defence the defendant unqualifiedly admits paragraphs 6 and 7 of the statement of claim.

With respect to paragraph 1 of the statement of claim it is admitted that the plaintiff obtained from the owner of Oak Island the right to explore for and take any valuables he was able to locate therein, but otherwise the defendant does not admit the allegations in paragraph 1.

The balance of the allegations in the statement of defence with respect to the allegations in paragraphs 2 to 5 of the statement of claim, are replied to as outlined in paragraphs 4 to 10 which read:

4. He admits that from the period from 1962 to about April, 1969, the Plaintiff actively explored for, dug for. and drilled for, buried treasure on Oak Island, and otherwise he does not admit paragraph 2 thereof, and says that in doing so, the Plaintiff was never carrying on or carrying out any business or activity in the nature of a business, was at all times engaged in a mere hobby, pastime or infatuation.

5. He denies that the expenses referred to in paragraph 3 of the Statement of Claim, other than the sum of $2862.05 incurred in 1969, and $1,208.60 incurred in 1970, were ever incurred by the Plaintiff.

6. In the alternative, if the expenses, other than the sum of $2,862.05 incurred in 1969, and $1,208.60 incurred in 1970, were expenses which had been made or incurred .by the Plaintiff, which is not admitted or denied, then he says that at all material times the endeavours carried out by the Plaintiff in respect of which the balance of the expenses were incurred, were in respect of a mere hobby, pastime or infatuation.

7. In the further alternative, the expenses, other than the sums of $2.862.05 incurred in 1969 and $1,208.60 incurred in 1970, were outlays on account of capital.

8. In the further alternative, the deduction, in computing the Plaintiff’s income for 1969 and 1970, of any portion of the expenses, other than the sum of $2.862.05 incurred in 1969 and $1,208.60 incurred in 1970, would not be reasonable in the circumstances.

9. In the further alternative. the expenses, other than the sum of $2.862.05 incurred in 1969 and $1,208.60 incurred in 1970, were expenses which, in accordance with normal commercial and accountancy practice, had to be deducted in the year in which they were incurred, and in computing the Plaintiff's income for 1969 and 1970, there cannot be deducted the expenses incurred in prior years.

10. He denies paragraph 4 of the Statement of Claim and says that on the 1st of April, 1969, the Plaintiff assigned all his rights in Oak Island to Triton Alliance Ltd., in consideration of receiving therefrom, shares of the company, which thereafter pursued as agent for the Plaintiff the hobby, pastime or infatuation of exploring for valuables.

In reply to the statement of defence the plaintiff joins issue with the allegations in paragraph 4 of the statement of defence that the plaintiff was not carrying on business.

The plaintiff joins issue with the defendant that the. expenses alleged to have been incurred, with the exception of those for the years 1969 and 1970, were not incurred and the plaintiff joins issue with the defendant on the allegations in paragraphs 4 to 10 of the statement of defence.

As I appreciate the allegations in the statement of defence, they raise the following issues:

(1) that the plaintiff in searching for treasure was not carrying on a business or a venture in the nature of trade, but was merely engaged in a hobby;

(2) that the plaintiff did not expend an amount of $101,518.35 in his search for buried treasure (I reach the amount of $101,518.35 by deducting from the total amount of $105,589 alleged in paragraph 3 of the statement of claim, as amended, the total of the amounts of $2,862.05 and $1,208.60 admitted to have been incurred in the years 1969 and 1970 respectively) thereby putting the plaintiff to the proof. thereof;

(3) alternatively, that if these expenses were incurred, excepting the expenses incurred in 1969 and 1970, they were incurred in respect of a hobby which appears to me-to be a repetition of the prior allegation that the plaintiff was not engaged in a business or venture in the nature of trade but in a hobby but only expressed differently;

(4) alternatively, that the expenses, excepting the sums laid out in 1969 and 1970, were not incurred for the purpose of gaining or producing income from a business but were outlays on account of capital (parenthetically I cannot refrain from pointing out that I can see no difference between the amounts laid out in 1969 and 1970 and the amounts laid out in the prior years other than that the amounts in these last two years were allowed by the Minister as deductions in computing the plaintiff’s income);

(5) alternatively, that the deduction of the total amounts of $101,518.35 in the years other than those in 1969 and 1970 were not reasonable;

(6) alternatively, that the expenses, other than those in 1969 and 1970, were expenses which, in accordance with the normal commercial and accounting practice, should have been deducted in the years in which they were incurred and cannot be deducted in 1969 and 1970;

(7) lastly, that plaintiff did not abandon the project on April 1, 1969 but rather arranged that the project again categorized as a hobby, should be carried on by a corporate entity in which the plaintiff held shares as agent for himself.

In R W S Johnston v MNR, [1948] SCR 486; [1948] CTC 195; 3 DTC 1182, Rand, J delivering the judgment of the majority said at page 489 [202]:

Every such fact found or assumed by the assessor or the Minister must then be accepted as it was dealt with by these persons unless questioned by the appellant. If the taxpayer here intended to contest the fact that he supported his wife within the meaning of the Rules mentioned he should have raised that issue in his pleading, and the burden would have rested on him as on any appellant to show that the conclusion below was not warranted. For that purpose he might bring evidence before the Court notwithstanding that it had not been placed before the assessor or the Minister, but the onus was his to demolish the basic fact on which the taxation rested.

In MNR v Pillsbury Holdings Limited, [1965] 1 Ex CR 676; [1964] CTC 294; 64 DTC 5184, in which the Minister by section 6 of his. notice of appeal specifically set forth the assumptions on which the assessments appealed from were based, this was said at page 686 [302, 5188]:

The relevance of this pleading appears from the decision of the Supreme Court of Canada in Johnston v MNR, [1948] SCR 486; [1948] CTC 195, per Rand, J, delivering the judgment of the majority, at pp 489, 202:

“Every such fact found or assumed by the assessor or the Minister must then be accepted as it was dealt with by these persons unless questioned by the appellant.’’

(For the word “appellant” in that quotation, may be substituted “respondent” for the purpose of this appeal.) The respondent could have met the Minister’s pleading that, in assessing the respondent, he assumed the facts set. out in paragraph 6 of the Notice of Appeal by:

(a) challenging the Minister’s allegation that he did assume those facts,

(b) assuming the, onus of showing that one or more of the assumptions was wrong, Or,

(c) contending that, even if the assumptions were justified, they do not of themselves support the assessment.

