Consumers' Gas Company Ltd. v. The Queen, 82 DTC 6300, [1982] CTC 339 (FCTD), aff'd, 84 DTC 6058, [1984] CTC 83 (FCA)

Walsh, J:—This action concerns plaintiff’s claim for.maximum capital cost allowance under Class 2 in its 1971-72-73 and 1974 taxation years of additional amounts of $4,073,751, $5,163,174, $5,958,696 and $6,907,912 for each of the said years respectively. At the opening of the hearing it was agreed that as a result of further auditing and verification these figures should now read $3,923,093.83, $4,900,149.89, $5,749,511.45, and $6,629,456.19 for each of the four years in question and the conclusion of the amended statement of claim should be amended accordingly. These figures appear from the partial agreed statement of facts produced at the opening of the hearing which also sets out that the agreed additional capital cost allowance which could be claimed for the years in question should the judgment be rendered wholly in favour of plaintiff would amount to $235,385.63, $294,008.99, $344,970.69, and $397,767.37 respectively for each of the said years.

A table forming part of the partial agreed statement of facts shows that total reimbursement for the alteration, modification or replacement of its Class 2 depreciable properties for which plaintiff was reimbursed by other parties for the years in question amounted to $731,032.33 for 1971 of which $456,169.29 was reimbursed by a government, municipality or other public authority and $274,863.04 from other sources, $1,212,441.69 for 1972 of which $1,121,261.43 was reimbursed by a government, municipality or other public authority and $91,180.26 from other sources, $1,143,370.55 for 1973 of which $1,051,896.75 was reimbursed by a government, municipality or other public authority and $91,473.80 from other sources, and $1,224,915.43 in 1974 of which $1,054,280.60 was reimbursed by a government, municipality or other public authority and $170,634.83 from other sources.

The plaintiff is a public company primarily engaged in processing and distributing natural gas to residential, commercial and industrial users in Ontario, operating in various operating districts.

The reason for the breakdown of figures into those received from government, municipality or other public authorities and those received from other sources results from paragraph 13(7)(e) of the Income Tax Act which for the years in question read as follows, being paragraph 20(6)(h) in the former Act applicable for the 1971 year.

13 (7) For the purpose of this section and any regulations made under paragraph 20(1 )(a) the following rules apply:

(e) where a taxpayer has received or is entitled to receive from a government, municipality or other public authority, in respect of or for the acquisition of property, a grant, subsidy or other assistance other than an amount authorized to be paid under an Appropriation Act and on terms and conditions approved by the Treasury Board for the purpose of advancing or sustaining the technological capability of Canadian manufacturing or other industry, the capital cost of the property shall be deemed to be the capital cost thereof to the taxpayer minus the amount of the grant, subsidy or other assistance.

It is further admitted that none of the amounts shown as total reimbursement for four years in question were included in plaintiff's undepreciated capital cost for taxation years prior to 1971 and that no capital cost allowance was Claimed in respect of those amounts prior to 1971. The reimbursements were received pursuant to certain contracts between plaintiff and other parties, resulting from 198 contracts in 1971, 209 in 1972, 252 in 1973 and 245 in 1974 or an average of 226 contracts per year.

Finally it is agreed that if the Court should find wholly in favour of plaintiff that plaintiff is entitled to include the amounts referred to as total reimbursements received in its Class 2 capital cost and if those amounts do not result in any other offsetting effect on taxable income then, as compared with the reassessments, plaintiff’s undepreciated capital cost at the end of each taxation year prior to any capital cost allowance being taken should be increased by the amounts set out above and plaintiff’s capital cost allowance foreach year should similarly be increased by the amounts indicated.

