Oxford Shopping Centres Ltd. v. The Queen, 79 DTC 5458, [1980] CTC 7, aff'd 81 DTC 5065, [1981] CTC 128 (FCA)

The Associate Chief Justice:— This is an appeal under the Income Tax Act from a re-assessment of tax for the year 1973. In making the assessment the Minister disallowed as being an outlay of capital a deduction claimed by the plaintiff of an amount of $490,050 paid by the plaintiff to the City of Calgary under the terms of a contract in writing. In its place the Minister allowed a deduction of about 5% of that amount as an eligible deduction under section 14 of the Income Tax Act.

The issues in the appeal are (1) whether the amount was an outlay of capital or an expense deductible in computing income for tax purposes and

(2) whether, if the amount was deductible as an expense, the plaintiff was required to amortize it over a period of years deducting only an appropriate portion of it in the taxation year in question. That the amount was expended for the purpose of gaining or producing income from business or property is admitted.

The agreement was made on December 21, 1972. For some years prior to that the plaintiff, then Chinook Shopping Centre Limited, had owned and operated a large shopping centre situated on a rectangular area of land in the City of Calgary bounded eastwardly by MacLeod Trail, southwardly by Glenmore Trail, westwardly by Meadow View Road and Northwardly by 60th Avenue. Across 60th Avenue was another shopping centre known as Southridge Shopping Centre owned by Chinook Ridge Expansion Limited and Oxlea Investment Limited and located on land bounded southwardly by 60th Avenue and westwardly by 5th Street SW. 5th Street SW was not Straight but followed an “S” shaped course. Its northern end, however, was in line with the prolongation northwardly of Meadow View Road. Both the MacLeod Trail and Glenmore Trail were arterial roads and traffic congestion at their intersection and at the intersection of Meadow View Road and Glenmore Trail presented problems both for the city and for the plaintiff.

In 1969, preliminary plans had been developed by the city for a clover-leaf type of interchange at the MacLeod—Glenmore intersection which, if constructed, would have taken a considerable portion of the plaintiff’s parking area and would have made it necessary for the plaintiff to find other parking space, either by constructing a parking garage or otherwise, in order to fulfill its commitments to its tenants with respect to the provision of adequate parking. The plaintiff objected to the proposal on several grounds, including that of safety of access to and egress from the Chinook Shopping Centre, and succeeded in persuading the city to join with it in having a study made by traffic consultants. As a result of this, the plan for a cloverleaf interchange was abandoned in favour of what was referred to as a “tight-diamond” interchange.

The earlier city plans had included a proposal, to which objection was not taken, for the construction of a “fly-over” to accommodate traffic moving eastwardly on Glenmore Trail and wishing to turn left into Meadow View Road and thence into the shopping centre. At the time the agreement was signed, this “fly-over” was still part of the overall plans and there were also plans for realigning and straightening 5th Street SW to connect it with Meadow View Road, and to close and convey to the owners of the shopping centres, both of which by this time were controlled by Oxlea, most of 60th Avenue SW and the curved southern portion of 5th Street SW to accommodate plans of the owners for the expansion of the combined shopping centre and its parking area.

The particular agreement, under which the amount in question in these proceedings was paid, was but one of six written agreements forming a single transaction relating to the proposed changes. In the first of these, it is recited, inter alia, that:

AND WHEREAS Chinook, Chinook— Ridge and Oxlea desire to undertake an expansion and a connection of the shopping centres and require certain lands from the City for this purpose;

AND WHEREAS the City desires to undertake the widening of Glenmore i ran, the realignment of 5th Street South West and the construction of a traffic inter- change, all as hereinafter defined and requires certain lands from Chinook and Ox- lea for this purpose;

The agreement went on to provide for the sale by the plaintiff and Chinook- Ridge and Oxlea to the city at an agreed price of $85,000 per acre of portions of their lands required for the widening and alterations of the streets and for the sale by the city to the plaintiff and Oxlea at the same price per acre of the portions of 60th Avenue SW and 5th Street SW and of a laneway north of 60th Avenue SW which were no longer to be required as streets. The city also agreed to construct the realignment of 5th Street SW and the interchange at the MacLeod—Glenmore intersection.

