Bowie T.C.J.:
The issue raised by this appeal is whether the amounts expended by the Appellant company during its 1992 taxation year for the purchase of two fishing licences should be characterized as being on income or on capital account.
Facts
Mr. Robert Fraumeni is the president and the sole shareholder of the Appellant company. He has been engaged in the fishing industry for more than 20 years. The Appellant was incorporated in 1984, and at present has about 50 employees. Its business is catching and selling fish on the west coast of Canada. Over the years Mr. Fraumeni, personally or through his company, has bought and sold both fishing vessels and fishing licences on a number of occasions. The purchases with which this appeal is concerned were made on June 30, 1992.
On that date the Appellant entered into an agreement with Ocean Triumph Seafood Products Ltd. (OTSP) and John Gordon Sanderson whereby it purchased a vessel, the Ocean Tribune, together with two fishing licences, one a class C licence and the other a class ZN, from OTSP. The purchase price for the two licences was stated in the agreement to be $150,000.00. Mr. Fraumeni was unsure, but thought that this amount was negotiated on the basis of $50,000.00 for the C licence, and $100,000.00 for the ZN licence. By that same agreement the Appellant purchased four licences from Sanderson for a total price of $1,009,000.00.
The Appellant’s fiscal period ends on June 30th in each year. In filing its income tax return for the 1992 year it initially treated the acquisition of the OTSP licences as being on capital account. It showed these on the asset side of its balance sheet as part of a category described as “licences” under “other assets”. Some two weeks later the Appellant filed an amended return based upon a revised set of financial statements for the year. In those revised statements there is no asset described as “licences” to be found. The revised income statement shows an amount of $159,050.00, described as “licences” as an expense charged against income. It is common ground that $150,000.00 of this amount represents the acquisition price of the OTSP licences. The evidence did not explain the disappearance of the remainder of the amount shown on the first balance sheet as an asset described as licences. However the reassessment by the Minister which is now under appeal did no more than disallow the claimed expenses for licences to the extent of the $150,000.00, which is attributable to the purchase price of the OTSP licences. As I have said above, the only question before me is whether or not the Appellant was entitled to treat these acquisitions as expenses, or if they must be considered to be on capital account. If it is the latter, then they are an eligible capital expenditure within the contemplation of subsection 14(5) of the Income Tax Act (the Act).
Commercial fishing in Canada is strictly regulated, and may only be undertaken pursuant to a licence. Section 7 of the Fisheries Act gives very broad discretionary power to the Minister of Fisheries and Oceans (the Minister) to issue fishing licences. These powers are exercised at the local level by officials in the Department of Fisheries and Oceans (DFO). Each of the parties called an experienced officer of DFO to give evidence about licensing practices. From their evidence, and that of Robert Fraumeni, the following facts as to the operation of the licensing regime appear.
Originally fishing licences were of relatively few types, but over the years the system has become much more complex, so that there are now some 15 or 20 different types of licences issued. Each type of licence permits the fishing of one or more species of fish. The C licence is a vessel licence and permits fishing for ling cod and certain other groundfish species. The ZN licence is personal, and permits fishing for rockfish. There are a great many restrictions which may be attached to licences to regulate such things as the place where fishing may take place, the length of boat which may be used, the type of gear which may be used, and the allowable volume of fish which may be caught, to name but a few. Fishing of each species is restricted to defined open seasons. The main object of the regulatory regime is to protect the viability of the fishery, and so restrictions have become more onerous with the passage of time.
By 1992, when the Appellant acquired the licences which give rise to this appeal, it was virtually impossible to obtain a new licence from DFO, or at least one of either of the two types here in issue. Persons wishing to enter the fishery, or to expand their operations by increasing their allowable catch, could only do so by acquiring an existing licence from someone else. In theory, these licences are issued for a period of one year, for a relatively nominal annual fee. In practice, however, licences are renewed by DFO year after year to the people holding them the previous year. So long as an application is made to renew a licence in a timely way, and provided that the holder of the licence is not subject to any sanctions for failure to comply with all of the conditions of the licence, there is a high expectation that in the normal course of events the licence will be renewed for a further year. This is not a guaranteed certainty, and Mr. Fraumeni did cite an instance of a licence renewal being refused where the licence had not been utilized in the prior year. The very high probability of renewal taking place is borne out, however, by the fact that experienced businessmen such as Mr. Fraumeni are willing to pay very large sums of money for the right to be the person who applies for the renewal of a licence.
