Firestone v. The Queen, 87 DTC 5237, [1987] 2 CTC 1 (FCA), rev'g 86 DTC 6405, [1986] 2 CTC 251 (FCTD)

MacGuigan, J.—This case reveals new wrinkles in the old cloth of income tax law, specifically with respect to the traditional problem of whether a sum of money has the quality of income or of capital. This kind of problem may arise either under the category of receipts or under that of expenditures. As Lord Macmillan put it in Van den Berghs, Limited v. Clark, [1935] A.C. 431 at 439; 19 T.C. 390 at 429, "the argumentative position alternates according as it is an item of receipt or an item of disbursement that is in question, and the taxpayer and the Crown are found alternately arguing for the restriction or the expansion of the conception of income.” In the case at bar what is in question are expenditures, which the taxpayer is claiming as admissible deductions, and which the Crown is maintaining are capital items.

I

This is an appeal from a judgment of McNair, J. dated July 7, 1986, the corrected pronouncement of which (by order elated August 27, 1986) allowed the appellant's appeal against ministerial reassessments made for his 1969 to 1972 taxation years inclusive, with respect to the deductibility of certain expenses which the parties agreed were deductible, but in every other respect upheld the reassessments.

The learned trial judge accordingly rejected the appellant's contention that the Minister of National Revenue should also be required to reconsider and reassess on the basis that expenses incurred by the appellant during the 1969 to 1972 taxation years and categorized under the headings of "Investigation of Opportunities" and "Supervision of Companies" in total amounts of $77,590 and $101,640 respectively, should also be allowed as deductions in the relevant years.

The facts are essentially these. In 1968 the appellant resigned as president of Firestone Tire and Rubber Company of Canada Limited with a view to starting his own "venture-capital" business whereby he would acquire small to medium-sized manufacturing concerns that were ailing or financially distressed but had the potential for being turned around through proper supervision and direction of their affairs. He hoped to put together a group of companies diversified in the manufacturing sector as a "mini-conglomerate", the shares of which might eventually be traded publicly.

To achieve his goal, the appellant leased office space and hired full-time and part-time employees to assist him in investigating various business opportunities and in supervising the operation of acquisitions once made. During the years 1969-1972 the appellant and his employees investigated and evaluated a wide range of business opportunities or prospects, approximating 50 in number, and including products, patents, licences and know-how, as well as companies.

The appellant made no acquisitions in 1969, but acquired all the issued shares of three companies in 1970. In 1971 he caused to be incorporated and acquired all the shares of Firan International Limited ("Firan"), which then acquired all the shares of the capital stock of a further acquisition. In 1972 the appellant transferred all his shares in the three companies acquired in 1970 to Firan, which then became the holding company for the shares of the four companies.

After the first acquisitions in 1970 the appellant and his employees were engaged in supervising, monitoring and conferring with the management of the acquired companies, giving them general direction and guidance without becoming involved in day-to-day operations, with a view to making the companies more profitable. They also, of course, continued investigating new opportunities.

After the transfer of the shares of the operating companies to Firan in 1972, the appellant's two key employees became employees of Firan, but also continued to be employed and paid by the appellant to do investigations in other industries.

The relevant provisions of the Income Tax Act are set out by the trial judge, whose careful analysis is worth quoting at some length:

For the 1969, 1970, and 1971 taxation years, the statutory provisions more particularly applicable to the plaintiff's case were sections 3 and 4, paragraphs 12(1)(a) and (b) and subsection 203(1) of the Income Tax Act, R.S.C. 1970, c. 1-5. On December 23, 1971, the Income Tax Act was substantially amended by the enactment of an amending Act, S.C. 1970-71-72, c. 63. The former statutory provisions were revised and renumbered to read:

3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year determined by the following rules:

(a) determine the aggregate of amounts each of which is the taxpayer's income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, his income for the year from each office, employment, business and property;

9. (1) Subject to this Part, a taxpayer's income for a taxation year from a business or property is his profit therefrom for the year.

