The Queen v. Metropolitan Properties Co. Ltd., 85 DTC 5128, [1985] 1 CTC 169 (FCTD)

Walsh, J:—This is an appeal by the Crown seeking to restore the reassessment made for defendant’s 1974 taxation year respecting the treatment to be given on an aggregate amount of $1,509,699 costs expended or incurred by the defendant in respect of installing certain services and improvements with respect to residential subdivisions developed by defendant. Defendant had succeeded in its appeal of this reassessment before the Tax Review Board, judgment dated March 26, 1982, reported in [1982] CTC 2254; DTC 1259.

In the proceedings before this Court it was agreed that the transcription of the evidence and exhibits filed before the Tax Review Board in that hearing, together with an agreed statement of facts would constitute the evidence for this appeal, no further evidence being adduced. The facts are clear but the legal issue to be decided is important and difficult, extensive jurisprudence to which the Court was referred by both parties being somewhat conflicting and not conclusively settling the legal issue involved in this case. The facts themselves are not unusual for developers, so a final decision will affect the accounting practices for tax purposes of many such developers. It is agreed that the legal issue to be decided is whether the said amount of $1,509,699 was deductible as current expenses in the 1974 taxation year as defendant claims, or whether it formed part of and was to be taken into account in determining the costs of the defendant’s inventory on hand at the end of its 1974 taxation year, and consequently was not deductible in the said year.

It is not necessary to set out the agreed statement of facts in extenso, but the more important paragraphs will be referred to. Defendant is a corporation resulting from various amalgamations of predecessor corporations carrying on land development and its first fiscal and taxation year was the year ending December 31, 1974. During that year it carried on the development activities previously initiated by its predecessor corporations and assumed their obligations including residential privately owned development agreements which had been entered into with the municipality for development of several residential subdivisions.

The development agreements required the developer to install and construct designated municipal services and improvements at its sole cost and expense, on real property in the respective subdivisions dedicated to the city, such as sewers, water main, paving of roadways and sidewalks, tree planting and sodding areas fronting on its land from the curb to the front property line, street lights, installation of electrical and telephone services and street signs. The agreements provided that the cost of these installations would be considered as paid in effect as a prepayment of realty taxes which would be otherwise levied by the city; the developer conveyed the services to the city concurrently with their installation and construction. The developer agreed to dedicate and vest title to the said streets, lanes, avenues, roads, parks and other reserves of real property to the city without cost for public purposes.

During its 1974 taxation year in fulfilment of these obligations entered into by it and its predecessor corporations defendant incurred expenses in the amount of $1,509,699 after adjustment which it deducted from its net income from the year for income tax purposes.

In its financial statements for its 1974 financial year however defendant treated the amount of $1,509,699 as forming part of its inventory on hand at the end of the period of serviced and partially serviced residential building lots for sale, rather than as current expenses. This was done by including as part of its inventory on hand at the beginning of the period amounts in respect of serviced and partially serviced residential building lots for sale in the amount of $495,765* [1] as land development costs. It also included as part of its inventory on hand at the end of the period for such purposes an amount of $2,005,465. In preparing its income tax return and then reconciling its net income shown in financial statements with his net income for income tax purposes defendant added to its net income the amount of $495,765 and deducted the amount of $2,005,465 to arrive at the current expense figure of $l,509,699f [2] as already referred to.

It is admitted in the agreed statement of facts that said deduction by the defendant of the said amount as a current expense in its 1974 taxation year was consistent with the manner in which defendant’s predecessor corporations had arrived at their respective net incomes for income tax purposes in prior taxation years, deducting similar amounts of land development costs as current expenses. This procedure had not been disallowed by the Minister in previous years, until the 1974 taxation year when the reassessment added back this amount to the net income which defendant had declared. Defendant took notice of objection to this on October 3, 1977 and on June 15, 1979 the reassessment was confirmed by the Minister.

