Date: 19991119
Docket: A-527-96
CORAM: STONE, J.A.
ISAAC, J.A.
SEXTON, J.A.
BETWEEN:
BUCK CONSULTANTS LIMITED
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
Heard at Toronto, Ontario, on Friday, November 19, 1999
Judgment Delivered from the Bench at Toronto, Ontario
on Friday, November 19, 1999
REASONS FOR JUDGMENT OF THE COURT BY: ISAAC J.A.
Date: 19991119
Docket: A-527-96
CORAM: STONE, J.A.
ISAAC, J.A.
SEXTON, J.A.
BETWEEN:
BUCK CONSULTANTS LIMITED
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT OF THE COURT
(Delivered from the Bench at Toronto, Ontario on
Friday, November 19, 1999)
ISAAC J.A.
[1] This is an appeal from a judgment of a judge of the Tax Court of Canada which was pronounced on 3 June, 1996. The judgment dismissed with costs appeals by the appellant from re-assessments of tax made by the Minister of National Revenue ("the Minister") under the Income Tax Act1 ("the Act") for the taxation years 1986, 1987, 1988 and 1989. The reasons for judgment are reported in 96 D.T.C. 1464.
[2] The Tax Court Judge dismissed the appellant"s appeal in the following terms:
| The appeals fails. Paragraph 18(1)(a) prohibits the deduction sought. It reads: |
| 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 tax payer for the purpose of gaining or producing income from the business or property; |
| Obviously no outlay was in fact made during the rent-free period. Equally no rental expense was incurred during that period. The terms of the lease are clear. Article 4.01(a) reads: |
| 4.01 The Tenant shall pay to the Landlord, yearly and every year during the Term, without any set-off, compensation or deduction whatsoever, a Basic Rent in Canadian dollars as follows: |
| (a) from September 1, 1987 to October 31, 1988 - nil; |
| The Statement of Agreed Facts uses apt language when it describes the expense claimed as "notional" rent. Rental expense is not incurred until payment of the rent is due. Paragraph 18(1)(a) cannot be read as a provision directed to purpose alone. To do so, would treat the words "made or incurred" as meaningless. |
| "Every word in a statue is presumed to make sense and to have a specific role to play in advancing the legislative purpose." |
| Finally, I will observe that I am unaware of any authority for the proposition that ordinary commercial principles of accounting permit the deduction of rent accruing due. Ordinary office rent in my view is a classic example of a running expense, that is to say, an expense that cannot be allocated directly to a corresponding item of revenue and it is therefore deductible when payment is due. In effect the appellant seeks to deduct in computing its 1988 and 1989 income a part of amounts which, if the future unfolds as expected, it will be obliged to pay in later years in respect of the cost of earning the income of those later years. The deduction sought would not result in a true or accurate picture of the appellant"s income. Rather it would understate income during the rent-free period and overstate income of subsequent years. |
| At the hearing both counsel agreed that the Minister was correct in adding to the appellant"s income for the 1988 taxation year "Non-Deductible Deprecation" of $58,680. [Footnotes omitted] 2 |
[3] Since the notional rent for the 1988 taxation year was not deductible, it followed that there were no non-capital losses available to carry-back to the 1986 and 1987 taxation years. Accordingly, the appellant"s appeals in issue for those years were also dismissed.
[4] The narrow issue before us is whether the Tax Court Judge erred in concluding that the notional rents of $444,288 and $402,375 were not deductible by the appellant in computing its income for the taxation years 1988 and 1989, respectively.
[5] We did not find it necessary to call upon counsel for the respondent because we were all of the view that this appeal cannot succeed.
[6] It seems to us that paragraph 18(1)(a) of the Act expressly prescribes the terms upon which an "outlay" or "expense" may be deducted in computing the income of a taxpayer from a business or property.
[7] The paragraph provides that the "outlay" or "expense" must have been "made" or "incurred" by the taxpayer for the purpose of gaining or producing income from the business or property. In this way, the Act has dictated "some specific treatment to be given to particular types of expenditures ... including the general limitations expressed in paragraph 18(1)(a)."3
[8] In oral argument counsel for the appellant conceded that the appellant did not make any outlay for rent during the rent-free period of the lease. However, since the appellant used in its business the accrual method of accounting and had amortized the benefit of the rent-free period over the 15 year life of the lease, counsel contended that the appellant had incurred a liability from the date of entering into the lease and could properly deduct rent attributable to the rent-free period as an expense incurred in that period. This, he contended, was consistent with generally accepted principles of accounting and with accepted business practice in the real estate industry.
[9] Although the amortization of the benefits over the life of the lease might be acceptable for accounting purposes, we do not agree that that fact alone mandates the legal result for the purpose of paragraph 18(1)(a) of the Act. In this connection, the following passage taken from the reasons of McLachlin J. for a unanimous Court in Shell Canada Limited v. the Queen, et al4, at paragraph 73, is instructive:
| 73 First, the manner in which Shell recorded the net foreign exchange gain for its non-tax financial accounting is not determinative of the proper tax treatment. This Court has frequently held that accounting practices, by themselves, do not establish rules of income tax law: Canderel, supra, at paras 32-37, per Iacobucci J. At any rate, non-tax financial accounting is generally designed to reflect the overall economic position of the entire corporation. Section 20(1)(c)(i) of the Act, in contrast, applies to the tax treatment of specific transactions. It therefore should not be surprising that the same transaction may properly be assessed differently for different purposes : see generally Friedberg v. Canada, [1993] 4 S.C.R. 285, at p. 286, per Iacobucci J. |
[emphasis added]
[10] Contrary to the view expressed by counsel for the appellant, we are all of the view that the issue whether the appellant had incurred an obligation to pay rent during the rent-free period has been determined adversely to his client by the decision of this Court in Her Majesty the Queen v. Burnco Industries Ltd.5, where Pratte J.A. writing for a unanimous Court stated:
| In our opinion, an expense, within the meaning of paragraph 18(1)(a) of the Income Tax Act, is an obligation to pay a sum of money. An expense cannot be said to be incurred by a taxpayer who is under no obligation to pay money to anyone. |
[emphasis added]
[11] Paragraph 4.01(a) of the lease, already quoted, indicates clearly that the appellant had no obligation to pay any rent during the rent-free period.
[12] We are of the view then that the Tax Court Judge was right is dismissing the appellant"s appeal for the reasons that he gave. We would, accordingly, dismiss the appeal with costs.
"Julius A. Isaac"
J.A.
FEDERAL COURT OF CANADA
Names of Counsel and Solicitors of Record
| STYLE OF CAUSE: BUCK CONSULTANTS LIMITED |
Appellant
Respondent
| DATE OF HEARING: FRIDAY, NOVEMBER 19, 1999 |
| PLACE OF HEARING: TORONTO, ONTARIO |
REASONS FOR JUDGMENT
Delivered at Toronto, Ontario
on Friday, November 19, 1999
| APPEARANCES: Mr. David Malach |
| SOLICITORS OF RECORD: Aird & Berlis |
| Deputy Attorney General of Canada |
FEDERAL COURT OF CANADA
Date: 19991119
Docket: A-527-96
Between:
Appellant
Respondent
REASONS FOR JUDGMENT
__________________
1 R.S.C., 1985, c. 1 (5th Supp.)
2 Appeal Book pp. 33-34.
3 See Canderel Limited .v the Queen, 98 D.T.C. 6100 at 6106 (S.C.C.).
4 S.C.C. File No. 26596, October 15, 1999.
5 84 D.T.C. 6348 (F.C.A.).
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