Citation: 2008TCC263
Date: 20080502
Docket: 2003-1118(IT)G
BETWEEN:
RONALD CAPUTO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Little J.
A. Facts
[1] The Appellant is an
individual who resides in the city of Calgary, Alberta.
[2] The Appellant’s
appeal and the appeals filed by Messrs. Madell, Falkenberg, and Storwick were
heard on common evidence.
[3] The four Appellants
were “test cases” for approximately 460 investors.
[4] The four Appellants
were proceeding as Representative Appeals on behalf of the other investors who
have filed Notices of Objection against the Reassessments issued by the Minister
of National Revenue (the “Minister”).
[5] The Quest Prestige
Card was a customer loyalty card that entitled the holder to discounts at
hotels, restaurants and other commercial establishments.
[6] Rockhaven
International Inc. (“Rockhaven”) was a company incorporated in the British Virgin Islands. Rockhaven owned the
copyright to the Quest Prestige Card.
[7] Stellar Financial
Services Inc. (“Stellar”) was a corporation resident in Canada.
[8] Stellar and
Rockhaven entered into a Distribution Agreement in 1996. Under the Distribution
Agreement Stellar was required to identify territories in Canada and the United States of
America in
which Quest Prestige Cards could be sold. Stellar was also to receive a
commission of $1,750 for each territory sold to investors, such as the
Appellant.
[9] In 1996 and 1997
the Appellant entered into eleven Licence Agreements with Rockhaven. Pursuant
to these agreements, Rockhaven granted the Appellant an exclusive right to
publish, reproduce, market and distribute the Quest Prestige Card within the territories
specified in the agreements.
[10] The eleven
territories covered by the Licence Agreements granted to the Appellant were
located in Vancouver and Victoria in British Columbia plus Kent and Seattle in
Washington State and San Diego, California. Each of the specified territories
had a population of approximately 50,000.
[11] Pursuant to the
Licence Agreement, the Appellant agreed to pay a licence fee of $350 plus Advance
Royalties of $20,000 for each territory.
[12] The Appellant also
agreed to pay a royalty amount of $5 for each Quest Prestige Card sold,
distributed, marketed, published or reproduced during the 20‑year term,
after the sale of the first 4,000 cards or the first year – whichever came
first.
[13] In 1996 and 1997 the
Appellant also entered into eleven Operating Agreements with Crusader Marketing
Corporation Inc. (“Crusader”). The agreements provided that Crusader was
retained to market and distribute the Quest Prestige Card in the eleven
territories acquired by the Appellant.
[14] Crusader agreed to
provide the Appellant with eleven cash performance bonds in the amount of
$15,000 per territory. It was specified that $3 would be released to Crusader
upon the sale of a Quest Prestige Card. At the expiration of the agreement the
balance of the bond was to be forfeited to the Appellant as damages for lack of
performance.
[15] Based on the evidence presented at
trial the Appellant and the other three Appellants could not confirm that the
performance bonds were actually established.
[16] When the Appellant
filed his income tax returns for the 1996 and 1997 taxation years, he deducted
the following amounts:
|
|
|
1996
|
|
1997
|
|
Prepaid
royalty expenses
|
|
$134,544
|
|
$143,670
|
|
Licence
expense
|
|
$2,355
|
|
$2,497
|
|
|
|
$136,899
|
|
$146,167
|
[17] By Notices of
Reassessment dated June 24, 1999, the amounts referred to in paragraph [16]
above were disallowed by the Minister.
[18] After the Notices of
Reassessment were confirmed, the Appellant filed a Notice of Appeal to the Tax
Court of Canada.
B. Issues
[19] (a) Were the investments made by the
Appellant to become a Quest Prestige Card distributor, a source of income for
the purposes of section 9 of the Income Tax Act (the “Act”)? If
not, no expenses related to those investments are deductible by the Appellant.
(b) In the alternative,
are the Advance Royalties “tax shelter investments” as defined in section 143.2
of the Act? If so, subsection 143.2(6) prohibits the deduction of
the Advance Royalties in the years under appeal.
(c) In the further alternative,
can any portion of the Appellant’s Advance Royalty expenses reasonably be
regarded as having been made or incurred in respect of a period after the end
of the years under appeal? If so, subsection 18(9) of the Act prohibits
the deduction of the Advance Royalties in the years under appeal.