During the course of argument it was disclosed by counsel that an agreement has recently been reached between plaintiff and defendant dealing with the 1975 to 1983 taxation years. The nature of the agreement was not disclosed. It was stated that if the Crown wins this case then for 1984 and subsequent taxation years the treatment for which it contends would be applied.

Mr William Rae who was vice-president of defendant at the time and is currently vice-president of its successor corporation and is a chartered accountant testified before the Tax Review Board that most of the major development out- lays required by the agreement with the municipality have to be incurred before any lots are sold or houses built on them as no one would purchase a building site with no capacity to get to it or no services. In his view the word “inventory” means something which is turned over fairly rapidly, and in the case of manufacturing businesses for example perhaps three or four times a year. In the long run the land development costs are recovered by selling the lots or houses. The sale price would also hopefully include the costs incurred in obtaining the land. Sometimes although not frequently the process may take two years but in some cases, seven years or more is required, depending on the size of the subdivision and market conditions.

Mr Glen Edward Cronkwright, a practising chartered accountant, testified as an expert witness before the Tax Review Board on behalf of defendant. He stated that for external financial accounting purposes generally accepted accounting principles were developed in order to get conformity and consistency to arrive at a profit figure. The most authoritative source for this is the Canadian Institute of Chartered Accountants Handbook. He testified that the application of generally accepted accounting principles (GAAP) is reasonably well settled in the land development industry. From the public reporting viewpoint an attempt is made to accumulate all of the costs that are incurred in connection with the land assembly and sale until one gets to the point of starting to sell lots and then to decide what is the appropriate cost to charge against any particular lot sale. An attempt is made to match for external financial reporting the cost of the lot against the sale price of it and included in the land cost would be the initial land cost themselves including scrap land and land that is going to be dedicated to the municipality for parks and so forth, the cost of dealing with governmental authorities, expenditures to get appropriate zoning and all of the servicing costs that are attributable to the subdivision area itself such as roadways and streets and all costs that relate to the acreage under development. There may be a judgment call as to cost allocation to the various lots as to whether relative sale prices, or frontage is used, and also as to how much of general administrative expenses can be put into the cost of the land. The recommended accounting procedure according to him would be to capitalize the carrying charges such as interest on money borrowed to acquire land, realty taxes and so forth. There may be some debate as to how long the developer keeps capitalizing the interest. He considers the use of the words “inventory” and “capitalizing” as being more or less interchangeable, the question being whether costs are added to the carrying value as opposed to writing them off currently for financial purposes.

He stated he considered that defendant’s financial statements accorded with generally accepted accounting principles for a company in this sort of business. He testified that it is very common to take a statement prepared for a financial reporting purposes and make a series of adjustments to reconcile the income for financial statements within income for tax purposes. The statute itself contemplates many divergences from GAAP.

He stated that he has no hesitation in filing a tax return that computed income for tax purposes in the method adopted by the taxpayer although in doing so he would advise him that that was contrary to the views of tax authorities and might be challenged but that he nevertheless felt it was an appropriate method of computing income. Comparing the land development industry with manufacturing industry in which although some scrap may be involved which affects the material costs incorporated in the product that is being sold he stated at pages 98-99 of his evidence:

In this industry we have the land being assembled, we have somewhat of an analogy of the scrap metal with the roads and so on that are not there for sale, but we have a very tremendous amount of costs that are incurred, not on the lot that is for sale, but on the roadways and on the parks. All on property that the taxpayer does not have to sell. And it would seem to me that in computing profit for purposes of assessing tax these costs can be held to be operating or running expenses of the on-going business.

On behalf of the Crown Brian Patrick Duggan, Associate Professor of accounting at the Faculty of Administrative Studies at the University of Manitoba who also teaches courses for the Institute of Chartered Accountants testified as an expert witness. He agreed that for external accounting purposes for the shareholders and creditors the land development costs were properly treated as forming part of the inventory. He stated however that he did not agree that it was proper to expense them on a current basis for tax purposes. Plaintiffs case is based on three propositions:

1. Profits and gains for Income Tax purposes should be ascertained on ordinary principles of commercial trading. Since it is conceded that the financial statements presented a proper method of accounting for public purposes the taxpayer must bring itself under the umbrella of specific provision in the Income Tax Act in order to justify a different method of calculating the income for tax purposes.