(The Minister could, of course, as an alternative to relying on the facts he found or assumed in assessing the respondent, have alleged by his Notice of Appeal further or other facts that would support or help in supporting the assessment. If he had alleged such further or other facts, the onus would presumably have been on him to establish them. In any event the Minister did not choose such alternative in this case and relied on the facts that he had assumed at the time of the assessment.)

In the remarks enclosed in parentheses as above quoted, it was said that if the Minister had alleged further or other facts not specifically alleged as facts found or assumed by him, then “the onus would presumably have been on him to establish them”.

The seed of the thought expressed in the words quoted immediately above was brought to fruit by Gibson, J in Brewster v The Queen, [1976] CTC 107; 76 DTC 6046, when he said at page 111 [6049]:

Pleading assumptions in the alternate is novel in view of the state of the law. In law the onus is on the taxpayer to destroy some or all of the assumptions. But it is open to the defendant to plead other facts not relied in making the assessments or reassessments, but in that event, the onus is on the Minister of National Revenue to prove such other facts.

(It seems therefore that it is fundamentally wrong in law to plead assumptions in the alternative. In like manner, it is fundamentally wrong in law for any assessors of the Minister of National Revenue to assess or reassess and not tell precisely the basis for such assessment or reassessment, but instead as certain assessors often do, namely, assess or reassess in the alternative, or merely record the basis as contrary to the Income Tax Act, on the premise that thereby they are “keeping their options open’’, and that they are entitled in law to do so.)

It is abundantly clear from the foregoing extract, and it cannot possibly be otherwise, that an assessor in order to make an assessment of a taxpayer’s income and liability to tax thereon ‘and the amount thereof must make certain assumptions of fact.

Because the statement of defence herein does not contain specific allegations setting forth the assumptions on which the assessments appealed from were based, as has been customary in numerous other pleadings and as was done in the proceedings in the Pillsbury Holdings case and in the Brewster case, the question then arose as to what assumptions were made by the assessors in the present appeals. The plaintiff is entitled to know what those assumptions were and if the plaintiff is entitled to dispute that assumptions alleged to be made were in fact made, as stated in the Pillsbury Holdings case, it follows that in the absence of specific allegations in the pleadings as to what assumptions were made by the assessors then the plaintiff is entitled: to establish what assumptions were made. Counsel for the plaintiff was at a disadvantage in proving what assumptions were made by the assessors because the two assessors responsible for the assessments had long since left the employ of the Department of National Revenue and counsel for the Minister was unaware of their whereabouts so that they were not available for examination for discovery nor to subpoena.

Accordingly, counsel for the plaintiff tendered oral and documentary evidence to this end which I permitted to be adduced.

The first two documents brought to my attention were the notices of reassessment of the plaintiff for his 1969 and 19/70 taxation years both dated February 15, 1974, in which losses sustained ‘Re: Oak Island’’ in the amounts of $2,862.05 and $1,208.60 in the respective years were allowed as deductible expenses which were forwarded, with other material, to the Registry of the Federal Court of Canada following on the appeals against the assessments as is required by section 176 of the present Income Tax Act, formerly subsections 100(1) and (2) of the Income Tax Act, RSC 1952, c 148 as amended.

This is consistent with the allegations contained in paragraph 6 of the statement of claim and with the allegations contained in para graphs 5, 6, 7, 8 and 9 of the statement of defence in which these two amounts are the subject of exempting language.

Of course the plaintiff in his income tax returns had claimed as deductible in these two years the total of the expenses incurred over the years 1962 to 1970 in the amount of $106,019.61 as alleged in paragraphs 3 and 5 of the statement of claim which was amended to read $105,598.

Upon receipt of the notice of reassessment, the plaintiff consulted with the chartered accountant who had prepared his income tax returns.

The accountant, Mr Steven A Yaphe, wrote a letter dated February 22, 1973 to the. Department of National Revenue, to the assessor responsible for the reassessment of the plaintiff, which letter is in the nature of a notice of objection and I reproduce the body of that letter (Exhibit P1) in full:

Thank you for the opportunity of allowing us to make further representations for inclusion in your brief to be sent to Head Office for evaluation.

In our opinion the issue in question is clearly one of principle. A grave . injustice would be done if the expenses incurred on the Oak Island project

were treated as on account of capital and not as an Outlay for gaining income from an adventure in the nature of trade.

Whether a project was engaged in for profit should be made by reference to objective standards, taking'into account all of the facts and circumstances of each case. Although a reasonable expectation of profit is not required the facts and circumstances should indicate that the taxpayer entered into the activity, or continued the activity, with the objective of making a profit. Although it may be argued that the expectation of profit was not that great it cannot be denied that there was, in fact, a distinct chance of actually making a large profit.

The venture in question was never for the purpose of deriving income from an investment but was clearly undertaken with the intention of realizing: a profit on the sale of the treasure. The venture was always a speculation. If income had resulted from the project it would clearly have been taxable. The motive was always one of profit and, accordingly, because the venture was actively and not casually pursued any profit could not possibly have been considered as a windfall gain.

An analogy may be drawn to the case of an investor in a wildcat oil well who incurs very substantial expenditures in his quest for oil. I don’t think it can be disputed that he is in the venture for anything else but profit, even though the expectation of a profit might be considered unreasonable.

It is a recognized fact in taxation law that the opportunity to earn a substantial ultimate profit. in a highly speculative venture is ordinarily sufficient to indicate that the activity is engaged in for profit even though losses or only occasional small profits are actually generated.

Business is defined to include ‘‘an adventure or concern in the nature of. trade’. Even though the transaction may be a single isolated, venture entirely unconnected with the taxpayer’s occupation, it is, by virtue of the definition of business, a business. In fact, the Oak Island project has been recognized by the Internal Revenue Service of the United States of America as a business. The individual who carried on the project prior to David Tobias was allowed a deduction as an ordinary business loss in calculating his income.

The manner in which the project was carried on is also significant. At all times the activities were carried on in a businesslike manner. Plans were drawn up, meetings were held, professional consultants engaged and new techniques developed in a manner consistent with an interest to improve profitability. Engineering firms were engaged and drilling equipment leased for the operations. Drilling crews were hired and the exploration was carried out in conformity with a sophisticated set of plans.