(d) In the further
alternative, must the Advance Royalty expenses be matched to revenue from sales
of Quest Prestige Cards when determining profit under section 9 of the Act?
If so, no amounts in respect of the Advance Royalties are deductible by the
Appellant in the years under appeal.
(e) In the further
alternative, was any portion of the unpaid $15,000 balance of Advance Royalties,
due under each Licence Agreement, a contingent liability in the years under
appeal? If so, paragraph 18(1)(e) of the Act prohibits the deduction of
the contingent amounts.
(f) In the further
alternative, were the Licence Fees capital expenses? If so, paragraph 18(1)(b) of
the Act prohibits their deduction as a current expense.
C. Analysis
and Decision
[20] As noted above, the
Appellant agreed to pay Rockhaven $20,350 for each of the territories covered
by the Licence Agreement. This payment consisted of a $20,000 Advance Royalty
payment and a Licence Fee in the amount of $350.
[21] The evidence
presented to the Court indicated the following:
(A) The
Appellant claimed a deduction for the full amount of $20,350 per territory when
he filed his income tax returns for the 1996 and 1997 taxation years.
However, the Appellant admitted that he never paid nor was he ever asked to pay
the Advance Royalty of $15,000 per territory. In summary, the Appellant’s total
cash outlay, per territory, was limited to $5,350.
(B) The
Appellant admitted that at the time of his initial investment there was no
activity by Crusader to sell Quest Prestige Cards in the territories acquired
by him.
(C) Crusader
generated no revenue for the Appellant from the sale of the Quest Prestige
Cards in 1996 and 1997. It was admitted, however that Crusader did generate
nominal revenue for the Appellant in 1999.
(D) The
Appellant agreed that he did not conduct any investigation (either directly or
indirectly) concerning the various corporate entities behind the Quest Prestige
Card, before he made his investment.
(E) The
Appellant agreed that he did not monitor the marketing activities of Crusader.
(F) The
Appellant claimed business losses on the basis that he was engaged in the sale
of Quest Prestige Cards. However, the Appellant agreed that he had abdicated
all marketing and control of the distribution of the Quest Prestige Cards to
Crusader.
[22] In summary, neither
the Appellant nor any of the other three Appellants could point to any activity,
on their part, of marketing the Quest Prestige Card.
[23] I will now deal with
the specific issues under appeal.
I. Source of Income
[24] Counsel for the
Respondent maintained that the Appellant was not engaged in a commercial
activity when he made investments in the Quest Prestige Card promotion. Counsel
for the Respondent also maintained that the Appellant had no source of business
or property income from which to deduct the $20,000 Advance Royalty and the
$350 Licence Fee.
[25] Counsel for the
Appellant and Counsel for the Respondent each referred to the decision of the
Supreme Court of Canada in Stewart v. Canada, 2002 SCC 46 and Walls
v. Canada, 2002 SCC 47. In Stewart the Supreme Court stated the
following:
50 It is clear that in
order to apply s. 9, the taxpayer must first determine whether he or she has a
source of either business or property income. As has been pointed out, a
commercial activity which falls short of being a business, may nevertheless be
a source of property income. As well, it is clear that some taxpayer
endeavours are neither businesses, nor sources of property income, but are mere
personal activities. As such, the following two-stage approach with respect
to the source question can be employed:
(i) Is the activity of
the taxpayer undertaken in pursuit of profit, or is it a personal endeavour?
(ii) If it is not a personal endeavour,
is the source of the income a business or property?
The first stage of the test assesses the
general question of whether or not a source of income exists; the second stage categorizes the source
as either business or property.
51 Equating “source of income” with an activity
undertaken “in pursuit of profit” accords with the traditional common law
definition of “business”, i.e., “anything which occupies the time and attention
and labour of a man for the purpose of profit”: Smith, supra, at
p. 258; Terminal Dock, supra. As well, business income
is generally distinguished from property income on the basis that a business
requires an additional level of taxpayer activity: see Krishna, supra, at p. 240. As
such, it is logical to conclude that an activity undertaken in pursuit of
profit, regardless of the level of taxpayer activity, will be either a business
or property source of income.