2. The method that ought to be accepted for tax purposes is that which will best reflect the taxpayer’s true income position.

3. Costs of inventory should include land development costs.

In support of the first proposition plaintiff refers to the judgment of Justice Addy in The Queen v Sylvio Marchand, [1979] 1 FC 32; [1978] CTC 763; 78 DTC 6507. In that case the defendant purchased shares in a Caisse d’Entraide Economique in Quebec. The bylaws required that an additional sum of 4/2 per cent, which amounted to $90 must be paid to the Caisse in addition to the purchase price of the shares. The question was whether this additional amount was a capital outlay and not deductible as plaintiff claimed, or whether it was made for the purpose of earning income in the form of taxable interest and therefore deductible. At page 35 [766] the judgment refers to the decision of Thorson, P in Daley v MNR, [1950] CTC 254; 4 DTC 877:

As Thorson P of the former Exchequer Court said in Daley v MNR, where he altered somewhat his earlier interpretation of the Act as set out in Imperial Oil Limited v MNR, [1947] CTC 353, sections 6(a) and 6(b) of the 1927 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 sections 18(l)(a) and 18(l)(b) is not identical to that of section 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 section 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.

Reference was made to the Supreme Court decision of Dominion Taxicab Association v MNR, [1954] CTC 34; 54 DTC 1020 in which each taxicab owner had to pay $500 for each cab for the privilege of joining the association. The Minister assessed the total so received as income. Appellant contended that it was loans or deposits and a deferred liability of appellant to its members. The appeal was allowed, it being held that the money in question was a part of the appellant’s assets. At page 37 [1021] Rand, J [sic] stated:

It is the submission of the respondent that the sum of $40,500.00 is profit derived from appellant’s business during the taxation year and so is liable to tax under the combined effect of sections 2(1), 3(a) and 4 of the Income Tax Act. The expression “profit” is not defined in the Act. It has not a technical meaning and whether or not the sum in question constitutes profit must be determined on ordinary commercial principles unless the provisions of the Income Tax Act require a departure from such principles.

In the case of The Queen v Bank of Nova Scotia, [1981] CTC 162; 81 DTC 5115, Justice Heald at 166 [5118] reiterated the principle that “good accounting principles apply unless there is a statutory requirement to depart from them’’.

In support of the second proposition plaintiff also refers to some jurisprudence. In the case of MNR v Anaconda American Brass Ltd, [1955] CTC 311; 55 DTC 1220, the Privy Council disregarded the taxpayer’s use of the LIFO system of recording the cost price of goods purchased near the end of the year which would not probably be processed until the following year but adopted, as the Minister contended the FIFO system as being more in accord with normal accounting procedures.

It is contended that there is no section of the Income Tax Act which permits the deduction sought by defendant as current income expenses. Section 20 of the Act sets out permissible deductions including such items as interest, expenses of representation and investigation of site but would not cover the present items. These deductions and others elsewhere in the Act would be permissible for tax purposes whether or not generally accepted accounting principles would allow them. In the case of MNR v Tower Investment Inc, [1972] FC 454; [1972] CTC 182; 72 DTC 6161, Justice Collier held that it was appropriate to allocate advertising expenses for sale of apartment buildings constructed over a period of years on the basis of the accounting principle of matching costs with revenues, since he did not find any prohibition in the statute against the matching system and the method adopted by the taxpayer more accurately set forth its true income position. In the case of Qualico Developments Ltd v The Queen, [1984] CTC 122; 84 DTC 6119 (FCA) dealing with the allocation of landscaping costs the Court refused to allow their deduction from income for the year in which they were incurred as they were costs incurred in respect of property included in inventory so they were only deductible in the year of sale. At page 127 [6123] the judgment reads:

. . . the statute then goes on to provide with respect to deductions, at first, in sections 18 and 19, by a series of prohibitions or limitations and then, in section 20, by express permission to deduct certain items.