Another agreement related to the demolition by the plaintiff of an existing service station on its premises and the construction of a anew one at a different location in consideration of $235,000 to be paid by the city. Another related to the construction of the “fly-over” and gave the plaintiff the right, during an option period, to require the city to construct the “flyover” on certain agreed terms as to payments to be made by the plaintiff. Another agreement conferred on the city an option to buy from the plaintiff at an agreed price per acre, equal to that in the first mentioned agreement, land of the plaintiff that would be required for the construction of the “flyover”. By a further agreement, Oxlea agreed to donate to the city a parcel of land to the westward of the realigned 5th Street SW.

I come now to the remaining agreement. The parties to it were the plaintiff, Chinook-Ridge, Oxlea and the city and it recited that:

WHEREAS pursuant to an agreement made even date herewith between the parties hereto, Chinook and Oxlea have sold to the City and the City has sold to Chinook and Oxlea certain lands and premises for the widening of Glenmore Trail, the realignment of 5th Street South West and for the construction of a traffic interchange, all as hereinafter defined, and as a result thereof the City has agreed at the request of Chinook, Chinook-Ridge and Oxlea to make certain changes to lands and roads adjoining the Chinook Shopping Centre and the Southridge Shopping Centre so as to facilitate the use of such lands and the proposed expansion as hereinafter defined;

AND WHEREAS the cost of such changes as aforesaid might result in Chinook and Oxlea being liable to the City for local improvement rates and taxes arising by reason of such changes and in lieu of making payment of such local improvement rates and taxes that might be payable Chinook and Oxlea have agreed to pay to the City the sums of money and at the times hereinafter provided;

AND WHEREAS the City has agreed to pay Chinook certain moneys to assist in defraying certain costs which will be incurred by Chinook arising out of the construction of the interchange;

Its provisions included:

2. The City, in consideration of the moneys to be hereafter paid to it by Chinook and Oxlea in lieu of local improvement rates and taxes that might be payable by Chinook and Oxlea by reason of any works and improvements undertaken by the City herein, will

(a) construct the realignment north of 60th Avenue as shown on City of Calgary Plan File No DD-3-14;

(b) construct the realignment south of 60th Avenue, including the cost of providing access to the Chinook Shopping Centre, as shown on City of Calgary Plan File No DD-3-14;

(c) construct an entrance or access to the Chinook Shopping Centre accommodating all turns from and to the MacLeod Trail opposite 61st Avenue South West, the same to include a traffic control signal to be located thereat, all as shown on City of Calgary Plan File No DD-4-03;

(d) make those certain improvements to MacLeod Trail between Glenmore Trail and 60th Avenue South West as shown on City of Calgary Plan File No DD-4-03, except the 60th Avenue South West improvements shall be deferred to a time that is mutually acceptable to Chinook, Oxlea and the City.

3. In consideration of the City undertaking the works and improvements at the request of Chinook and Oxlea as provided in clause 2 hereof, Chinook and Oxlea in lieu of any assessment of local improvement rates and taxes that might arise therefrom will pay to the City the aggregate sum of $488,575 at the times and in the manner hereinafter set forth:

(a) on December 31, 1972, Chinook shall pay to the City the sum of $21,000;

(b) on March 31, 1973, Oxlea shall pay the City the sum of $30,000;

(c) on March 31, 1973, Chinook shall pay to the City the sum of $437,575;

which payments shall be deemed to be payment and satisfaction in full of any and all local improvement rates and taxes which might be payable by Chinook and Oxlea as a result of the works and improvements undertaken by the City as aforesaid. Provided, however, if the 60th Avenue South West improvements referred to in clause 2(d) hereof are made, Chinook will pay to the City a further sum of $9,000 plus interest at 8 /2% per annum compounded annually calculated from January 1, 1973, to date of payment, such payment to be in lieu of any local improvement rates or taxes that might be payable by Chinook to the City therefor.

