O’Connor
J.T.C.C.:-These
appeals,
relating
to
the
appellant’s
1986
and
1987
taxation
years,
were
heard
in
Vancouver,
British
Columbia
pursuant
to
the
general
procedure
of
this
Court.
Issues
There
are
two
issues.
The
first
is
whether
the
appellant
is
entitled
to
a
deduction
of
$637,671
in
the
1987
taxation
year
for
renovations
to
the
Park
Royal
Shopping
Centre
("Centre”).
The
second
is
whether
the
appellant
is
entitled
to
deduct
$167,170
in
1986
and
$715,734
in
1987
for
architect’s
fees
for
plans
for
the
proposed
construction
of
a
building
("Kapilano
200")
on
the
Centre.
The
witnesses
heard
on
behalf
of
the
appellant
were
Peter
John
Finch
who
at
all
relevant
times
was
the
president
and
managing
director
of
the
appellant
and
Amin
Laljai,
a
representative
of
the
Larko
Group,
one
of
whose
companies
purchased
the
Centre
in
1990.
No
witnesses
were
called
by
the
respondent.
Facts
The
basic
facts
are
as
follows:
1.
The
Centre
consisted
of
a
north
mall
which
was
built
on
freehold
land
owned
by
the
appellant
and
a
south
mall
which,
to
a
great
extent,
was
built
on
land
leased
under
a
long-term
lease
by
the
appellant
from
the
Squamish
Indian
Band.
2.
The
expenditures
in
1987
totalling
$637,671
were
made
pursuant
to
a
program
called
the
’’North
and
South
Mall
Redecoration
Proposed
Two
Year
Program"
("program").
The
total
estimated
cost
of
the
Program
was
$1,232,000.
The
breakdown
of
this
amount
and
the
nature
of
the
expenditures
are
indicated
in
Exhibit
A-4
as
follows:
The contents of this table are not yet imported to Tax Interpretations.
3.
The
Program
was
adopted
at
a
meeting
of
the
board
of
directors
of
the
appellant
held
March
23,
1987.
It
is
annexed
to
those
minutes
and
reads
as
follows:
NORTH
AND
SOUTH
MALL
REDECORATION
PROPOSED
TWO
YEAR
PROGRAM
In
our
continuing
program
of
maintaining
the
upscale
attractive
appearance
of
the
north
and
south
malls,
we
request
the
approval
of
the
following
projects
which
we
recommend
be
carried
out
over
the
years
1987
and
1988:
A.
New
Furniture—North
and
South
Malls
The contents of this table are not yet imported to Tax Interpretations.
Our
budget
for
the
above
including
design
and
contingency
allowance
amounts
to
$377,000.
On
both
the
north
and
south
mall
projects
in
1969
and
1978
respectively,
the
mall
furnishings
played
a
part
in
the
budget
balancing,
thus
were
of
a
quality
and
design
considerably
less
than
ideal.
The
years
show
and,
further,
there
is
a
wide
mixture
of
designs
and
finishes.
We
are
of
the
opinion
that
a
unified
design
will
tie
both
malls
together
in
the
mind
of
shoppers.
The
present
directory
boards
are
totally
inadequate
and
difficult
to
update.
We
plan,
as
part
of
the
above-noted
package,
to
place
12
new
easy-to-read
units
on
the
malls
(i.e.,
five
on
the
north
mall
and
seven
on
the
south
mall).
This
installation
will
flag
up
store
names
and,
in
our
view,
bring
about
much
more
movement
of
customers
within
the
centre.
Of
all
the
projects,
we
place
this
as
being
of
top
priority
in
our
continuing
program.
B.
Upgrade
Existing
Furniture-South
Mall
The
new
furniture
installation
will
require
the
refurbishing
of
existing
benches
and
handrails
on
the
south
mall.
The
quality
of
the
benches
and
railings
on
the
south
mall
was
also
kept
at
a
low
level
due
to
the
constraints
of
our
1978
Budget.