52 The purpose of this first stage of
the test is simply to distinguish between commercial and personal activities,
and, as discussed above, it has been pointed out that this may well have been
the original intention of Dickson J.'s reference to "reasonable
expectation of profit" in Moldowan. Viewed in this light, the criteria
listed by Dickson J. are an attempt to provide an objective list of factors for
determining whether the activity in question is of a commercial or personal
nature. These factors are what Bowman J.T.C.C. has referred to as
"indicia of commerciality" or "badges of trade": Nichol,
supra, at p. 1218. Thus, where the nature of a taxpayer's venture contains
elements which suggest that it could be considered a hobby or other personal
pursuit, but the venture is undertaken in a sufficiently commercial manner, the
venture will be considered a source of income for the purposes of the Act.
53 We emphasize that this
"pursuit of profit" source test will only require analysis in
situations where there is some personal or hobby element to the activity in
question. With respect, in our view, courts have erred in the past in
applying the REOP test to activities, such as law practices and restaurants,
where there exists no such personal element: see, for example, Landry, supra,
Sirois, supra, Engler v. R. (1994), 94 D.T.C. 6280 (Fed. T.D.). Where
the nature of an activity is clearly commercial, there is no need to analyze
the taxpayer's business decisions. Such endeavours necessarily involve the
pursuit of profit. As such, a source of income by definition exists, and there
is no need to take the inquiry any further.
(Emphasis added)
54 It should also be
noted that the source of income assessment is not a purely subjective
inquiry. Although in order for an activity to be classified as commercial
in nature, the taxpayer must have the subjective intention to profit, in
addition, as stated in Moldowan, this determination should be made by
looking at a variety of objective factors. Thus, in expanded form, the
first stage of the above test can be restated as follows: “Does the taxpayer
intend to carry on an activity for profit and is there evidence to support that
intention?” This requires the taxpayer to establish that his or her
predominant intention is to make a profit from the activity and that the
activity has been carried out in accordance with objective standards of
businesslike behaviour.
55 The objective
factors listed by Dickson J. in Moldowan, at p. 486, were: (1) the
profit and loss experience in past years; (2) the taxpayer’s training; (3) the
taxpayer’s intended course of action; and (4) the capability of the venture to
show a profit. As we conclude below, it is not necessary for the purposes
of this appeal to expand on this list of factors. As such, we decline to
do so; however, we would reiterate Dickson J.’s caution that this list is not
intended to be exhaustive, and that the factors will differ with the nature and
extent of the undertaking. We would also emphasize that although the
reasonable expectation of profit is a factor to be considered at this stage, it
is not the only factor, nor is it conclusive. The overall assessment to
be made is whether or not the taxpayer is carrying on the activity in a
commercial manner. However, this assessment should not be used to
second-guess the business judgment of the taxpayer. It is the commercial
nature of the taxpayer’s activity which must be evaluated, not his or her
business acumen.
56 In
addition to restricting the source test to activities which contain a personal
element, the activity which the taxpayer claims constitutes a source of income
must be distinguished from particular deductions that the taxpayer associates
with that source. An attempt by the taxpayer to deduct what is
essentially a personal expense does not influence the characterization of the source
to which that deduction relates. This analytical separation is mandated
by the structure of the Act. While, as discussed above, s. 9 is the
provision of the Act where the basic distinction is drawn between personal and
commercial activity, and then, within the commercial sphere, between business
and property sources, the characterization of deductions occurs
elsewhere. In particular, s. 18(1)(a) requires that deductions be
attributed to a particular business or property source, and s. 18(1)(h)
specifically disallows the deduction of personal or living expenses of the
taxpayer:
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;
...
(h) personal or living
expenses of the taxpayer ....
57 It is clear
from these provisions that the deductibility of expenses presupposes the
existence of a source of income, and thus should not be confused with the
preliminary source inquiry. If the deductibility of a particular expense is in
question, then it is not the existence of a source of income which ought to be
questioned, but the relationship between that expense and the source to which
it is purported to relate. The fact that an expense is found to be a personal
or living expense does not affect the characterization of the source of income
to which the taxpayer attempts to allocate the expense, it simply means that
the expense cannot be attributed to the source of income in question. As well,
if, in the circumstances, the expense is unreasonable in relation to the source
of income, then s. 67 of the Act provides a mechanism to reduce or eliminate
the amount of the expense. Again, however, excessive or unreasonable expenses
have no bearing on the characterization of a particular activity as a source of
income.