(2) Subject to section 31, a taxpayer's loss for a taxation year from a business or property is the amount of his loss, if any, for the taxation year from that source computed by applying the provisions of this Act respecting computation of income from that source mutatis mutandis.

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; [or]

(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part;

248. (1) In this Act,

"business" includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, includes an adventure or concern in the nature of trade but does not include an office or employment;

"property" means property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes

(a) a right of any kind whatever, a share or a chose in action,

For the sake of brevity and convenience, I will refer to the relevant statutory provisions according to the numbering sequence of the 1971 amendments. They are essentially the same as the predecessor sections of the former Act.

In order for an expense to be deductible in computing a taxpayer's income, two preconditions must be met. The expense must have been made or incurred for the purpose of gaining or producing income from the business or property of the taxpayer within the ambit of paragraph 18(1)(a) of the Income Tax Act. Once it is found that a particular expenditure is one made for the purpose of gaining or producing income then it must still be determined whether or not such expenditure is a payment on account of capital within the prohibition of paragraph 18(1)(b) : see B.C. Electric Railway Co. Ltd. v. M.N.R., [1958] S.C.R. 133; [1958] C.T.C. 21; 58 D.T.C. 1022. It is the position of the defendant that neither of these proconditions have been met with respect to the expenses in question.

It is common ground that the plaintiff's ultimate goal was to earn profits from the businesses which he acquired. The evidence leaves little doubt that the activity in which he was engaged occupied much of his time, attention and energy. Counsel for the defendant strongly urged that the purchase of shares with a view to profit by holding them as an investment is not a business. It was pointed out that the plaintiff charged no management fees to the conglomerate companies. Emphasis was laid on the fact that there was no business of providing management services. Hence, there was no source of income nor a reasonable expectation of profit from an activity that could be classified strictly as a business. There was at best only the expectation of ultimately benefiting as an investor. Counsel for the defendant argued therefore that the outlays incurred in the investigation of corporate opportunities and the supervision of companies acquired as a result thereof were not deductible on revenue account.

Revenue derived from the ownership of corporate shares is generally regarded as income from property that does not normally require the exertion of much activity or energy on the part of the owner in order to produce the anticipated return: Hollinger v. M.N.R., [1972] C.T.C. 592; 73 D.T.C. 5003 (F.C.T.D.).

The companies acquired by the plaintiff were ailing or stagnant businesses which were targeted because of their unrealised profit potential. Much time, care and energy was exerted in the initial acquisitions and thereafter. The evidence goes to show that these acquisitions would not have been likely to produce gainful income without the active and extensive businesslike intervention of the plaintiff and his key employees. The crux of the matter, as it seems to me, is whether the expenditures in question were paid on revenue account as running expenses incurred in the process of operation of the plaintiff's venture capital business or whether they were capital expenditures paid as part of a plan for the assembly or putting together df the very business structure itself, that is, the corporate conglomerate.

This feature has been the subject of many cases over the years. . . . [He then referred to Canada Starch Co. Ltd. v. M.N.R., [1969] 1 Ex. C.R. 96; [1968] C.T.C. 466; 68 D.T.C. 5320; Bowater Power Co. Ltd. v. M.N.R., [1971] C.T.C. 818; 71 D.T.C. 5469; M.N.R. v. Algoma Central Railway, [1968] S.C.R. 447; [1968] C.T.C. 161; 68 D.T.C. 5096; Oxford Shopping Centres Limited v. The Queen, [1980] C.T.C. 7; 79 D.T.C. 5458; Johns-Manville Canada Inc. v. The Queen, [1985] 2 S.C.R. 46; [1985] 2 C.T.C. 111; 85 D.T.C. 5373; and Neonex International Ltd. v. The Queen, [1977] C.T.C. 472; 77 D.T.C. 5321, affd. [1978] C.T.C. 485; 78 D.T.C. 6339 (F.C.A.)].

