Rouleau,
J.:—The
issue
to
be
determined:
In
the
year
of
acquisition,
may
a
taxpayer
deduct
the
entire
amount
disbursed
for
prepaid
rental
for
a
parcel
of
vacant
land
for
which
the
lease
extends
over
a
period
of
some
60
years;
or,
in
the
alternative,
should
it
be
classified
as
a
capital
disbursement
and
a
capital
cost
allowance
permitted
pursuant
to
subsection
1100(11)
and
paragraph
1100(14)(b)
of
the
Income
Tax
Regulations.
The
issue
concerns
four
taxation
years
of
the
defendant,
the
Court
file
nos.
being
T-2541-84,
T-2542-84,
T-2543-84
and
T-2544-84.
This
decision
shall
be
applicable
to
all
those
taxation
years
which
have
been
reassessed
by
the
Minister
of
National
Revenue.
The
defendant
is
one
of
12
investors
who
banded
together
to
construct
an
apartment
building
on
leased
land.
These
individual
investors
appointed
an
agent,
namely
Coach
House
Properties
Ltd.,
to
act
on
their
behalf
in
the
acquisition
of
the
leased
land
and
to
contract
for
the
construction
of
the
building
to
be
located
on
the
lands
in
question.
A
brief
historical
background
respecting
previous
transactions
is
now
necessary.
By
an
agreement
dated
December
1,
1976,
Major
Development
Ltd.
leased
property
to
Woodbine
Management
Ltd.
for
a
term
of
60
years
for
a
total
consideration
of
$360,000.
The
first
instalment
of
$180,000
was
payable
at
the
time
of
the
execution
of
the
agreement
and
the
balance
of
$180,000
was
due
in
December
1977.
Before
the
second
instalment
was
to
be
paid
and
with
the
consent
of
the
head
lessor,
Woodbine
Management
Ltd.
disposed
of
its
leasehold
interest
in
October
1977
by
way
of
assignment
to
Coach
House
Properties
Ltd.
(defendant's
company).
At
the
closing
of
the
transaction
Coach
House
reimbursed
Woodbine
its
initial
lease
down
payment
of
$180,000
together
with
interest;
it
then
directly
disbursed
to
the
head
lessor
the
balance
of
$80,000
which
was
due
in
December
1977.
In
October
1977
the
defendant,
along
with
11
other
associates,
acquired
this
leasehold
interest
for
the
purpose
of
development,
each
of
them
investing
the
sum
of
$30,000.
For
the
taxation
year
1977
the
defendant
claimed
as
an
expense
the
total
sum
of
$30,000.
He
filed
his
annual
return
claiming
a
loss
carried
back,
affecting
his
1976
return
(Court
No.
T-2541-84),
a
current
loss
for
1977
(Court
No.
T-2542-84)
and
a
loss
carried
forward
affecting
his
1978
(Court
No.
2543-
84)
and
1979
returns
(Court
No.
T-2544-84).
The
Minister
reassessed
and
ruled
that
the
disbursement
was
a
capital
disbursement
and
allowed
a
capital
loss
pursuant
to
subsection
1100(11)
and
paragraph
1100(14)(b)
of
the
Income
Tax
Regulations.
When
the
matter
proceeded
before
the
Tax
Court
of
Canada,
the
defendant,
through
his
counsel,
conceded
that
the
$15,000
paid
to
Woodbine
should
be
treated
as
a
capital
disbursement
and
ac-
cepted
the
reassessment
for
that
portion
since
it
was
considered
an
acquisition
of
leasehold
interest.
On
the
other
hand,
he
maintained
that
the
$15,000
disbursed
by
the
defendant
and
paid
directly
to
the
head
lessor
was
prepaid
rental
and
therefore
deductible
as
a
business
expense
pursuant
to
paragraph
18(1)(a)
of
the
Income
Tax
Act.
The
parties
proceeded
by
way
of
an
agreed
statement
of
facts
which
I
reproduce:
AGREED
STATEMENT
OF
FACTS
The
parties
hereto,
by
their
respective
solicitors,
hereby
admit
the
facts
and
documents
hereinafter
specified
provided
that:
(a)
such
admission
is
made
for
the
purpose
of
this
appeal
only
and
may
not
be
used
against
either
party
by
any
other
person
or
on
any
other
occasion;
and
(b)
The
parties
hereto
reserve
their
right
to
object
to
the
relevancy
of
any
of
the
said
facts
and
documents.
1.
By
agreement
made
December
1,
1976,
Major
Development
Ltd.
leased
property
described
as:
Firstly,
Lot
B
of
Lot
7;
secondly,
Lot
B
of
Lot
9,
both
in
Block
440,
District
Lot
526,
Group
1,
New
Westminster
District,
Plan
5484,
and
South
Half
of
Lot
8,
Block
440,
District
Lot
526,
Plan
1276,
municipally
known
as
525
West
14th
Avenue,
in
the
City
of
Vancouver,
in
the
Province
of
British
Columbia
to
Woodbine
Management
Ltd.
2.
A
copy
of
the
lease
agreement
referred
to
in
paragraph
1
hereof
is
annexed
as
Schedule
"A”
to
this
agreement.
3.
Woodbine
Management
Ltd.
paid
$180,000
to
Major
Development
Ltd.
on
or
about
December
30,
1976.
4.
The
lease
was
modified
by
agreement
made
October
5,
1977
between
Major
Development
Ltd.
and
Woodbine
Management
Ltd.
A
copy
of
the
modification
of
the
lease
agreement
is
annexed
as
Schedule
“B”
to
this
agreement.
5.
By
agreement
made
October
11,
1977
between
the
Defendant
and
others
and
Coach
House
Properties
Ltd.
and
Cambridge
Properties
Ltd.,
the
Defendant
and
eleven
other
individuals
confirmed
the
appointment
of
Coach
House
Properties
Ltd.
as
their
agent
and
trustee
for
certain
purposes
including
the
execution
of
a
60
year
lease
of
the
property
described
in
paragraph
1
and
management
of
a
33
unit,
4-storey
frame
apartment
to
be
constructed
thereon.
A
copy
of
the
agreement
is
annexed
as
Schedule
“C”
to
this
agreement.
6.
By
agreement
made
October
5,
1977
between
Woodbine
Management
Ltd.
and
Coach
House
Properties
Ltd.,
the
lease
was
assigned
to
Coach
House
Properties
Ltd.
A
copy
of
the
assignment
of
lease
agreement
is
annexed
as
Schedule
“D”
to
this
agreement.
7.
A
copy
of
the
statement
of
adjustments
in
respect
of
the
sale
and
purchase
of
the
leasehold
interest
is
annexed
as
Schedule
“E”
to
this
agreement.
8.
On
October
12,
1977,
Messrs.
Davis
&
Co.
drew
cheques
on
the
firm's
trust
account
as.
follows:
(a)
a
cheque
in
the
amount
of
$202,274.35
payable
to
Major
Development
Ltd.
pursuant
to
the
statement
of
adjustments;
and
(b)
cheques
in
the
amounts
of
$74,331.40,
$64.73
and
$137,769.31
payable
to
Woodbine
Management
Ltd.
pursuant
to
the
statement
of
adjustments.