…
60 In summary, the issue of whether or not a taxpayer has a source of
income is to be determined by looking at the commerciality of the activity in
question. Where the activity contains no personal element and is clearly
commercial, no further inquiry is necessary. Where the activity could be
classified as a personal pursuit, then it must be determined whether or not the
activity is being carried on in a sufficiently commercial manner to constitute
a source of income. However, to deny the deduction of losses on the
simple ground that the losses signify that no business (or property) source
exists is contrary to the words and scheme of the Act. Whether or not a
business exists is a separate question from the deductibility of
expenses. As suggested by the appellant, to disallow deductions
based on a reasonable expectation of profit analysis would amount to a case law
stop-loss rule which would be contrary to established principles of
interpretation, mentioned above, which are applicable to the Act. As well,
unlike many statutory stop-loss rules, once deductions are disallowed under the
REOP test, the taxpayer cannot carry forward such losses to apply to future
income in the event the activity becomes profitable. As stated by Bowman
J.T.C.C. in Bélec, supra, at p. 123: “It would be ...
unacceptable to permit the Minister [to say] to the taxpayer ‘The fact that you
lost money ... proves that you did not have a reasonable expectation of profit,
but as soon as you earn some money, it proves that you now have such an
expectation.’”
[26] I believe that the
approach outlined by the Supreme Court in Stewart may be summarized as
follows:
(a)
Firstly,
the Court must determine if the taxpayer has a source of income from a business
for the purpose of section 9 of the Act. The ultimate objective of this
part of the test is to distinguish between commercial and personal activities
(paragraph 50), in accordance with the methodology prescribed by the Supreme
Court, especially at paragraphs 52-56, and 60.
(b)
Secondly,
having found a source of income, a Court must determine if the expenses claimed
by the taxpayer may be deducted pursuant to subsection 18(1) from the income
earned from the business. If they can, the expenses will be allowed, but only
to the extent that they are “reasonable” as required under section 67 (see paragraph
57 of Stewart). The Supreme Court emphasized (at paragraph 60):
Whether or not a business exists is a
separate question from the deductibility of expenses.
[27] If we apply the test
as outlined in Stewart to the facts identified above, the following
points should be recognized:
1.
The
Reasonable Expectation of Profit Test (“REOP”) has been rejected by the Supreme
Court as a test to determine whether a particular activity is a source of
income.
2.
Lower
Courts are invited to employ the two-stage approach as outlined in paragraph 50
of Stewart. In instances where the activities of the parties are not
“clearly commercial”, as stated in paragraph 53 of Stewart, lower Courts
are required to consider whether “the activity” has been carried out in
accordance with objective standards of business-like behaviour (see
paragraph 54 of Stewart). Lower Courts should decide whether “the
taxpayer is carrying on the activity in a commercial manner” (paragraph 55
of Stewart).
[28] Based on the
statements made in Stewart and the fact that the nature of the
Appellant’s endeavours were not “clearly commercial”, I must consider whether
the “activity” under review meets the tests as outlined above.
Objective standards of
business-like behaviour:
I have
carefully analyzed all of the evidence and the following points should be
noted:
(a)
None
of the four Appellants made any profit from the purchase of a licence to market
the Quest Prestige Cards in a specified territory or from the purchase of a
share in territories in Texas through Stellar
Dynamic Limited Partnership. (Note: Only the three other Appellants were
involved in the Partnership.)
(b)
Furthermore,
it appears that there was no chance that any of the Appellants would ever realize
a profit from the sale of Quest Prestige Cards because they were each required
to provide Rockhaven with the entire $5 per card that was received from
Crusader, upon a sale.
(c)
None
of the Appellants provided any evidence of experience in marketing a product in
a definable territory.
(d)
None
of the Appellants gave evidence of any intended course of action to produce a
profit from selling Quest Prestige Cards in the specified territories.
(e)
Based
on the evidence provided, I have concluded that the sale of the Quest Prestige
Card was incapable of ever producing a profit because Crusader did not appear
to have a source of funding to carry on a sales campaign. Crusader also had no
confirmed source of compensation for their services and appeared to be controlled
by related persons.
(f)
In
his argument, Counsel for the Respondent said that the Quest Prestige Card
promotion was not a business opportunity offered to the Appellant, rather it
was a tax refund scam perpetrated on these individuals (underlining
added).
[29] Counsel for the
Respondent said at page 28 of his written submissions:
… This is not a case of a business
that suffered losses because it was ill conceived or poorly managed, and the
tax authorities are second guessing the business acumen of a taxpayer. This is
a case where, in fact, there was no business. There were no business expenses.