The venture was not one of a limited period of time. In fact, it covered a period starting in 1962 and ending in 1969. At all times the taxpayer was involved in an active capacity and not as a mere investor. As a matter of fact, he spent long periods of time at the drilling site. In addition, competent and qualified persons were engaged to assist in carrying on the activity.

It should also be pointed out that there was no element of personal pleasure or recreation in the Oak Island project. The activity clearly lacked any appeal other than profit.

For all of the above noted reasons as well as many that have not been enumerated it is our opinion that the Oak Island project is most clearly an adventure in the nature of trade. If a profit had been obtained, it would have been taxable. If Mr Tobias had been walking down the beach and stumbled upon a half-buried treasure chest the gain on the sale of the treasure would most likely have been considered as a windfall gain. But where the search involves such a vast amount of activity and covered such a lengthy period of time it is virtually impossible to visualize any potential profit as creating anything other than taxable income.

As a point of fact, Mr Tobias and his previous accountant Mr H Wetstein, who has since retired from active practice, did consult the Department of National Revenue in 1964 and 1965 and were informed that the project would be considered as an “adventure in the nature of trade’’ but that no losses could be claimed until the project was concluded.

In the Minister of National Revenue v Henry J Freud decided before the Supreme Court of Canada on October 1, 1968 the Court said in part . . . “such being the principles to be applied in cases when a profit is obtained, the same rules must be followed when a loss is ’suffered. Fairness to the taxpayer requires us to be very careful to avoid allowing profits: to be taxed as income but losses treated as on account of capital and therefore not deductible from income when the situation is essentially the same.” Since the Oak Island project clearly appears to be an adventure in the nature of trade the loss incurred on the venture should: properly be allowed as a business loss deductible from income in 1969, the year in which the project was abandoned.

Until April 1, 1969 David Tobias clearly had every right to receive any income that may have resulted from the project by virtue of the license he possessed to. search for buried treasure. On April 1, 1969 Triton Alliance Ltd was duly incorporated by Letters Patent under Part I of the Canada Corporations Act. Mr Tobias had been forced to abandon the venture because he no longer had the available funds with which to pursue the project and his license had expired.

Triton Alliance Ltd was successful in interesting various people in commencing a search for buried treasure on Oak Island and such search was eventually commenced in 1969. David Tobias has a 17.3% interest in this Company. As Mr Tobias’ personal involvement in the project ceased on March 31, 1969 we feel it is unreasonable to infer that the project was not abandoned on that date.

It is difficult to cover all of the relevant facts in correspondence of this nature and we would welcome the opportunity of meeting with the individuals concerned to review this matter further.

That letter raises six points which I summarize as follows:

(1) that the search for buried treasure on Oak Island was a commercial enterprise the activities of which were carried on in a businesslike manner in accordance with preconceived plans with sophisticated modern equipment;

(2) that sums expended from 1962 to 1969 were not capital outlays but expenses laid out for the purpose of earning income from a business of the plaintiff;

(3) that there was a reasonable expectation of profit;

(4) that the project was carried on for profit with no element of personal pleasure and recreation;

(5) that the project was abandoned by the plaintiff on April 1, 1969;

and

(6) that, according to established proper accountancy and commercial principles, the expenditures incurred over a period of time, those expenditures should be charged, either in whole or in part, in the year in which income was derived from the project or in the year in which the project was abandoned by the plaintiff.

The Department responded to Mr Yaphe’s letter dated February 22, 1973 (Exhibit P1) by letter dated December 6, 1973 (Exhibit P2) signed by A Leduc, for Chief of Audit, and the reference mentions M Morel. Mr Leduc and Mr Morel were the assessors who reassessed the plaintiff and both of whom have now retired and were unavailable for examination for discovery and I take it that there were continuing discussions between. them and Mr Yaphe during the period between February 22, 1973 and December 6, 1973, culminating in the letter dated December 6, 1973 (Exhibit P2). The body of that letter reads:

As requested by you in our telephone conversation of November 29, we are giving you a resume of the decision reached by our Rulings Division, Legislation Branch.

1. The project is one of a commercial nature.

2. The expenses are deductible as they are incurred.

According to the above, your 1969 to 1970 income tax returns will be re-assessed to allow you the expenses paid in 1969—$2,862.05 and in 1970—$1,208.60. As the years prior to 1969 are statute-barred, no re-assessment can be made.

By notification by tne Minister dated June 14, 1974 the plaintiff was advised as follows:

WHEREAS the taxpayer was assessed for income tax by Notice of Assessment in respect of the taxation years ended December 31, 1969 and 1970.

AND WHEREAS by Notices of Objection the taxpayer has objected to the assessed tax for the reasons therein set forth,

The Honourable the. Minister of National Revenue having reconsidered the assessments and having considered the facts and reasons set forth in the Notices of Objection hereby confirms the said assessments as having been made in accordance with the provisions of the Act and in particular on the ground that as the law was in force during the years under objection, the taxpayer’s income has been properly determined under sections 3 and 4 of the Act; and expenses of prior years are not deductible in determining the income of the 1969 and 1970 taxation years.

In addition to Mr Yaphe’s letter dated February 22, 1973 (Exhibit P1) the plaintiff’s solicitor also filed a notice of objection, which is basically similar to the statement of claim, and which was included in the material forwarded to the Registry of the Federal Court in accordance with subsections 100(1) and (2) of the Action the assessments being appealed. This, no doubt, accounts for the use of “Notices of Objection’’ in the plural.

Mr Yaphe’s letter dated February 22, 1973 and the reply thereto dated December 6, 1973 were not included in the material sent up by the Department but were introduced in evidence by Mr Yaphe.

With his letter of February 22, 1973, the reply of the Department dated. December 6, 1973 and the notification by the Minister dated June 14, 1974 before him, Mr Yaphe testified as follows:

It is my understanding that the Minister had considered all of the issues that I had raised before and that with the exception of the issue of the generally accepted accounting principles that the Department was satisfied with the proof of the expenses, with the fact that the whole project was not of a personal nature, that the expenses were not of a capital nature, that the expenses were reasonable and that the project was a commercial venture; namely, either a business or a venture in the nature of trade.