Copies
of
the
trust
ledgers
are
annexed
as
Schedule
“F”
to
this
agreement.
9.
In
computing
his
income
for
the
1977
taxation
year,
the
Defendant
deducted,
on
a
cash
basis,
inter
alia,
the
sum
of
$30,000
being
his
proportionate
share
of
the
amount
of
$360,000
referred
to
in
the
assignment
of
lease
agreement.
A
copy
of
the
Summary
of
Development
Expenses
which
was
attached
to
the
Defendant’s
1977
Income
Tax
Return
is
annexed
as
Schedule
“G”
to
this
agreement.
Dated
at
Vancouver,
British
Columbia,
this
13th
day
of
September,
1985.
In
addition
to
the
agreed
statement
of
facts,
I
think
it
pertinent
at
this
time
that
some
of
the
clauses
from
the
head
lease
dated
December
1,
1976,
between
Major
Development
Ltd.
and
Woodbine
Management
Ltd.
be
also
reproduced:
1.00
In
consideration
of
the
Rents,
Covenants,
Conditions
and
Agreements
herein
reserved
and
contained
on
the
part
of
the
Lessee
to
be
paid,
observed
and
performed,
the
Lessor
has
demised
and
leased,
and
by
these
presents
doth
demise
and
lease
unto
the
Lessee
ALL
AND
SINGULAR
the
lands
described
in
Schedule
“A”
hereto.
TERMS
TO
HAVE
AND
TO
HOLD
the
demised
lands
for
and
during
the
term
of
sixty
(60)
years
to
be
computed
from
and
including
the
1st
day
of
December,
1976
(hereinafter
called
the
“Commencement
Date’’)
and
from
thenceforth
next
ensuing
and
fully
to
be
completed
and
ended
on
the
30th
day
of
November,
2036
2.00
YIELDING
AND
PAYING
THEREFOR
during
the
said
term,
subject
to
the
provisos
hereinafter
contained,
the
rent
of
THREE
HUNDRED
AND
SIXTY
THOUSAND
($360,000.00)
DOLLARS
payable
$180,000.00
on
or
before
the
30th
day
of
December,
1976
and
the
balance
of
$180,000.00
with
interest
thereon
at
the
rate
of
twelve
(12%)
per
cent
per
annum
calculated
monthly
not
in
advance
from
the
30th
day
of
December,
1976
shall
become
payable
on
the
30th
day
of
December,
1977.
The
Lessee
covenants
and
agrees
to
make
payments
of
interest
accrued
to
date
on
the
31st
day
of
January,
1977
and
the
last
day
of
each
and
every
following
month
up
to
and
including
the
30th
day
of
November,
1977.
2.01
THE
PARTIES
confirm
that
the
payments
in
Article
2.00
herein
are
not
refundable
under
any
circumstances.
3.01
The
Lessee
shall
pay
as
they
become
due
all
taxes
assessed
against
the
demised
lands
and
any
structure
erected
thereon,
all
federal,
provincial
and
municipal
taxes,
rates,
duties
and
assessments,
whether
general
or
special,
and
in
the
event
the
Lessee
should
fail
to
so
do
the
Lessor
shall
be
at
liberty
to
make
such
payments
on
behalf
of
the
Lessee.
3.02
The
Lessee
shall
save
the
Lessor
harmless
from
any
and
all
payments
which
may
arise
out
of
the
construction
by
the
Lessee
of
any
structure
on
the
demised
lands
and
the
operation
thereof.
3.03
Any
amount
payable
by
the
Lessee
under
Articles
3.01
to
3.03
inclusive
shall
be
deemed
to
be
rent
and
shall
be
collectable
and
be
paid
as
additional
rent
within
thirty
days
after
demand
by
the
Lessor.
4.24
The
Lessor
and
the
Lessee
confirm
that
this
lease
is
a
lease
of
land
only
and
that
any
structure
to
be
built
on
the
said
lands
and
any
operation
thereof
are
the
full
and
complete
responsibility
of
the
Lessee
and
the
Lessee
covenants
and
agrees
to
save
the
Lessor
herein
from
any
and
all
claims
arising
therefrom.
5.00
The
Lessor
agrees
that
all
improvements
made
by
the
Lessee
shall
belong
to
and
be
the
property
of
the
Lessee.
6.00
It
is
the
intention
of
the
parties
hereto
that
this
lease
shall
be
a
net
lease,
and
that
the
rental
provided
to
be
paid
to
the
Lessor
hereunder
shall
be
net
to
the
Lessor,
and
shall
yield
to
the
Lessor
the
entire
such
rental
during
the
full
term
of
this
lease
without
abatement
for
any
cause
whatsoever
and
that
all
costs,
expenses
and
obligations
of
every
kind
and
nature
whatsoever
relating
to
and
whether
or
not
of
a
kind
now
existing
or
within
the
contemplation
of
the
parties
hereto,
shall
be
paid
by
the
Lessee.
Clause
6.01
provides
that
the
non-payment
of
the
second
instalment
for
rent,
in
December
of
1977,
would
constitute
default
and
reversion
of
the
property
to
the
lessor
without
any
refund
possible
regardless
of
the
lease
still
having
58
years
of
unexpired
term.
Clause
6.03
of
the
lease
granted
an
option
to
purchase
the
land
for
$400,000
in
November
1991;
a
further
option
to
purchase
could
be
exercised
on
November
30,
2011
for
$800,000.
Clause
6.04
reserved
to
the
lessor
the
right
to
purchase
the
improvements
to
the
land
(i.e.,
the
buildings)
at
the
end
of
the
term
for
nominal
consideration.
In
the
agreement
of
October
5,
1977
amending
the
head
lease,
Major
Development
Ltd.
permitted
the
assignment
by
Woodbine
Management
Ltd.
together
with
the
right
to
mortgage
the
leased
premises.
The
agreement
of
October
5,
1977,
the
assignment
of
lease,
conveyed
all
of
the
rights
that
Woodbine
may
have
had
to
Coach
House
and
was
consented
to
by
the
head
lessor.
The
agreement
of
October
11,
1977
is
witness
to
the
12
individuals
appointing
Coach
House
Properties
Ltd.
to
act
on
their
behalf.
In
article
4.03
it
refers
to
the
“purchase
price”
of
leased
lands;
as
well
article
5
entitled
“Cost
of
project”
refers
to
$360,000
being
“the
purchase
price
for
the
lease
of
the
leased
lands
(the
‘land
cost').”
Before
proceeding
to
restate
the
issue,
I
should
like
to
clarify
the
amount
in
dispute.