With respect to these provisions it is important to note that nothing in sections 18 or 19 would have prohibited the deductions here in question in accordance with accepted accounting principles and that in particular they would fall within the excepting words of the prohibition of paragraph 18(l)(a). It reads:

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property:

That brings me to subsection 20(1) and the particular provision of it on which the appellant relies. It provides that:

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

The overriding feature of this provision is required because what are subsequently allowed as deductions are items of a capital nature or items which would not be allowable on accepted accounting principles in determining the profit from a business or property. It is also worthy of note that the subsection does not purport to override section 10 which would give effect to the appellant’s right to deduct the landscaping costs here in question in accordance with its system.

With respect to such costs there is no need for a provision overriding subsections 18( l)(a), (b) and (h) to make them deductible in computing profit from the appellant’s business. The only effect of the paragraph 20(1 )(aa) on which the appellant relies, if it applies at all to such costs, is to allow the deduction in a year that might be a different year from that in which it would be allowed under the system of section 10, that is to say, the year the costs were paid, which would not necessarily be the year the dwelling in respect of which the costs were incurred was sold.* [3]

Plaintiff contends that this judgment is even stronger than the situation in our case where there is no statutory deductions similar to that in paragraph 20(1 )(aa), but defendant contends that it is not relevant as it concerned a situation where a taxpayer was attempting to apply a section of the Act which the court found was not applicable to his case. Moreover in the present case there is of course the fundamental argument that the costs in question were all incurred on and in connection with portions of defendant’s property which could not and would not be sold although the expenses were useful and necessary if one looks at the development as a whole.

In support of the third proposition plaintiff argues that there is a direct relationship between the land development costs and the finished product (ie the lots which were to be sold and acquired an added value as a result of the land development costs expended on portions of the property which would not be sold).

Defendant in arguing against plaintiffs propositions relied strongly on the Tax Review Board decision in this case ([1982] CTC 2254; 82 DTC 1258). This decision by Chairman Cardin was a very thorough one and carefully reviewed extensive jurisprudence, some of which is referred to again in the present appeal. It is apparent however that in reaching his conclusion he relied as a matter of comity of judges on the decision of J O Weldon of the Tax Appeal Board in the case of Dartmouth Developments Ltd v MNR, [1967] Tax ABC 780; 67 DTC 551, although he agrees with the reasoning which led to that decision. He distinguishes the decisions in The Queen v Guaranteed Homes Limited, [1978] CTC 636; 78 DTC 6510 and Neonex International Ltd v The Queen, [1977] CTC 472; 77 DTC 5321. In reference to the Marchand decision (supra), he states that the question of GAAP was not an issue nor was it defined, but he would also distinguish that case which otherwise he would consider would be binding on the Court. He states that in his decision he has relied on the concept of ordinary commercial principles and business practices and their general application in tax matters has never been questioned by any Court and concludes:

In arriving at my conclusion on the deductibility of development costs in 1974, I cannot ignore the reasons and the decision in Dartmouth (supra) since no other case presenting the same issue and the same facts as those of the present appeal has since been adjudicated. The Minister of National Revenue never appealed the Dartmouth decision (supra) and the Federal Court affirmed it, at least on one occasion.

I would question however whether there is any significant difference as he seems to find between “ordinary commercial principles and business practices” and “generally accepted accounting principles (GAAP)”. His reference to the Federal Court having affirmed the Dartmouth decision is apparently based on the Neonex International case (supra). That case dealt inter alia with proper accounting and tax treatment of substantial sums disbursed in connection with uncompleted displays and signs which a taxpayer had deducted as expense paid out for earning income although in prior years it had treated them as part of its working process inventory. The Minister disallowed these deductions. Justice Marceau in rendering his decision stated at page 480 [5326] of the report:

As I see it, when a company, in submitting in a tax return a report of its expenditures and revenues during a taxation year with a view to establishing its profits or gains and tax base, purports to include as expenditures all the expenses incurred in realizing a manufactured article not yet finished but does not take into account the whole value the article has for it at that time, it is not making an accurate report. True, in certain instances, costs which for accounting purposes are to be charged to inventory, may be deducted for income tax purposes (for example, expenses incurred in subdividing lots for sale or in bringing certain products to maturity, eg fruit orchard). But, in each instance, the “inaccuracy”, as a result of which tax is deferred, has been tolerated for very specific and exceptional reasons and not for the sole reason that the taxpayer suddenly found it more convenient so to do.