Plaintiff’s statement of claim sets out that the assessment practice of the defendant was not to permit the depreciation for tax purposes of the amounts of such contributions but to require the reduction of the plaintiff’s capital cost of Class 2 depreciable properties by the amount of donations, grants and other contributions received by plaintiff pursuant to contractual obligations of third parties to reimburse the plaintiff for its expenditures in making certain replacements, alterations or modifications to its Class 2 depreciable properties at the request of such third parties. Plaintiff filed formal notice of objection to assessments received in 1977 for its 1971, 1972 and 1973 taxation years and filed an amended tax return for the 1974 taxation year on the basis that the donations, grants, and other contributions did not reduce its capital cost of Class 2 depreciable properties, placing reliance upon the judgment in the case of Her Majesty the Queen v Canadian Pacific Ltd No 1, [1976] 2 FC 563; [1976] CTC 221; 77 DTC 5383. Defendant contends that both the amounts paid and reimbursement received by plaintiff pursuant to its agreement with third parties were on income account, but if the disbursements were on capital amount which it denies, either the capital cost to plaintiff of each of its said relocated pipelines built pursuant to said agreements is the amount disbursed by it less the reimbursement received from the third party, or alternatively in each case a pipeline is disposed of for proceeds of disposition equal to the amount the plaintiff was reimbursed under its respective agreement with the third party. In the latter alternative although the amount disbursed by plaintiff pursuant to the agreement could properly be added to its undepreciated capital cost of pipelines, that undepreciated capital cost would be reduced by the proceeds of disposition. Agreed books of documents were filed and plaintiff called only one witness, Ronald Carter, who has been an accountant with plaintiff since 1968. While not testifying as an expert witness he has undoubtedly had a very wide experience, being director of financial accounting and statistics for the company in charge of preparing exhibits for hearings before the Ontario Energy Board before which he also testifies as an expert witness. Previously he served as taxation supervisor for plaintiff. He gave background information about plaintiff’s extensive business of natural gas production and distribution. It serves some five million people and has approximately 17,000 kilometres of mains, and $1.1 billion of property, plant, and equipment in its distribution system. Its rates and accounting methods and practices are subject to approval of the Ontario Energy Board, the rates being based on a fair return on its rate base.

He testified that the Ontario Energy Board accepts two methods of accounting, the first being to credit contributions against the cost of construction, with the net amount appearing on the balance sheet, and in the second method the cost of construction is carried on the balance sheet and contributions against it are credited as a liability or a long term debt with deferred income tax. The company uses the first method for accounting purposes but the end result of either method would be that the amounts are netted for rate making purposes. Originally the method adopted for rate making purposes was also used for tax purposes but this was changed after the finding in the Canadian Pacific case which will be examined later in detail.

By far the greater part of the contributions result from the provisions of the Public Service Works and Highways Act, RSO c 420 (RSO 1970 c 388 for the years in question). This statute requires companies such as plaintiff to agree to road changes in return for a subsidy from the public authority requiring the change of 50% of the labour costs as defined in the Act, which do not include such items as supervision, or overhead nor is material included, so that in practice the actual subsidy received is somewhat less than 50% of the total cost. In the event that the Act does not apply then a municipality or other party requiring the building or construction of the pipeline will have to pay 100% of the costs.

The witness directed attention to exhibits showing how this is worked out with respect to various types of of contracts with Toronto Hydro, the Ontario Ministry of Transport and Communications, the St Lawrence Seaway Authority (a 100% contribution resulting from pipeline relocation in connection with the Welland Canal), Markborough Properties, a developer (100% contribution) and Bell Canada (also 100% contribution). Another example of a private 100% contribution was Ford Motors of Canada which required a relocation of the entry main to its plant as a result of building expansion alterations.

The witness explained that the abandoned mains are left in the ground as it is not worthwhile to recover them and that the new main is of no greater use to the plaintiff than the abandoned main. The changes in question here do not result from any expansion of the company’s distribution system for its own purposes since the old mains can remain in service for at least 80 years, nor is there any revenue gain for plaintiff resulting from the changes which are done to accommodate customers. The remaining undepreciated value of the abandoned pipeline remains in the company’s capital account and the capital cost allowance continues to be claimed on it together with the new pipeline. The company depreciates its pipelines over a 70-year period. As a result of crediting the contributions against the cost of the new pipeline, in the company’s books as the Ontario Energy Board requires for rate making purposes the books always show a value for the pipeline of less than its true value.