There is . . . no single overriding principle applicable to all sets of facts or circumstances. Each case must be decided on its own merits, so to speak. In any event, there would seem to be little doubt that the plaintiff's expenditures were made or incurred “for the purpose of gaining or producing income”, whether it be from property or a business. The plaintiffs contention is, of course, that the expenditures were running expenses laid out as part of the profit earning process of his business. This is the crux of the case and the remaining question, as I see it, is whether the expenditures were on revenue account or were capital outlays within the prohibition of paragraph 18(1)(b).

I find on the evidence that the plaintiff was a skilled and determined entrepreneur who embarked on the venture of acquiring ailing business enterprises having recognisable profit potential with a view to turning them to profitable account. The acquisitions were accomplished in each case through the purchase of shares and only after careful deliberation and evaluation. Much attention and expertise were devoted to enhancing the profitability of the acquired companies. A concomitant purpose, once the desired level of profitability had been attained, was to superimpose a holding company whose shares would trade publicly. The long range objective was to reap the profit reward by dividends funnelled through the holding company.

Essentially, this was the entrepreneurial design of the plaintiff's plan. I must now ask myself this question — is it any different from the taxpayer's plan in Neonex? In my opinion, it is not. Given the fact that the plaintiff may have looked at a number of business prospects before finally deciding, the business itself really came into being with the acquisition of the operating companies. This saw the establishment of the basic business entity or structure. The creation of the holding company was the finishing touch. I cannot regard the organization of the corporate conglomerate as anything other than an investment transaction. It must logically follow that the expenditures are not running expenses laid out as part of the profit earning process of the business. Rather, they were laid out as part of a plan for the assembly of business entities or structures. It is my opinion therefore that these expenditures were capital outlays within the prohibition of paragraph 18(1)(b) of the Income Tax Act.

II

In this Court the appellant argued that the trial judge erred in four respects: (1) in failing to give weight to the uncontradicted expert evidence as to accepted accounting practice and principles that the preferred treatment of the expenses in issue was not to capitalize or defer them in any way, but to deduct them as expired costs of the period in which they were incurred; (2) in failing to appreciate that the appellant’s venture capital business began in 1969 before the acquisitions and continued throughout the relevant period; (3) in failing to distinguish the Neonex decision, supra; (4) in assuming that every expenditure incurred by a taxpayer whose business involves acquiring capital assets necessarily is on capital account.

The overall argument of the respondent was that findings of fact by a trial judge should not be disturbed by an appellate court unless there are palpable overriding errors (Stein v. The Ship "Kathy K", [1976] 2 S.C.R. 802), and that that principle applies in respect of all the fact findings that enter into the decision here.

It has to be said with respect to the arguments of both parties; that what is principally in issue is a traditional question of law (mixed with fact) which cannot be put to rest solely on the basis of either generally accepted accounting principles or findings of fact by the trial judge, the question being whether a particular expenditure is on account of capital or revenue.

There is no single decisive test for making such a determination. One classic dictum is that of Viscount Cave, L.C. in British Insulated and Helsby Cables, Limited v. Atherton, [1926] A.C. 205 at 213-14; 10 T.C. 188 at 192:

But when an expenditure is made, not only once and for all, but with a view to brnging into existence an asset or an advantage for the enduring benefit of a trade, I think that there is 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.

Another is that of Dixon, J. (as he then was) in Sun Newspapers Ltd. v. Federal Commissioner of Taxation (1938), 61 C.L.R. 337 at 363, where he proposed the consideration of three essential matters:

There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.

