Collier, J:—This is an appeal from a decision of the Tax Appeal Board ([1969] Tax ABC 769). The Minister had reassessed the present respondent for its taxation years 1963, 1964 and 1965 and it successfully appealed to the Tax Appeal Board.
The evidence before this Court consisted of the evidence and proceedings before the Board with the addition of evidence from one witness called on behalf of the respondent.
The issue is whether the respondent must deduct in each of the years in question the actual amount laid out in that year for advertising expenses (as contended by the Minister) or whether it is entitled to defer some portion of these amounts into subsequent years in accordance with ordinary commercial principles or well-accepted principles of business and accounting practice subject, always, to any special directions in the Income Tax Act (as contended by the respondent).
The facts are really not in dispute and I adopt the following excerpts from the Reasons for Judgment of the Assistant Chairman of the Board at pages 769-70 (the “appellant” referred to in these excerpts is the taxpayer):
Appellant describes itself as a realty company and has a fiscal period ending on 31st August. Its first taxation year of activity appears to have been 1963. In that year, on farm land in a sparsely-occupied area about ten miles from the core of Montreal acquired in September, 1962, appellant proceeded with the erection of 24 apartment buildings that were to contain 660 apartments. There was also to be a “shopette” for the convenience of tenants. The whole project was duly completed in about fourteen months and became available for renting. Some of the apartments were furnished by the appellant, but the majority were not.
In order to obtain tenants, an intensive advertising Campaign was conducted; it was such as had never been waged before. About every known means of attracting prospective tenants was devised and exercised incessantly, including the singing of a jingle. Radio was the medium mostly used; no real estate agents were employed. The radio announcements were so frequent and repeated over such a lengthy period that people even began to complain of the unceasing flow of advertising that was forced upon them daily by appellant’s publicity agents. Nevertheless, good results were obtained and by October, 1964, a ninety-percent occupancy had been achieved. The cost of all this advertising was heavy, as may be supposed, and amounted to $153,301.78 in all. However, the rental income thereby generated grew to $674,328.16 in 1964. Appellant later deducted the first-mentioned sum from its taxable income in the following proportions: $7,351.01 in 1963; $63,595.87 in 1964, and $82,354.90 in 1965, in which year the entire undertaking was sold, rather unexpectedly it would appear, for over $4,425,000.00. The respondent did not approve of this procedure and considered that the appellant had improperly deferred deducting the said advertising expense at one fell swoop and, instead, had deducted such proportions thereof as it saw fit in the three years under appeal. The appellant’s right to deduct the advertising expense is not questioned; it is the method of doing so that is challenged. There is also no dispute as to the correctness of the figures involved.
I add at this point the following: the actual amounts expended for advertising were $92,351.01 in 1963, $58,595.87 in 1964; and $2,354 in 1965.
With respect to the sale of the undertaking in 1965, the Assistant Chairman said this and, again, I adopt his language (p 771):
The decision to sell having been arrived at — albeit reluctantly, where Weitzman was concerned — it became a case of “now or never” as regards deducting the balance remaining of the advertising expense and quite understandably this balance was therefore deducted from appellant’s income for the 1965 taxation year. It appears to me that his was the logical course to adopt in the circumstances disclosed.
Abe Weitzman, the first and other witness who testified, stated that he and Kenneth Wolofsky, a builder, were the appellant’s promotors and that, Originally, the firm intention had been to retain the buildings erected; not to sell them. Later, however, differences arose between the two men and, rather than continue in what he claimed was an untenable situation, Weitzman ultimately gave in. He said: Il went along with my partner and we sold.” This occurred in October, 1964, or within the appellant’s 1965 taxation year, which ended on 31st August, 1965. There is nothing in the evidence adduced to suggest that Messrs Weitzman and Wolofsky knew before October, 1964, that the sale of the project would be made; in fact, Weitzman specifically denied that there was ever any intention to sell. It was only when an unsolicited offer was received, in 1964, that proved too tempting to Wolofsky that the question of whether to sell, or not to sell, ever arose and it was Wolofsky alone who then insisted on selling.