The
defendant
amended
his
initial
position
that
$30,000
should
be
construed
as
prepaid
rental;
he
is
now
satisfied
that
the
sum
of
$15,000
paid
to
Woodbine
should
be
treated
as
an
acquisition
of
leasehold
interest
and
the
remaining
$15,000,
he
submits,
is
prepaid
rental
pursuant
to
the
terms
of
the
lease
and,
as
such,
should
be
deductible
in
computing
income
pursuant
to
the
provisions
of
paragraph
18(1)(a)
of
the
Income
Tax
Act.
I
must
determine
the
legal
characterization
of
the
$15,000
of
prepaid
rental.
Does
the
sum
come
within
the
purview
of
paragraph
18(1)(a)
of
the
Income
Tax
Act
(“an
outlay
or
expense
.
..
made
or
incurred
by
the
taxpayer
for
the
purpose
of
gaining
or
producing
income
from
a
business
or
property,”
which
is
deductible)
or
under
paragraph
18(1)(b)
(“an
outlay,
loss
or
replacement
of
capital,
a
payment
on
account
of
capital
or
an
allowance
in
respect
of
depreciation,
obsolescence
or
depletion,”
which
is
not
deductible).
Before
the
Tax
Court
of
Canada
the
arguments
seem
to
have
been
evasive
and
the
Judge
does
not
appear
to
have
been
required
to
answer
the
question
fully.
There
was
a
finding
that
the
amount
was
construed
to
be
prepaid
rental.
It
then
followed
that
the
sum
was
determined
to
be
a
deductible
expense.
Simply
put,
because
one
professes
the
expenditure
at
issue
to
be
prepaid
rent,
it
does
not
necessarily
follow
that
the
expense
was
incurred
to
produce
income
within
the
meaning
of
paragraph
18(1)(a)
of
the
Act;
or
for
that
matter,
could
it
not
be
characterized
as
being
capital
disbursement.
These
points
appear
to
have
been
avoided
in
the
other
proceeding.
It
was
taken
for
granted
that
prepaid
rental
was
automatically
construed
to
be
an
expense
against
business
or
revenue.
Indeed
the
Tax
Court
of
Canada
concluded:
It
is
my
opinion
that
the
characterization
of
the
amount
as
prepaid
rent
is
appropriate
.
.
.
and,
as
if
the
natural
consequence
of
that
statement
were
the
following,
it
added:
The
end
result
of
that
is
that
the
amount
at
issue
of
$15,000,
paid
in
the
year
of
1977
as
(sic)
a
deductible
expense
of
the
appellant
for
that
year
and
affects
his
later
tax
returns
because
of
loss
carried
forward
and
various
other
provisions
of
the
Act.
No
reason
was
advanced
to
show
in
what
respect
prepaid
rent
met
the
test
of
“an
outlay
made
to
produce
income,’
nor
was
any
reason
given
indicating
that
this
sum
should
not
be
treated
as
capital.
By
the
notices
of
reassessment
dated
June
29,
1981,
The
Minister
of
National
Revenue
had
disallowed
the
deduction
of
the
proportionate
share
of
the
$360,000
paid,
and
capitalized
the
sum
as
an
amount
paid
for
the
acquisition
of
a
leasehold
interest,
entitling
the
defendant
to
capital
cost
allowance
over
forty
12-month
periods.
Essentially,
the
Minister
disallowed
defendant's
non-capital
losses
and
substituted
a
claim
for
capital
cost
allowance.
The
Minister's
position
is
that
the
alleged
expenditure
for
rent
paid
under
the
assignment
of
the
lease,
claimed
as
a
deduction
from
income,
was
an
outlay
or
payment
on
account
of
capital
within
the
meaning
of
paragraph
18(1)(b)
of
the
Income
Tax
Act
and
determined
it
to
be
property
of
Class
13
of
Schedule
B
(now
Schedule
II)
of
the
Income
Tax
Regulations.
The
Crown
characterized
the
$15,000
contributed
by
the
defendant
for
the
final
lease
payment
as
the
acquisition
of
a
capital
asset.
It
submits
that
the
lease
conferred
four
substantial
benefits
of
enduring
value
on
the
defendant
and
his
co-investors:
1)
exclusive
use
of
the
property
for
60
years;
2)
the
right
to
construct
buildings
on
the
leased
land;
3)
options
to
purchase
the
land
at
two
intervals
over
the
60-year
term;
and
4)
the
right
of
the
lessee
to
retain,
as
its
own,
any
buildings
constructed
on
the
leased
premises
and
to
remove
them
at
the
termination
of
the
lease
(subject
to
the
lessor's
option
to
purchase).
Defendant's
position
is
that
the
assignment
of
the
lease
is
twofold
in
its
effect
and
purpose.
In
part
of
the
transaction,
the
defendant
acquired
a
leasehold
interest,
something
of
value;
the
second
aspect,
he
assumed
an
obligation,
the
payment
of
rent.
Therefore,
the
second
aggregate
sum
of
$180,000
paid
by
the
co-investors
to
the
lessor
clearly
was
a
prepayment
of
rent
by
the
new
tenant
(pursuant
to
the
assignment
of
the
lease)
as
required
by
the
lease.
Defendant's
counsel
further
argued
that
this
prepayment
of
rental
by
the
defendant,
inter
alia,
constituted
an
outlay
made
for
the
purpose
of
producing
income
from
a
business
or
property
(not
on
account
of
the
acquisition
by
him
of
a
capital
property)
and
was
accordingly
properly
deducted
from
his
income
pursuant
to
paragraph
18(1
)(a)
of
the
Income
Tax
Act.
As
I
have
already
noted,
counsel
did
not
submit
any
legal
argument
justifying
this
position.
However,
concerning
the
sum
paid
to
the
lessor,
he
relied
heavily
on
the
statement
of
adjustments
on
file,
submitting
the
question
"Who
actually
paid
what
to
whom?"
The
statement
of
adjustments
shows
that
a
total
of
$202,274.35
(representing
the
$180,000
rent
due
and
owing
under
the
lease
agreement
as
well
as
interest
accrued
at
12
per
cent,
taxes
and
a
water
bill)
was
paid
to
Major
whereas
a
cheque
totalling
$212,165.44
(i.e.,
the
$180,000
reimbursement
plus
interest
and
several
other
items)
Was
made
out
to
Woodbine.
In
my
view,
the
onus
of
proof
that
the
final
$180,000
is
a
deductible
business
expense
lies
with
the
defendant
and
this
because
of
the
peremptory
nature
of
the
language
contained
in
paragraph
18(1)(a)
which
states
that
“no
deduction
shall
be
made,
in
respect
of
.
.
.
an
outlay
or
expense
except
to
the
extent
that
it
was
made
or
incurred
by
the
taxpayer
for
the
purpose
of
producing
income
from
the
business
or
property/'
In
other
words,
if
the
defendant
fails
to
prove
that
the
sum
was
a
business
expense,
the
presumption
is
that
the
amount
is
capital
in
nature.
I
stress
this
point
because
counsel
for
the
defendant
appeared
to
advance
a
contrary
submission.