4. It is understood and agreed that payments made by Chinook and Oxlea to the City as provided for in this Agreement shall not be deemed to be payments for any local improvements that may be undertaken by the City in the vicinity of the Chinook Shopping Centre or the Southridge Shopping Centre or the Chinook- Ridge Centre at any time in the future.

5. The City shall, on March 31, 1973, pay to Chinook the sum of $37,000 to assist Chinook in defraying any costs that may be incurred by it arising out of the construction by the City of the interchange and any related works.

The amount of $490,050 in question is the sum of the three payments referred to in paragraph 3 plus an adjustment of $1,475 resulting from agreed changes in the plans and the rounding off of acreage figures.

The plaintiff’s case is that this amount was paid in lieu of local improvement taxes, that such taxes, if assessed, would have been an income expense, and that the amount in question was of the same nature. Counsel supported his position by pointing out that no new asset had been acquired for the payment and that it resulted in no change or improvement in the structure of the plaintiff’s business or of its premises.

The defendant’s case is that the expenditure was made to protect the capital assets of the business, that is to say, the shopping centre premises against the threat represented by the city’s initial plan for a clover-leaf interchange and to protect as well the goodwill attaching to the location of the shopping centre. Counsel sought support for this position by submitting that this was an extraordinary and non-recurring expenditure and not one made in the ordinary course of the plaintiff’s business.

I do not adopt either position in its entirety.

In my view, the plaintiff’s enjoyment of its premises was in no way threatened by any of the proposed plans except that for a clover-leaf interchange and by the time the agreements were made that proposal had been abandoned in favour of the better proposal for a “tight-diamond” interchange recommended by the traffic planning consultants. The amount in question was not the fees of the consultants for making the survey which produced the better plan and got rid of the threat of the earlier plan. Nor was it an expense incurred for that purpose. Save that the earlier proposal for a clover-leaf interchange indicates that there was a traffic problem call- ing for a solution and was the occasion for a survey to find a better solution it has, in my view, nothing to do with the question to be resolved.

On the other hand, the expenditure was not a payment of taxes. Nor was it an expenditure that can be characterized precisely as being in the nature of a payment of taxes. For while the amount was described in the agreement as being in lieu of taxes in respect of the road improvements in my view it takes its nature not from this wording but from the consideration given by the city for it, that is to say, the promise of the city to construct the improvements and the implied promise not to assess the plaintiff for local improvement taxes in respect of the cost of such improvements. If, for some reason, the city had never carried out the improvements a right to recover the amount on a failure of consideration would have arisen. Such a right is not characteristic of a payment of taxes. On the other hand, the $490,050 does not represent the cost of the street improvements and should not be regarded as having purchased them. Though evidence on the point is lacking, or sketchy at best, it seems likely that the amount represented only a part of their cost. I regard the amount, therefore, as a contribution toward the costs to be incurred by the city.

I turn now to the tests by which the question may be resolved. In British Columbia Electric Railway Limited v MNR, [1958] SCR 133; [1958] CTC 21; 58 DTC 1022, Abbott, J put the position under the former provisions of the Income Tax Act, which are not materially different from the relevant provisions presently in effect, as follows:

Since the main purpose of every business undertaking is presumably to make a profit, any expenditure made “for the purpose of gaining or producing income” comes within the terms of paragraph 12(1)(a) whether it be classified as an income expense or as a Capital outlay.

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)(1)(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 MNR, [1942] SCR 89 at 105; [1942] 1 DLR 596; [1942] CTC 1; 2 DTC 535; [1944] AC 126, [1944] 1 All ER 743; [1944] 3 DLR 545; [1944] CTC 94; 2 DTC 654, applying the principle enunciated by Viscount Cave in British Insulated and Helsby Cables, Limited v Atherton, [1926] AC 205 at 214; 10 TC 155, 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”.

Ten years later in MNR v Algoma Central Railway, [1968] SCR 477; [1968] CTC 161; 68 DTC 5096, Fauteux, CJ, speaking for the court, put the matter thus:

Parliament did not define the expressions “outlay ... of capital” or “payment on account of capital”. There being no statutory criterion, the application or nonapplication of these expressions to any particular expenditures must depend upon the facts of the particular case. We do not think that any single test applies in making that determination and agree with the view expressed, in a recent decision of the Privy Council, BP Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia, [1966] AC 224; [1965] 3 All ER 209, by Lord Pearce. In referring to the matter of determining whether an expenditure was of a capital or an income nature, he said, at 264:

The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer.

