The Queen v. Young, 89 DTC 5234, [1989] 1 CTC 421 (FCA)

Urie, J.A. (Heald and Hugessen, JJ.A. concurring): —The respondent in this appeal from a judgment of the Trial Division was successful both in that Court and in the Tax Review Board("the Board”) on his appeal from an assessment for income tax made by the Minister of National Revenue ("the Minister”) in respect of his 1980 tax year. Both the learned trial judge and the presiding member of the Board found that the respondent's subscription costs for certain investment publications were (a) outlays or expenses which formed part of the adjusted cost base of his investment portfolio or (b) were outlays or expenses incurred for the purpose of disposing of component parts of that portfolio both pursuant to the provisions of subsection 40(1) of the Income Tax Act (the "Act"):

(1) Except as otherwise expressly provided in this Part

(a) a taxpayer's gain for a taxation year from the disposition of any property is the amount, if any, by which

(i) if the property was disposed of in the year, the amount, if any, by which his proceeds of disposition exceeds the aggregate of the adjusted cost base to him of the property immediately before the disposition and any outlays and expenses to the extent that they were made or incurred by him for the purpose of making the disposition, or

(ii) if the property was disposed of before the year, the amount, if any, claimed by him under subparagraph (iii) in computing his gain for the immediately preceding year from the disposition of the property,

exceeds

(iii) such amount as he may claim, not exceeding a reasonable amount as a reserve in respect of such of the proceeds of disposition of the property that are not due to him until after the end of the year as may reasonably be regarded as a portion of the amount determined under subparagraph (i) in respect of the property; and

(b) a taxpayer's loss for a taxation year from the disposition of any property is,

(i) if the property was disposed of in the year, the amount, if any, by which the aggregate of the adjusted cost base to him of the property immediately before the disposition and any outlays and expenses to the extent that they were made or incurred by him for the purpose of making the disposition, exceeds his proceeds of disposition of the property, and

(ii) in any other case, nil.

As a result of the decision of this Court in The Queen v. Geoffrey Stirling, [1985] 1 F.C. 342; [1985] 1 C.T.C. 275, which was rendered after the judgment here under appeal, the respondent did not seek to support the judgment on the basis above referred to. However, the respondent took the position that there remains the issue, argued below, as to whether the outlays for the subscriptions for the publications in issue are deductible as current expenses incurred for the purpose of gaining income from a business or property in accordance with paragraph 18(1)(a) of the Act or are capital outlays the deduction of which is prohibited by paragraph 18(1)(b) of the Act. Paragraphs 18(1)(a) and (b) read as follows:

18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) General limitations.—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;

(b) Capital outlay or loss.— an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part.

That issue so stated puts the appellant in the curious position of now seeking to uphold the judgment from which she is appealing because of the Court's favourable ruling on the non-deductibility of the expenses in issue under paragraph 18(1)(a). The respondent, who was initially successful now has to contend that the judgment was erroneous.

The relevant facts, briefly stated are these.

The respondent, a retiree, in his 1980 tax return declared as income from investments —dividends, interest and taxable capital gains. In his return he claimed a deduction of $477.50 from income for subscription expenses in the acquisition of five investment publications which he said that he used as guides in deciding whether or not to buy or sell stocks on the basis of their expected yields. He denied that he was a trader or dealer in investments and, he said, that he did not acquire the publications in issue to add to his level of knowledge and expertise in investing. As earlier noted, the Minister disallowed the subscription expenses on the basis that they were not made or incurred for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(1)(a) of the Act. Rather, they were outlays or payments on account of capital, and their deduction was prohibited by paragraph 18(1)(b) of the Act. Both the Tax Review Board and Collier, J. in the Trial Division agreed with the Minister on this aspect of the appeal from the assessment although the latter found that they were capital outlays within the meaning of subsection 40(1). It is common ground, of course, that that finding was wrong for the reason earlier noted.

Because it was the respondent's contention that he was not in the business of investments but was, rather, the recipient of income from property, he had to satisfy the Court that his outlays for the purchase of subscriptions to the five publications were made for the purpose of gaining or producing income from that property and were not incurred in the acquisition of capital assets. It is true, as counsel for the respondent pointed out, that most of the cases enunciating the tests to be applied in the determination of whether an expense is on income or capital account relate to those expenses incurred in a business. However, the general principles applicable when such expense relates to income from a property are the same. There are numerous phrases and guidelines used in the determination of whether an expense is capital or income in nature. [1] The key ingredient in the determination, derived from all the cases is, as was said by Lord Pearce in the B.P.Australia case, ” . . a commonsense appreciation of all the guiding features . . ." enunciated in those cases. They have been referred to in several recent decisions of the Supreme Court of Canada and of this Court so that no useful purpose would be served in repeating them here.

Suffice it to say that a review of the evidence makes it crystal clear, in my view, that what the respondent was doing here was assembling a portfolio of equity shares, common and preferred, of a variety of corporations, some for capital appreciation and some for their dividend yields but all with a view to expanding the capital base by reinvesting the earnings however derived. Martland, J. in Irrigation Industries Limited v. M.N.R., [1962] S.C.R. 346 at 352 had this to say about such investments:

Corporate shares are in a different position [from property purchased or sold in the course of trade] because they constitute something the purchase of which is, in itself, an investment. They are not, in themselves, articles of commerce, but represent an interest in a corporation which is itself created for the purpose of doing business. Their acquisition is a well-recognized method of investing capital in a business enterprise.

That quotation is very apposite in the appreciation of what the respondent was doing when he purchased the publications, the costs for which he seeks to have deducted as expenses incurred in the earning of money from property. It is my view that the evidence of the respondent himself overwhelmingly demonstrates that he was assembling a portfolio of investments in shares of corporations which are capital assets. As an incidence of ownership of such a portfolio some may yield dividends, and others may not, depending on their nature. Some were purchased for their capacity to produce such earnings. Others were bought for their potential capital appreciation. Still others were for a combination of each. According to the evidence, the publications provided information on the ranges of stock prices for given periods, their yields and other pertinent information relating to the corporation's financial position. But most importantly, the information was used by the respondent for deciding on the purchase or sale of investments, managing such investments and generally in the administration of an expanding portfolio of capital assets. That being so the expenses were clearly not made for the purpose of earning or producing income from property. They were, thus, not deductible pursuant to paragraph 18(1)(a) of the Act and being capital in nature were, in fact, prohibited from deduction by paragraph 18(1)(b). Contrary to what was argued by counsel for the respondent, the accounting treatment accorded such expenses for the purpose of providing financial information to the owner is irrelevant in the context of their treatment for tax purposes.

Accordingly, I would allow the appeal and direct the restoration of the assessment by the Minister. The respondent, it was agreed, would be entitled to his costs throughout by virtue of section 178(2) of the Act, irrespective of the outcome of the appeal and it will be so ordered.

Appeal allowed.