We
have
here
an
opportunity
to
update
these
units,
particularly
around
the
fountain
area
and
the
railings
in
the
central
core
on
the
Gallery
Level.
Our
estimate
for
carrying
out
this
work
is
$55,000.
C.
Upgrade
North
Mall
Environment
This
is,
in
our
view,
a
key
project
in
the
ongoing
upgrading
of
the
north
mall
to
a
truly
contemporary
level.
The
fascia
treatment
of
the
"Annex'”
has
proved
to
be
extremely
effective,
and
it
is
on
this
theme
that
we
propose
to
carry
through
the
entire
north
mall.
We
would
see
this
project
being
carried
out
in
1987
and
1988.
The
"cedar
look"
which
was
very
acceptable
in
1969
is
no
longer
appropriate
with
present
trends.
We
have
given
much
thought
to
the
matter
of
making
a
major
visual
change
to
the
north
mall
at
the
lowest
possible
cost.
The
proposal
we
have
will
see
the
start
we
have
made
over
the
last
three
years
in
upgrading
the
mall
and
will
be
carried
a
major
step
forward.
We
believe
this
upgrading
plan
will
make
the
mall
much
more
attractive
to
customers,
thus
more
leasable
for
tenants.
We
place
an
estimated
budget
of
$610,000
on
this
project.
The
work
need
not
be
carried
out
all
at
one
time
as
it
can
economically
be
split
into
parts.
D.
Upgrade
South
Mall
Environment
We
have
four
main
changes
in
mind
for
the
south
mall
including
new
treatment
of
the
upper
wall
between
the
center
of
the
mall
(ground
level)
and
Eaton’s,
add
sparkle
lamp
posts
throughout
the
south
mall,
upgrade
the
children’s
play
area
adjacent
to
Marks
&
Spencer
and
replace
wood
flooring
on
the
gallery
level
with
ceramic
tile.
The
wood
flooring
has
proved
to
be
defective
under
use
and
at
present
has
developed
uneven
surface
together
with
stains
which
we
have
been
unable
to
remove.
The
new
finish
would
be
a
tile
finish
which
would
not
only
be
easier
to
maintain
but
would
prove
to
be
much
more
attractive
in
finish.
We
have
also
in
this
category
worked
with
the
architects
and,
in
taking
their
figures
into
account
together
with
fees
and
what
we
feel
to
be
a
reasonable
contingency,
have
come
to
a
total
of
$190,000
for
that
project.
We
set
out
below
the
total
budget
for
the
two
year
project
which
we
estimate
at
$1,232.000.
We
ask
that
the
board
note
that
whereas
these
funds
will
actually
be
required
during
1987
and
1988,
we
would
look
to
recovering
approximately
$400,000
of
that
figure
(plus
interest)
under
common
area
charges
over
the
five
years
from
the
year
of
expenditure.
We
are
in
an
extremely
competitive
environment
which
we
are
combating
through
an
improved
tenant
mix
and
a
major
advertising
and
promotion
effort.
A
major
portion
of
this
program,
we
believe,
must
also
be
the
maintaining
of
the
quality
level
of
the
Centre.
A
summary
of
costs
and
application
is
as
follows:
|
Total
|
|
C/A
|
|
PRSC
|
|
|
$
|
$
|
$
|
|
A.
New
furniture
-
North
&
South
|
377,000
|
127,000
|
250,000
|
|
B.
Upgrade
exsting
furniture-South
|
55,000
|
-0-
|
55,000
|
|
C.
Upgrade
North
Environment
|
610,000
|
560,000
|
50,000
|
|
D.
Upgrade
South
Environment
|
|
|
„190.000
_140.000
_
50,000
|
|
1,232,000
|
827,000
|
|
4.
With
respect
to
Kapilano
200,
the
appellant,
in
1982,
entered
into
a
standard
form
of
agreement
with
Armour
Blewett
and
partners,
a
firm
of
architects
for
the
development
of
Kapilano
200.
