Robertson
J.A.:
—
This
appeal
was
heard
together
with
the
appeal
in
Court
File
No.
A-348-94.
For
the
reasons
given
in
that
appeal,
a
copy
of
which
is
annexed
hereto,
I
would
dismiss
this
appeal
with
costs
on
the
basis
set
forth
in
those
reasons.
This
is
an
appeal
from
a
judgment
of
the
Trial
Division
allowing
the
respondent
taxpayer’s
appeal
from
an
assessment
of
the
Minister
of
National
Revenue
in
respect
of
its
1983
taxation
year.
In
the
decision
below,
now
reported
at
Toronto
College
Park
Ltd.
v.
R.
(sub
nom.
Toronto
College
Park
Ltd.
v.
Canada)
[1994]
1
C.T.C.
194,
94
D.T.C.
6172
(F.C.T.D.),
the
learned
trial
judge
held
that
certain
“tenant
inducement
payments”
made
by
the
respondent
were
“running
expenses”
and,
therefore,
fully
deductible
in
the
year
of
payment.
At
law,
a
running
expense
is
an
expense
which
cannot
reasonably
be
traced
or
allocated
directly
to
a
corresponding
item
of
revenue.
In
concluding
that
the
inducement
payments
were
“running
expenses”
the
Trial
Judge
relied
principally
on
an
earlier
decision
of
this
Court,
Cummings
v.
R.
(sub
nom.
Cummings
v.
The
Queen),
[1981]
C.T.C.
285,
81
D.T.C.
5207
(F.C.A.).
In
Cummings
this
Court
characterized
a
payment
made
by
a
taxpayer
to
indemnify
a
prospective
tenant
with
respect
to
its
liability
arising
from
the
cancellation
of
an
existing
lease
-
a
lease
pick
up
payment
-
as
a
running
expense.
Cummings
was
decided
in
1981.
The
decision
under
appeal
was
rendered
in
1993.
Two
years
later
this
Court
in
Canderel
Ltd.
v.
R.
(sub
nom.
Canderel
Ltd.
v.
Canada)
[1995]
2
C.T.C.
22,
(sub
nom.
R.
v.
Canderel
Ltd.)
95
D.T.C.
5101
(F.C.A.)
(leave
to
appeal
to
Supreme
Court
of
Canada
refused
(1995),
193
N.R.
399(n)
was
required
to
consider
the
tax
treatment
to
be
accorded
tenant
inducement
payments.
In
Canderel
it
was
held
that
tenant
inducement
payments
are
not
running
expenses,
as
they
relate
to
a
particular
source
of
income
and,
therefore,
are
capable
of
being
“matched”,
and
must
be
so
matched
for
tax
purposes
(see
Stone
J.A.
at
(C.T.C.
23;
D.T.C.
239),
Robertson
J.A.
concurring).
Assuming
that
the
rent
remains
constant
over
the
term
of
the
lease
matching
can
be
achieved
by
way
of
amortization
(see
Desjardins
J.A.
at
(C.T.C.
48;
D.T.C.
270).
The
Court
distinguished
Cummings
on
the
basis
that
the
characterization
therein
of
a
lease
pick
up
payment
as
a
running
expense
was
obiter.
In
that
case,
the
only
issue
before
the
Court
was
whether
the
lease
pick
up
payment
was
made
on
account
of
capital
or
income.
The
appellant’s
position
before
us
is
straightforward.
Applying
the
law
as
stated
in
Canderel,
the
respondent,
in
computing
its
profit
within
the
meaning
of
section
9
of
the
Income
Tax
Act
(the
“Act”),
is
not
entitled
to
deduct
the
entire
amount
of
the
two
tenant
inducement
payments
in
the
taxation
year
in
which
they
were
paid.
Rather
they
must
be
deferred
and
amortized
over
the
life
of
the
respective
leases.
In
the
present
case,
one
lease
provides
for
a
term
of
20
years,
with
an
option
to
renew
for
a
further
five
years.