David Bonham, FCA a chartered accountant and lawyer testified as an expert witness for defendant. He has high qualifications both as an accountant, writer of accounting text books and university teacher and served as vice-president of finance for Queens University from 1971 to 1977. His expert report, taken as read, assumes that as an ongoing part of its business plaintiff frequently has to locate its pipelines pursuant to contracts made at the request of other parties which takes place some 200 times a year, normally resulting from planned construction by the other party which would create a physical conflict with plaintiff’s pipeline or other facility, that in a vast majority of cases such work does not increase the capacity of the pipeline or other facility on which plaintiff retains ownership, that any salvage is incidental, that plaintiff makes full recovery of its costs except where prevented by statute, and that this work is a normal and necessary part of carrying on plaintiff’s business. On the basis of these assumed facts he gives his opinion, which is to the effect that the total cost of the work should be recorded as a Capital asset with the reimbursement as a reduction to the cost of acquiring it, and that the annual charge for depreciation should be on the resultant balance in the fixed asset account after each such transaction has been so recorded. He considers this to be appropriate as the relocation of facilities and related work cannot reasonably be avoided, so the resultant net cost can properly be considered as an inherent part of the cost of acquiring the fixed assets of the corporation.

He concludes that although alternative methods of disclosing such transactions may exist, it is his opinion that regardless of the alternative selected all such transactions must be reflected in the income statement and then through reinvested earnings as a regular ongoing commercial activity of the corporation, and that it would be unacceptable to record any part of these transactions as contributed surplus or in any manner other than through the income statement to reinvested earnings.

In testifying he outlined different types of surplus, distinguishing contributed surplus from earned surplus, contributed surplus being in the nature of windfalls, shareholders’ investments, and so forth and he does not believe that the contributions to relocation fall into any such categories. He discussed the second accounting method allowed by the Ontario Energy Board which results in the deferred credit gradually being brought into income, and provided it is brought in each year in the same amount as that claimed for capital cost allowance the end result would be the same. He would preferably have adopted the other method, which was actually adopted by plaintiff for accounting purposes, and merely include the net cost in the capital account as a Class 2 asset on which capital cost allowance could be claimed.

In argument extensive reference was made by plaintiff to the Canadian Pacific case (supra). This dealt with various aspects of taxation of Canadian Pacific Limited for its 1965, 1966 and 1967 taxation years, inter alia how it would deal with, for capital cost allowance purposes, donations and grants received for construction or modifications on its own property of rail lines, made at the request of another party to enable that party to carry out a project of its own, similar requests made by a government, municipality or other public authority allegedly within the meaning of paragraph 20(6)(h) of the Income Tax Act for the years in question (supra), and other questions relating to private sidings and improvements on properties leased by plaintiff which do not concern us in the present case. The costs were recorded in the company’s accounting records in accordance with the uniform classification of accounts as required by section 328 of the Railway Act and the Regulations of the Canadian Transport Commission, but as was pointed out at 251 of the trial judgment (CTC report) this does not bind the Minister of National Revenue with respect to the tax treatment of same. The same applies in the present case. After careful study of the principal jurisprudence, both Canadian, British and American, the Canadian Pacific case rejected for tax purposes the accounting method of carrying the net cost only to capital account for purposes of capital cost allowance. Reference was made at 255 to the British case of Corporation of Birmingham v Barnes (1935), 19 TC 195, in which the appellant corporation had entered into an agreement with the company to lay a tramway track to the company’s works in return for which they received a specific sum and also received a grant under the Unemployment Grants Committee for sums it had expended under renewal of its tramway tracks. It was held that the payment by the company and the grant from the Unemployment Grants Committee could not be taken into account in ascertaining the actual cost to the corporation of the tramway tracks in question for the purposes of computing the allowance due for wear and tear of such tracks, ie depreciation. At 217 of his judgment Lord Atkins States:

What a man pays for construction or for the purchase of a work seems to me to be the cost to him; and that whether someone has given him the money to construct or purchase for himself, or before the event has promised to give him the money after he has paid for the work, or after the event has promised or given the money which recoups him what he has spent.