This
project
was
for
the
proposed
construction
of
a
14-storey
office
building
to
be
erected
on
the
south
mall
leased
lands
at
a
projected
cost
of
approximately
20
million
dollars.
Pursuant
to
the
agreement
the
appellant
made
payments
of
$167,170
in
1986
and
$715,734
in
1987
for
the
plans
for
this
project.
The
project
was
eventually
abandoned
and
no
building
was
constructed.
5.
By
a
share
purchase
agreement
dated
March
23,
1990
the
Centre
was
in
effect
sold
to
the
Larko
Group.
This
was
effected
by
the
appellant’s
parent,
Sofisa
Group
selling
the
shares
of
Storrington
Investment
Co.
which
in
turn
owned
the
shares
of
the
appellant
whose
only
asset
at
the
time
was
the
Centre.
Position
of
the
appellant
re
renovation
costs
In
this
regard,
counsel’s
notes
of
argument
read:
7.
The
evidence
supports
the
view
that
in
the
success
of
a
shopping
centre,
appearance
is
of
great
importance
in
attracting
and
holding
one’s
share
of
the
buying
public.
As
community
tastes
change,
so
must
the
appearance
of
the
mall.
8.
At
the
beginning
of
1987
the
decor
was
1960s
and
early
19703.
There
was
a
wood
fascia
or
wall
covering
throughout
with
associated
low
level
lighting.
There
were
public
or
common
area
furniture
and
amenities
including
benches,
planters,
trash
bins
and
hand
rails
where
required.
9.
The
style
was
old-fashioned.
In
1987
It
was
updated.
None
of
what
was
changed
was
structural.
It
merely
replaced
what
was
already
there
with
something
perceived
to
be
more
attractive
to
the
consuming
public.
10.
The
costs
were
larger
than
those
ordinarily
incurred
on
an
annual
basis
in
maintaining
what
was
there.
That
will
be
the
result
when
a
significant
amount
of
replacement
occurs
in
the
year
in
order
to
keep
pace
with
industry
changes
and
standards.
The
costs
were
not
large
in
a
relative
sense
compared
to
the
worth
of
the
improvements
themselves
as
assessed
by
municipal
authorities.
The
changes
did
not
structurally
improve
or
alter
the
centre
nor
increase
its
life
expectancy.
11.
The
costs
are
those
which
are
a
necessary
and
incidental
part
of
the
successful
operation
of
a
business
which
relies
heavily
on
appearances
and
atmosphere
for
success.
12.
The
costs
were
deductible,
and
as
common
area
expenses,
recoverable
from
the
tenants
in
the
year
they
were
incurred.
However,
in
practice,
the
management
decided
to
recover
the
costs
from
the
tenants
over
15
years
to
maintain
their
rents
and
common
area
costs
at
a
competitive
level
and
to
ensure
the
present
and
future
tenants
were
treated
fairly.
13.
Against
that
background,
the
expenses
are
deductible
in
computing
income.
Position
of
the
appellant
re
Kapilano
200
The
appellant’s
position
is
that
the
expenditures
of
$167,170
in
1986
and
$715,734
in
1987
were
incurred
for
the
purposes
of
earning
income
and
are
deductible.
Counsel
for
the
appellant,
through
the
testimony
of
Mr.
Finch,
traced
the
long
history
of
the
appellant
and
its
predecessor
companies
not
only
with
respect
to
the
Centre
and
the
construction
thereon
of
certain
buildings
but
also
with
respect
to
the
development
of
certain
residential
properties
in
the
Vancouver
area.
He
points
to
the
fact
that
the
company,
in
paying
for
the
plans
for
Kapilano
200,
had
in
mind
the
overall
profitability
of
the
Centre,
i.e.,
that
Kapilano
200
would
attract
office
tenants
who
in
turn
would
spend
money
in
the
retail
portion
of
the
Centre,
thus
resulting
in
higher
rentals
from
the
retail
tenants.