Estey, J. has spoken recently in the Johns-Manville case, supra, at page 59 S.C.R. (119 C.T.C.; 5378 D.T.C.) of "almost an endless rainbow of expressions used to differentiate between expenditures in the nature of charges against revenue and those which are capital." Estey, J. himself, page 72 S.C.R. (126 C.T.C.; 5384 D.T.C.) clearly prefers "the application of the common sense approach to the business of the taxpayer in relation to the tax provisions," which in turn echoes the words of Lord Pearce in B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia, [1966] A.C. 224 at 264; [1965] 3 All E.R. 209 at 218:

It is a commonsense appreciation of all the guiding features which must provide the ultimate answer.

Lord Pearce's view, in turn, drew upon the approach suggested by Dixon, J. in Hallstroms Proprietary Limited v. The Federal Commissioner of Taxation (1946), 72 C.L.R. 634 at 648, that the answer "depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process."

Despite this climate of uncertainty as to the exact test, there has nevertheless been general agreement that an expenditure for the acquisition or creation of a business entity is on capital account. Hence Jackett, P. in Canada Starch Company Limited v. M.N.R., [1969] 1 Ex. C.R. 96 at 102; [1968] C.T.C. 466 at 472 ; 68 D.T.C. 5320 at 5323-24, was able to lay down this much:

Applying this test[that of Dixon J. in the Sun Newspapers case] to the acquisition or creation of ordinary property constituting the business structure as originally created, or an addition thereto, there is no difficulty. Plant and machinery are capital assets and moneys paid for them are moneys paid on account of capital whether they are

(a) moneys paid in the course of putting together a new business structure,

(b) moneys paid for an addition to a business structure already in existence, or

(c) moneys paid to acquire an existing business structure.

This approach was followed in this Court by Urie, J. in M.N.R. v. M.P. Drilling Ltd., [1976] C.T.C. 58; 76 D.T.C. 6028. Subsequently, in the Johns-Manville case supra, 73 S.C.R., 126 C.T.C., 5384 D.T.C., Estey, J. emphasized in his summation that the expenditures which he there found to be on current account "were not part of a plan for the assembly of assets".

What is true of a plan for the assembly of assets must, I think, be a fortiori true if the assets in question are shares of capital stock. As Martland, J. expressed it for the majority of the Supreme Court in Irrigation Industries Limited v. M.N.R., [1962] S.C.R. 346 at 352; [1962] C.T.C. 215 at 221; 62 D.T.C. 1131 at 1133-4:

Corporate shares are in a different position [from adventures in the nature of trade] because they constitute something the purchase of which is, ‘in itself, an investment. They are not, in themselves, articles of. commerce, but represent an interest in a corporation which is itself created for the purpose of doing business. Their acquisition is a well recognized method of investing capital in a business enterprise.

Counsel for the apellant acknowledged in the course of argument that the costs of the investigation of opportunities in relation to the four operating companies actually acquired were capital expenditures, and made it clear that they had in fact been capitalized here (Agreed Statement of Facts, Schedule B, Column 7, Appeal Book, vol. 2, p. 216). However, he submitted that the investigation costs of the other 50-odd opportunities that did not lead to acquisitions must be regarded rather as expenditures of an operating nature.

I find it impossible to accept this contention. It seems to me that all of the expenditures relating to the investigation of opportunities must be considered on the same footing. They were the same kinds of expenses, and they were made for the same purpose. They were, in effect, all part of the same venture-capital business which, the appellant strenuously urged, existed from 1969 on. It makes no sense to separate off the few which led to acquisitions from the many that did not. All were equally part of the appellant's plan of assembly of business assets. It was only to be expected, and indeed was the premise of the appellant's investigative method, that some possibilities would on examination turn out to be good risks, others too poor to be proceeded with. In my view, the very common-sense approach for which the appellant contended vitiates his attempted distinction.