No mention was made in it of the Dartmouth Development case and I do not find that this statement supports the conclusion that this Court by implication affirmed it. It is of some interest to note moreover that the Dartmouth Development case was decided some time before the GAAP principles were enunciated. The appeal judgment in the Neonex case [1978] CTC 485; 78 DTC 6339, adopted the statement of Justice Marceau with approval. It also stated at page 499 [6348]:

There is no doubt that the proper treatment of revenue and expenses in the calculation of profits for income tax purposes with a view to obtaining an accurate reflection of the taxable income of a taxpayer, is not necessarily based on generally accepted accounting principles. Whether it is so based or not is a question of law for determination by the Court having regard to those principles.

and again on the same page:

This evidence I would accept, since it was not challenged, as establishing the accepted accounting treatment for partially completed signs being produced under contract by the Appellant. The question then to be asked is whether the Income Tax Act requires or permits a different accounting treatment in the calculation of the Appellant’s income for income tax purposes than that which is applicable for the purposes of accurately portraying the financial picture of the company for shareholders and creditors. (emphasis mine)

Defendant refers to another Tax Review Board case of Guaranteed Homes Limited v MNR, [1977] CTC 2287; 77 DTC 202, in which the taxpayer deducted the cost of utilities connections to 77 building lots in a subdivision as being attributable to his business premises. While the decision approved the Minister’s position that these expenses should have been capitalized as being commercially sound and in accordance with general accounting principles the judgment stated that there is nothing in the Act which says that generally accepted accounting principles govern in taxation. The taxpayer’s appeal was allowed however on the basis of the wording of paragraph 20(1 )(ee) of the Act which permitted the cost of utilities connections to a taxpayer’s place of business to be deducted as an

expense. The decision concluded at 2288 [203]: “If a statute does not tax in clear unequivocal language, the courts have generally leaned towards the taxpayer’’. This decision was reversed in Appeal, [1978] CTC 636; 78 DTC 6510, but solely on the interpretation of paragraph 20(l)(ee). The Dartmouth Development case was referred to but distinguished at 643 [6516];

One further case should be mentioned here. It is Dartmouth Developments Ltd v Minister of National Revenue, 67 DTC 551. This is also a decision of the Tax Appeal Board. The Board held that money spent for the purpose of making service connections was spent for the purpose of making the Appellant’s inventory of land more saleable and therefore entitled to deduct the amount spent for this purpose in the taxation year in question. The claim for deduction in the present case is based solely on the language of Section 20(1 )(ee) and not on any argument about inventory. There are also material differences in the facts in the two cases. In my view they are clearly distinguishable and the Dartmouth decision affords little assistance in this case.

It cannot be said that it was either approved or disapproved.

The Guaranteed Homes case can obviously be distinguished from the present situation as can the cases of Jack L Cummings v The Queen, [1981] CTC 285; 81 DTC 5207 and J L Guay Ltee v MNR, [1971] CTC 686; 71 DTC 5423, which was referred to in the Cummings case. Both concerned the interpretation of paragraph 12(l)(e) of the Act dealing with reserves. In the Cummings case at 294 [5214] it was stated by Heald, J rendering the judgment of the Court of Appeal:

. . . the fact of the acceptability in accounting practice of dealing with a particular item in a particular manner, cannot, by itself, make that practice a proper deduction for income tax purposes. Notwithstanding the evidence of accounting practice, the fact remains that, on the facts here present, the deduction is prohibited by subsection 12(l)(e) of the Act.