I am in complete agreement with Mr Yaphes interpretation. The positive assumptions made by the assessors were twofold:

(1) the project was one of a commercial nature, and

(2) the expenses are deductible in the year they are incurred.

By necessary implication, since no mention is made of the other four points raised by Mr Yaphe in his letter dated February 22, 1973 (Exhibit P1), and by reason of their assumption that the project was a commercial one, the assessors must have found, (1) the sums alleged to have been paid out by the plaintiff from 1962 to 1970 were in fact paid out, and were so laid out for the purpose of gaining income from a business of the plaintiff, (2) that the project was not a hobby or personal living expense, and (3) that the project was abandoned by the plaintiff on April 1, 1969.

The sole matter in dispute between the plaintiff and the assessors, predicated upon their twofold assumptions, is that the plaintiff contends that according to proper and accepted accounting and commercial principles the expenses incurred over a period of time are deductible in the taxation year in which the plaintiff abandoned the project whereas the assessors’ position is that the expenses, other than those incurred in 1969 and 1970 which were allowed as deductions in accordance with normal commercial and accountancy prac- tice, were current expenses which must be deducted in the year in which they were incurred. This issue, arising from the assumptions of fact made by the assessors and adopted by the Minister, is perpetuated in paragraphs 9 and 17 of the statement of defence.

Assuming that there is no express section of the Income Tax Act to the contrary, the issue, as I see it to this point, is whether the established accountancy principles require that the expenses must be deducted in the year in which the project was abandoned, that is the principle of matching costs and revenues to determine the profit or loss, or if those accounting principles require that expenses of the nature here incurred must be deducted in the year they were incurred.

Those were the conflicting positions taken by the Minister and his assessors and the plaintiff which culminated in the reassessment of the plaintiff based on the assumption that proper accounting principles require that the expenses incurred by the plaintiff must be deducted in the year in which they were incurred.

However the Minister, as alternative to relying on the assumptions he made in assessing the plaintiff as he did, alleged by his statement of defence other facts in support of the assessments. This the Minister is entitled to do but having done so it follows that the onus of establishing those further and different facts assumed by him in the statement of defence falls on the Minister by reason of the decision in the Brewster case (Supra).

The onus of establishing that, in accordance with proper accountancy and commercial principles, the expenses incurred by the plaintiff from 1962 to 1970 are deductible in the year that the plaintiff abandoned the project, remains on the plaintiff in accordance with the decision in Johnston v MNR (supra).

Those other facts alleged in the statement of defence alternative to the assumptions made on reassessment relied on by the Minister and upon whom the onus falls to establish them, I have summarized above but I repeat them here for emphasis.

They are, (1) that the project of the plaintiff was not a venture in the nature of trade or a commercial venture; (2) that the expenses laid out by the plaintiff were not laid out for the purpose of earning income from a business or property, (3) that they were outlays on account of capital, (4) that the project of the plaintiff was a hobby,

(5) that the funds were not expended by the plaintiff, (6) that the Outlays were not reasonable, and (7) that the project was not abandoned by the plaintiff.

The first four of such alternative allegations by the Minister are susceptible of being considered together since they all flow from the same basic assumption; that the project was not a commercial venture or business within the meaning of sections 3 and 4 of the Income Tax Act and the extended meaning of “business” as defined in paragraph 139(1)(e) to include an adventure or concern in the nature of trade. If the plaintiff’s project should be found to have been a business then it would appear to follow that the expenditures were laid out for the purpose of gaining or producing income from that business in accordance with the exception in paragraph 12(1)(a) and, in that circumstance, would not be prohibited as deductions by paragraph 12(1)(b) and such a finding would negate the allegations by the Minister that the project was merely a personal hobby indulged in by the plaintiff.

Therefore turning to the allegations which are not susceptible of being considered together the first of which is that the plaintiff did not expend the amount of $105,598. it must be borne in mind that the assessors assumed that he had and must be taken to have accepted the total as accurate and it was not disputed by them. That being so the onus is on the Minister to establish to the contrary. The only evidence (other than a reference to a summary of the expenses- which coincides with the allegations in paragraph 3 of the statement of claim, in an affidavit of an expert witness produced by the Minister) was an extract from the examination of discovery of the plaintiff read in which was to the effect that supporting vouchers had been produced to the Department. No satisfactory evidence was adduced that the vouchers were not adequate to support the purpose for which they had been produced. The Minister has, therefore, failed to discharge the onus cast upon him in this respect.

The next allegation made by the Minister in support of the assessments is that the expenses laid out by the plaintiff were not reasonable in the circumstances and no deduction may be made therefor by virtue of subsection 12(2) of the Income Tax Act.

As I appreciated the submissions of counsel for the Minister in this respect they were that the plaintiff had no expertise in this or any related field and that he had not conducted adequate prior research into the possibility of pirate gold being buried on Oak Island from which it would follow that the prospect of discovering any treasure was extremely remote.

The plaintiff’s interest in Oak Island was inspired by a visit he made to that island during the latter part of the war when he was stationed in the Maritimes. At that time he met an American who became a full-time resident of the island engaged in exploratory work in which the plaintiff became extremely interested and that interest persevered until later years.

In 1961 the plaintiff read an article about the efforts of Mr Restall and his family who were resident on Oak Island exploring the site in the hope of finding something of extreme value.

From the plaintiff’s reading of historical material and other such literature he was well aware that immediately prior to 1700 piracy had been rampant particularly in the Caribbean and elsewhere as well, under the guise of privateers who were not overly careful about restricting their enterprise to enemy vessels as required by their commissions and were not adverse to turning to pure piracy by preying upon any merchant vessels carrying valuable cargoes when privateering was not too profitable due to a lack of prizes.

When peace came about in 1706 the warring nations of France, Spain and England agreed to stamp out privateering and its piracy sideline. It was a term of the Treaty of Paris that the nations whose nationals had turned to piracy be required to surrender themselves and the plunder they had accumulated in exchange for a pardon. If they did not and were captured they would be executed. The pirates, being capacious persons but at the same time sensible enough to realize that their piratical ventures were doomed to end by force of changed circumstances and their lives might also come to an abrupt end on a gibbet if they did not conform, worked out a compromise. They abandoned the holiday climate of the Caribbean which for other reasons had become too hot for them but they would take the greater portion of their accumulated plunder and secrete it along the less temperate coast of North America. Having done this they would then deliver up a much lesser portion of their treasure to obtain their promised pardons. Once secure with their pardons they then planned to dig up their buried treasure and spend the rest of their lives in comfort. Many did not make it back. Their violent lives led to their violent deaths at the hands of their crews who had a share in the treasure not delivered up and some were hanged anyway, including Captain Kidd.