Appellant’s
counsel’s
notes
of
argument
refer
to
the
appellant’s
alternative
methods
as
to
how
Kapilano
200
would
be
developed.
He
states
there
were
three
methods,
one
being
a
sublease
of
the
lands
to
a
developer
who
would
build
in
accordance
with
the
plans;
a
second
was
that
the
appellant
would
enter
into
a
joint
venture
with
a
developer,
the
appellant
contributing
its
rights
under
the
ground
leases
and
the
developer
constructing
the
building;
a
third
was
the
appellant
building
itself.
To
quote
from
these
notes:
A.
KAPILANO
200
COSTS
l.
The
evidence
supports
the
view
that
the
appellant
wanted
to
ensure
development
on
the
site
to
enhance
profitability.
It
cared
not
whether
the
development
in
the
form
of
an
office
building
was
done
as
its
own
project,
or
by
way
of
sublease,
or
by
way
of
joint
venture.
That
had
been
its
view
from
September
1984
and
remained
that
way
until
the
end.
Development
by
way
of
sublease
had
been
a
part
of
the
corporate
history
and
operating
methodology.
2.
By
mid-1985
it
was
apparent
that
development
by
the
appellant
for
its
own
account
was
"the
least
likely"
of
the
alternatives.
That
resulted
from
a
decision
that
the
appellant’s
assets
in
British
Columbia
should
be
reduced
rather
than
increased,
whether
by
the
sale
of
the
shopping
centre
or
the
sale
of
the
shares
of
the
shopping
centre
company
and
its
parent,
Storrington
Investments
Ltd.
3.
Having
regard
for
the
amount,
the
purpose
to
which
the
expenditures
were
applied
and
the
time
frame,
the
expenses
at
first
glance
seem
to
be
more
in
the
nature
of
those
required
to
create
a
capital
asset
rather
than
expand
a
business.
Closer
analysis
shows
that
not
to
be
the
case.
The
fact
that
the
appellant
carried
the
design
of
the
project
through
to
the
working
drawing
stage
was
well
explained
by
Mr.
Finch
as
necessary
because
of
the
complexities
created
by
the
lease
on
Indian
Lands,
the
need
to
obtain
approvals
from
both
the
Band
and
the
Municipality
of
West
Vancouver,
and
the
need
to
ensure
that
the
development
which
would
ultimately
occur
would
enhance
rather
than
detract
from
the
overall
site
and
the
profitability
of
the
shopping
centre.
Common
sense
and
good
business
judgment
dictated
that
the
preferred
course
was
to
get
the
project
to
the
stage
where
it
could
proceed
without
complication
before
getting
any
outsiders
involved
in
the
actual
development.
The
project
was
significant:
it
stands
to
reason
that
the
expenses
will
be
significant
as
well.
The
time
frame
was
not
brief
but
is
understandable
having
regard
for
the
complicated
land
relationships,
the
recession
and
the
decision
to
lighten
up
in
British
Columbia
which
matured
over
a
period
of
time.
These
factors
do
not
change
the
purpose
for
which
the
expenses
were
incurred.
4.
The
expenses
were
incurred
to
increase
the
appellant’s
ability
to
earn
income.
The
possibility
of
the
addition
of
office
space
was
thought
by
management
and
the
board
in
the
relevant
period
and
particularly
1986
and
1987,
to
be
a
means
of
increasing
traffic
at
the
centre,
keeping
ground
rent
down
(thereby
increasing
profit)
at
the
time
of
any
rent
under
the
head
lease
review,
increasing
base
rent,
and
increasing
rent
determined
as
a
percentage
of
tenant
gross
revenue.
[authorities
cited]
5.
Had
the
appellant
sold
its
project
or
anything
associated
with
it
at
a
profit,
the
gain
would
most
assuredly
have
been
taxed
as
income.