The
other
lease
is
for
a
term
of
11
years
and
5
months.
[With
respect
to
the
possible
tax
treatment
of
a
renewal
term
see
discussion
infra.]
More
precisely,
the
appellant
maintains
that
the
tenant
inducement
payments
must
be
“set
off’
or
“matched”
against
revenues
over
the
respective
terms
of
the
leases
rather
than
being
deducted
entirely
in
the
year
in
which
they
were
paid.
As
is
obvious,
the
issue
in
this
case
is
strictly
one
of
timing.
The
irony
is
that
because
of
the
decision
of
this
Court
in
Canderel,
the
respondent
was
required
to
assume
the
role
of
protagonist.
Thus,
the
success
of
this
appeal
turns
on
the
validity
of
the
respondent’s
submissions.
The
respondent’s
position
is
equally
straightforward:
Canderel
was
“improperly”
decided,
the
Court
having
failed
to
consider
the
effect
of
subsection
18(9)
of
the
Act
in
reaching
its
conclusion.
The
thrust
of
the
respondent’s
argument
is
that
the
scheme
of
the
Act
allows
it
to
deduct
the
inducement
payments
in
the
year
they
are
made
or
incurred
and
that
the
legal
effect
of
the
decision
in
Canderel
is
to
undermine
that
scheme
by
rendering
subsection
18(9)
“redundant”
or
“meaningless”.
Curiously
enough
this
argument
appears
to
have
been
raised
before
the
Tax
Court
in
Canderel,
but
not
addressed
by
the
Tax
Court
Judge:
see
Canderel
v.
R.
(sub
nom.
Canderel
Ltd.
v.
Canada),
[1994]
1
C.T.C.
2336,
94
D.T.C.
1133
(T.C.C.).
It
is
also
evident
that
it
was
not
pursued
before
the
Court
of
Appeal.
Alternatively,
the
respondent
argues
that
in
the
circumstances
of
this
case
the
Minister
failed
to
show
that
amortization
of
the
tenant
inducement
payments
over
the
term
of
the
respective
leases
provides
a
truer
picture
of
the
taxpayer’s
income
and,
therefore,
it
is
entitled
to
deduct
the
entire
expense
as
was
permitted
under
generally
accepted
accounting
principles
(the
“GAAP”
rules)
prevailing
at
the
time
the
payments
were
made.
I
shall
deal
with
each
of
these
submissions
in
turn.
The
respondent
submitted
that
the
rule
in
Canderel
renders
section
18(9)
of
the
Act
redundant
or
meaningless
and,
therefore,
that
case
must
be
deemed
to
have
been
wrongly
decided.
The
argument
rests
initially
on
the
taxpayer’s
understanding
of
the
law
as
it
stood
prior
to
Canderel.
That
understanding
was
expressed
as
follows.
If
an
expenditure
is
classified
as
a
running
expense
a
taxpayer
must
deduct
the
amount
fully
in
the
year
in
which
it
is
paid.
The
only
exception
is
said
to
arise
in
cases
where
an
amount
paid
is
not
characterized
as
an
expense
at
the
time
it
was
incurred,
but
later
becomes
an
expense.
The
cases
of
Minister
of
National
Revenue
v.
Tower
Investment
Inc.,
[1972]
C.T.C.
182,
72
D.T.C.
6161
(F.C.T.D.)
and
Associated
Investors
of
Canada
Ltd.
v.
Minister
of
National
Revenue,
[1967]
C.T.C.
138,
67
D.T.C.
5096
(Exch.),
respectively,
were
cited
in
support
of
those
propositions.
With
respect
to
all
other
expenses,
counsel
for
the
respondent
maintained
that
the
taxpayer
retains
the
option
of
either
deducting
the
expense
in
the
year
incurred
or
deferring
and
amortizing
it.
In
oral
argument,
counsel
also
submitted
that
the
taxpayer’s
decision
whether
to
deduct
in
the
year
the
payment
is
made
remains
unaffected
by
the
GAAP
rules.