This case was also referred to by Jackett, P, as he then was, in the case of Ottawa Valley Power Company v MNR, [1969] CTC 242; 69 DTC 5166 in which at 254 [5174] he stated:

The next question is whether, assuming that I am right in concluding that the appellant would have been entitled to capital cost allowance if it had received the cash from Hydro and expended it on the capital additions and improvements itself, it is in any different position because the bargain took the form of Hydro undertaking to make the expenditures in such a way that the additions and improvements would be made to the appellant’s assets and belong to the appellant.

He eventually found against the appellant since it itself had not incurred the expenditure on capital account, the work being done for it by Hydro, but referred to the Corporation of Birmingham v Barnes case (supra) as authority for the proposition that had the company made the expenditures itself it could have carried the total amount to capital account for depreciation purposes. This decision of Chief Justice Jackett, as he later became, distinguished in a footnote the American case of Detroit Edison Co v Commissioner of Internal Revenue 1942 319 US 93 stating that the decision seems to have been based on the fact that the payments received were not taken into revenue, and concluding that if the payments had been taken into revenue, it would seem that the Court might have reached the opposite result. In the Detroit Edison case it was stated under Paragraph No 102:

But we think the statutory provision that the “basis of property shall be the cost of such property” normally means, and that in this case the Commissioner was justified in applying it to mean, cost to the taxpayer.

and again under No 103:

But it does not follow that the Company must be permitted to recoup through untaxed depreciation accruals an investment it has refused to make. The Commissioner was warranted in adjusting the depreciation base to represent the taxpayer’s net investment.

The Detroit Edison case was itself distinguished in the United States Federal Court of Appeal in the case of Brown Shoe Co v Commissioner, 339 US 583, which held that the petitioner was entitled to deductions on account of depreciation on property acquired from community groups or acquired with cash received from such groups, and might also include the value of such contributions from community groups in equity invested capital. The Detroit Edison case had denied inclusion in its base for depreciation of electric power lines of the amount of payments received by the electric company for construction of the line extensions to the premises of applicants for service. It was held that to the extent of such payments the electric lines did not have cost to the taxpayer and that such payments were neither gifts nor contributions to the taxpayer’s capital. In the Brown Shoe case the Court stated at 591:

. . . We do not consider that case controlling on the issue whether contributions to Capital are involved here. Because in the Detroit Edison “The payments were to the customer the price of the service,” the Court concluded that “it overtaxes imagination to regard the farmers and other customers who furnished these funds as makers either of donations or contributions to the company.” Since in this case there are neither customers nor payments for service, we may infer a different purpose in the transactions between petitioner and the community groups. The contributions to petitioner were provided by citizens of the respective communities who neither sought nor could have anticipated any direct service or recompense whatever, their only expectation being that such contributions might prove advantageous to the community at large. Under these circumstances the transfers manifested a definite purpose to enlarge the working capital of the company.

We are not in the present case of course dealing with contributions from community groups. In 1954 the Internal Revenue Code of the United States was amended, (Section 362) being somewhat similar to paragraph 20(6)(h) of the Canadian Statute (supra) but broader so as to cover all contributions and not merely those from public authorities. It was necessary in the Canadian Pacific case to consider the applicability of paragraph 20(6)(h), the question being whether Canadian Pacific received or was entitled to receive “from a government, municipality, or other public authority, in respect of or for the acquisition of property, a grant, subsidy or other assistance . . . for the purposes of advancing or sustaining the technological capability of Canadian manufacturing or other industry”. At 253 the trial judge stated:

. .. Although the argument was not raised before me I would seriously doubt whether the sums which Canadian Pacific received from public authorities for the relocation of railway tracks or telecommunication lines were “for the purpose of advancing or sustaining its technological capability” since in each case the evidence indicated tht it was satisfied with the lines as they were and merely moved them to accommodate the public authority in question. In any event, I do not find that these payments can be considered as “a grant, subsidy or other assistance”.