For reasons which were not explained in the evidence, DFO considers some classes of licence to be transferable, and others not to be. Some licences are attached to a particular vessel, and others are personal to the licensee. If the licence is personal and transferable then DFO will treat a purchaser as the person entitled to apply for renewal, and will handle the application as it would an application by the original holder of the licence. If the licence is transferable, but attached to a vessel, then a purchaser must either purchase the vessel to which the licence is attached along with the licence, or else apply to DFO to transfer the licence from that vessel to another of the same size owned by the purchaser. If the licence is not considered by DFO to be transferable, as in the case of the ZN licence, then the practice that has developed is that the vendor will hold the licence in trust for the purchaser, and covenant to renew it for the benefit of the purchaser from year to year, and to transfer it to the purchaser if it becomes transferable at some future time. As Mr. Fraumeni pointed out in his evidence, such agreements can give rise to difficulties of enforcement upon the death of the vendor, even though expressed to be binding upon the vendor’s heirs. In at least one reported case DFO has given preference at renewal time to the heir of the deceased licensee over the purchaser, and the Supreme Court of British Columbia refused to enforce the purchaser’s rights. Nevertheless, as the present case shows, purchases do in fact take place on this basis, and for prices many times the annual renewal fee.
Mr. Fraumeni testified that the value of fishing licences is extremely volatile, with the price being governed by the law of supply and demand. The value of the fish which a purchaser may expect to catch in the future pursuant to a licence must inevitably influence the price that the purchaser is willing to pay. Volatility in the value of licences is the result of the uncertainty as to those future yields which in turn results from the prospect of increased regulatory restrictions imposed in the interests of preserving declining fish stocks.
The legislative framework
The Act, by paragraphs 18(1)(a) and (b), permits the deduction of an outlay or expense only if it has been made or incurred for the purpose of gaining or producing income from a property or a business. No deduction is permitted in respect of an outlay made on capital account, except so far as the regulations provide for the deduction of capital cost allowance, or as is permitted by paragraph 20(1 )(b) in respect of eligible capital expenditures. Those provisions read as follows:
18 (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
(a) 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;
(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;
20(1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:
(b)such amount as the taxpayer may claim in respect of a business, not exceeding 7% of the taxpayer’s cumulative eligible capital in respect of the business at the end of the year;
Principles
The dividing line between expenditures on current account and those on capital account is an elusive one. If there is a consensus at all, it is that there is no simple rule which may be applied to distinguish one from the other. The Supreme Court of Canada considered the question most recently in the Johns-Manville case. Following a review of the English, Australian and United States cases on the subject, Estey J., for a unanimous Court, said at page 65:
After this review of the authorities it can be seen that the principles enunciated by the courts and the elucidation on the application of those principles is of very little guidance when it becomes necessary, as it is here, to apply those principles to a precise set of somewhat unusual facts.
Nevertheless, there is some guidance to be found in the authorities. Dixon J., as he then was, referred in the Sun Newspapers case to three factors that should 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.
Some years later he said in Hallstrom s Propriety Ltd. v. Federal Commissioner of Taxation that the answer to the question
...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.
Viscount Radcliffe, in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd.f pointed out the need to distinguish between the cost of creating or enlarging the permanent revenue producing structure, on the one hand, and the cost of producing that revenue on the other.
In British Columbia Electric Railway v. Minister of National Revenue Abbott J. explained the distinction this way:
Once it is determined that a particular expenditure is one made for the purpose of gaining or producing income in order to compute income tax liability it must next be ascertained whether such disbursement is an income expense or a capital outlay. The principle underlying such a distinction is, of course, that since for tax purposes income is determined on an annual basis, an income expense is one incurred to earn the income of the particular year in which it is made and should be allowed as a deduction from gross income in that year. Most capital outlays on the other hand may be amortized or written off over a period of years depending upon whether or not the asset in respect of which the outlay is made is one coming within the capital cost allowance regulations made under paragraph 11(1 )(a) of the Income Tax Act.
The general principles to be applied to determine whether an expenditure which would be allowable under paragraph (12)((l)(a) is of a capital nature, are now fairly well established. As Kerwin J. as he then was, pointed out in Montreal Light, Heat & Power Consolidated v. M.N.R., applying the principle enunciated by Viscount Cave in British Insulated and Helsby Cables, Limited v. Atherton, the usual test of whether an expenditure is one made on account of capital is, was it made “with a view of bringing into existence an advantage for the enduring benefit of the appellant’s business”, (footnotes omitted)
The words that I have quoted above from the judgment in Johns-Manville echo substantially the view expressed by Fauteux C.J. in Minister of National Revenue v. Algoma Central Railway^ where he adopted the state- ment of Lord Pearce that in each case the answer must be derived from a common-sense appreciation of all the circumstances, rather than by the application of any rigid test.