Moreover, I believe the matter has already been decided by this Court in Neonex International Ltd. v. The Queen, [1978] C.T.C. 485; 78 D.T.C. 6339. In that case the taxpayer corporation, in addition to its electric sign and outdoor advertising business, was the parent company of a conglomerate of subsidiary or affiliated companies engaged in various unrelated types of business. Among the issues under appeal was the deductibility of legal expenses for a proposed takeover which ultimately failed. The only real difference between the facts in the Neonex case and those in the case at bar is that in the former the corporate takeover actually got underway, even though it ultimately proved abortive, and that the expenditures could thus be linked to a specific transaction. Urie, J. wrote as follows for a unanimous Court at 496-97 (D.T.C. 6346), upholding the decision of the trial judge:

[T]he learned trial judge . . . found it difficult to accept that the buying of shares with a view to retaining them can itself be said to be a business. Rather, he held, the appellant was in the business of making and selling signs and, as well, in the business of supplying management expertise, services and funds to the companies, the control of which it had acquired by the purchase of shares. The acquisition of the shares was, in his view, not in itself a business but was, in each case, an investment made with a view to earning income. .. . .

I wholly agree with this finding. I also agree with the trial judge that the legal expenses at issue herein — those incurred in an effort to complete the takeover and those incurred in seeking compensation in lieu of shares — were outlays associated with an investment transaction and thus were made on capital account. That being so the trial judge correctly held, in my opinion, that the expenses were not deductible. . . .

The distinction urged by the appellant between the two cases does not, to my mind, exist. In the Neonex case what was material to the Court was that the legal expenses were made in relation to the assembly of assets. This was clearly stated by Marceau, J. in the Trial Court, [1977] C.T.C. 472 at 479; 77 D.T.C. 5321 at 5325 (whose approach was approved in this Court):

The conclusion to be drawn is unavoidable: the legal expenses here in question — those incurred in an effort to complete the take-over as well as those incurred in seeking to get compensation in lieu of shares — were outlays associated with an “investment transaction”, they were made in connection with the acquisition of a capital asset. They were, therefore, expenditures on capital account. [Emphasis added.]

The appellant also relied on the statement of Estey, J. in the Johns-Manville case, 67 S.C.R., 123 C.T.C., 5382 D.T.C., concerning situations where the taxpayer is left with no tax relief of any kind:

[I]f the interpretation of a taxation statute is unclear, and one reasonable interpretation leads to a deduction to the credit of a taxpayer and the other leaves the taxpayer with no relief from clearly bona fide expenditures in the course of his business activities, the general rules of interpretation of taxing statutes would direct the tribunal to the former interpretation.

Admittedly, the appellant is left in such a position in the case at bar under the pre-1972 Act, but I do not find that the interpretation of the statute is unclear in relation to him. I believe his situation falls clearly within the Neonex decision.

With respect to the expenditures relating to the investigation of opportunities, I would therefore maintain the conclusion of the learned trial judge that they should not be allowed as deductions in computing the appellant's income or loss from a business or property for the taxation years in which they were incurred.

III

The trial judge made no distinction in his holding between the appellant's expenditures for the investigation of opportunities and those for the supervision of his companies, once acquired. He nevertheless found (Appeal Book, p. 667), that "the business itself really came into being with the acquisition of the operating companies. This saw the establishment of the basic business entity or structure." Of course, he went on to draw the inference that even these expenditures "were laid out as part of a plan for the assembly of business entities or structures".

The appellant argued that the trial judge's inference was based on an error of law in failing to distinguish between the costs of acquisition and those of current improvement of a property, and that the supervision costs in the case at bar were analogous to those accepted by the Crown in the Neonex case.

The respondent replied that the Crown allowed the supervision costs in Neonex because the taxpayer was receiving management fees from its subsidiaries, whereas here the appellant had no contracts for management services, no fees were paid and there was no expectation of profit reasonable or otherwise. There was not even a source of profit. Thus supervision expenses, since they related to the management of the portfolio or assets, must be considered as incurred in building the structure of his business.

