Brooke Bond Foods Ltd. v. The Queen, 84 DTC 6144, [1984] CTC 115 (FCTD)

Décary, J [TRANSLATION]:—The fundamental issue in this case is as follows:

(a) Whether the expense is a current expense of plaintiff, making the amount deductible under paragraph 18( l)(a) of the Act, or whether the expense is a payment on account of capital, which would bring paragraph 18(l)(b) into play and prevent it from being deducted except as expressly permitted by Part I of the Act;

(b) If the expense is a capital outlay, there then arises the issue of whether the amount is deductible under paragraph 20(1 )(b) of the Act, as in the assessment, or under paragraph 20(1)(dd) of the Act, as plaintiff maintains. Defendant alleges that the expense constitutes a payment on account of capital. The parties agree that if the building had been constructed as planned, the expense in question would have been part of the capital cost of the building. This is how plaintiff treated the expense in its financial statements before the project was abandoned.

The fact the project was abandoned does not alter the nature of the expense, which remains an outlay on account of capital. As Thorson, J of the Exchequer Court wrote in Siscoe Gold Mines Ltd v MNR, [1945] CTC 397; 2 DTC 749, at 753:

The fact that it was decided to abandon the option and not to acquire the (mining) claims cannot change the nature, the character of the disbursements. They were losses incurred in connection with a capital venture. . . I think it is clear that an expenditure incurred for the purpose of enabling a taxpayer to decide whether a capital asset should be acquired [1] is an outlay or payment on account of capital. . .,

Counsel for the plaintiff relied on the judgments of Noël, J in Bowater Power Co Ltd v MNR, [1971] CTC 818; 71 DTC 5471; and Pigott Investments Ltd v The Queen, [1973] CTC 693; 73 DTC 5507. We are of the view, with respect, that the facts of these two cases are very different from those in the case at bar.

In Bowater, the company operated an electricity development and marketing business. As appears from the reasons, this type of business involved a constant evaluation not only of the energy resources available but also of development methods. In the case at bar the situation was entirely different as regards the building that was planned to be constructed. Plaintiff was not at all involved in the purchase and sale of real property and was not trying to generate income by renting the building. Bowater Power Co Ltd continually evaluated the energy resources available and the expenses incurred were current in nature. The situation is entirely different in the case at bar; the expenses in question are not current or usual. Plaintiff evaluated its needs with respect to its head office only once, when it incurred the expenses in question.

Similar comments apply, with respect, to the same judge’s judgment in Pigott Investments Ltd. In that case the company operated a construction business. As the judge wrote, at 5514 (CTC 702):

the benefit sought by the payments made was sought by Pigott and for Pigott was not of a capital nature but rather of a revenue nature, to Pigott’s construction business and therefore, the expenses are deductible.

Noël, J applied MNR v H J Freud, [1968] CTC 438; 68 DTC 5279, where the facts, we respectfully believe, have nothing to do with the case currently before the Court.

The facts in these two cases can therefore be distinguished from the facts in the case at bar. To our knowledge there is no judgment to the effect that the cost of plans and specifications for the construction of a building constitutes a current expense if the building is not constructed.

The treatment reserved for special outlays that are not included in the cost of depreciable property under the Act was altered considerably by the provisions added to the Income Tax Act in 1972. Under the old Act such expenses were commonly referred to as “nothings” because they did not qualify for any deduction in computing income.

At present certain such capital outlays are deductible under the provisions governing “eligible capital property”. Such property is defined in paragraph 54(d) of the Act as ‘‘any property, one-half of any amount payable to the taxpayer as consideration for the disposition of which would, if he disposed of the property, be an eligible capital amount in respect of a business within the meaning given that expression in subsection 14(1)”.