Analysis
The circumstances of this case lead me to conclude that the expenditure for the rights in respect of the two fishing licences which the Appellant purchased should be considered to be on capital account. Two of these circumstances are paramount.
First, the licences are a necessary foundation of a fishing business in the same way as a boat and nets or other tackle. A potential entrant to the industry is immediately faced with the anomalous situation that although the annual licence fees are relatively low, ranging from a high of $2,000.00 for licences to fish for roe herring and herring spawn on kelp, to a low of $10.00 for a number of different classes of licence, they are also, subject to some minor exceptions, unobtainable, except through the one-time outlay of a very substantial amount to purchase an existing licence.
Second, the commercial reality is that the Appellant entered into the transactions with OTSP and Sanderson not simply to be able to fish the licences in the short run, but with a view to acquiring the expectation of a long series of renewals in the future. It is the prospect of this series of renewals that constitutes “an asset of an enduring nature”, and which prompted the Appellant to pay $150,000.00 for the two licences. This amount is in stark contrast to the annual licence fees, payable to DFO on renewal, of $10.00 for the C licence and $50.00 for the ZN licence. These latter amounts are, of course, in the nature of an expense directly referable to the year’s catch.
The fact that the realizable market value of these licences is subject to considerable fluctuation does not, in my view, weigh heavily in the consideration of the nature of the asset. There are many capital assets owned by businesses whose value may be expected to fluctuate greatly from time to time. The most obvious of these, perhaps, is an equity interest in an ongoing business concern, the value of which may be very volatile indeed; this does not, however, lead to the characterization of its acquisition as an expense.
Counsel for the Appellant in argument relied upon the decision of this Court in Buston v. R.,10 the decision of Cattanach J. in Williams Brothers Canada Ltd. v. Minister of National Revenue)^ and the decision of Thurlow A.C.J. in Oxford Shopping Centres Ltd. v. R..^ I do not find any of these to be determinative of the present case. The Buston case is superficially similar, in that the Appellant there had entered into three long term lease agreements for the right to use roe herring licences. He paid a total of $46,000.00 for the three licences, and gave evidence that he hoped to derive a benefit from them for at least two or three years. However there does not appear to have been the same evidence before the Court in that case as in the present one as to the high probability of renewal of the licences in future years.
The payment of some $230,000.00 at issue in Williams Brothers was made by the taxpayer to acquire from another company an assignment of its interest in a contract for the construction of a pipeline. In allowing the taxpayer’s appeal from an assessment which treated this amount as a capital outlay, Cattanach J. observed that the Appellant earned its profits by laying pipe, and that to do so it must first obtain the work, and then do the work. This outlay was made in order to obtain a specific job, which was completed within the fiscal year. Unlike the present case, the Appellant secured no advantage of an enduring nature as a result of the payment.
The payment in Oxford Shopping Centres was made by the Appellant to the City of Calgary pursuant to an agreement between them whereby the city agreed to build an interchange, and to make certain other improvements to the Appellant’s shopping centre access, for which the Appellant paid the city $490,050.00. This was held to be a contribution toward the cost to the city of making the road improvements, which Thurlow A.C.J. found were required to alleviate traffic congestion in the vicinity of the Appellant’s shopping centre, and thus make it a more attractive venue for the shopping public. He characterized this as
...just one of the broad range of needs or demands which arise in the course of running such a business and which, for the success of the operation, must be met or provided for out of the revenues of the business. 1 3
The same cannot be said of the purchase price of the fishing licences in the present case, which was paid in order to permit the Appellant to expand its operations.
More helpful is the judgment of Cattanach J. in Metropolitan Taxi Ltd. v. Minister of National Revenue} The Appellant in that case paid $104,000.00 for the taxi cabs and the associated taxi licences of a competitor. It allocated $72,000.00 of the price to the acquisition of the licences. These licences were to expire within a month from the date of purchase, but the outlay was held to be of a capital nature. The evidence in that case, as in the present, established that there were only a limited number of licences in existence, that no new licences were being issued by the regulatory authority, and that the renewal of existing licences, absent some form of misconduct by the licensee, was almost a certainty, although not a legal entitlement.
As the Supreme Court of Canada, the Privy Council, and the High Court of Australia have all acknowledged, a trial judge must in each case form an opinion as to where the balance lies, keeping in mind the principles to which I have referred above. The circumstances of the present case, including a common-sense appreciation of what it was that the Appellant intended to achieve from a practical and business point of view, lead me to conclude that balance lies in favour of characterizing the amounts paid by the Appellant for the licences as a capital outlay.
The appeal is dismissed with costs.
Appeal dismissed.
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