Reference was made to the case of G T E Sylvania Canada Limited v Her Majesty the Queen, [1974] CTC 408; 74 DTC 6315, in which Justice Cattan- ach considered the question and stated at 415 (CTC report):

As I have said before, the constant and dominating feature in the words “grant” and “subsidy” is that each contemplates the gift of money from a fund by government to a person for the public weal. Something concrete and tangible is to be bestowed. For the reasons I have expressed the general words “or other assistance” must be coloured by the meaning of those words.

Reference was also made to the Ottawa Valley Power Company case (supra) where Jackett, P stated at 249-50:

I do not think that the words in paragraph (h) — “grant, subsidy or other assistance from a .. . public authority” — have any application to an ordinary business contract negotiated by both parties to the contract for business reasons. If Ontario Hydro were used by the legislature to carry out some legislative scheme of distributing grants to encourage those engaged in business to embark on certain classes of enterprise, then I would have no difficulty in applying the words of paragraph (h) to grants so made.

That was not the situation in the Canadian Pacific case nor is it the situation in the present case. In the case of St John Dry Dock and Shipbuilding co Ltd v MNR, [1944] CTC 106; 2 DTC 663, Thorson, J, as he then was, stated at 114:

The fact that an amount is described as a Government subsidy does not of itself determine its character in the hands of the recipient for taxation purposes. In each case the true character of the subsidy must be ascertained and in so doing the purpose for which it was granted may properly be considered.

The judgment in the Canadian Pacific case was sustained in appeal, [1978] 2 FC 439; [1977] CTC 606; 78 DTC 5388, save for two of the eight items for which capital cost allowance had been claimed. The first was a deviation of a track carried out by contract with the St Lawrence Seaway Authority for which Canadian Pacific was reimbursed for a relatively minor part of the work done by it. This sum was not spent in order to acquire property but rather for purposes of doing some work for the Seaway Authority on the railway line then owned by the Authority, although this line was later turned over by the Authority to the company in exchange for the old one. It was held that the capital cost to the respondent of the new line was the value of the old line, not the sums expended by the respondent to perform for the benefit of the Authority some work related to the construction of the new line. The other issue on which the judgment was not sustained was with respect to private sidings built by Canadian Pacific by agreement to build a private siding for a customer to the customer’s property at the customer’s expense save for the track material which it provided and of which it retained ownership. Here again it was held that the sum expended by Canadian Pacific was not a capital expenditure but merely a cost of carrying out a building contract for the benefit of a customer. On the principal issue with which we are concerned however the judgment was fully upheld. In so doing the Court of Appeal placed reliance on the House of Lords’ decision in Corporation of Birmingham v Barnes (supra).

Defendant cannot seriously maintain its first contention that both the amounts paid and reimbursements received by plaintiff should be considered as on income account. Even defendant’s own expert witness disagrees with this and it is evident that the expenses of relocation were not expenses laid out on account of income but were merely for the relocation of certain of plaintiff’s pipeline which were in themselves capitalized assets. Moreover the reimbursement represented in the great majority of cases less than 40% of total cost and it would be difficult to conceive of plaintiff disbursing the difference as income producing expense when no change of income is involved. Actually such a treatment would be more advantageous for plaintiff in any given taxation year as the amount thereby deductible would be greater than what could be claimed as capital cost allowance, although in the long run the method of tax accounting which plaintiff seeks would be more advantageous in that the entire cost of relocation could eventually be claimed by annual capital cost allowance deduction without any corresponding tax liability being incurred as a result of the contribution. This argument must therefore be rejected and the present case must depend on one of the alternative arguments.