The respondent called as a witness before the Tax Appeal Board a chartered accountant who had prepared its financial statements. This was Harry Stein who had 33 years’ experience. In his opinion the procedure adopted in this case was the most appropriate and in accordance with well-accepted accounting principles; that is, when an intensive advertising campaign is such that the benefit must reasonably be expected to extend over future years the practice is to charge a certain proportion of the expense to those years instead of deducting the whole expenditure from the income of the previous year. Mr Stein referred to accounting textbooks and other publications to support his position.
On the appeal to this Court, an independent chartered accountant, Howard Gilmour, was called on behalf of the respondent. He testified that the method used by the respondent for the years in question was in accordance with recognized accounting practice and involved the proper matching of revenue and expense. He said the essence of accrual ‘accounting was based on the matching principle and this demanded a certain amount of judgment on the part of the individual accountant or his client as to how one should proportion these advertising expenses over the subsequent years.
As was the case with Mr Stein, Mr Gilmour supported his evidence with excerpts from various textbooks on accounting and other publications.
Generally speaking, the evidence here and before the Tax Appeal Board was that on the facts of this particular case the method adopted by the taxpayer of deferring some of the advertising expense into future years was not only in accordance with generally accepted accounting principles but also more accurately reflected the truth about the taxpayer’s income position.
The appellant, both in the Tax Appeal Board and in this Court, did not adduce any evidence to challenge or contradict Mr Stein or Mr Gilmour. The appellant argues the decision of the Tax Appeal Board is wrong:
(1) The principle of matching revenue and expense has not been accepted by the Courts and is not permissible under the Income Tax Act, except under certain special provisions of the Act.
(2) As a matter of law under the Income Tax Act expenditures such as the ones here must be deducted in the year in which they are laid out and cannot be deferred.
Counsel for the appellant chose to argue this case as a matter of general principle. I propose, so far as possible, to confine my decision to the facts of this particular case.
In my view, the first contention advanced by the appellant is too broad. As was said by Thorson, P in Publishers Guild of Canada Ltd v MNR, [1956-60] Ex CR 32 at 50; [1957] CTC 1 at 17; 57 DTC 1017 at 1026:
. . . the prime consideration, where there is a dispute about a system of accounting is, in the first place, whether it is appropriate to the business to which it is applied and tells the truth about the taxpayer’s income position and, if that condition is satisfied, whether there is any prohibition in the governing income tax law against its use.
I do not find there is any prohibition in the statute against the matching system. In fact, it was held appropriate under the particular circumstances of the case by Kerr, J in Sherritt Gordon Mines, Ltd v MNR, [1968] Ex CR 459; [1968] CTC 262; 68 DTC 5180. I quote from page 481 [283, 5193] of the judgment:
I am satisfied that at least where the amount is significant in relation to the business of a company, it is in accordance with generally accepted business and commercial principles to charge, as a cost of construction, payments of interest in respect of the construction period on borrowed money expended by the company for such construction and to write such payments off over a period of years. The practice of doing so is not as common outside the public utility field as within that field but it has extended to companies outside that field.
The facts in the case referred to were quite different from the facts in the present case.
In my view, the system used here more accurately sets forth the respondent’s true income position: for instance, by its method it showed some profit for the year 1963; by the appellant’s method it would have shown a loss.
It seems to me the main argument advanced by the appellant was the second one I have referred to earlier. A number of authorities were cited but in my opinion many of them are distinguishable in that they did not involve, either directly or by analogy, the point in issue here. I shall refer to only those cases which appear to be directly on point.