[authority
cited]
6.
When,
instead
of
a
gain
a
loss
has
been
sustained,
the
same
rules
will
apply
to
permit
a
loss
to
be
allowed
as
a
deduction.
That
principle
reinforces
the
view
that
preliminary
expenses
in
relation
to
a
development
project
by
a
land
development
company
should
be
deductible
when
the
project
carries
the
badges
of
trade
or
business.
Counsel
also
argued
that
although
the
expenditures
were
originally
incurred
to
improve
the
Centre’s
profits,
the
controlling
shareholders
of
the
appellant
gradually
changed
direction
and
decided
to
downsize
assets
in
British
Columbia.
He
points
to
the
conclusion
of
a
report
of
the
directors
to
the
shareholders
of
the
appellant
for
the
year
ended
December
31,
1988
which
concludes
as
follows:
After
consultation
between
the
company
and
its
parent
companies,
Storrington
Investment
Company
Limited
and
Sofisa
Financial
Corporation
Ltd.,
it
was
decided
during
1988
to
sell
the
Park
Royal
Shopping
Centre.
The
preferred
method
for
the
sale
is
for
Sofisa
to
sell
all
its
shares
in
Storrington,
whose
only
major
asset
at
the
time
of
sale
would
be
the
shares
of
the
company.
The
company
would
before
the
sale
of
the
shares
transfer
to
a
new
company
wholly
owned
by
Sofisa
the
Hillside
land
and
all
other
assets
it
presently
holds
leaving
only
the
Park
Royal
Shopping
Centre
complex....
It
is
planned
that
the
transaction
will
take
place
in
1989.
Counsel
further
points
out:
And
then
we
have
the
intervention
of
the
firm
decision
to
sell,
essentially
down
tool,
and
nothing
more
happens
to
the
project.
There
hasn’t
been
a
whiff
of
this
project
since,
certainly
since
the
early
part
of
1989.
I
think
the
last
that
we
see
of
it
at
all
was
October
5,
1988,
when
Mr.
Finch
writes
to
the
Squamish
Indian
band
but
what
is
most
clear
of
all
is
that
the
company
which
bought
the
shares
of
Storrington
Investment
in
turn
owning
British
Pacific
Properties
Limited
[former
name
of
the
appellant],
had
no
interest
whatsoever
and,
indeed
to
this
date
has
no
interest
whatsoever
in
the
kind
of
project
that
was
contemplated
by
Kapilano
200.
Position
of
the
respondent
re
renovation
costs
With
respect
to
the
renovation
costs,
counsel
for
the
respondent
pointed
to
their
nature
and
extent,
the
amounts
involved
and
concluded
they
were
not
normal
items
of
repair
and
maintenance
but
were
more
of
a
replacement
nature
with
an
enduring
benefit
and
consequently
they
were
capital
expenditures.
She
points
to
the
description
of
the
renovations
in
the
Program
quoted
above.
She
stated
in
oral
argument:
As
Mr.
Finch
said
in
his
testimony
and
as
this
report
shows
that
the
north
mall
had
not
had
a
major
renovation
done
to
it
since
1969
and
the
south
mall
had
not
had
a
major
renovation
since
the
time
of
its
building
in
1978.
As
Mr.
Finch
said
that
they
had
been
somewhat
remiss
about
bringing
these
malls
up
to
date
and
that
they
needed
to
pull
their
socks
up
because
of
the
competition
that
was
growing
in
the
Lower
Mainland.
And
certainly
the
change
described
by
Mr.
Finch
was
very
dramatic.
He
said
that
the
fascia
which,
according
to
his
evidence,
would
have
covered
I
think
half
of
the
inner
mall
walls.
The
half
above
the
stores
was
changed
from
a
cedar
look
to
a
very
post-modern
metal
look
and
he
said
all
the
furniture,
the
planters,
the
trash
cans
in
the
island
seating
areas,
those
were
all
bought
new
except
for
some
minor
amounts
for
refinishing
benches
and
handrails.