Defendant also relies on the case of Oxford Shopping Centres Ltd v The Queen, [1980] CTC 7; 79 DTC 5458, dealing with an agreement with a municipality whereby it would approve roadways to ease traffic congestion and provide better access to the taxpayer’s shopping centre, in consideration of which the taxpayer would pay a substantial sum to the municipality in lieu of local improvement rates and taxes which would otherwise have been payable as a result of the improvements. The Minister disallowed a claim for the payment as a deduction as a business expense contending it should be capitalized. Both the Trial Division and the Court of Appeal maintained the taxpayer’s position. Chief Justice Thurlow, then sitting in the Trial Division, concluded as follows at 18 [5466-7]:

I think it follows from this that for income tax purposes, while the “matching principle” will apply to expenses related to particular items of income, and in particular with respect to the computation of profit from the acquisition and sale of inventory (compare Neonex International Ltd v The Queen, [78 DTC 6339 at p 6348], [1978] CTC 485 at p 497), it does not apply to the running expense of the business as a whole even though the deduction of a particularly heavy item of running expense in the year in which it is paid will distort the income for that particular year. Thus while there is in the present case some evidence that accepted principles of accounting recognize the method adopted by the plaintiff in amortizing the amount in question for corporate purposes and there is also evidence that to deduct the whole amount in 1973 would distort the profit for that year, it appears to me that as the nature of the amount is that of a running expense that is not referable or related to any particular item of revenue, the footnote to the Associated Industries case and the authorities referred to by Jackett, P, and in particular the Vallambrosa Rubber case and the Naval Colliery case, indicate that the amount is deductible only in the year in which it was paid. All that appears to me to have been held in the Tower Investment case and by the Trial Judge and LeDain, J in the Canadian Glassine case is that it was nevertheless open to the taxpayer to spread the deduction there in question over a number of years. It was not decided that the whole expenditure might not be deducted in the year in which it was made, as the earlier authorities hold. And there is no specific provision in the Act which prohibits deduction of the full amount in the year it was paid.

The reference to the decision of LeDain, J (which was a dissenting judgment) in the case of MNR v Canadian Glassine Co Ltd found at page 16 [5465] of Justice Thurlow’s judgment reads as follows:

In Associated Investors of Canada Limited v MNR, [1967] 2 Ex CR 96 at page 100 (note), Jackett P expressed the opinion that the principle affirmed by Thorson P was not “applicable in all circumstances’’, and that “there are many types of expenses that are deductible in computing profit for the year in respect of which they were paid or payable’’. In the Tower Investment case Collier J concluded [at pages 461-462]: “In my view, the distinctions made by Jackett, P are applicable in a case such as this. The advertising expenses laid out here were not current expenditures in the normal sense. They were laid out to bring in income not only for the year they were made but for future years.”

I agree with the learned Trial Judge that this conclusion is equally applicable to the expenditure in this case. The opinion of Thorson P is not a conclusion that is dictated by the terms of section 12(l)(a) but a principle deduced from “the general scheme of the Act”, and as such it should be subject to necessary qualification for cases such as the present one in which its application would seriously distort rather than fairly and reasonably reflect the taxpayer’s position with respect to income and expenditure. Indeed, in this Court counsel for the appellant did not dispute the right to apply the “matching principle” to the present case, assuming that the expenditure was found to be one that was deductible in determining income.

Defendant argues that GAAP principles are not applicable to determine land developers profit for income tax purposes nor do they purport to be. They were developed as a result of a research study prepared in 1971 for the Canadian Institute of Chartered Accountants. At page 11 it states:

While recognizing that consideration of income tax can rarely be divorced from day-to- day management decisions within the industry, the study group considers it to be of more importance for present purposes to examine the underlying purpose and function of accountancy in the industry. Accordingly this study does not consider the subject of income taxes within the industry.

Defendant contends that there are many items that go into the value of remaining land which cannot be capitalized as costs of inventory such as legal and accounting fees and that expenditures on land which thereafter no longer belongs to the taxpayer, cannot be included in inventory.