In Canada Starch Co Ltd v MNR, [1969] 1 Ex CR 96; [1968] CTC 466; 68 DTC 5320, Jackett, P (as he then was) after citing the Algoma case summarized the distinction thus:

For the purpose of the particular problem raised by this appeal, I find it helpful to refer to the comment on the “distinction between expenditure and out-goings on revenue account and on capital account” made by Dixon, J in Sun Newspapers Ltd et al v Fed Com of Taxation (1938), 61 CLR 337 at 359, where he said:

The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure, or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss.

In other words, as I understand it generally speaking,

(a) on the one hand, an expenditure for the acquisition or creation of a business entity, structure or organization, for the earning of profit, or for an addition to such an entity, structure or organization, is an expenditure on account of capital, and

(b) on the other, an expenditure in the process of operation of a profit-making entity, structure or organization is an expenditure on revenue account.

Applying this test to the acquisition or creation of ordinary property constituting the business structure as originally created, or an addition thereto, there is no difficulty. Plant and machinery are capital assets and moneys paid for them are moneys paid on account of capital whether they are

(a) moneys paid in the course of putting together a new business structure,

(b) moneys paid for an addition to a business structure already in existence, or

(c) moneys paid to acquire an existing business structure.

In my opinion, however, from this point of view, there is a difference in principle between property such as plant and machinery on the one hand and goodwill on the other hand. Once goodwill is in existence, it can be bought, in a manner of speaking, and money paid for it would ordinarily be money paid “on account of capital”. Apart from that method of acquiring goodwill, however, as I conceive it, goodwill can only be acquired as a by-product of the process of operating a business. Money is not laid out to create goodwill. Goodwill is the result of the ordinary operations of a business that is so operated as to result in goodwill. The money that is laid out is laid out for the operation of the business and is therefore money laid out on revenue account.

In the BP Australia case; Lord Pearce had cited as “a valuable guide to the traveller in these regions” the discussion in Sun Newspapers Ltd v Federal Commissioner of Taxation (1938), 61 CLR 337 at 363, in which Dixon, J said:

There are, I think, three matters to 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.

and

the expenditure is to be considered of a revenue nature if its purpose brings it within the very wide class of things which in the aggregate form the constant demand which must be answered out of the returns of a trade or its circulating capital and that actual recurrence of the specific thing need not take place or be expected as likely.

Lord Pearce also cited the following passage from the judgment of Lord Radcliffe in Commissioner of Taxes v Nchanga Consolidated Copper Mines, [1964] AC 948 at 960:

Again, courts have stressed the importance of observing a demarcation between the cost of creating, acquiring or enlarging the permanent (which does not mean perpetual) structure of which the income is to be the produce or fruit and the cost of earning that income itself or performing the income-earning operations. probably this is as illuminating a line of distinction as the law by itself is likely to achieve, but the reality of the distinction, it must be admitted, does not become the easier to maintain as tax systems in different countries allow more and more kinds of capital expenditure to be charged against profits by way of allowances for depreciation, and by so doing recognise that at any rate exhaustion of fixed capital is an operating cost. Even so, the functions of business are capable of great complexity and the line of demarcation is sometimes difficult indeed to draw and leads to distinctions of some subtlety between profit that is made ‘‘out of” assets and profit that is made “upon” assets or “with” assets.

Later in his reasons, Lord Pearce expressed the view cited by Fauteux, CJ in the Algoma case and then proceeded:

Although the categories of capital and income expenditure are distinct and easily ascertainable in obvious cases that lie far from the boundary, the line of distinction is often hard to draw in border line cases; and conflicting considerations may produce a Situation where the answer turns on questions of emphasis and degree. That answer:

“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”:

per Dixon, J in Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946), 72 CRL 634, 648. As each new case comes to be argued felicitous phrases from earlier judgments are used in argument by one side and the other. But those phrases are not the deciding factor, nor are they of unlimited application. They merely crystallise particular factors which may incline the scale in a particular case after a balance of all the considerations has been taken.