The
sign
posts
were
changed.
The
directories
were
changed.
The
lighting
was
changed
from
some
kind
of
a
subdued
lighting
to
a
much
brighter
lighting
and
the
earth
tone
colours
were
changed.
So
that
the
whole
look
changed
to
a
high-tech
post-modernism
look
with
a
lot
of
stainless
steel,
aluminum
and
plastic,
I
believe,
Mr.
Finch
said.
So
I
would
submit,
Your
Honour,
with
all
those
changes
put
together
if
we
had
photographs
of
the
mall
as
it
was
before
that
major
renovation
and
after,
it
would
look
very
substantially
different.
The
second
reason,
I
would
submit,
that
the
appellant
had
in
mind
for
making
these
renovation
expenditures,
was
to
prepare
the
shopping
centre
for
sale
to
the
best
advantage.
And
Mr.
Finch
said
in
cross-examination
that
there
was
a
sort
of
a
dual
reason
basically
for
carrying
out
these
renovations
both
to
update
or
upgrade
the
shopping
centre
to
deal
with
the
competition
and
also
to
prepare
it
for
a
possible
sale
to
the
best
advantage.
And
my
submission,
Your
Honour,
is
that
either
of
those
reasons
make
the
renovations
on
account
of
capital
rather
than
income.
I
would
also
submit...that
the
appellant
itself
in
the
way
it
handled
these
expenses,
recognized
that
they
were
major
renovation
expenses
and
that
in
the
portions
that
the
appellant
could
recover
from
the
tenants,
that
amount
was
amortized.
I
believe
Mr.
Finch’s
testimony
was
that
it
was
spread
out
over
15
years
and
that
he
said
even
though
he
thought
it
could
have
been
charged
in
one
year
that
it
would
represent
quite
a
blip
in
the
rental
cost
and
that
it
wouldn’t
be
fair
to
the
tenants
at
that
time
and
it
also
wouldn’t
be
attractive
to
potential
tenants
if
they
had
that
big
charge
in
one
year.
And
my
submission...is
that’s
exactly
what
capital
cost
allowance
is
to
deal
with.
It’s
to
spread
the
cost
of
depreciable
property
which
has
an
enduring
benefit
over
a
number
of
years
rather
than
to
allow
it
all
to
be
deductible
in
one
year.
In
addition...in
the
financial
statements
that
have
been
filed
as
exhibits
we
have
the
1986
and
1987
financial
statements
and,
as
we
have
seen
from
the
statements
in
there,
there
amounts
over
and
above
these
renovation
expenses
that
have
been
charged
to
service
and
maintenance
costs.
In
1986
there
was
an
amount
of
$785,578
and
in
1987
there
was
an
amount
of
$760,530.
And
these
I
would
submit...would
be
the
regular
repair
and
maintenance
costs.
Position
of
the
respondent
re
Kapilano
200
The
position
of
the
respondent
is
that
the
expenditures
for
the
plans
are
capital
in
nature
and
therefore
not
deductible.
There
is
no
relief
as,
in
the
years
in
question,
namely
1986
and
1987,
there
were
no
provisions
in
the
Income
Tax
Act
permitting
depreciation
or
amortization
of
the
costs
of
plans
for
a
building.
Counsel
for
respondent
submits
as
follows:
I
would
submit
that
if
you
look
at
the
invoice,
the
invoice
at
tab
10
of
Exhibit
A-l...is
dated
November
30,
1987....
And
it
says:
Total
fees
to
date
including
consultants,
$881,125.
And
then
the
amounts
already
billed
are
subtracted
leaving
an
amount
payable
at
that
time.
But,
basically,
the
total
fees
billed
or
total
fees
incurred
to
that
date
were
$881,000
and
the
evidence
is
that
the
total
amount
spent
on
architectural
fees
was
close
to
one
and
a
half
million
dollars.