Further relying on the decision of the Canadian Pacific case, plaintiff contends that if contributions for performing such work were to be netted in plaintiff’s capital account, which is defendant’s alternate argument supported by the expert witness, there would have been no need for paragraph 20(6)(h) in the Act (now 13(7)(e)) with reference to grants, subsidies or other assistance provided by a government, municipality or other authority, as all such contributions would be netted whatever their origin. It might even be contended that by virtue of the inclusio unius fit exclusio alterius principle existence of this section might imply that contributions other than those from a government, municipality or other public authority would not normally be netted.

With respect to defendant’s second alternative argument that in each relocation the original pipeline must be deemed to have been disposed of for proceeds of disposition equal to the amount plaintiff was reimbursed for the construction of the new line, plaintiff referred to several cases as to the proper meaning to be given to the word “disposition”. This was examined in the Saskatchewan Court of Appeal in the case of Harman v Gray-Campbell Ltd, [1925] 2 DLR 904 at 908-909 where Lamont, J states:

I am therefore of opinion that the words “dispose of . . . her landed property” in the note before us, mean, to make the property over to another so that no interest therein remains in the plaintiff.

To dispose of it required not only a willingness on the part of the plaintiff to part with her interest, but a willingness on the part of someone else to take that interest of . .. That the plaintiff abandoned the property is, I think, clear; but the contract does not give a right of repossession upon the abandonment by the plaintiff of her interest. An abandonment of her interest does not, in my opinion, constitute a disposal of it, unless the abandonment of it is accepted by her vendor and her interest taken over by him.

In the Supreme Court case of The Queen v Malloney’s Studio Limited, [1979] CTC 206; 79 DTC 5124, Estey, J in dealing with disposition of depreciable property states at 210 [5127]:

. .. Thus it seems abundantly clear that for the purposes of this invocation of rule (g), the disposition in question must be bilateral and include both a disposer and “the person to whom the depreciable property was disposed of”, whether or not such person may thereupon become entitled to any capital cost allowance under the Act. Here the demolition involved no recipient.

In the present case there was certainly no disposition by plaintiff of the abandoned pipeline; in fact the evidence indicated that it retained ownership of same. Moreover it follows that the remaining undepreciated capital cost of the abandoned pipeline remained in plaintiff’s capital account. It would appear that the decision of the Court of Appeal in the Canadian Pacific case with respect to the St Lawrence Seaway Authority deviation (supra) does not apply since in that case a new line of railway was conveyed to it by the Seaway Authority which had built it, in exchange for the old one, while in the present case plaintiff never disposed of the old pipelines nor obtained the new ones by way of conveyance from third parties but built them itself aided by contributions from such third parties.

In the present case the contributions went into plaintiff’s books as contributions to capital for income tax purposes. Plaintiff points out that by definition in subsection 248(1 ) of the Income Tax Act (139(1)(e) of the former Act) is defined as including a concern in the nature of trade. Paragraph 12(1 )(g), ((6)(1)(j) of the old Act) includes in “income” “any amount received by a taxpayer in the year that was dependent upon the use of or production from property . ..” Certainly the relocation of the pipelines which plaintiff made were not adventures in the nature of trade calculated to result in profit. It was obliged to make the relocations by law in the greater number of cases and even for those which it had made voluntarily by contract with a private company these were not done in order to sell more gas nor acquire a new customer. At best they might be said to be done as a matter of goodwill and good business relations. Neither were the amounts received dependent upon the use of or production from plaintiff’s property. While defendant argues strongly that the frequency of the relocations indicates that they were current business transactions this does not necessarily make the contributions subject to entry in the revenue account nor is it a more important factor than the absence of any element of profit. In the Canadian Pacific case at 611, Pratte, J in rendering the judgment of the Court of Appeal points out:

As the respondent had entered into many transactions giving rise to that kind of a problem, the parties agreed before trial to adduce evidence in respect of only certain of those transactions, it being understood tht the decision of the Court concerning them would be applied by the parties to the solution of the difficulties raised by the others.

Evidence was thus adduced in respect of nine typical transactions.

This is the situation in the present case and indicates that the relocation of tracks by Canadian Pacific was also a common occurrence in the carrying out of its business, so the element of frequency in the present case does not in itself make that judgment inapplicable.