On the facts the appellant had no supervision expenditures in 1969 because he had no operating companies, but he claimed deductions of $46,886 for 1970, $44,575 for 1971, and $10,179 for 1972 under the categories of (1) entertainment, (2) Lear jet, (3) office expenses, (4) salaries and benefits, (5) telephone, postage and stationery, (6) automobile expenses, and (7) miscel- laneous. The respondent rightly pointed out that the question is not what money is spent on but rather what it is spent for. Consequently, the ordinariness of the appellant’s disbursements does not establish their status as running expenses. Nevertheless, they were clearly spent, as the trial judge found (Appeal Book, at p. 654-5), "to monitor the fiscal policy and business operations of the companies and give them general direction and guidance with a view to making them more profitable." In this connection it is worthy of note that the holding company paid annual dividends to the appellant totalling $860,000 during the years 1979 to 1984. The trial judge gives the credit for this change in profitability to the appellant (Appeal Book, p. 659):

Much time, care and energy was exerted in the initial acquisitions and thereafter. The evidence goes to show that these acquisitions would not have been likely to produce gainful income without the active and extensive businesslike intervention of the [appellant] and his key employees.

The distinction apparently sanctioned in Bowater Power Company Limited v. M.N.R., [1971] C.T.C. 818; 71 D.T.C. 5469 is one between costs for the acquisition of new property and those for the improvement of existing property. There the taxpayer corporation, which was in the business of generating and selling electric power and energy, incurred engineering costs with respect to the feasibility of increasing the capacity and capability of its plants, so as to attain the maximum utilization of its existing watershed. Noël, A.C.J. said, at 836 (D.T.C. 5480-81):

The costs here of the engineering studies conducted to examine the potential of appellant's drainage area or to determine the feasibility of constructing power developments at certain sites in Newfoundland were also incurred in my view or laid out while the business of the appellant was operating and was part of the cost of this business. Had it led to the building of plants, business profits would have resulted. Should these expenses be less current expenses because instead of being laid out in the process of inducing the buying public to buy the goods or with a view to introducing particular products to the market, they were laid out for the purpose of determining whether a depreciable asset should be constructed from which business gains could be collected and would then have been added to the value of this capital asset which would have been subject to capital cost allowances. I do not think so. . . . These expenditures, it is true, did not materialize into any concrete assets for which capital allowances could have been obtained but they were made for the purpose of effecting an increase in the volume and the efficiency of its business and, therefore, for the purpose of gaining income. . . . I do not indeed feel that merely because the expenditure was made for the purpose of determining whether to bring into existence a capital asset, it should always be considered as a capital expenditure and, therefore, not deductible. In distinguishing between a capital payment and a payment on current account, regard must always be had to the business and commercial realities of the matter. . . .

The M.P. Drilling case, supra, also laid great stress on the distinction between going into business and being in business. Urie J. wrote for this Court, at 62-63 (D.T.C. 6031-32):

[T]he appellant made no distinction, apparently either at trial and certainly not during the argument on the appeal, between the various kinds of expenditure for which deductibility was sought. In my view, while some were clearly made in the income earning process such as, for example, expenses incurred during the negotiations of the various contracts for the supply and sale of gas, others did not so readily fall within that category. Counsel took the position that, in substance, all of the expenditures were for a like purpose, i.e., to ascertain the feasibility of going into the business of purchase and sale of liquified natural gas to certain Pacific rim countries and this was so whether the work involved in such studies was carried out by the respondent's own personnel or by outside consultants. He argued that none were made as part of the operation of the profit earning process of an existing business but were made as part of the formation of the structure necessary to engage in that process.

In my opinion, that argument is not supported by the evidence and, in fact, there is evidence which points in the opposite direction. Not the least important of that kind of evidence was the fact that negotiations undertaken by the respondent's officers had culminated in some expressions of intent by potential customers to buy the gas and some by producers of the gas to sell it to the respondent for the purpose of resale. Quite clearly then, the respondent was in fact in business and was not simply bringing the business into existence. No particular expenditures were drawn to our attention to enable us to reach a conclusion that anyone or more of them could be characterized as capital expenses while others might fall solely into the category of revenue expenses. I have no reason, therefore, to alter the view which I have previously expressed that all must be held to have been incurred for the purpose of earning income and accordingly were properly deductible in the years in which they were incurred.