In
its
written
submissions
the
respondent
took
the
posi-
tion
that
taxpayers
are
entitled
to
calculate
their
income
in
accordance
with
generally
accepted
principles
and
that
where
more
than
one
method
of
calculation
is
acceptable
taxpayers
retain
the
option
of
selecting
an
acceptable
method
regardless
of
the
type
of
expense
involved:
see
Respondent’s
Memorandum
of
Fact
and
Law
at
para.
21.
However,
for
purposes
of
deciding
this
appeal,
and
in
dealing
with
the
substance
of
the
respondent’s
argument,
I
do
not
find
it
necessary
to
resolve
the
perceived
inconsistency.
In
summary,
the
respondent
maintained
that
prior
to
Canderel
taxpayers
were
not,
as
a
general
rule,
required
to
defer
and
amortize
current
expenses.
The
general
rule
is
one
of
full
deductibility
in
the
year
the
expense
is
incurred
or
made.
Furthermore,
it
was
submitted
that
this
general
rule
is
now
codified
in
subsection
18(9)
of
the
Act,
of
which
the
relevant
provisions
read
as
follows:
18(9)
Notwithstanding
any
other
provision
of
this
Act,
(a)
in
computing
a
taxpayer’s
income
for
a
taxation
year
from
a
business
or
property
(other
than
income
from
a
business
computed
in
accordance
with
the
method
authorized
by
subsection
28(1)),
no
deduction
shall
be
made
in
respect
of
an
outlay
or
expense
to
the
extent
that
it
can
reasonably
be
regarded
as
having
been
made
or
incurred
(i)
as
consideration
for
services
to
be
rendered
after
the
end
of
the
year,
(ii)
as,
on
account
or
in
lieu
of
payment
of,
or
in
satisfaction
of,
interest,
taxes
(other
than
taxes
imposed
on
insurance
premiums),
rent
or
royalty
in
respect
of
a
period
after
the
end
of
the
year,
or
(iii)
as
consideration
for
insurance
in
respect
of
a
period
after
the
end
of
the
year,
other
than
(A)
where
the
taxpayer
is
an
insurer,
consideration
for
reinsurance,
and
(B)
consideration
for
insurance
on
the
life
of
an
individual
under
a
group
term
life
insurance
policy
where
all
of
part
or
the
consideration
is
for
insurance
that
is
(or
would
be
if
the
individual
survived)
in
respect
of
a
period
that
ends
more
than
13
months
after
the
consideration
is
paid;
(b)
such
portion
of
each
outlay
or
expense
(other
than
an
outlay
or
expense
of
a
corporation,
partnership
or
trust
as,
on
account
of,
in
lieu
of
payment
of
or
in
satisfaction
of,
interest)
made
or
incurred
as
would,
but
for
paragraph
(a),
be
deductible
in
computing
a
taxpayer's
income
for
a
taxation
year
shall
be
deductible
in
computing
the
taxpayer’s
income
for
the
subsequent
year
to
which
it
can
reasonably
be
considered
to
relate;...
[Emphasis
added.]
It
is
common
ground
that
the
legal
effect
of
the
foregoing
provision
is
that
taxpayers
are
required
to
amortize
certain
prepaid
expenses
where
they
relate
to
more
than
one
taxation
year.
Counsel
for
the
respondent
argued
that
subsection
18(9)
has
the
effect
of
codifying
the
general
rule
while
enumerating
the
exceptions.
Only
in
respect
of
the
exceptions
specifically
noted
in
subsection
18(9)
of
the
Act
is
a
taxpayer
prohibited
from
deducting
fully
the
expense
in
the
year
it
was
made
or
incurred.
That
list
of
exceptions
does
not,
of
course,
include
tenant
inducement
payments.
Against
this
background
the
respondent
argued
that
if
amortization
of
a
tenant
inducement
expense
is
required
automatically
under
the
rule
in
Canderel,
subsection
18(9)
becomes
redundant
and
the
“but
for”
language
found
in
paragraph
18(9)(b)
rendered
“nonsensical”.