There is no factual foundation for any of the deductions claimed by the
appellants …
Overview: It appears that the Appellants were duped
into thinking that Crusader would market the Quest Card for them. The
Appellants’ belief that they had invested in a business opportunity does not
make the Quest Card promotion a commercial activity. Through their evidence,
and the absence of any evidence from the promoters, it is apparent that the
Appellants were victims of a scam. Regardless, a deduction cannot be allowed to
the Appellants in the absence of the pursuit of profit in a legitimate business
activity. “Put simply, other Canadian taxpayers should not have to bear the financial
burden which arises from unfortunate circumstances”.
[30] In my opinion, the
activity engaged in by the four Appellants of selling the Quest Prestige Card
does not meet the test of objective standards of business-like behaviour as
referred to in Stewart for the reasons outlined above.
[31] In further support
of his argument, Counsel for the Respondent referred to various Court decisions
which involved taxpayers who had invested in numerous promotions made by Henry
N. Thill.
[32] Counsel for the Respondent
said that the structure used by Mr. Allen and the other promoters of the Quest
Prestige Card was virtually identical to the structure that was used by Henry
N. Thill in numerous promotions.
[33] One of the main
“Henry N. Thill” type cases cited by Counsel for the Respondent was Maloney
v. The Queen, 1989 CTC 213. In that case, Mr. Justice Joyal of
the Federal Court held that the true intent of Mr. Maloney and the other
Appellants was not to pursue a profitable business opportunity, but rather to avail
themselves of the attractive tax deduction the scheme would provide to them.
[34] Mr. Maloney appealed
the decision of the Federal Court to the Federal Court of Appeal (see Maloney
v. The Queen, 92 DTC 6570).
[35] In dismissing the
appeal, Justice Hugessen said:
While it is trite law that a taxpayer may
so arrange his business as to attract the least possible tax (see Duke of
Westminster’s case, [1936] A.C. 1), it is equally clear in our view
that the reduction of his own tax cannot by itself be a taxpayer’s business for
the purpose of the Income Tax Act … To put the matter another
way, for an activity to qualify as a “business” the expenses of which are
deductible under paragraph 18(1)(a) it must not only be one engaged in by the
taxpayer with a reasonable expectation of profit, but that profit must be
anticipated to flow from the activity itself rather than exclusively from the
provisions of the taxing statute.
(Emphasis added)
[36] Various decisions of
the Tax Court followed the decision of Maloney. I refer to the following
cases involving “Henry N. Thill” promotions:
(a) Bendall v.
The Queen, 96 DTC 1626;
(b) La Liberté v. The Queen,
96 DTC 1483;
(c) Schatroph v.
R., [1997] 3 C.T.C. 2148;
(d) Burton v. The Queen, 98 DTC 2064;
(e) Lorenz v. Canada, [1997] 1 C.T.C. 2484;
and
(f) McPherson v.
Canada, 2006 TCC 648.
[37] In Burton, Justice Beaubier said
that the operation was not organized to carry on business for profit. Justice
Beaubier said “it was a tax loss scheme, pure and simple”.
[38] I have reviewed all
of the above Court decisions plus a number of other decisions involving Henry
N. Thill tax schemes. In my opinion the decisions involving Mr. Thill
remain “good law” in spite of the fact that the Stewart decision has
rejected the REOP test.
[39] In my opinion the activity
of the Appellant to become a Quest Prestige Card distributor was not a source
of income for the purpose of section 9 of the Act.
II. Tax Shelter
Rules
[40] Section 143.2 of the
Act provides for an adjustment to the cost of expenditures relating to a
tax shelter investment.
[41] A “tax shelter
investment” is defined in subsection 143.2(1) of the Act. A “tax shelter
investment”, means a property that is a tax shelter for the purpose of subsection
237.1(1) of the Act, which requires mandatory registration and reporting
requirements for “tax shelters”.
[42] Stellar filed and
received a tax shelter identification number as required under section 237.1 of
the Act with respect to providing services [Exhibit 1, Tab 2, Form
T5001E]. It therefore follows that section 143.2 of the Act applies in
the present appeal.