It was argued that the matching principle is not applicable to a developer and that the remarks of Marceau, J in the Neonex case which have been quoted (supra) although approved on appeal are to some extent obiter.

Reference was also made to the Publishers Guild of Canada case, [1957] CTC 1 at 17; 57 DTC 1017 at 1026, in which Thorson, P stated:

But the Court must not abdicate to accountants the function of determining the income tax liability of a taxpayer. That must be decided by the Court in conformity with the governing income tax law. It is an established principle of such law in this Court that there is a statutory presumption of validity in favour of an income tax assessment until it is shown to be erroneous and that the onus of doing so lies on the taxpayer attacking it.

In the present case the problem was compounded by the fact that the experts did not agree. Mr Glen Conkwright, defendant’s expert after pointing out that the practice adopted was that accepted by the tax authorities for many years states that this supports the fact that the deduction of all current outlays immediately is an accounting practice that is used commercially. He states:

I think it is also consistent with the attitude of many of the business men in that industry where they are very highly cash-focused. We put, with all due respect, a minimum amount of cash into a project and we try to get our cash out very quickly, so they are very much cash-oriented, they are almost in the business of dealing with money as opposed to land, one could suggest.

So I would say yes that this method is an acceptable accounting practice for the purpose used. As I say, not for external financial reporting, but for the purpose used I would say yes, it is.

Q And it accords with ordinary business and commercial practice?

A Yes.

Reference was made to the decision of Jackett, P in the case of Associated Investors of Canada Limited v MNR, [1967] CTC 138 at 143; 67 DTC 5096 at 5099 in which he stated:

Ordinary commercial principles dictate according to the decisions, that the annual profit from a business must be ascertained by setting against the revenues from the business for the year, the expenses incurred in earning such revenue.

and earlier on the same page:

Profit from a business, subject to any special directions in the statute, must be determined in accordance with ordinary commercial principles. (Canadian General Electric Co Ltd v Minister of National Revenue (1962) SCR 3 [61 DTC 1300], per Martland J at page 12.) The question is ultimately “one of law for the court”. It must be answered having regard to the facts of the particular case and the weight which must be given to a particular circumstance must depend upon practical considerations. As it is a question of law, the evidence of experts is not conclusive.

Some argument was made with respect to the history of pertinent amendments to the Income Tax Act. Following the amendments in chapter 63 of S of C 1970-71-72 sections 18(l)(a) and 18(2) read as follows:

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) General limitation — an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property.

18. (2) Notwithstanding paragraph 20(1 )(c), in computing the taxpayer’s income for a taxation year from a business or property, no deduction shall be made in respect of any amount paid or payable by the taxpayer in the year and after 1971 as, on account or in lieu of payment of, or in satisfaction of,

(a) interest on borrowed money used to acquire land, or on an amount payable by him for land, or

(b) property taxes (not including income or profits taxes or taxes computed by reference to the transfer of property) paid or payable by him in respect of land to a province or a Canadian municipality,

if, having regard to all the circumstances, including the cost to the taxpayer of the land in relation to his gross revenue, if any, therefrom for that or any previous year, the land cannot reasonably be considered to have been, in that year,

(c) included in the inventory of a business carried on by the taxpayer,

(d) otherwise used in, or held in the course of, carrying on a business carried on by the taxpayer, or

(e) held primarily for the purpose of gaining or producing income of the taxpayer from the land for that year,

except to the extent that the taxpayer’s gross revenue, if any, from the land for that year exceeds the aggregate of all other amounts deducted in computing his income from the land for that year.

By 1974 a further amendment however repealed subsection 18(2)(d) and paragraph 28(2)(c) now read:

(c) used in, or held in the course of, carrying on a business by the taxpayer other than a business in the ordinary course of which land is held primarily for the purpose of resale or development, or

This was done by S of C 1974-75, chapter 26 which also added subsection 10(1.1). Subsection 10(1) read:

10. (1) For the purpose of computing income from a business, the property described in an inventory shall be valued at its cost to the taxpayer or its fair market value, whichever is lower, or in such other manner as may be permitted by regulation.

and subsection 10(1.1) now added read:

(1.1) For the purposes of subsection (1), the cost to the taxpayer of land that is described in the inventory of a business carried on by him shall include any amount described in paragraph 18(2)(a) or (b) in respect of that land for which no deduction is permitted to him.