He
seemed
to
assume
that,
since
he
had
conceded
that
the
reimbursement
of
$180,000
to
Woodbine
was
a
capital
outlay
to
acquire
a
leasehold
interest,
the
further
$180,000
paid
to
Major
had
to
be
a
business
expense.
That
conclusion
does
not
necessarily
follow.
Defendant's
counsel
placed
substantial
reliance
on
Interpretation
Bulletin
IT-261R
dated
May
1980.
In
argument
he
referred
the
Court
to
paragraph
6
of
this
Bulletin
which
provides
in
part:
.
.
.
In
the
past,
when
calculating
income
from
property
some
individual
taxpayers
deducted
prepaid
rent
in
the
fiscal
period
in
which
it
was
paid
rather
than
in
the
period
that
it
benefitted.
The
Department
will
accept
this
practice
for
payments
which
were
made
prior
to
December
5,
1977
.
.
.
“Prepayment
of
rent”
is
defined
in
paragraph
3
of
the
same
bulletin:
A
payment
is
a
prepayment
of
rent
where
a
tenant
makes
a
payment
to
his
landlord
and,
as
a
result
pays
no
rent
or
pays
rent
at
a
rate
that
is
less
than
he
would
otherwise
have
had
to
pay.
The
defendant
submits
that
this
bulletin,
replacing
IT-261,
dated
November
1975,
appears
to
clearly
state
the
position
by
the
Department.
In
other
words,
since
they
sought
to
clarify
a
previous
interpretation
with
a
later
bulletin
one
should
be
allowed
to
place
reliance
on
the
confusion,
or
the
lack
of
clarity,
in
the
taxpayer's
favour.
The
curious
aspect
of
IT-261R
is
that
it
makes
no
mention
of
the
fact
that
the
prepayment
of
rent
must
have
been
made
to
produce
income.
This
is
assumed.
The
interpretation
bulletin,
in
defining
“prepayment
of
rent,”
strangely
enough
does
not
describe
the
types
of
leases
to
which
it
is
applicable.
Above
all,
it
makes
no
distinction
between
long
and
short-term
leases,
thus
theoretically
enabling
someone
such
as
Mr.
Moore
to
deduct
the
entire
amount
of
prepaid
rent
regardless
of
the
length
of
the
lease
or
the
sums
involved.
Interpretation
Bulletin
IT-261
R
had
not
been
released
at
the
date
of
this
transaction.
The
bulletin
it
replaced,
IT-261
dated
November
1975,
is
of
some
importance
because
of
the
emphasis
placed
on
it
by
the
defendant
and
I
take
the
liberty
of
reproducing
the
bulletin
in
its
entirety:
1.
It
is
sometimes
difficult
to
distinguish
between
a
payment
of
a
premium,
and
a
payment
of
rent
in
advance.
Also,
lease
rental
must
not
be
confused
with
the
capital
cost
of
a
leasehold
interest
which
is
the
bonus
or
initial
consideration,
paid
in
respect
of
acquiring
the
right
to
occupy
the
property,
whether
that
property
is
being
acquired
as
business
premises
or
otherwise.
However,
a
payment
is
really
a
prepayment
of
rent
where
a
tenant
makes
a
payment
to
his
landlord
and,
as
a
result
pays
no
rent
or
pays
the
rent
at
a
rate
that
is
less
than
he
would
otherwise
have
had
to
pay.
2.
In
determining
whether
a
payment
is
a
premium
or
is
prepaid
rent,
a
lease
rental
or
the
capital
cost
of
a
leasehold
interest
or
is
made
as
whole
or
partial
consideration
in
respect
of
the
sale
of
a
greater
property
interest
than
a
leasehold
interest,
each
case
must
be
considered
in
the
context
of
the
factual
circumstances
of
the
transaction
It
is
the
substance
of
the
transaction
which
is
determining
of
its
nature
rather
than
the
name
agreed
on
by
the
parties
to
describe
it.
3.
Where
a
lessee
pays
in
a
lump
sum
the
rent
payable
annually
for
the
duration
of
the
lease,
it
is
considered
by
the
Department
that
he
does
not
acquire
any
new
right
or
privilege
but
merely
pays
the
rent
in
advance.
As
a
general
rule,
if
the
lessor
when
entering
into
a
contract
disposes
of
capital,
the
consideration
he
receives
will
be
in
the
nature
of
capital
while
if
he
only
assigns
the
use
of
this
capital
without
the
ownership,
the
consideration
will
be
in
the
nature
of
income.
4.
With
regard
to
the
deduction
of
a
rent
pre-payment
by
accrual-basis
taxpayers
engaged
in
a
business,
the
rent
prepayment
must
be
prorated
over
the
duration
of
the
lease
including
all
renewal
periods
unless
the
payment
can
be
shown
to
be
a
prepayment
of
rent
for
a
lesser
period
only.
An
accrual-basis
lessor
must
include
in
his
income
the
value
of
the
prepayment
in
the
year
it
becomes
due
and
payable,
but
may
claim
a
reserve
(see
paragraph
6
below).
For
the
purpose
of
computing
the
income
of
a
cash-basis
payee
or
for
the
purpose
of
computing
the
allowable
deductions
of
a
cash-basis
payer,
such
payments
may
not
be
averaged
or
prorated
over
the
leasehold
term
in
respect
of
which
they
are
paid.
5.
A
lump
sum
payment
made
by
a
tenant
engaged
in
a
business
which
constitutes
the
capital
cost
of
a
leasehold
interest
is
a
non-deductible
capital
outlay;
however,
capital
cost
allowance
may
be
claimed
either
under
class
13
of
Schedule
B
of
the
Regulations,
or,
if
applicable,
under
class
3,
6
31
or
32
where
the
conditions
of
subsection
1102(5)
of
the
Regulations
are
met.
6.
If
the
prepayment
of
rent
is
income
in
the
lessor's
hands,
he
will
be
entitled
to
deduct
a
reasonable
amount
as
a
reserve
in
respect
of
periods
for
which
rent
for
the
possession
or
use
of
land
has
been
received
in
advance,
by
virtue
of
paragraph
20(1)(m)(iii).
The
application
of
subparagraph
(iii)
is
normally
extended
to
prepaid
rentals
in
respect
of
any
real
property.
The
reasonable
amount
for
this
purpose
at
the
end
of
a
taxation
year
would
be
that
part
of
the
rent
received
in
advance
and
included
in
the
income
of
the
taxpayer
for
that
year
or
a
prior
taxation
year
which
relates
to
the
period
of
time
after
the
end
of
the
year
for
which
the
possession
or
use
of
the
land
must
be
made
available.
However,
where
a
taxpayer
reports
income
on
the
cash-basis
method,
subsection
20(7)
provides
that
no
reserve
may
be
deducted.
Paragraph
1
of
bulletin
IT-261
provides
for
a
definition
of
"prepayment
of
rent”
similar
to
that
contained
in
paragraph
3
of
the
revised
bulletin
(IT-
261R,
May,
1980).