[43] Notwithstanding any other provision of the Act,
subsection 143.2(6) calculates the expenditure amount in respect of a tax
shelter investment, which is essentially the amount of a taxpayer's expenditure
before applying the rules, reduced by deducting the total of:
(i) limited recourse amounts that can reasonably be
considered to be related to the expenditure;
(ii) at-risk adjustment in respect of the expenditure;
and
(iii) limited recourse amount and at-risk adjustment
of each taxpayer who deals at arm's length with the taxpayer and holds an
interest in the taxpayer, that can reasonably be considered related to the
expenditure.
[44] The Appellant’s expenditure with respect to the tax
shelter investment was the $20,000 royalty amount, which was reported on the
Summary Tax Shelter Information Form [Form 5003E].
[45] In the Tolhoek v. Canada decision, 2006 TCC 681
confirmed (2008 FCA 128), Madam Justice Campbell states that the
unpaid principle of certain long term debt will be deemed to be a
limited-recourse amount unless all of the exceptions in subsection 143.2(7)
of the Act apply.
[46] The first five exceptions to be met are found in
paragraph 143.2(7)(a) of the Act, summarized as follows:
1. bona fide arrangements;
2. evidenced in writing;
3. made at the time the
indebtedness arose;
4. made for the purposes of
repayment of debt and all interest; and
5. that the arrangements were made within a
reasonable period, no longer than 10 years.
[47] The remaining two exceptions can be found
in paragraph 143.2(7)(b) of the Act, referred to by Madam Justice Campbell
at paragraph 41:
1. interest must be payable at least
annually at the prescribed rate; and
2. the interest must be paid no later than
60 days after the end of each taxation year of the debtor that ends in the
period.
[48] In the present
appeal the $15,000 unpaid balance of the Advanced Royalty due under each Licence
Agreement was not made with bona fide arrangements for repayment and no
interest was levied on these outstanding balances. As such the full $15,000
would be regarded as the limited-recourse amount and deducted from the
Appellant’s expenditure of $20,000.
[49] Subsection 143.2(2)
of the Act sets out what is meant by the term “at-risk adjustment”, the
provision reads as follows:
(2) At-risk adjustment -- For the purpose of this section, an at-risk adjustment in
respect of an expenditure of a particular taxpayer, other than the cost of a partnership
interest to which subsection 96(2.2) applies, means any amount or benefit
that the particular taxpayer, or another taxpayer not dealing at arm's length
with the particular taxpayer, is entitled, either immediately or in the future
and either absolutely or contingently, to receive or to obtain, whether
by way of reimbursement, compensation, revenue guarantee, proceeds of
disposition, loan or any other form of indebtedness, or in any other form or
manner whatever, granted or to be granted for the purpose of reducing the
impact, in whole or in part, of any loss that the particular taxpayer may
sustain in respect of the expenditure or, where the expenditure is the
cost or capital cost of a property, any loss from the holding or disposition of
the property.
(Emphasis added)
[50] The at-risk
adjustment would be the $15,000 performance bond that Crusader had promised to establish
since the Appellant was contingently entitled to this amount for the purpose of
reducing the impact, in whole or in part, of any loss that may have been sustained
in respect of the investment.
[51] Due to the
application of the tax shelter rules, the Advanced Royalties expense would be reduced
to zero and as such no deduction would be permitted.
[52] By virtue of the
application of the tax shelter rules, there is no longer an expense relating to
the investment in the Quest Prestige Card, the arguments and provisions
outlined in subparagraphs 19(c), (d) and (e) above would no longer apply.
III. Licence
Fee
When
an expenditure is made, not only once and for all, but with a view to bringing
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 [British Insulated &
Helsby Cables Ltd. v. Atherton, 10 T.C. 155, at 192].
[53] The Licence
Agreement between the Appellant and Rockhaven required the Appellant to pay a
$350 licence fee. Due to the enduring benefit that resulted from this one time
payment (i.e. a 20-year licence to sell the Quest Prestige Card in assigned
territories) the full $350 would be regarded as a capital outlay and the
Appellant would be precluded from a current deduction due to the application of
paragraph 18(1)(b) of the Act.
[54] Pursuant to Schedule
II of the Income Tax Regulations the licence acquired from Rockhaven
would fall in Class 14 for the purposes of the capital cost allowance rules,
such classification would result in the $350 payment being capitalized and
amortized over the life of the Licence Agreement (i.e. 20 years).
[55] Based upon the
reasons outlined above the appeals are dismissed, with costs.
Signed at Toronto, Ontario, this 2nd day of May 2008.
“L.M. Little”
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