These were all historical facts known to the plaintiff who was also aware of numerous expeditions undertaken over the past 200 years to find buried treasure and their successes and failures.

One such expedition was reputed to have found evidence of buried treasure on Oak Island in 1795 and it was believed that anything of value would be located on the main area deposited in some ingenious manner so as to be protected by water to impede discovery by the uninitiated or by chance.

To embark upon a search for buried treasure a person needs only to have a reasonable expectation that it is likely to be in a certain area. That knowledge can be gleaned from historical fact such as a Spanish galleon with a cargo of Inca gold which never made it back to Spain, its usual course, the perils of the sea it was likely to encounter on that course and that would determine when the vessel came to grief, as the area in which to concentrate a search.

There are numerous examples of recoveries being made, the most recent one which comes to mind is when sea divers located the wreck of the French man-of-war “Le Chameau”, which sank in 1725 approximately 12 miles from Louisburg, Nova Scotia, laden with pay for the garrison. This led to the recovery of artifacts which were turned over to public authorities for historical and archaeological purposes and gold and silver coins which were sold by the discoverers for $280,000. The gain realized was the subject of litigation before the Tax Review Board in MacEachern v MNR, [1977] CTC 2139; 77 DTC 94.

The appellant enjoyed sea diving but in partnership with two other sea divers engaged in the search for and recovery of the cargo of “Le Chameau’’ after her discovery. The gain on the recovery and sale of the gold and silver was treated as income by the Minister on the basis that at all times the appellant and his partners intended to sell for profit anything of: value that was recovered. The appellant contended that sea diving was his hobby and the gain .was capital in nature.

The Board found that while sea diving may have been the appellant’s hobby it was a hobby with a potential for substantial profit and this together with other characteristics akin to a business led to the conclusion that the gain was taxable.

This leads me to the conviction that if the plaintiff’s project had been crowned with success the positions of the respective parties to this litigation would have been exactly the reverse to the positions taken here.

By virtue of subsection 12(2) whether an expense is reasonable depends on the surrounding circumstances. In the present appeals the plaintiff had assured himself to his satisfaction that there was a distinct possibility that treasure might be found, despite the failure of his predecessors, by the use of more modern methods and equipment. Regardless of the high degree of uncertainty as to the success of the project the prospect of the very substantial reward would compensate the plaintiff for the time, money and risk involved.

This is not unusual or peculiar to the plaintiff. Daily investors are persuaded to spend their money on projects where it is not known if there will be any future return but they are willing to do so in the belief that the substantial rewards in the event of success will compensate them for the uncertainty involved. I have in mind investors in penny mining stocks and prospectors and their grubstakers who spend a lifetime searching for the rich vein they may never find.

Neither do I think that, because the plaintiff is not possessed of a degree in mining engineering, geophysics or is an archaeologist, he is disqualified from searching for buried treasure nor that such lack of professional qualifications renders expenditures made by him to that end unreasonable.

He is not searching for minerals, petroleum and like treasures buried in the earth by nature. He is searching for treasure secreted by human ingenuity and to find the likely hiding. place does not require the professional attributes of a mining engineer. Rather it requires a common-sense knowledge of the human element supplemented by the business acumen of hiring qualified persons to operate equipment or a handyman’s ability to operate that equipment. These qualifications the plaintiff appears to have possessed.

Jim Hawkins, the tavern keeper’s son in Treasure Island, was not possessed of professional qualifications but he did have the deceased Captain’s map of the buried treasure. The country squire, whose assistance Jim Hawkins sought and obtained, had the necessary business acumen and finances to charter the “Hispanola” and hire the crew but not sufficient acumen to avoid including in that crew former members of the Captain’s crew who felt they owned a share of the treasure and, led by Long John Silver, mutinied to secure their full shares or more. The squire, as did the plaintiff, also had the conviction that the treasure could be found and that it would be substantial.

For the foregoing reasons there were, in my judgment, circumstances present which made the plaintiff’s expenditures reasonable.

The Minister also relied upon the assumption that the project had not been abandoned on April 1, 1969 by the plaintiff.

If my recollection of the evidence is correct, some time about 1966 Mr Restall was killed in an accident and from that time forward the plaintiff carried on the project on his own. I think that it was in 1966 that Mr Restall died because in 1966 and 1967 particularly, there was a marked increase in expenditures. This I think was attributable to the rental and operation of a new type of drill which the plaintiff considered most advantageous in furthering the search.

However in 1968 and 1969 the plaintiff, having spent much more money than he had anticipated, was no longer able to carry on from his personal resources.

A further infusion of finances was necessary so on April 1, 1969 a company, under the name of Triton Alliance Limited, was incorporated to continue the search.

The plaintiff acquired 900 of the common shares of the company at a price of $1 per share and his wife purchased 300 shares at the same price. This shareholding represented a total 14% of the entire issued capital stock of the company. However the plaintiff acquired $100,000 debentures issued by the company secured by a first charge on its assets. The plaintiff was the sole debenture holder.

It is not clear from the evidence whether the consideration for the debenture was $100,000 which the plaintiff had expended and would constitute an asset of the company or a cash advance of $100,000. As I read the evidence the latter appears the more likely but in either event there is no material difference, in my view, because the $100,000 was a loan by the plaintiff to the company. That is what a debenture is security for and it bestows no ownership in the equity of the company.

In essence the submission on behalf of the Minister in this respect is as set forth in paragraph 10 of the statement of defence which is to the effect that the plaintiff assigned his rights in the Oak Island project to Triton Alliance Limited, in consideration for shares received and thereafter the company pursued for the plaintiff as his agent the hobby, pastime or infatuation of exploring for valuables.