Section 14 of the Act provides for the creation of an account called “cumulative eligible capital”. This account is composed of “one-half of the aggregate of the eligible capital expenditure” (paragraph 14(5)(a) ).,

“Eligible capital expenditure” is defined in paragraph 14(5)(b). It means the portion of any outlay or expense made or incurred by a taxpayer on account of capital for the purpose of gaining or producing income from his business. A capital expenditure will be regarded as an “eligible capital expenditure” only if it is not an outlay or expense (subparagraph 14(5)(b)(i) ), that would be deductible but for any provision of the Act limiting the quantum of the deduction. This provision implies that an amount deductible under paragraph 20(l)(a) is excluded (the words “otherwise than under paragraph 20(1 )(b)” were added because 20(l)(b) limits the quantum but this is precisely what was intended with respect to the “cumulative eligible capital” account); or that would not be deductible under the provisions of the Act. This would apply, for example, to a paragraph 18(l)(c) deduction (the words “other than paragraph 18(l)(b)” were added because the draftsman wished specifically to provide for capital outlays under paragraph 18( l)(b) that would not otherwise be deductible by creating the “cumulative eligible capital” account).

An “eligible capital expenditure” is thus a capital outlay that is not deductible under the Act either under the capital cost allowance provisions or under the provisions of section 20, for example. Thus if the outlays in question constituted amounts deductible under paragraph 20(1 )(dd) they would not constitute “eligible capital expenditures” even if the expense was otherwise capital in nature.

It follows that some of the former “nothings” can now be deducted in computing a taxppayer’s income under the “eligible capital property” provisions. [2] It is clear that the outlays in question constitute such property. The amounts are payments on account of capital because they relate to the creation of a capital property and because the plans and specifications that were prepared had a certain value, as the witness McDiarmid clearly stated. If plaintiff had decided to construct a building these plans could have been used since they had been prepared carefully. The witness explained that there had been up to seven revisions of these documents. [3]

With respect to plaintiffs argument based on paragraph 20(l)(dd) of the Act, finally, we are of the view that this provision applies only to the amounts paid for investigating the suitability of the site. As Sweet, J wrote in Queen & Metcalfe Carpark Ltd v MNR, [1973] CTC 810; 74 DTC 6007, at 6013:

it is the suitability of the site which is to be investigated not a building to be erected on the site.

In the case at bar the evidence adduced showed that a sum of $625 was paid by Dominion Bridge Co Ltd to a firm specializing in soil analyses to conduct such a study. This sum of $625 is therefore deductible under paragraph 20(l)(dd) of the Act and the appeal should be allowed with respect to this amount.

The remainder of the amount was paid for the preparation of plans and specifications for the building. [4] Even though plaintiff had to submit plans and specifications to the Ontario Development Corporation and receive approval from the Sheridan Park Research Community before the Ontario Development Corporation would agree to sell, this procedure had nothing to do with the issue of the site’s suitability. According to the evidence, plaintiff was very keen to build its head office on the lot, which could not have been more suitable for it. The site was located in a prestigious area. Furthermore, it was easily accessible from downtown Toronto or from the Toronto airport, it was close to attractive residential neighbourhoods, it was an ideal size and, finally, it was very reasonably priced compared with other sites considered.

The stumbling block in the way of the construction project was the Sheridan Park Research Community’s insistence that the part of the building that was to be used by the executive personnel and the administration and financial and accounting services staff not exceed 33 / per cent of the building. This requirement was designed to protect the distinctive character of Sheridan Park, whose primary function was to promote scientific research and development.

In the final analysis the plans and specifications played no part in the refusal to allow plaintiff to construct its building in Sheridan Park. The determining factor was the fact that plaintiff was not devoting sufficient space to scientific research.

Moreover, we are of the view that the problem was not determining whether the site was suitable for plaintiff. The issue was rather whether the operations plaintiff wished to carry out suited the Sheridan Park Research Community.

We are of the opinion that plaintiff cannot avail itself of the provisions of paragraph 20(l)(dd) to deduct the sum in question except for the amount of $625.

For these reasons we are of the view that the appeal should be allowed in part and the reassessment referred back to the Minister so that he may issue a reassessment allowing plaintiff to deduct the sum of $625 in computing its income under paragraph 20(1 )(dd), but for the remainder, namely $52,935 less $625, or $52,310, the assessment should be upheld, with costs against the plaintiff. [5]