It was then argued that there must be revenue before any deduction can be made for expenses which might otherwise properly be deductible as made for the purpose of earning income. / cannot agree that because the respondent had not generated any revenue, let alone profit, makes it any less "the process of operation of a profit making entity". Nor does the fact that no revenues were generated from the activity transform what would have been deductible outlays for the purpose of gaining income, had there been any revenue, into expenditures made for the acquisition or creation of a business entity, or, to put it in the way earlier cases have put it, to bring into existence an asset or advantage of an enduring benefit of a trade (British Insulated and Helsby Cables v. Atherton (1926), A.C. 205 at pp. 213-14).

In my opinion the short answer to the proposition advanced is that if the expenditures were made for the purpose of earning income and were not capital in nature and thus not rendered non-deductible by virtue of paragraph 12(1)(b) or by any other provision of the Act, they were proper expenses to be chargeable against income whether or not any income resulted from such expenditures. [Emphasis added.]

An added perspective is provided by Odeon Associated Theatres Ltd. v. Jones, [1971] 2 All E.R. 681, where the taxpayer company claimed as deductions substantial sums of money spent on repairs and renewals at a newly acquired cinema. Buckley, L.J. put the matter this way, at page 693:

The cost of acquiring or creating a physical capital asset for use in a trade or business is clearly ‘capital expenditure. The cost of improving such an asset by adding to it or modifying it may well be capital expenditure, on the other hand, the cost of works of recurrent repair or maintenance of such an asset attributable to the wear and tear occurring in the course of use of the asset in his trade or business by the person carrying c^ut the works is revenue expenditure, and so constitutes a proper debit item in the profit and loss account of the business. Whether, where there has been a change of ownership, the cost of works of repair or maintenance attributable to wear and tear which occurred before the change of ownership should be regarded as revenue expenditure or capital expenditure is a question the answer to which must, in my opinion, depend on the particular facts of each case. . . .

There are, evidently, three distinct situations rather than just two. At one extreme there is the cost of acquiring or creating a capital asset, which is always a capital expenditure. At the other extreme there is the cost of current repair or maintenance, which is always a running expense. But in between there is the cost of improving a capital asset by adding to it or modifying it, which may well be a capital expenditure, but which must be characterized as one or the other on the particular facts of each case, especially — though I think not exclusively — when there has been (as in the case at bar) a change of ownership. In the Odeon case the court concluded that the expenditure was by nature on revenue account.

Similarly, in Oxford Shopping Centres Ltd. v. The Queen, [1980] C.T.C. 7; 79 D.T.C. 5458, where a taxpayer company claimed a deduction for money paid to a municipality under an agreement for improved roads to ease traffic congestion and provide better access to the taxpayer's property, Thurlow, J. (as he then was) was prepared to uphold the deduction even though it appeared to be a once and for all payment. He write at 14 (D.T.C. 5463):

For if, as I think, the expenditure can and should be regarded as having been laid out as a means of maintaining, and perhaps enhancing, the popularity of the shopping centre with the tenants' customers as a place to shop and of enabling the shopping centre to meet the competition of other shopping centres, while at the same time avoiding the imposition of taxes for street improvements, the expenditure can, as it seems to me, be regarded as a revenue expense notwithstanding the once and for all nature of the payment or the more or less long term character of the advantage to be gained by making it.