In Consolidated Textiles Limited v MNR, [1947] Ex CR 77; [1947] CTC 63; 3 DTC 958, the taxpayer sought to deduct certain operating expenses incurred in 1938 from its 1939 income. That case arose under the Income War Tax Act. Thorson, P held at pages 82-83 [69]:
In my opinion, sec 6(a) excludes the deduction of disbursements or expenses that were not laid out or expended in or during the taxation year in respect of which the assessment is made. This is, I think, wholly in accord with the general scheme of the Act, dealing as it does with each taxation year from the point of view of the incoming receipts and outgoing expenditures of such year and by the deduction of the latter from the former with a view to reaching the net profit or gain or gratuity directly or indirectly received in or during such year as the taxable income of such year.
In my opinion, that case is distinguishable; without going into detail, the relevant sections considered by Thorson, P are substantially different from the relevant sections of the present Act.
In L Berman & Co Ltd v MNR, [1961] CTC 237; 61 DTC 1150, Thorson, P considered whether certain payments made by the taxpayer were proper deductions within the present paragraph 12(1)(a) of the Income Tax Act, RSC 1952, c 148. He found the payments in question there were properly deductible. The taxpayer had sought to deduct all the payments from the 1956 receipts, including some made in 1955. Thorson, P referred to the Consolidated Textiles case and held the deductions could only be claimed in the year they were laid out. He said at page 249 [1157]:
But the appellant is not entitled to deduct from what would otherwise have been its taxable income for 1956 all the payments made by it. The payments made in September and December, 1955, are not deductible. I had occasion to consider a similar question in Consolidated Textiles Limited v MNR, [1947] Ex CR 77; [1947] CTC 63. In that case the appellant, a manufacturer of lingerie fabrics, in making its income tax return for the year 1939, sought to deduct from its 1939 receipts certain operating expenses incurred in 1938. The deduction was disallowed by the Minister and the appellant appealed. I agreed with the Minister and held that Section 6(a) of the Income War Tax Act excluded the deduction of disbursements or expenses that were not laid out or expended in or during the taxation year in respect of which the assessment was made. Consequently, I hold that the appellant was not entitled to deduct from its 1956 receipts any of the payments made by it in 1955. My reasons for doing so are the same as those set out in the case to which I refer and I include them, mutatis mutandis, in these reasons.
Similarly, Thorson, P in Rossmor Auto Supply Limited v MNR, [1962] CTC 123 at 126; 62 DTC 1080 at 1082, again referred to his previous judgment in the Consolidated Textiles Limited case.
The aspect of the Rossmor case which dealt with the year in which a deduction must be claimed was commented on by Jackett, P (now the Chief Justice of this Court) in Associated Investors of Canada Ltd v MNR, [1967] Ex CR 96; [1967] CTC 138; 67 DTC 5096, in a footnote at pages 100-101 [142-3; 5098]. I set out the footnote in full here and, respectfully, adopt it:
A submission was also made that Section 12(1)(a) of the Income Tax Act, which reads as follows:
“12. (1) In computing income, 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 property or a business of the taxpayer,”’
must be interpreted as prohibiting the deduction in the computation of profit from a business for a year of any outlay. or expense not made or incurred in that year. In support of this submission, reliance was placed on Rossmor Auto Supply Ltd v MNR, [1962] CTC 123, per Thorson, P at p 126, where he said, “As I view Section 12(1)(a), the outlay or expense that may be deducted in computing the taxpayer’s income for the year . . . is limited to an outlay or expense that was made or incurred by the taxpayer in the year for which the taxpayer is assessed” (the italics are mine). If this view were a necessary part of the reasoning upon which the decision in that case was based, I should feel constrained to follow it although, in my view, it is not based on a principle that is applicable in all circumstances. In that case, however, the loan was clearly not made in the course of the appellant’s business and the President so held. In my view, while certain types of expense must be deducted in the year when made or incurred, or not at all, (eg, repairs as in Naval Colliery Co Ltd v CIR (1928), 12 TC 1017, or weeding as in Vallambrosa Rubber Co, Ltd v Farmer (1910), 5 TC 529), there are many types of expenditure