It is interesting to note that by a 1979 amendment (S of C 1979 ch 5) subsection 10(1.1) was repealed and subsection 18(2) was further amended so that paragraph (c) now read:

(c) used in, or held in the course of a business carried on in the year by the taxpayer, or

These amendments appear to have restored the situation which existed prior to the 1974-75 amendments. Paragraph 20(1 )(c) to which reference is made in subsection 18(2) is the section dealing with the deductibility of interest on borrowed money used for the purpose of earning income from a business property, or on an amount payable for property acquired for the purpose of gaining or producing income therefrom.

While it is the situation that existed in 1974 that is before the Court in the present case the significance of these various amendments is that Parliament has addressed itself to the question on various occasions and has not seen fit to include as deductions from current income costs of installing services on the land dedicated to the municipality, although it has specifically dealt with interest on borrowed money used to acquire the land and with property taxes on it. Moreover the 1974 tax law in any event did not require that the land be included in the inventory of a business carried on by the taxpayer, as an exception to the exception of non-deductibility of interest on property taxes but rather merely required that it be used or held in the course of carrying on business in the ordinary course of which land is held primarily for the purpose of resale or development (which is of course the situation of the taxpayer in the present case).

The concluding clause which deals with the situation where the taxpayer’s gross income from the land for the year exceeds the aggregate of all other amounts deducted in computing his income from the land for that year was not argued and does not appear to be applicable. Net income for the year was shown on the taxpayer’s return as $1,674,259 but it is a consolidated balance sheet on which income from sales of other developments of defendant would be incorporated, and there was no evidence as to what if any sales were made in the year 1974 of lots or houses in the development with which we are here concerned.

Conclusions

On the facts of this case and after considering the foregoing somewhat confusing jurisprudence the following conclusions can be reached.

1. General Accepted Accounting Principles (GAAP) should normally be applied for taxation purposes also, as representing a true picture of a corporation’s profit or loss for a given year.

2. By exception they need not be applied for income tax purposes if there is some section or sections in the Income Tax Act which justify or require a departure from them or do not correspond with what are commonly accepted business and commercial practices.

3. The fact that prior to the 1974 taxation year the Department of National Revenue had permitted defendant’s predecessor corporations to deduct the type of expenses with which we are here concerned as revenue expenses does not of itself establish that this was normal commercial and business practice, nor does it estop plaintiff from adopting a different position for the 1974 taxation year.

4. The fact that the expenditures in question were made on portions of the land within defendant’s development which thereafter will be deeded to the municipality and no longer available to defendant for sale does not of itself prevent these expenses from being included in defendant’s inventory of remaining land, and recovered as such land together with houses built on it by the developer or the lots alone are sold from time to time. This presents a truer picture of defendant’s net income in any given year and is in accordance with GAAP principles.

5. The fact that there is nothing in the Income Tax Act to prevent such deductions from being treated as current expenses and deducted as such from income in the year in which they are made is not sufficient justification for departing from GAAP principles in dealing with them in this way. It is the converse argument which should be adopted to the effect that these principles should only be departed from if something in the Act specifically requires or authorizes this. Parliament has addressed itself to and dealt with the treatment to be given to other types of developers’ expenses but has not specifically dealt with the type of expenses with which we are concerned here, and failure to do so results in the desirability of applying generally accepted commercial and business practice as reflected in the GAAP principles.

For the above reasons I find that the expenses in question should have been capitalized as plaintiff seeks and taken into account in determining the costs of defendant’s inventory on hand at the end of its 1974 taxation year rather than being deducted from income as an expense item in that year.

Plaintiffs action will therefore be maintained with costs and the reassessment made for defendant’s 1974 taxation year is restored.