Paragraph
2
lays
down
what
I
believe
to
be
the
correct
test
of
characterization
of
any
amount:
“It
is
the
substance
of
the
transaction
which
is
determining
of
its
nature
rather
than
the
name
agreed
on
by
the
parties
to
describe
it.”
In
this
respect,
I
agree
with
Crown
counsel.
Defendant's
approach,
focussing
on
the
statements
of
adjustments,
cannot
govern
the
interpretation
of
the
amount
at
issue
in
this
case.
Paragraph
3
achieves
the
same
result
as
paragraph
6
of
IT-261
R:
it
seems
to
permit
a
deduction
for
rent
prepaid
in
a
lump
sum
even
though
the
amount
represents
rent
payable
over
the
term
of
a
lease.
Nevertheless,
there
is
a
hint
in
paragraph
3
where
it
is
stated,
"he
does
not
acquire
any
new
right
or
privilege’,
that
an
amount
prepaid
in
satisfaction
of
rent
is
not
to
be
considered
capital
in
nature.
It
then
followed
that,
pursuant
to
paragraph
4,
Mr.
Moore
sought
to
deduct
the
amount
on
a
cash
basis.
Revenue
Canada
advised,
by
Special
Release
dated
December
5,
1977,
(therefore
for
our
purposes
after
the
$180,000
had
been
paid
by
the
investors
to
Major
on
October
12,1977)
that,
notwithstanding
Interpretation
Bulletin
IT-261,
rent
prepaid
for
a
period
in
excess
of
five
years
(which
is
the
case
here)
would
be
regarded
as
a
capital
expenditure
for
leased
property
and
that
the
bulletin
would
be
revised
accordingly.
The
major
distinction
is
that
Interpretation
Bulletin
IT-261R
(dated
May
1980)
made
no
mention
of
the
time
restriction.
I
would
like
to
make
reference
to
Interpretation
Bulletin
IT-487.
According
to
paragraph
2(a)
of
this
more
recent
bulletin
it
is
not
necessary
to
show
that
income
actually
resulted
from
the
particular
outlay
or
expenditure
itself;
it
now
requires
proof
that
the
expense
was
for
the
purpose
of
produc-
ing
income,
or
was
part
of
the
income-earning
process.
The
intention
of
the
taxpayer
and
the
other
11
investors
in
acquiring
the
lease
from
Woodbine
now
becomes
important.
Their
stated
objective
was
to
erect
a
33-unit
apartment
building
on
the
site
and
earn
rental
income.
Their
final
objective
was
income
production,
but,
when
Coach
House
prepaid
the
rent
to
Major,
it
must
be
noted
that
the
building
had
not
yet
been
constructed.
The
various
interpretation
bulletins
which
I
have
referred
to
are
not
binding
or
authoritative.
They
are
statements
of
policy
enunciated
by
Revenue
Canada.
If
the
end
result
be
that
bulletins
conflict
with
the
legislator's
intent
in
drafting
paragraph
18(1
)(a)
of
the
Act,
I
consider
myself
free
to
disregard
them
or
restrict
them
in
their
scope
or
meaning
in
order
to
give
effect
to
the
true
intention
of
the
law.
Since
the
only
substantive
argument
submitted
on
behalf
of
the
defendant
related
to
the
interpretation
of
the
various
bulletins
issued
by
the
Minister
of
National
Revenue,
I
feel
it
necessary
to
review
them
in
much
more
detail
and
afford
them
greater
scrutiny
than
they
would
otherwise
be
entitled
to.
Conclusions
Having
carefully
examined
the
real
nature
of
the
expenses
in
question
and
having
given
considerable
thought
as
to
why
they
were
incurred,
I
have
come
to
the
conclusion
that
the
$15,000
deducted
by
the
taxpayer
was
an
expenditure
on
account
of
capital.
I
hold
this
view
for
several
reasons.
In
the
case
of
Johns-Mansville
Canada
Inc.
v.
The
Queen,
[1985]
2
C.T.C.
111
at
126;
85
D.T.C.
5373
at
5384
Estey,
J.,
speaking
for
a
unanimous
Supreme
Court
of
Canada,
refers
to
a
“‘basic
concept
in
tax
law
that
where
the
taxing
statute
is
not
explicit,
reasonable
uncertainty
or
factual
ambiguity
resulting
from
the
lack
of
explicitness
in
the
statute
should
be
resolved
in
favour
of
the
taxpayer.”
I
am
not
convinced,
on
a
reading
of
the
Income
Tax
Act,
that
there
exists
any
uncertainty
or
factual
ambiguity
as
to
the
deductibility
of
prepaid
rent.
The
uncertainty,
if
any,
lies
in
the
characterization
of
the
amount
at
issue
as
whether
it
should
be
treated
as
an
expense
against
revenue
or
a
capital
outlay.
It
is
true
that
the
Income
Tax
Act
does
not
define
what
is
meant
by
"an
outlay
.
.
.
for
the
purpose
of
producing
income";
nor
does
it
attribute
any
specific
meaning
to
the
expression
"capital
outlay".
However,
the
mere
lack
of
a
definition
in
the
Act
cannot
be
considered
as
sufficient
to
create
confusion
if
other
means
are
available
through
which
the
characterization
of
the
sum
involved
can
be
ascertained.
The
ambiguity
does
not
originate
within
the
Act
itself
but
rather
from
seemingly
conflicting
interpretations
found
in
the
interpretation
bulletins.
Consequently,
the
rule
resolving
doubts
in
the
taxpayer’s
favour
would
have
no
application
to
this
case.
Moreover,
this
rule
would
conflict
with
the
well-established
principle
that,
in
order
to
claim
a
deduction,
the
taxpayer
must
clearly
bring
himself
within
a
specific
provision
of
the
Act.
As
I
have
already
stated,
the
statute
puts
the
onus
on
Mr.
Moore
to
satisfy
me
that
he
falls
within
the
purview
of
paragraph
18(1)(a)
of
the
Act
rather
than
paragraph
18(1)(b).
In
passing
I
would
like
to
note
that
the
taxpayer
filed
his
1977
tax
return
in
1978,
some
months
after
the
Department
of
National
Revenue
had
issued
its
Special
Release
of
December
5,
1977
wherein
a
policy
of
placing
a
five-
year
restriction
on
prepaid
rent
was
clearly
enunciated.
Not
being
bound
by
the
interpretation
bulletins,
my
task
is
to
interpret
the
Income
Tax
Act
with
a
view
to
determining
whether
it
was
the
legisla-
tor's
intent
to
allow
a
deduction
for
prepaid
rent
in
the
manner
sought
by
the
taxpayer.
The
recent
decision
of
the
Supreme
Court
of
Canada
in
Stubart
Investments
Ltd.
v.
The
Queen,
[1984]
C.T.C.
294;
84
D.T.C.
6305
provides
some
guidance
in
this
respect.
At
315-16
(D.T.C.
6322-23),
Mr.
Justice
Estey
said:
.
.
.