Lord Pearce then went on to consider the three matters referred to by Dixon, J, in the Sun Newspapers case. The first of these was the character of the advantage sought, including its lasting qualities and that of recurrence as well as the nature of the need or occasion for it. Under this head, he considered as well the test of whether the expenditure was from fixed or from circulating capital, how the expenditures should be treated on the ordinary principles of commercial accounting and whether the amounts were spent on the structure within which the profits were to be earned. He also considered the manner in which the benefit was to be used, the second of the matters suggested by Dixon, J, and the third, that is to say, the method of payment.

I have summarized all this because it seems to me to point up some of the many facets of a complex situation that it may be necessary to take into account and weigh in reaching a conclusion in a case that does not readily or Clearly fall into the one category or the other but exhibits characteristics some of which point in one direction and others in the other direction.

In the present case, the plaintiff’s business, as I appreciate it, on such materials as are before the court, consists in the letting of shops on its premises to tenants who carry on their businesses therein, the provision of parking areas for use by the tenants’ customers and perhaps the provision of some services to the tenants. The returns consist of rentals which are in part calculated on the revenues of the tenants’ businesses. The success of the plaintiff’s business is thus very much dependent on the popularity of its premises as a place for its tenants’ customers to do their shopping.

In such a business, it seems to me that while money spent by the plaintiff to enlarge or improve the shopping centre premises or the buildings thereon or in organizing the business structure would be expenditures of capital, annual expenditures for taxes on the premises, including assessments for local street improvements, as well as moneys spent to popularize the centre as a place for customers to do their shopping, whether by way of advertising or gimmicks of one kind or another or otherwise, not resulting in the acquisition of additional plant or machinery for use in the business, would be revenue expenses.

Turning now to the several matters to be considered, in my view, it is the nature of the advantage to be gained which more than any other feature of the particular situation will point to the proper characterization of the expenditure as one of capital or of revenue expense. That the payments viewed by themselves were in a sense made once and for all is apparent. But so is almost any item which in isolation may be somewhat unusual in one way or another. That the advantage, whatever it was, was expected to be of a lasting or more or less permanent nature is also apparent. This is perhaps the strongest feature suggesting that the expenditure was capital in nature. But the advantage is no more permanent in nature than that expected to be realized from the geological survey which had been made in the Algoma case. In the test of “what the expenditure is calculated to effect from a practical and business point of view” such features, while carrying weight, are not conclusive.

For if, as I think, the expenditure can and should be regarded as having been laid out as a means of maintaining, and perhaps enhancing, the popularity of the shopping centre with the tenants’ customers as a place to shop and of enabling the shopping centre to meet the competition of other shopping centres, while at the same time avoiding the imposition of taxes for street improvements, the expenditure can, as it seems to me, be regarded as a revenue expense notwithstanding the once and for all nature of the payment on the more or less long term character of the advantage to be gained by making it.

Nor do I think the question is resolved and the expenditure characterized as capital simply because the agreement was one of several related agreements some of which plainly dealt with matters of a capital nature and which altogether made up a single complex transaction. If there had been but a single agreement in which the expenditures were not segregated or severable, the easily recognizable capital nature of what was involved in the other agreements might well have served to characterize the whole. But I do not think that the same result follows where the particular expenditure has been carefully segregated in a separate agreement which demonstrates what the particular expenditure was for.

Moreover, while the undesirable effects of traffic congestion on the popularity of the shopping centre and on its prospects for competing with a rival shopping centre might conceivably have led to some other whole or partial solution involving an outlay of a capital nature, such as to restructure the shopping centre or its buildings or its means of access, and egress, (and some such outlays may indeed have been made), this is not what the expenditure here in question was for. The money was not paid for changes in or additions to the appellant’s premises or the buildings thereon or in connection with the structure of the appellant’s business. Rather, it was paid to induce the city to make changes on city property that could be beneficial to the plaintiff in achieving its object of promoting its business by enhancing the popularity of its shopping centre.