If the only possible profit from the appellant's supervision expenses were to have been an accretion in the market value of the appellant's shares of capital stock in the operating companies, then his failure to charge management fees to those companies might have been fatal to his claim to deduct them as running expenses. But there were always intended to be operating profits, and ultimately (i.e., from 1979) there were. The appellant's business was in no sense solely or even principally share management. It was rather the profitable management of his operating companies, even though that was achieved at one remove from and without direct involvement in their day-to-day operations. It was in fact skilful indirect business management of a high order. It was no less so because the appellant did not keep proper accounts or issue finanial statements of his own.

Nor is the appellant's case weakened by the fact that there is neither immediate income nor an immediate source of income in his business. One of the early cases in the field, Vallambrosa Rubber Co., Ltd. v. Farmer (1910), 5 T.C. 529 rendered that argument inefficacious, as explained by Lord President Dunedin, at pages 534-35:

The Junior Counsel for the Crown, encouraged by certain expressions which he found used by various learned Judges who had given judgments in Tax Cases, wished your Lordships to accept this proposition, that nothing ever could be deducted as an expense unless that expense was purely and solely referable to a profit which was reaped within the year. . . .

l think the proposition only needs to be stated to be upset by its own absurdity. Because what does it come to? It would mean this, that if your business is connected with a fruit which is not always ready precisely within the year of assessment you would never be allowed to deduct the necessary expenses without which you could not raise that fruit. This very case, which deals with a class of thing that takes six years to mature before you pluck or tap it, is a very good illustration, but of course without any ingenuity one could multiply cases by the score. Supposing a man conducted a milk business, it really comes to the limits of absurdity to suppose that he would not be allowed to charge for the keep of one of his cows because at a particular time of the year, towards the end of the year of assessment, that cow was not in milk, and therefore the profit which he was going to get from the cow would be outside the year of assessment. As I say, it is easy to multiply instances, but the real truth is that it is just one of those mistakes which are made by fixing your eyes too tightly upon the words of Rules and Cases which are given in the Act of 1842. These, after all, are only guides, because the real point is, what are the profits and gains of the business? Now, it is quite true that in arriving at the profits or gains of a business you are not entitled, simply because — for what are likely quite prudent reasons — you either consolidate your business by not paying the profit away or enter into new speculations or increase your plant and so on — you are not entitled on that account to say that what was a profit is a profit no more. The most obvious illustration of that is a sum carried to a reserve fund. It would be a perfectly prudent thing to do, but none the less if that sum is carried to a reserve fund out of profit it is still profit, and on that Income Tax must be paid. But when you come to think of the expense in this particular case that is incurred for instance in the weeding which is necessary in order that a particular tree should bear rubber, how can it possibly be said that this is not a necessary expense for the rearing of the tree from which alone the profit eventually comes? And the Crown will not really be prejudiced by this, because when the tree comes to bear the whole produce will go to the credit side of the profit and loss account. When the year comes when the tree produces the only deduction will be the amount which has been spent on the tree in that year; they will not be allowed to deduct what has been deducted before.

Again, it seems to me, the rule is the same: a realistic, common-sense, business approach will not be defeated by narrow technicalities, unless they are clearly imposed by the law. In my opinion, no such rigidities are here imposed by the law, and the appellant must be allowed a deduction for his supervision expenses.

It will be obvious, from what I have said, that I take the view that the appellant equally meets the tests of paragraphs 18(1)(a) and 18(1)(b) of the post-1971 Act (or of paragraphs 12(1 )(a) and 12(1)(b) of the pre-1972 Act).

In the result I would allow the appellant's appeal in part and vary the trial judge's order of August 27, 1986, by adding a new paragraph immediately following paragraph 1 as follows:

2. those of the expenses incurred by the appellant during the 1970 to 1972 taxation years which were described in paragraph 10 of the Agreed Statement of Facts and in the schedules appended thereto as Supervision of Companies should be allowed as deductions in computing the appellant's income for the relevant taxation years.

I would also renumber the remaining paragraphs of the order.

In view of the appellant’s substantial success, he is entitled to his costs both here and below.

Appeal allowed in part.