I
cannot
accede
to
this
submission
for
several
reasons.
The
initial
flaw
in
the
respondent’s
submission
can
be
traced
to
the
mistaken
belief
that
subsection
18(9)
was
intended
to
codify
the
so-called
general
rule
permitting
full
deductibility
of
all
expenses
in
the
year
the
expenditure
was
made
or
incurred.
The
more
plausible
explanation
is
that
Parliament
wished
to
make
clear
that,
with
respect
to
certain
prepaid
expenses,
taxpayers
would
be
obligated
to
use
the
accrual
or
amortization
method
of
accounting
when
computing
profit
under
section
9
of
the
Act.
In
effect,
taxpayers
are
required
to
defer
and
amortize
those
prepaid
expenses
identified
in
subsection
18(9)
over
the
period
to
which
they
reasonably
relate.
That
the
purpose
underlying
subsection
18(9)
is
to
remove
any
ambiguity
is
reinforced
by
the
Department
of
National
Revenue’s
Interpretation
Bulletin
IT-417(R)
which
reads
in
part:
As
a
general
rule,
taxpayers
are
required
to
use
the
accrual
method
of
accounting
to
calculate
the
income
from
a
business
or
property
as
contemplated
by
section
9.
In
calculating
income
for
tax
purposes,
the
Department
requires
that
the
accounting
for
prepaid
expenses
and
deferred
charges
be
in
accordance
with
the
matching
principle
as
required
in
generally
accepted
accounting
principles,
subject
always
to
any
contrary
provision
of
the
Act.
To
remove
any
uncertainty,
subsection
18(9)
of
the
Act
was
enacted
into
law
on
February
26,
1981
effective
from
December
11,
1979
and
requires
a
taxpayer
to
match
certain
specific
expenditures
to
the
taxation
year
to
which
they
can
reasonably
be
considered
to
relate.
The
Department
takes
the
view
that
subsection
18(9)
was
enacted
for
greater
certainty
and
notwithstanding
that
it
does
not
cover
deferred
charges
or
all
types
of
expenses
that
can
be
prepaid,
it
is
considered
that
the
Income
Tax
Act
(even
as
it
read
prior
to
the
introduction
of
subsection
18(9))
always
required
and
continues
to
require
that
all
costs
that
could
clearly
be
related
to
future
periods
be
expensed
in
those
periods,
if
they
are
material
and
if
failure
to
defer
the
expense
would
distort
the
net
profit
not
only
of
the
year
during
which
the
expense
was
incurred
but
also
of
the
subsequent
year
or
years
to
which
the
benefit
relates.
The
argument
that
Canderel
had
the
effect
of
rendering
subsection
18(9)
redundant
is
also
flawed
in
at
least
one
other
material
respect.
Assuming,
and
without
deciding,
that
the
general
rule
is
as
stated
by
the
respondent,
it
does
not
follow
that
the
promulgation
of
a
judicial
exception
to
a
rule
has
the
effect
of
rendering
the
statutory
exceptions
redundant.
At
most,
it
could
be
said
that
Canderel
had
the
effect
of
adding
another
exception
to
the
statutory
list
of
expenses
which
require
amortization.
On
further
reflection,
however,
the
redundancy
argument
is
most
likely
premised
on
the
assumption
that
prepaid
expenses
and
tenant
inducement
payments
fall
into
the
same
category;
that
is
to
say
non-running
expenses.
Presumably,
it
is
open
to
argue
that
Canderel
stands
for
the
proposition
that
expenses
which
can
be
matched
must
be
amortized
and
therefore
there
is
no
need
for
subsection
18(9)
to
list
other
kinds
of
expenses
which
meet
this
criteria.
The
rule
in
Canderel
would
be
broad
enough
to
capture
the
statutory
exceptions,
thereby
rendering
them
redundant.
In
my
view
the
flaw
in
the
argument
can
be
traced
to
the
mistaken
assumption
that
prepaid
expenses
of
the
kind
specified
in
subsection
18(9)
are,
or
could
be,
classified
as
non-running
expenses
as
are
tenant
inducement
payments.