Defendant contends that plaintiff’s tax position is not in accordance with either accounting or economic reality, and now contends that preferably the entire cost of relocation should be included in the capital account for capital cost allowance purposes, and does not suggest that the while contribution should be brought into income in the year when it was received, provided that it be brought in in such a way that it will be amortized in the current year and future years at a rate equal to the amount claimed by plaintiff as capital cost allowance on the costs of the relocation. The end result will be the same.

It was contended that the Canadian Pacific case does not apply since in it the Crown never argued that the contributions received were income, the whole argument relating to the amounts to be taken into capital cost. In it reference was made at 255 to the comments of Chief Justice Jackett in the Ottawa Valley Power case (supra) respecting the Detroit Edison case (supra) in which he suggested, as I have already indicated that the ratio decidendi in the Detroit Edison case was that the receipts were not taken into revenue from which he concludes that “if the payments had been taken into revenue it would seem that the Court might have reached the opposite result”. Counsel also distinguishes the Canadian Pacific case on the ground that it was largely decided on the basis of subsection 84A(3) of the Income Tax Act relating to railroads which is not pertinent to the present case. These distinctions have little weight however since in the Canadian Pacific case contributions received were not taken into revenue but were capitalized, and paragraph 20(6)(h) of th Act was examined fully in reaching a conclusion that it was not applicable, any more than it is in the present case.

Defendant contends that it is not possible to consider the contributions as contributions to surplus. Jurisprudence does not so hold however, each case depending on its own facts. In the Ottawa Valley Power case for example (supra) Jackett, P in a somewhat obiter portion of his judgment states that in the event that the Ottawa Valley Power itself had paid for the alterations instead of Hydro paying for them on behalf of Ottawa Valley Power then “In my view, if that had happened, there would be two aspects of the matter, viz,

(a) the appellant would have incurred capital costs for which it should have capital cost allowance, and

(b) the appellant would have received a payment from the purchaser of its power which should be taken into its revenues if it is part of the payment for what it has sold in the course of its business or should be regarded as a capital receipt if, in the circumstances, it should so characterized." (italics mine)

That case was complicated by the fact that by the terms of the agreement appellant agreed to continue to accept a lower price for more expensive power in consideration for being provided with the capital additions and improvements. The case of C/R v Fleming & Co (Machinery) Ltd, 33 TC 57, referred to by defendant dealt with the treatment of a payment received by a long term manufacturer’s agency for termination of a contract. At 63 Lord Russell states:

On the other hand when the benefit surrendered on cancellation does not represent the loss of an enduring asset in circumstances such as those above mentioned —. where for example the structure of the recipient’s business is so fashioned as to absorb the shock as one of the normal incidents to be looked for and where it appears that the compensation received is no more than a surrogatum for the future profits surrendered — the compensation received is in use to be treated as a revenue receipt and not a capital receipt.

This can clearly be distinguished from the facts in the present case where plaintiff surrendered no future profits for the contributions paid, the relocation of the pipelines not affecting the profits one way or the other. The case of Okalta Oils Limited v MNR, [1955] CTC 39; 55 DTC 1176; 70 DTC 1417 can similarly be distinguished. It dealt with a subsidy under the Income War Tax Act for drilling and exploration costs for an oil well. The late Cameron, J after pointing out that the section in question dealt with legislation designed to encourage the production of oil and oil products stated at 44-45:

. . . I find it impossible to put upon the subsection such a construction as would enable a corporation which is out-of-pocket on its operation, but on the contrary had had all its expenses paid for by another party — in this case a Crown corporation — to be repaid for such expenses out of taxes which would otherwise accrue to the Crown. To do so would mean that the legislation was intended to confer not only indemnity for such losses, but also an additional bonus of a like amount, an interpretation which I think Parliament did not contemplate.