that are deductible in computing profit for the year “in respect of” which they were paid or payable. (Compare Sections 11(1)(c) and 14 of the Act.) This is, for example, the effect of the ordinary method of computing gross trading profit (proceeds of sales in the year less the amount by which opening inventories plus cost of purchases in the year exceeds closing inventories) the effect of which (leaving aside the possibility of market being less than cost) is that the cost of the goods sold in the year is deducted from the proceeds of the sale of those goods even though the goods were acquired and paid for in an earlier year. This is, of course, the only sound basis for computing the profits from the sales made in the year. Compare /RC v Gardner Mountain & D’Ambrumenil, Ltd (1947), 29 TC per Viscount Simon at p 93: “In calculating the taxable profit of a business . . . services completely rendered or goods supplied, which are not to be paid for till a subsequent year, cannot, generally speaking, be dealt with by treating the taxpayer’s outlay as pure loss in the year in which it was incurred and bringing in the remuneration as pure profit in the subsequent year in which it is paid, or is due to be paid. in making an assessment . . . the net result of the transaction, setting expenses on the one side and a figure for remuneration on the other side, ought to appear . . . in the same year’s profit and loss account, and that year will be the year when the service was rendered or the goods delivered.” (Applied in this Court in Ken Steeves Sales Ltd v MNR, [1955] Ex CR 108; [1955] CTC 47, per Cameron, J at p 119.) The situation is different in the case of “running expenses”. See Naval Colliery Co Ltd v CIR, supra, per Rowlatt, J at p 1027: . . . and expenditure incurred in repairs, the running expenses of a business and so on, cannot be allocated directly to corresponding items of receipts, and it cannot be restricted in its allowance in some way corresponding, Or in an endeavour to make it correspond, to the actual receipts during the particular year. If running repairs are made, if lubricants are bought, of course no enquiry is instituted as to whether those repairs were partly owing to wear and tear that earned profits in the preceding year or whether they will not help to make profits in the following year and so on. The way it is looked at, and must be looked at, is this, that that sort of expenditure is expenditure incurred on the running of the business as a whole in each year, and the income is the income of the business as a whole for the year, without trying to trace items of expenditure as earning particular items of profit.” See also Riedle Brewery Ltd v MNR, [1939] S.C.R. 253; [1938-39] CTC 312. With regard to the flexibility of method permitted under the Income Tax Act for computing profit, see Cameron, J in the Ken Steeves case, supra, at pp 113-4; 54-55.
In my view, the distinctions made by Jackett, P are applicable in a case such as this. The advertising expenses laid out here were not current expenditures in the normal sense. They were laid out to bring in income not only for the year they were made but for future years.
I have therefore concluded that the treatment of the advertising expenses by the respondent in this case was proper and not prohibited by the Income Tax Act.
I refer to the judgment of Noel, J (now the Associate Chief Justice of this Court) in Steer v MNR, [1965] Ex CR 458; [1965] CTC 181: 65 DTC 5115. He said at pages 466-7 [189, 5119]:
If the problem were merely one of determining the profit from the whole life span of a business undertaking or other source of income, it would be relatively simple. When the undertaking or other source comes to an end, you add up all the receipts therefrom and deduct all the expenses thereof and the balance is the profit or loss. Under the Income Tax Act, it is not so simple because you must determine the taxpayer’s profit from a source for each taxation year. This raises problems of allocation as between various years where the life of the undertaking or other source extends over more than one year. These problems have been solved for the most part in the case of businesses and other sources that fall into common categories. The solutions adopted, however, vary greatly even within the same categories. It may well be acceptable to adopt a “cash basis” — ie, taking into account for each year any cash receipts and cash expenditures in the year — for one business and equally acceptable to adopt, for a very similar business, some quite sophisticated so-called ‘‘accrual basis”.
The appeal is dismissed with costs.
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