There
is
no
doubt
that
prepaid
expenses
can
be
amortized
over
a
period
of
years.
But
it
does
not
follow
that
they
can
be
matched
to
a
specific
source
of
income.
In
short,
simply
because
an
expense
can
be
amortized
does
not
mean
it
can
be
matched.
Subsection
18(9)
provides
two
examples
which
illustrate
the
validity
of
that
distinction.
Subparagraph
18(9)(a)(ii)
requires
that
prepaid
rents
be
amortized
over
the
period
to
which
they
relate.
It
is
difficult
to
envisage
a
situation
in
which
the
payment
of
an
overhead
expense
such
as
rent
could
reasonably
or
directly
be
attributed
to
the
production
of
a
specific
revenue,
that
is
matched
with
a
corresponding
item
of
revenue,
as
opposed
to
general
expenditures
paid
to
earn
future
and
speculative
income.
Arguably,
it
is
improbable
that
prepaid
rent
would
be
classified
as
a
non-running
expense
and,
as
a
result,
even
though
amortization
is
possible,
it
would
not
be
required
but
for
subsection
18(9)
of
the
Act.
Similarly,
paragraph
18(9)(a)(i)
relates
to
prepaid
service
contracts
which
would
include,
for
example,
a
two
year
contract
for
the
repair
and
maintenance
of
a
building.
This
is
a
classic
example
of
an
overhead
expense
which
cannot
be
related
directly
to
a
specific
source
of
income:
see
Naval
Colliery
Co.
(The)
v.
Inland
Revenue
Commissioners
(sub
nom.
Naval
Colliery
Co.
v.
Commissioners
of
Inland
Revenue)
(1928),
12
Tax
Cas.
1017
(K.B.)
at
page
1027.
This
is
certainly
true
if
the
building
in
question
were
occupied
by
the
taxpayer,
and
the
same
holds
if
the
building
were
being
rented
to
tenants.
Once
again,
subsection
18(9)
has
the
effect
of
requiring
that
that
type
of
prepaid
expense
be
deferred
and
amortized,
irrespective
of
whether
it
would
be
classified
as
a
running
expense.
Accordingly,
in
my
opinion,
the
rule
in
Canderel
does
not
render
subsection
18(9)
meaningless
and,
therefore,
the
respondent’s
argument
must
also
fail
on
this
ground.
This
leads
me
to
the
alternative
argument.
The
respondent’s
final
argument
is
that
the
Minister
failed
to
establish
that
the
deferral
and
amortization
of
the
tenant
inducement
payments
provides
a
“truer
picture”
of
the
taxpayer’s
net
income
when
contrasted
with
the
expensing
or
capitalization
methods.
The
respondent
relies
on
the
fact
that
at
trial
it
was
agreed
that
GAAP
permitted
either
the
deferral,
expensing
or
capitalization
of
tenant
inducement
payments
and
that
neither
party
would
produce
evidence
as
to
which
of
the
three
options
was
preferable.
That
the
onus
rests
on
the
Minister
to
establish
whether
the
deferral
method
represents
a
truer
picture
of
the
respondent’s
income
is
said
to
arise
from
the
fact
that
in
reassessing
the
respondent
the
Minister
treated
the
tenant
inducement
payments
as
eligible
capital
expenditures,
while
at
trial
the
Minister
took
the
position
that
the
payments
should
be
deferred
over
the
term
of
the
respective
leases,
including
any
renewal
term.
The
respondent
submits
that
in
changing
his
position,
the
Minister
assumed
the
onus
of
adducing
evidence
in
support
of
its
position.
In
my
view,
this
argument
also
fails.
According
to
the
analysis
provided
in
Canderel,
the
issue
is
not
which
of
the
three
GAAP
options
gives
the
truer
picture
of
the
taxpayer’s
profit
or
net
income.