The present case clearly does not deal with incentive subsidies. It is possible to similarly distinguish the case of Radio Engineering Products Ltd v MNR, [1970] Tax ABC 650; 70 DTC 1417 and in appeal [1973] CTC 29; 73 DTC 5071, in which a $450,000 subsidy was paid to the appellant for outlays in connection with the development of a certain telephone system and it was held that the appellant was obliged to apply the subsidy for the purpose for which the loan was granted and it must therefore be deducted from the appellant’s expenditures. At 663 of the Tax Appeal Board judgment it is stated:

. . . It is common ground that grants from the Crown must be deducted from expenditures. In the case at bar the subsidy was granted to carry out, under the scheme, work totally of a revenue character.

In the present case there is no revenue advantage for plaintiff. In another case referred to by defendant, that of Nuclear Enterprises Ltd v MNR, [1971] CTC 449; 71 DTC 5243, Kerr, J in dealing with the taxability of grants from the National Research Council and the Department of Defence Production for financial assistance in research and manufacturing stated at 466:

In the present case, I am unable to give the applicable provisions of the Income Tax Act a construction that the appellant should not only not be required to include the grants as income but should also be allowed to deduct from its other income the expenditures that in reality were paid for, not by the appellant, but by NRC and Department of Defence Production.

Here again that case dealt with grants to promote research which might eventually enure to the benefit of the taxpayer among others. It has already been concluded that paragraph 20(6)(h) of the Act dealing with grants, sub- sidies, or other such assistance from a government, municipality or other public authority does not apply in the present case.

Relying on the evidence of Mr Bonham in support of its principal argument that the subsidy should have been deducted from the cost of the relocations and only the resulting difference capitalized, defendant refers inter alia to the case of J L Guay Ltd v MNR, [1971] CTC 686; 71 DTC 5423, in which Associate Chief Justice Noel, as he then was, stated at 691:

. . . In determining the taxable profits of a taxpayer we can take as a starting point the profit and loss statement prepared according to the rules of accounting practice. However, the profit shown on this statement has always to be adjusted according to the statutory rules used in determining taxable profits. This is because a number of facts taken into consideration by accountants are excluded by certain provisions of the Income Tax Act in the determining of taxpayers’ profits.

It was contended that there is no statutory provision permitting the contributions in the present case to be treated differently for tax purposes from the manner in which they were treated for accounting purposes establishing the proper rate base for the company. While there may be no statutory requirement necessitating a different treatment, the weight of jurisprudence and more specifically the Canadian Pacific case suggests the contrary.

Further support for plaintiff’s position can be found in a relatively recent British case of Murray (Inspector of Taxes) v Goodhews, [1978] 1 W.L.R. 499, in which a voluntary payment was made as a goodwill gesture for the termination of certain tenancies of public houses held by the taxpayer. The taxpayer was assessed corporation tax on the voluntary payment on the basis that it represented compensation for loss of profits from the loss of the tenancies and were thus profits or gains of the trade. This was reversed, the judgment holding that the payments were capital receipts. The headnote reads:

. .. every case of a voluntary payment must be considered on its own facts to ascertain the nature of the receipt in the hands of the recipient and as the payments to the taxpayer company were not linked with future trading relations between the parties and were not payments made to compensate for loss of profits and were unrelated to any specific trading transaction, they were not receipts arising from the taxpayer company’s trade.

I have concluded that plaintiff in the present case was justified in considering that contributions received towards the relocation of its pipelines done, not for its benefit, but for the benefit of the parties making the contributions, can be carried to a contributed capital account without passing through income. While this undoubtedly has the result, as plaintiff readily concedes of conferring an advantage on its shareholders which the parties making the contributions had no intention of doing, nevertheless this appears to be the correct manner of dealing with these contributions in the light of current jurisprudence. As plaintiff’s counsel argues if this results in unintended tax advantages for plaintiff the remedy is in the hands of defendant by way of amending legislation.

Plaintiff's appeal therefore must be maintained, and its tax assessments for its 1971, 1972, 1973 and 1974 taxation years are referred back to the Minister for reassessment in accordance with the terms of this judgment, with costs.