It
seems
more
appropriate
to
turn
to
an
interpretation
test
which
would
provide
a
means
of
applying
the
Act
so
as
to
affect
only
the
conduct
of
a
taxpayer
which
has
the
designed
effect
of
defeating
the
expressed
intention
of
Parliament.
In
short,
the
tax
statute,
by
this
interpretative
technique,
is
extended
to
reach
the
conduct
of
the
taxpayer
which
clearly
falls
within
“the
object
and
spirit”
of
the
taxing
provisions,
[
.
.
.
]
The
desired
objective
is
a
simple
rule
which
will
provide
uniformity
of
application
of
the
Act
across
the
community,
and
at
the
same
time,
reduce
the
attraction
of
elaborate
and
intricate
tax
avoidance
plans,
and
reduce
the
rewards
to
those
best
able
to
afford
the
services
of
tax
technicians.
In
all
this,
one
must
keep
in
mind
the
rules
of
statutory
interpretation,
for
many
years
called
a
strict
interpretation,
whereby
any
ambiguities
in
the
charging
provisions
of
a
tax
statute
were
to
be
resolved
in
favour
of
the
taxpayer;
the
taxing
statute
was
Classified
as
a
penal
statute.
See
Grover
&
lacobucci,
Materials
on
Canadian
Income
Tax,
5th
ed.,
(1981),
pp.
62-65.
The
converse
was,
of
course,
also
true.
Where
the
taxpayer
sought
to
rely
on
a
specific
exemption
or
deduction
provided
in
the
statute,
the
strict
rule
required
that
the
taxpayer’s
claim
fall
clearly
within
the
exempting
provision,
and
any
doubt
would
there
be
resolved
in
favour
of
the
Crown.
See
Lumbers
v.
M.N.R.,
[1944]
C.T.C.
67;,
[1943]
C.T.C.
281;
2
D.T.C.
631
(Ex
Ct),
affirmed,
[1944]
S.C.R.
167;
and
W.
A.
Sheaffer
Pen
Co
Ltd.
v.
M.N.R.,,
[1953]
Ex
CR
251;,
[1953]
C.T.C.
345;
53
D.T.C.
1223.
Indeed
the
introduction
of
exemptions
and
allowances
was
the
beginning
of
the
end
of
the
reign
of
the
strict
rule.
.
.
.
Courts
today
apply
to
this
statute
the
plain
meaning
rule,
but
in
a
substantive
sense
so
that
if
a
taxpayer
is
within
the
spirit
of
the
charge,
he
may
be
held
liable
While
not
directing
his
observations
exclusively
to
taxing
statutes,
the
learned
author
of
Construction
of
Statutes,
2nd
ed.,
(1983),
at
87,
E.
A.
Driedger,
put
the
modern
rule
succinctly:
Today
there
is
only
one
principle
or
approach,
namely,
the
words
of
an
Act
are
to
be
read
in
their
entire
context
and
in
their
grammatical
and
ordinary
sense
harmoniously
with
the
scheme
of
the
Act,
the
object
of
the
Act,
and
the
intention
of
Parliament.
The
case
of
Lor-Wes
Contracting
Ltd.
v.
The
Queen,
[1985]
2
C.T.C.
79;
85
D.T.C.
5310
(F.C.A.),
followed
in
the
footsteps
of
the
Stubart
decision
and
Mr.
Justice
MacGuigan
stated
at
83
(D.T.C.
5313):
...
The
only
principle
of
interpretation
now
recognized
is
a
words-in-total-
context
approach
with
a
view
to
determining
the
object
and
spirit
of
the
taxing
provisions.
Keeping
in
mind
the
general
principles
of
interpretation
of
tax
statutes
to
which
I
have
just
referred,
I
must
now
proceed
to
determine
whether
the
amount
at
issue
in
this
case
ought
to
be
viewed
as
capital
or
as
an
expense
against
revenue.
In
The
Queen
v.
Metropolitan
Properties
Co.
Ltd.,
[1985]
1
C.T.C.
169;
85
D.T.C.
5128
(F.C.T.D.)
Mr.
Justice
Walsh
enunciated
two
principles
which
seem
to
be
pertinent
in
these
proceedings.
At
180
(D.T.C.
5137)
he
wrote:
1.
General
Accepted
Accounting
Principles
(GAAP)
should
normally
be
applied
for
taxation
purposes
also,
as
representing
a
true
picture
of
a
corporaion’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
of
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.
It
is
a
generally
accepted
accounting
principle
that
the
acquisition
of
a
parcel
of
land
for
development
purposes
constitutes
a
capital
expenditure.
In
this
particular
case,
the
investors
acquired
leased
land
rather
than
title
and
determined
the
expenditure
to
be
prepaid
rent.
Since
substance
is
to
prevail
over
form,
I
am
not
bound
by
what
the
taxpayer
chose
to
call
the
disbursement.
I
am
of
the
view
that
I
am
confronted
here
with
what
is
generally
referred
to
as
a
‘‘capital
lease”
in
accounting
circles.
In
International
Survey
of
Accounting
Principles
and
Reporting
Practices
(edited
by
R.D.
Fitzgerald,
A.D.
Stickler
and
T.
R.
Watts
for
Price
Waterhouse
International,
distributed
by
Butterworths,
Scarborough,
Ontario,
1979)
the
authors
state
at
page
17:
[O]ften
the
lessee
may
acquire
ownership
of
the
property
at
the
end
of
the
lease
on
very
favourable
or
nominal
terms.
In
other
words,
the
lease
has
sometimes
become
a
form
of
deferred
purchase
and
many
enterprises
find
it
advantageous
to
lease
many
or
all
of
their
assets.
Such
leases
often
also
provide
taxation
benefits
to
the
lessor
and
to
the
lessee.
In
these
cases,
although
the
contract
is
legally
a
lease,
it
is
in
substance
equivalent
to
a
purchase
with
the
purchase
price
being
paid
in
instalments.
Although
legal
title
to
the
ownership
of
the
property
may
not
pass
until
the
end
of
the
lease,
in
reality
the
benefits
and
risks
of
ownership
pass
from
the
lessor
to
the
lessee
at
the
inception
of
the
lease
term.
It
is
well
established
in
many
countries
that
accounting
should
attempt
to
reflect
the
substance
of
a
transaction
rather
than
merely
record
the
legal
form.
Where
this
concept
is
accepted,
it
is
logical
to
suggest
that
a
lease
which
in
effect
transfers
the
benefits
and
risks
of
ownership
should
be
accounted
for
as
a
purchase
by
the
lessee
and
as
a
sale
by
the
lessor.
Notwithstanding
the
absence
of
transfer
of
title,
the
property
would
be
recorded
in
the
balance
sheet
of
the
lessee
as
an
asset
and
a
corresponding
liability
would
be
recorded
for
future
rental
payments.
This
approach
to
lease
accounting
has
been
adopted
in
the
professional
pronouncements
of
some
countries.
These
pronouncements
accept
the
philosophy
of
accounting
for
a
lease
as
if
it
were
a
purchase,
but
vary
considerably
in
the
extent
of
their
detailed
application
procedures.