In my view this submission is untenable. In the first place the plaintiff did not assign his rights in the project to the company in exchange for shares of the company. As I read the evidence, adduced by the Minister, which was a reading in of the examination for discovery of the plaintiff, the plaintiff paid for the shares he acquired in the amount of $900 and that represented only 13 to 14% of the issued, outstanding and fully paid shares of the company. He did acquire debentures to secure an amount of $100,000 and, as I said before, the better view is that this was a cash loan and in any event does not confer equity ownership on the plaintiff, only security for a loan.

The incorporation of a company raises the presumption of an intention to carry on business. The objects will determine the nature of the business and even if a company pursues unauthorized or ultra vires objects , that does not prevent the operations as being of a business nature. This being so I fail to follow how it can be said that the company engaged in the hobby, pastime or infatuation of exploring for valuables. In my view the presumption arising from the fact of incorporation has not been rebutted.

More conclusively I cannot accept the proposition that the company carried on a hobby as agent for the plaintiff for to do so would be to disregard the very concept of the nature of a corporation laid down in Salomon v Salomon & Co, [1897] 2 AC 22, where Lord Hershell said at page 42:

. . . I am at a loss to understand what is meant by saying that A Salomon & Company Limited is but an “alias” for A Salomon. It is not another name for the same person; the Company is ex hypothesi a distinct legal persona. As little am I able to adopt the view that the company was the agent of Salomon to carry on his business for him.

or in the present instance, as submitted, the plaintiff’s hobby, if the project was a hobby.

For the foregoing reasons the Minister has not discharged the onus of establishing that the plaintiff did not personally abandon the project in 1969.

This, therefore, leaves for consideration the four allegations in the statement of defence as support to the assessments of the plaintiff to income tax additional to the twofold assumptions upon which the assessments were originally based.

Those four allegations are repeated. They are:

(1) that the project was not “an adventure or concern in the nature of trade”,

(2) that the expenses were not laid out for the purpose of earning income from a business,

(3) that the expenditures were an outlay of capital, and

(4) that the project was a hobby.

As I have said before if it should be found that the project was an adventure in the nature of trade and accordingly a “business” within the extended definition of business and the expenditures were laid out for the purpose of gaining or providing income from that business then the third and fourth allegations automatically fail.

In MacEachern v MNR (supra), decided by the Tax Review Board, it was held that the search for and recovery from a wrecked ship, when found, of its reputedly valuable cargo had the potential of profit and under favourable circumstances, substantial profit which factor would tend, at a minimum, to distinguish the enterprise from a mere hobby and endow it with characteristics akin to a business endeavour. Added to this were the additional factors that the undertaking necessitated high risks of personal safety; the investment of time and money was part of an individual commitment and over all there was a partnership agreement among the three participants providing for contribution to expenses and a sharing of profits.

The reasoning of the Board commends itself and, in my view, the circumstances in the present appeals are as strong or stronger in leading to the conclusion that the undertaking was even more commercial in nature than in the MacEachern case and that the hobby or pleasure element was not present.

The assumption made by the assessors was that “the project is one of a commercial nature”. In my view there were ample grounds for the assessors so assuming but as the Minister is entitled to do he did a complete about-face in the statement of defence contradicting that assumption by alleging the exact contrary. For the reasons above expressed the onus then becomes the Minister’s to establish that fact and in my view that onus becomes more difficult because of the prior assumption to the contrary.

I find it impossible to distinguish between the allowance of expenditures made by the plaintiff in the years 1969 and 1970 from the expenditures made by the plaintiff for the years 1962 to 1968 which were disallowed predicated with nature of the expenses.

In the statement of defence it is denied that the project was commercial in nature. That is advanced as a ground for disallowing the claims for deduction of the expenditures in 1962 to 1968 but those laid out in 1969 and 1970 are excepted. There is no evidence of any change in the character of the project as it was from 1962 to 1968 having taken place in 1969 and 1970 and if the expenditures in those last two years are properly deductible it must be because they were laid out for the purpose of gaining or producing income from a business, not in pursuit of a hobby (see paragraphs 5 and 6 of the statement of defence), not a capital outlay (paragraph 7) and that they were reasonable (paragraph 8) as well as being laid out in those two years.

The allowance by the Minister of the deductions claimed by the plaintiff in 1969 and 1970 is inconsistent and mutually incompatible with the disallowance of the claim for deductions for expenditures from 1962 to 1968 except for the years in which the expenditures were incurred which to me is the only perceptible distinction and points up in clear relief the issue between the parties immediately following the assessments on the assumptions originally made by the Minister through his assessors.

The plaintiff acquired the right by agreement with the owner of Oak Island to explore for and take away any valuables he found. That was admitted in the statement of defence. There is no suggestion that the plaintiff acquired that right in conjunction with anyone else particularly Mr Restall. To me the acquisition of that right by the plaintiff indicates a prelude to the embarkation upon an intensive search. It has all the earmarks of the prior preparation of the operation of a commercial venture.

The plaintiff then entered into an agreement with Robert Restall. Mr Restall had been living on Oak Island with his family conducting a search for valuables. While he had acquired experience in the years he had been so engaged, he had also exhausted his personal finances. It was logical that the plaintiff should join forces with Mr Restall to utilize his experience and for his part the plaintiff would contribute financing, his own labour and talents and business experience.

The agreement between the two is mentioned in the examination for discovery of the plaintiff introduced in evidence by the Minister and in Exhibit Dl to the discovery. However Exhibit Dl was not introduced as an exhibit in the present appeals and I do not have that exhibit before me.

The plaintiff did say in the discovery that he spoke with Mr Restall, that he approved of the programme of exploration carried on by him, that he foresaw a prospect of success and that he was willing to assist financially with the intention of sharing in the recovery of anything of value. If a pirate had gone to such extreme care to protect his plunder it must have had great value at that time and would have multiplied multifold times in current value.

The most logical argument advanced by the Minister in support of the allegation that the expenditure of the plaintiff was a capital outlay was that the plaintiff was paying for a part of the business of Restall.

A central and essential feature of a capital expenditure is that it is made to secure an asset or advantage of enduring benefit and an aspect which flows from the use of the word “enduring” (that was the word used by Lord Cave in Atherton v British Insulated and Helsby Cables Ltd, [1926] AC 205, is that the expenditure is made once and for all, that is in a single payment rather than a series of payments (however I do not mean to imply that because payments made in series necessarily characterizes the payments as on account of revenue rather than on account of capital but in so saying I have in mind that the asset or advantage must endure in the way that fixed capital endures).