In Ounsworth v Vickers Limited, [1915] 3 KB 267, in somewhat comparable circumstances, the cost of a new facility on property not belonging to the taxpayer but for use in the plaintiff’s business was held to be an expenditure of capital. But here the improvements while beneficial in helping the flow of traffic on the streets adjoining the shopping centre and in the process making it easier for tenants’ customers to gain access to and egress from the centre and as well making it unnecessary for them to look for easier alternative routes, were not, as I view them, improvements for use in carrying on the plaintiff’s business. They were improvements for use by the public in general, both for those entering or leaving the shopping centre and for those simply passing it.

The need or occasion for the expenditure, in my view, was the undesirable effects which traffic congestion was causing and could be expected to cause on the popularity of the shopping centre and on its prospects for competing with a rival shopping centre to be constructed some three miles distant. It thus appears to me to have arisen out of and to be incidental to the carrying on of the plaintiff’s business rather than to the premises on which the business was carried on. It was, as I see it, 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.

Moreover, there would never be any return on or of the amount save, bit by bit, in enhanced rental revenues of the business that might result from the construction by the city of the street improvements. This, as it seems to me, also points to the expenditure being one chargeable to circulating capital, rather than fixed capital.

With respect to how the expenditure should be treated according to the principles of commercial accounting, I see no reason to doubt that what was done by the plaintiff in its accounts in charging the expenditure to revenue and writing off the amount over a 15-year period so as not to distort the profit and loss results in the year of payment, rather than treating the advantage as an asset and charging depreciation in respect of it was in accordance with such principles, in particular as no asset was acquired for the payment and all that it could ever produce for the business was an intangible advantage to be realized in enhanced revenues of the business, the duration of which could only be estimated and then not with precision. Moreover, it seems to me that the intangible advantage to be realized for the expenditure would have made an odd sort of entry as a capital asset in a balance sheet. This consideration as well, therefore, appears to me to suggest the revenue nature of the expenditure.

I see nothing in the manner in which the advantage was to be enjoyed, save that it could only be realized in revenue receipts, that assists in classi- fying the expenditure as capital or as a revenue expense. With respect to the means by which the advantage was to be obtained, that is to say, by three lump sum payments rather than by periodic payments in some way referable to the extent of the advantage for the period, the indication is that the expenditure was more like a capital outlay than a revenue expense.

After having considered these matters at length, it appears to me that the prédominent criteria point to the conclusion that from a practical and business point of view, the expenditure is more appropriately classified as a revenue expense and not as an outlay of capital.

I turn now to the question whether in computing its income for tax purposes, the plaintiff was required to apportion the expenditure of the $490,050 over a period of years. That is what the appellant did in computing its profit for corporate purposes. In its balance sheet dated March 31,1973, it showed as an asset an item described as “deferred charges’’ which included the $490,050. At that time though the amount had been paid to the city, the construction work had not yet been done. A note to the balance sheet states that the $490,050 will be amortized over fifteen years commencing in 1974. But for income tax purposes, the plaintiff deducted the whole $490,050 as an expense of the year 1973.

The plaintiff did this because, in 1964, deductions claimed in 1961, 1962 and 1963 of amortized portions of a smaller but similar expenditure incurred and paid in 1961 were disallowed by the Minister and the plaintiff was required to compute its income by taking the deduction of the full amount in the 1961 taxation year. A similar position appears to have been taken on behalf of the Minister in MNR v Tower Investment Inc, [1972] FC 454; [1972] CTC 182; 72 DTC 6161, where, however, Collier, J concluded that in respect of expenditures totalling $153,301 made in 1963,1964 and 1965, for advertising the taxpayers’ apartments, the taxpayer was not required to deduct particular amounts in the year in which the expenditure was made but in accordance with accounting principles could defer an appropriate part of the deduction to a later year.