For
example,
the
Canadian
pronouncement
is
stated
as
a
general
principle,
with
guidance
but
no
precise
rules
for
its
application
.
.
.
The
generally
accepted
view
to
which
the
authors
allude
is
that
contained
in
section
3065
of
the
Canadian
Institute
of
Chartered
Accountants'
Handbook.
The
general
principles
of
accounting
for
leases
are
to
be
found
in
subsection
3065.09
and
3065.10
as
follows:
3065.09
A
lease
that
transfers
substantially
all
of
the
benefits
and
risks
of
ownership
related
to
the
leased
property
from
the
lessor
to
the
lessee
should
be
accounted
for
as
a
capital
lease
by
the
lessee
and
as
a
salestype
or
direct
financing
lease
by
the
lessor.
[JAN.
1979]
3065.10
A
lease
where
the
benefits
and
risks
of
ownership
related
to
the
leased
property
are
substantially
retained
by
the
lessor
should
be
accounted
for
as
an
operating
lease
by
the
lessee
and
lessor.
[JAN.
1979]
Since
I
am
only
concerned
with
the
lessee's
position,
I
plan
to
deal
with
certain
accounting
aspects
of
leases
from
the
lessee’s
standpoint
and
refer
to
two
definitions
which
I
feel
are
relevant:
DEFINITIONS
3065.03
The
following
definitions
have
been
adopted
for
purposes
of
this
Section:
(a)
Capital
lease
is
a
lease
that,
from
the
point
of
view
of
the
lessee,
transfers
substantially
all
the
benefits
and
risks
incident
to
ownership
of
property
to
the
lessee.
(e)
Bargain
purchase
option
is
a
provision
allowing
the
lessee,
at
its
option,
to
purchase
the
leased
property
for
a
price
which
is
sufficiently
lower
than
the
expected
fair
value
of
the
property,
at
the
date
the
option
becomes
exercisable,
that
exercise
of
the
option
appears,
at
the
inception
of
the
lease,
to
be
reasonably
assured.
In
order
to
determine
whether
a
lease
is
to
be
classed
as
capital
outlay
or
an
operating
lease,
the
Canadian
Institute
of
Chartered
Accountants
(“C.I.C.A.”)
advances
the
following
propositions
in
subsections
3065.05
and
3065.06:
3065.05
The
Recommendations
in
this
Section
are
derived
from
the
view
that
property
has
benefits
and
risks
associated
with
its
ownership.
Benefits
may
be
represented
by
the
expectation
of
profitable
operation
over
the
property's
economic
life
and
of
gain
from
appreciation
in
value
or
realization
of
a
residual
value.
Risks
include
possibilities
of
losses
from
idle
capacity
or
technological
obsolescence
and
of
variations
in
return
due
to
changing
economic
conditions.
In
the
opinion
of
the
Accounting
Research
Committee,
a
lease
that
transfers
substantially
all
of
the
benefits
and
risks
of
ownership
to
the
lessee
is
in
substance
an
acquisition
of
an
asset
and
an
incurrence
of
an
obligation
by
the
lessee
and
a
sale
or
financing
by
the
lessor.
3065.06
From
the
point
of
view
of
a
lessee,
a
lease
would
normally
transfer
substantially
all
of
the
benefits
and
risks
of
ownership
to
the
lessee
when,
at
the
inception
of
the
lease,
one
or
more
of
the
following
conditions
are
present:
(a)
There
is
reasonable
assurance
that
the
lessee
will
obtain
ownership
of
the
leased
property
by
the
end
of
the
lease
term.
Reasonable
assurance
that
the
lessee
will
obtain
ownership
of
the
leased
property
would
be
present
when
the
terms
of
the
lease
would
result
in
ownership
being
transferred
to
the
lessee
by
the
end
of
the
lease
term
or
when
the
lease
provides
for
a
bargain
purchase
option.
(b)
The
lease
term
is
of
such
a
duration
that
the
lessee
will
receive
substantially
all
of
the
economic
benefits
expected
to
be
derived
from
the
use
of
the
leased
property
over
its
life
span.
Although
the
lease
term
may
not
be
equal
to
the
economic
life
of
the
leased
property
in
terms
of
years,
the
lessee
would
normally
be
expected
to
receive
substantially
all
of
the
economic
benefits
to
be
derived
from
the
leased
property
when
the
lease
term
is
equal
to
a
major
portion
(usually
75%
or
more)
of
the
economic
life
of
the
leased
property.
This
is
due
to
the
fact
that
new
equipment,
reflecting
later
technology
and
in
prime
condition,
may
be
assumed
to
be
more
efficient
than
old
equipment
which
has
been
subject
to
obsolescence
and
wear.
(c)
.
.
.
In
view
of
the
fact
that
land
normally
has
an
indefinite
useful
life,
it
is
not
possible
for
the
lessee
to
receive
substantially
all
the
benefits
and
risks
associated
with
its
ownership,
unless
there
is
reasonable
assurance
that
ownership
will
pass
to
the
lessee
by
the
end
of
the
lease
term.
The
Institute
concludes
that
the
lessee
should
account
for
a
capital
lease
as
an
asset
and
in
subsection
3065.17
states:
3065.17
The
capitalized
value
of
a
depreciable
asset
under
a
capital
lease
would
be
amortized
over
the
period
of
expected
use,
on
a
basis
that
is
consistent
with
the
lessee's
depreciation
policy
for
other
similar
fixed
assets.
If
the
lease
contains
terms
that
allow
ownership
to
pass
to
the
lessee
or
a
bargain
purchase
option,
the
period
of
amortization
would
be
amortized
over
the
lease
term.
In
dealing
with
operating
leases
or
those
that
may
be
expended,
the
C.I.C.A.
submits:
Method
of
accounting
for
an
operating
lease
3065.29
Because
most
operating
leases
are
short-term,
charging
lease
rentals
to
expense
on
a
straight-line
basis
over
the
lease
term,
even
if
not
payable
in
such
a
manner,
would
normally
result
in
recognition
of
the
expense
in
a
manner
that
is
representative
of
the
time
pattern
in
which
the
user
derives
benefit
from
the
leased
property.
However,
circumstances
may
indicate
that
another
basis
is
required
to
achieve
this
result.
3065.30
Lease
rentals
under
an
operating
lease
should
be
included
in
the
determination
of
net
income
over
the
lease
term
on
a
straight-line
basis
unless
another
systematic
and
rational
basis
is
more
representative
of
the
time
pattern
of
the
user's
benefit.
[JAN.
1979]
I
am
satisfied
that
the
defendant's
lease
exhibits
the
characteristics
of
a
capital
lease.
There
is
reasonable
assurance
that
the
investors
will
exercise
their
option
to
purchase
the
land
in
view
of
the
fact
that
they
were
to
construct
a
33-unit
apartment
building
on
the
site;
they
were
to
retain
land
improvements
upon
exercise
of
their
option
to
purchase;
they
acquired
substantially
all
the
benefits
and
risks
incidental
to
ownership
of
property.