In my view the expenditures laid out by the plaintiff meet none of the recognized judicial tests to ascertain if an expenditure is on account of capital.

In Vallambrosa Rubber Co Ltd v Farmer, 5 TC 529, Lord Dunedin propounded in a practical way what he described as a rough test and not a bad criterion to distinguish between a capital outlay and an income outlay. A capital outlay is one that is laid out once and for all but an income expenditure is a thing that is going to recur every year.

While Lord Dunedin did not intend this criterion to be decisive in every case and recognized its limitations nevertheless he applied it in the case before him and, in my view, that rough test is applicable in the appeals before me.

Any cost to the plaintiff for the right to explore for valuables would be a capital cost but not those incurred in the conduct of that search. These in my view are expenditures laid out for the purpose of earning income, even though the outlays may prove abortive, for without the expenditures there could be no search and without the search there could be no recovery of treasure and that was the intention of the project.

In my view the proper inference to be drawn from the arrangement between the plaintiff and Restall is that it was a joint venture, with attributes of a partnership arrangement with the unlikelihood of formal registration of a partnership, in which the plaintiff bore the costs of the exploration as they occurred in the hope of a share of substantial reward if or when any discovery occurred. On the death of Mr Restall in 1966 or 1967 the plaintiff continued the search on his own account.

The plaintiff was not a dormant partner but an active co-venturer. He made frequent visits to the site while Restall was alive and participated in field work. He sought and engaged specialized persons and he investigated, decided upon and rented special machinery.

For the foregoing reasons I find that the plaintiff was engaged in an undertaking in the nature of trade within the meaning of paragraph 139(1 )(e) and so was engaged in a business and not in a hobby, that the expenses laid out by the plaintiff from 1962 to 1970 were laid out by him for the purpose of gaining or producing income from that business within paragraph 12(1)(a) and were not outlays on account [of capital] within paragraph 12(1)(b).

There remains the issue which was the basis of dispute between the assessors and the plaintiff as to the year or years in which the expenses incurred in 1962 to 1968 can be deducted.

The position taken by the assessors was that, in accordance with normal commercial and accountancy practice the expenses incurred must be deducted in the years they were incurred and not in the years 1969 and 1970.

The plaintiff takes the exact opposite position, seeking to deduct the expenses incurred from 1962 to 1968 in the years 1969 and 1970 and in this instance the onus of establishing this to be the case falls on the plaintiff.

Counsel for the Minister points out that income tax is an annual affair and so it is. That is abundantly clear from subsection 2(1) of the Act which provides that:

2. (1) An income tax shall be paid as hereinafter required upon the taxable income for each taxation year of every person resident in Canada at any time in the year.

It is equally clear that tax shall be paid on taxable income for the year and by virtue of subsection 2(3).

By virtue of paragraph 3(a), the income of a taxpayer includes income from a business as I have found this to be.

By virtue of section 4, income for a taxation year from a business is the profit therefrom for the year.

“Profit” is not specifically defined in the Income Tax Act.

Lord Halsbury, LC has said in Gresham Life Assurance Society Ltd v Styles, 3 TC 185 at 188:

The thing to be taxed is the amount of profits and gains. The word “profits” I think is to be understood in its natural and proper sense—in a sense which no commercial man would misunderstand.

Later at page 189:

Profits and gains must be ascertained on ordinary principles of commercial trading, . . .

Lord Hershell added at page 193:

It cannot, of course, be denied that, as a matter of business, profits are ascertained by setting against the income earned the cost of earning it, nor that as a general rule, for the purpose of assessment to the income tax, profits are to be ascertained in the same way.

These principles found their best expression in Usher’s Wiltshire Brewery, Limited v Bruce, [1915] AC 433. Earl Loreburn, LC said at page 444:

. . . profits and gains must be estimated on ordinary principles of commercial trading by setting against the income earned the cost of earning it, subject to the limitations prescribed by the Act.

Lord Summer said at page 468:

The effect of this structure (that is where specific provision is made for certain deductible expenditures) I think, is this, that the direction to compute the full amount of the balance of the profits must be read as subject to certain allowances and to certain prohibitions of deductions, but that a deduction, if there be such, which is neither within the terms of the prohibition nor such that the expressed allowance must be taken as the exclusive definition of its area, is to be made or not to be made according as it is or is not, on the facts of the case, a proper debit item to be charged against incomings of the trade when computing the balance of profits of it.

In Imperial Oil Limited v MNR, [1947] Ex CR 527; [1947] CTC 353; 3 DTC 1090, Thorson, P said at page 530 [359]:

. . . the deductibility of disbursements or expenses is to be determined according to ordinary principles of commercial trading or well accepted principles of business and accounting practice unless their deduction is prohibited by reason of their coming within the express terms of the excluding provisions of the section.

Later in Daley v MNR, [1950] CTC 254; 4 DTC 877, he said at page 260 [880]:

. . it follows that in some cases the first enquiry whether a particular disbursement or expense is deductible . . . [is] whether its deduction is permissible by the ordinary principles of commercial trading or accepted business and accounting practice.

For the reasons I have expressed there is no doubt that the expenses here involved are properly deductible expenses but the question remains in what year are they deductible.

Lord Halsbury also said in the Gresham Assurance case (supra) at page 189:

. . I cannot think that the framers of the Act could be guilty of such confusion of thought as to assume that the cost of the article sold to the trader, which he in turn makes his profit by selling, was not to be taken into account before you arrived at what was intended to be the taxable profit.

In Oryx Realty Corporation v MNR, [1974] CTC 430; 74 DTC 6352, the Appeal Division of this Court considered the question of the gross profit upon the sale of realty and held that prior to the sale of a parcel of land, the cost of the land was not deductible because there was no sale price to deduct it from. It was only from the moment of sale that the cost of the land could conceivably be considered as a deductible outlay or expense.

The same principle is applicable in the present appeals. Until the search leads to the discovery of a treasure there is nothing from which to deduct the costs of the search from to ascertain the profit on its realization.

The onus of establishing that the costs of the search are deductible in the year in which the project produced income or was abandoned lies on the plaintiff.

Accordingly the plaintiff introduced the expert testimony of Robert N Cockfield, a qualified practising chartered accountant.