Rather
the
question
is
whether
an
expense
in
question
can
be
matched
with
a
specific
source
of
revenue.
If
it
can,
then
it
must
be
amortized.
In
Canderel
this
Court
was
unanimous
in
holding
that
tenant
inducement
payments
could
be
so
matched
and
therefore
the
“amortization
method
is
the
only
method
acceptable
for
income
tax
purposes”
(per
Desjardins
J.A.
at
(C.T.C.
48;
D.T.C.
270)).
That
conclusion
stands
as
a
matter
of
law
and
is
unaffected
by
whatever
expert
testimony
might
have
been
proffered
with
respect
to
the
suitability
or
appropriateness
of
any
one
of
the
options
outlined
in
GAAP.
As
is
well
known,
the
calculation
of
“profits”
under
section
9
of
the
Act
is
a
question
of
law:
see
Symes
v.
R.
(sub
nom.
Symes
v.
Canada),
[1993]
4
S.C.R.
695,
[1994]
1
C.T.C.
40,
94
D.T.C.
6001
at
page
723
(C.T.C.
52,
D.T.C.
6009).
Parenthetically,
I
note
that
the
materials
filed
with
the
Court
refer
to
the
fact
that
as
of
1990
GAAP
states:
“Where
the
costs
are
associated
with
negotiating
and
executing
of
a
specific
lease
and
these
costs
have
a
useful
life
no
longer
than
the
lease
to
which
they
relate,
the
costs
should
be
amortized...”:
see
R.
Lewin,
“Tax
Treatment
of
Lease
Inducements
and
At-Risk
Rules
and
the
New
Limited
Recourse
Debt
Rules”,
in
Real
Estate
Transactions:
Tax
Planning
for
the
Second
Half
of
the
1990s,
Corporate
Management
Tax
Conference,
1995
(Canadian
Tax
Foundation,
1995)
at
5:4.
That
this
Court
in
Canderel
came
to
the
same
conclusion,
albeit
by
a
different
route,
is
a
testament
to
the
fact
that
tax
law
and
accounting
principles
can
be,
on
occasion,
in
harmony.
There
is
one
other
matter
which
was
touched
on
during
oral
argument,
but
not
pursued
by
the
parties.
While
the
matter
may
or
may
not
be
relevant
to
the
ultimate
resolution
of
this
case,
a
brief
discussion
is
warranted.
The
appellant
seeks
a
judgment
to
the
effect
that
the
tenant
inducement
payments
are
to
be
“set
off
(or
“matched”)
against
revenues
over
the
respective
terms
of
the
leases”.
While
the
appellant
is
entitled
to
such
a
judgment,
in
accordance
with
the
law
stated
in
Canderel,
no
mention
is
made
of
whether
the
term
of
the
lease
containing
the
renewal
option
should
be
extended
to
include
the
renewal
term.
If
I
were
required
to
decide
the
issue,
I
would
have
given
a
negative
response.
Since
the
option
to
renew
is
within
the
exclusive
control
of
the
tenant
and
not
the
respondent,
and
since
it
is
mere
speculation
as
to
whether
the
renewal
option
will
ever
be
exercised,
it
seems
only
logical
and
practical
that
tenant
inducement
payments
be
matched
with
revenues
over
the
initial
term
of
the
lease
for
which
the
tenant
has
an
existing
obligation
to
pay
rent.
Finally,
it
is
to
be
noted
that
by
order
of
the
Court
this
appeal
was
heard
together
with
the
appeals
in
Court
File
No.
A-349-94
and
A-
350-94.
A
copy
of
these
reasons
will
be
filed
in
those
Court
Files
and
shall
thereupon
become
the
reasons
for
judgment
therein.
For
the
foregoing
reasons,
the
appeals
will
be
allowed,
with
one
set
of
costs,
the
judgments
of
the
Trial
Judge
dated
June
3,
1994
set
aside
and
the
assessments
referred
back
to
the
Minister
for
reconsideration
and
reassessment
in
a
manner
consistent
with
these
reasons.
Appeal
was
allowed.