The
lease
is
for
60
years
as
opposed
to
short-term.
It
is
of
“enduring
value”
and
therefore
prima
facie
not
an
operating
lease.
The
investors
will
receive
substantially
all
the
economic
benefits
one
would
expect
to
derive
from
the
use
of
the
land
as
owners
in
fee
simple.
The
prepaid
rental
for
the
entire
term
has
transferred
to
the
lessee
all
the
benefits
and
risks
of
ownership.
In
my
view,
they
have
created
a
capital
lease.
The
true
intentions
of
the
parties
acquiring
this
leasehold
interest
can
be
found
in
article
5
of
the
agreement
dated
October
11,
1977.
They
themselves
refer
to
the
consideration
as
“land
cost’’;
by
implication
they
were
acquiring
land
in
a
substantive
way
and
were
assuming
the
benefits
as
well
as
the
risks
incidental
to
ownership.
Since
the
deduction
of
prepaid
rent
in
the
manner
contemplated
by
the
taxpayer
is
not
expressly
permitted
by
any
section
of
the
Income
Tax
Act
and,
as
the
amount
would
not,
even
according
to
generally
accepted
accounting
principles,
be
deductible
in
any
event,
I
find
that
Mr.
Moore
has
fallen
short
of
satisfying
me
that
the
$15,000
at
issue
did
not
constitute
a
capital
outlay.
By
the
very
fact
that
Parliament
felt
it
necessary
to
subsequently
enact
subparagraph
18(9)(a)(ii)
of
the
Income
Tax
Act,
it
seems
to
me
that
it
had
never
been
the
legislator’s
intent
to
allow
this
kind
of
deduction
for
prepaid
rent
on
a
cash
basis
in
the
year
where
the
expenditure
was
incurred.
It
may
well
be
that
rent
prepaid
annually
may
have
been
deductible
in
accordance
with
generally
accepted
accounting
principles
over
the
term
of
an
operating
lease,
but
this
is
not
in
issue.
I
recently
had
to
deal
with
the
problem
in
Tomenson
Inc.
v.
The
Queen,
[1986]
1
C.T.C.
525;
86
D.T.C.
6267.
In
that
particular
case
I
dealt
with
the
characterization
of
expenditures
in
which
I
found
certain
distinctions
between
expenditures
on
revenue
account
and
on
capital
account.
At
531-32
(D.T.C.
14-15)
I
wrote:
The
second
test
of
characterization
that
has
been
adopted
by
the
courts
—
the
“enduring
benefit”
test
—
has
its
source
in
the
decision
of
the
House
of
Lords
in
British
Insulated
and
Helsby
Cables
Ltd.
v.
Atherton,
[1926]
A.C.
205
wherein
Viscount
Cave
enunciated
(at
pp.
213-214)
the
“enduring
benefit"
test:
..
.
But
when
an
expenditure
is
made,
not
only
once
and
for
all,
but
with
a
view
to
bringing
into
existence
an
asset
or
an
advantage
for
the
enduring
benefit
of
a
trade,
I
think
that
there
is
a
very
good
reason
(in
the
absence
of
special
circumstances
leading
to
an
opposite
conclusion)
for
treating
such
an
expenditure
as
properly
attributable
not
to
revenue
but
to
capital.
(Emphasis
added)
Although
Viscount
Cave
did
not
elaborate
on
the
meaning
of
the
expression
“enduring
benefit”,
in
commenting
on
the
“once
and
for
all”
test
enunciated
by
Lord
Dunedin
in
Vallambrosa
Rubber
Co.
v.
Farmer
1910
S.C.
519,
at
525,
he
did
determine
(at
p.
213)
that,
notwithstanding
the
lump
sum
method
of
payment
in
securing
an
asset
or
advantage,
such
payment
would
not
be
characterized
as
an
expenditure
on
capital
account
if
that
sum
“would
be
properly
chargeable
against
the
receipts
for
the
year".
One
can
infer
from
Viscount
Cave’s
dictum
that
if
the
benefit
or
value
derived
from
the
acquisition
of
an
asset
is
consumed
in
the
year
in
which
it
was
acquired,
or
over
at
least
a
two-year
period,
the
cost
of
the
acquisition
of
the
asset
or
advantage
might
reasonably
be
considered
as
a
revenue
expenditure.
This
line
of
reasoning
was
pursued
in
the
decision
of
the
House
of
Lords
in
Hinton
v.
Maden
and
Ireland
Ltd.,
[1959]
1
W.L.R.
875
wherein
Lord
Reid,
in
commenting
on
the
demarcation
between
an
expenditure
on
revenue
account
and
a
capital
outlay,
stated
(at
p.
886):
.
.
.
I
claim
no
expert
knowledge
of
accountancy
or
of
business
methods,
and
the
only
practical
difference
that
occurs
to
me
—
and
none
other
was
suggested
in
argument
—
is
that
if
you
treat
a
sum
as
capital
expenditure
you
do
not
write
it
all
off
in
one
year
or
set
it
all
against
the
income
of
one
year,
whereas
if
you
treat
it
as
revenue
expenditure
the
whole
of
it
is
set
off
against
the
revenue
of
the
year
when
it
is
expended.
I
would
suppose
that
accounts
are
intended
to
have
as
close
a
relation
as
is
reasonably
practicable
to
reality.
If
you
buy
plant
which
still
has
a
substantial
value
at
the
end
of
the
year
I
would
suppose
that
that
value
ought
to
be
reflected
somewhere
in
the
accounts.
If
the
cost
is
treated
as
capital
expenditure
there
seems
to
be
no
difficulty
in
writing
off
that
cost
year
by
year
as
the
plant
wears
out
or
becomes
obsolete,
but
if
the
cost
is
treated
as
revenue
expenditure
I
do
not
know
what
item
in
the
next
year’s
accounts
would
reflect
the
continuing
value
of
the
plant.
I
do
not
suggest
that
this
distinction
is
or
should
be
an
inflexible
rule.
There
may,
for
all
I
know,
be
good
reasons
for
not
following
it
in
particular
cases,
but
in
the
absence
of
any
indication
of
any
specialty
in
this
case
I
am
inclined
to
approach
this
case
in
that
way.
[Emphasis
added.]
Relating
the
above
analysis
to
the
facts
of
the
present
case,
I
am
satisfied
that
the
defendant's
acquisition
of
the
lands
constitutes
an
asset
that
is
of
an
enduring
benefit.
The
lease
prepayment
is
not
merely
a
revenue
expenditure
but
rather
an
outlay
of
capital
within
the
meaning
of
paragraph
18(1)(b)
of
the
Income
Tax
Act.
For
all
of
the
above
reasons,
I
hereby
set
aside
the
decision
of
the
Tax
Court
of
Canada
and
restore
the
Minister's
reassessment
for
the
taxation
years
1976,
1977,
1978
and
1979.
The
plaintiff
shall
be
allowed
its
costs.
Appeal
allowed.
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