In paragraph 9 of the affidavit of Mr Cockfield, filed in accordance with Rule 482 and received in evidence, Mr Cockfield swore as follows:

9. Assuming that a commercial venture consisting of seeking for hidden treasure was Carried on by an individual, with a view to making profit and that in the course of this venture, expenditures were incurred over a period of time, (here I insert that all conditions precedent above set forth Mr Cockfield’s following opinion, have been met) my opinion is that proper accounting principles would require those expenditures to be charged as expenses in whole or in part in the year where either income was derived from the venture by recovery of the whole of or an important part of the treasure sought or, in the year in which the project was abandoned by him.

The Minister also introduced in evidence the affidavit of Michael MacKenzie, an equally qualified chartered accountant. With the consent of counsel for the plaintiff the affidavit was permitted to be taken as read.

In a memorandum exhibited to his affidavit Mr MacKenzie stated:

In my opinion, based on the facts and assumptions. set out in Part Il, (here I insert that the facts and assumptions referred to are basically the same as assumed by Mr Cockfield and which I have found to exist) it would have been in accordance with generally accepted accounting principles in Canada and in accordance with the accounting frequently followed by mining companies in the development stage, to have capitalized and deferred expenditures incurred in exploring for, digging for and drilling for buried treasure on Oak Island up to the year in which the decision was made to abandon the project or in which it was realized that the project had little chance of success, whichever was the earlier.

Mr MacKenzie devoted the greater part of his memorandum to an exposition as to the proper method of how these expenses should be detailed in the financial statements of the project and in my appreciation of his exposition it was that these costs should be shown as deferred expenditures to be capitalized and written off against revenues derived in future accounting periods. He also added that any expenditures capitalized should be written off against income in any year in which it was decided to abandon the project.

The ethical object of accountancy is to present a true picture of each year’s business results so that the shareholders of a company or an individual carrying on a business can see at a glance the financial position he is in.

I doubt very much if the plaintiff had his accountant prepare annual financial statements of the Oak Island project. No such statements were produced in evidence and I doubt their existence. They were unnecessary for the plaintiff to realize his annual financial position. He knew full well the sums that he had laid out in each year in conducting the search for buried treasure and he knew equally well that the search had not been successful in that year with no resulting revenue to set the costs against to determine profit for that year which is taxable income.

However the continuing search was of advantage to the plaintiff. The area where an unsuccessful search had been conducted could be eliminated thus narrowing the area in which the search could be conducted with prospect of greater success. That was of benefit to him.

He could have sought a deduction, not against income from the project because there was none, but from other income in the year the expenses were incurred. This he did not do and I do not think his judgment can be questioned for not doing so. That would simply mean that the expenditure for the year would be charged to a mental profit and loss account (since I assume no financial statements were prepared) of the Oak Island project and be written off once and for all.

However, since the costs incurred have by virtue of a process of elimination narrowed the area to be searched, it is equally as cogent that the plaintiff should mentally assign the cumulative expenditure to a deferred account to be set off against revenue in the year it arises or to be written off in the year that he might be obliged to abandon the project.

In my opinion there is no inconsistency between Mr Cockfield called on behalf of the plaintiff and Mr MacKenzie. They were agreed that in accordance with generally accepted accountancy principles in Canada the expenses incurred over a period of time should be charged as expenses in whole or in part in the year revenue was derived from the project or in the year in which the project was abandoned.

I do not think that had financial statements been prepared and the expenditures had been included as an asset in the balance sheet under some such caption as ‘‘Capitalized deferred expenditures” that such would change the character of the expenditures from expenses laid out for the purpose of producing or gaining income from a business to a capital outlay bearing in mind that to discover and recover a buried treasure there must be a search for it and the cost of the search is a cost necessary for the ultimate object of the business which was to find and sell articles of value.

Accordingly I conclude that the opinions of Mr Cockfield and Mr MacKenzie as to the generally accepted accounting principles are based on sound postulates consistent with commercial practice.

Neither do I think that the plaintiff is precluded from deducting the expenses accumulated from 1962 to 1968 in the years 1969 and 1970 when the project was abandoned.

Income tax is, as submitted on behalf of the Minister, an annual affair but it is an annual tax on profits for each year and in determining what is taxable income for the plaintiff's 1969 and 1970 taxation years the plaintiff is not precluded by any express provision of the Income Tax Act from deducting in those years expenditures laid out for the purpose of gaining income over a period of prior years, in the circumstances of these appeals. I have been unable to find any such express provision of the Income Tax Act nor was any such provision pleaded or cited to me.

In my judgment this conclusion is consistent with and dictated by the passage reproduced above from the decision of Thorson, P in Daley v. MNR (supra) at page 260 [880], to the effect that in some cases the first inquiry must be whether a deduction is permissible by the ordinary principles of commercial trading or accepted accounting practice (and my view is that this is such a case) as well as the principle enunciated in Oryx Realty Corporation v MNR (supra) which I paraphrase to be that prior to the production of revenue there is no revenue against which to set off the costs of earning such revenue or put another way, the cost of producing income is to be withheld or deferred against the eventuality of earning income and deducted on that event or when the project is abandoned. When the project is abandoned there is no point in withholding or deferring the expenses further.

This conclusion, in the peculiar circumstances of these appeals, is also inconsistent with the conclusion in the familiar and often cited Vallambrosa Rubber case (supra).

In that case the rubber company had a plantation of which, in a certain year, only a seventh part produced rubber, the remaining six- sevenths of the plantation being in the process of cultivation for that purpose. Rubber trees do not produce rubber until six years old. it was held that to arrive at its assessable profits for the year concerned, the company was entitled to deduct the expenditures for the whole plantation, that is the producing and non-producing parts, and not only the one-seventh of those expenditures applicable to the one- seventh producing part but the whole of the expenditures.

This decision is consistent with the opinion of the two: expert accountancy witnesses in these appeals to the effect that proper accounting principles would require these expenditures to be charged in whole or in part in the year in which income was derived by the discovery of the whole or an important part of the treasure sought with the added gloss that the expenditures should be charged in the year the project was abandoned, which in my view also makes common sense and is therefore based on sound postulates.

For the foregoing reasons the appeals from the assessments for the plaintiff's 1969 and 1970 taxation years are allowed with costs to the plaintiff.