In MNR v Canadian Glassine Co Ltd, [1976] 2 FC 517; [1976] CTC 141, Le Dain, J, after concluding in a dissenting opinion that the expenditure in question was a revenue expense, said at 536 [155]:

In Associated Investors of Canada Limited v MNR, [1967] 2 Ex CR 96, at 100 (note), Jackett, P expressed the opinion that the principle affirmed by Thorson, P was not “applicable in all circumstances”, and that “there are many types of expenses that are deductible in computing profit for the year ‘in respect of’ which they were paid or payable.” In the Tower Investment case Collier, J concluded [at 461-462]: “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 agree with the learned Trial Judge that this conclusion is equally applicable to the expenditure in this case. The opinion of Thorson, P is not a conclusion that is dictated by the terms of section 12(1)(a) but a principle deduced from “the general scheme of the Act’’, and as such it should be subject to necessary qualification for cases such as the present one in which its application would seriously distort rather than fairly and reasonably reflect the taxpayer’s position with respect to income and expenditure. Indeed, in this Court counsel for the appellant did not dispute the right to apply the “matching principle” to the present case, assuming that the expenditure was found to be one that was deductible in determining income.

In the present case, the position taken on behalf of the Crown was that, if the amount was not a capital expenditure, it was incumbent on the taxpayer to amortize it over a period of years and claim only a part of it as deductible each year. Counsel contended that, except where the Income Tax Act makes a specific provision, the recognized principles of commercial accounting apply for the purpose of determining the income from a business for the year and that to deduct the whole amount in the year 1973, rather than to amortize and deduct it over a period of years, distorts and unduly reduces the income for 1973. He made no attack on the accounting method adopted by the plaintiff in computing its profit for corporate purposes by amortizing the amount over a 15-year period.

In Associated Investors of Canada v MNR, [1967] 2 Ex CR 96; [1967] CTC 138; 67 DTC 5096, Jackett, P (as he then was) in a footnote at 100 [142, 5098] said: [1]

*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 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 IRC v Gardner Mountain & D’Ambrumenil, Ltd (1947), 29 TC per Viscount Simon at 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, per Cameron, J at 119.) The situation is different in the case of “running expenses”. See Naval Colliery Co Ltd v CIR, supra, per Rowlatt, J at 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] SCR 253. 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 113-4.

I think it follows from this that for income tax purposes, while the “matching principle’’ will apply to expenses related to particular items of income, and in particular with respect to the computation of profit from the acquisition and sale of inventory*, [2] it does not apply to the running expense of the business as a whole even though the deduction of a particularly heavy item of running expense in the year in which it is paid will distort the income for that particular year. Thus while there is in the present case some evidence that accepted principles of accounting recognize the method adopted by the plaintiff in amortizing the amount in question for corporate purposes and there is also evidence that to deduct the whole amount in 1973 would distort the profit for that year, it appears to me that as the nature of the amount is that of a running expense that is not referable or related to any particular item of revenue, the footnote to the Associated Industries case and the authorities referred to by Jackett, P, and in particular the Vallambrosa Rubber case and the Naval Colliery case, indicate that the amount is deductible only in the year in which it was paid. All that appears to me to have been held in the Tower Investment case and by the trial judge and LeDain, J in the Canadian Glassine case is that it was nevertheless open to the taxpayer to spread the deduction there in question over a number of years. It was not decided that the whole expenditure might not be deducted in the year in which it was made, as the earlier authorities hold. And there is no specific provision in the Act which prohibits deduction of the full amount in the year it was paid. I do not think, therefore, that the Minister is entitled to insist on an amortization of the expenditure or on the plaintiff spreading the deduction in respect of it over a period of years.

There is another aspect of the matter. The 15-year period chosen has not much relation to the expected life of the street improvements. They may well last much longer. The period was probably selected for no better reason than that it is the period which the city would have used. On the other hand, it is not the expected life of the street improvements that should be considered. What, if anything, should be considered for such a purpose is the expected duration of the benefits to the popularity of the shopping centre that were expected to arise from the improvements and this, compounded as it is by the prospect of another shopping centre three miles away, and possibly other developments affecting the popularity of the plaintiff’s shopping centre in a rapidly growing city, is imponderable. This confirms me in the view that the whole amount is deductible in the year of payment.

The appeal, therefore, succeeds and it will be allowed with costs and the re-assessment will be referred back to the Minister for re-assessment, accordingly.