So
I
would
submit...that
those
amounts
would
have
to
have
been
a
substantial
portion
of
them
incurred
after
the
date
of
this
invoice.
Of
these
three
possibilities
that
have
been
referred
to,
a
sublease
to
a
developer,
a
joint
venture
or
building
by
the
appellant
itself,
it’s
only
the
first
one,
a
sublease
to
a
developer,
which
I
would
submit
would
even
have
the
possibility
of
[the
expenditure]
being
on
income
account,
and
I
would
further
submit...that
there
is
really
no
evidence
at
all
that
it
could
be.
That’s
purely
speculation....
Looking
at
the
second
possibility
which
was
for
the
appellant
to
build
it
as
a
joint
venture
with
another
developer,
Mr.
Finch’s
evidence
was
that
what
the
company
envisaged
in
that
case
would
be
that
the
two
joint
venturers
would
own
the
building
jointly
and
then
they
would
derive
rental
income
from
it.
So,
in
that
case,
it’s
[the
expenditure]
clearly
not
income
[on
income
account].
And
the
third
possibility,
of
course,
is
for
the
appellant
to
have
built
it
by
itself.
With
respect
to
the
method
of
building
it
by
the
appellant
itself
I
would
submit
that
that
was
obviously
the
preferred
method
of
Mr.
Finch
who
was
the
president
and
managing
director
of
the
appellant,
as
he
said,
he
wrote
the
progress
report,
the
Kapilano
200
Progress
Report.
And
if
you
look
at
that
report
at
tab
19
of
A-2
on
pages
3
to
4
it
sets
out
the
three
methods
by
which
the
company
considered
building
Kapilano
200,
as
it
says,
without
the
commitment
of
capital
by
the
company.
And
the
third
method
discussed
on
page
4
is
the
company
constructing
the
building
by
raising
outside
financing
for
a
100
per
cent
of
the
total
cost
of
the
building.
And
it
says
further
down
there:
Preliminary
discussions
with
North
Western
Mutual
Life
who
are
the
mortgagee
of
the
shopping
centre
have
indicated
that
they
would
consider
the
financing
of
the
office
building
in
a
similar
form
to
the
financing
of
the
extension
of
the
shopping
mall
which
took
place
in
1978.
The
additional
financing
could
therefore
be
as
high
as
100
per
cent
of
the
total
cost
of
the
project
since
the
additional
financing
together
with
the
existing
financing
would
be
secured
on
the
total
shopping
centre
investment.
And
then
on
page
5
just
above
the
heading,
"Summary”,
it
says:
Method
3
contains
the
highest
element
of
risk
but
if
successful
would
provide
the
highest
return.
It’s
also
my
submission...that
it
seems
apparent
from
the
evidence
that
there
were
more
than
three
alternatives
being
considered
in
respect
of
the
Kapilano
200
project.
The
fourth
alternative...is
that
the
Kapilano
200
project,
to
the
point
that
the
appellant
contemplated
completing
it,
was
an
asset
in
itself
which
was
to
enhance
the
value
of
the
shopping
centre.
And
certainly
that
is
what
actually
happened
in
the
end.
The
glossy
brochure
[for
the
sale
of
the
Centre]
was
printed
up
and
even
though
we
don’t
have
a
copy
of
it
the
evidence
is
that
the
Kapilano
200
project
was
referred
to
in
there.
And
Mr.
Finch
said
in
his
redirect
this
morning
that
while
the
sale
of
the
shopping
centre
was
being
considered,
and
that’s
as
far
back
as
about
1985-1986....
Counsel
also
pointed
to
Exhibit
A-1,
tab
16,
being
a
statutory
declaration
of
Ian
Bell
who
was
chairman
of
the
board
of
directors
of
the
appellant
until
his
retirement
on
May
11,
1989.
It
states:
During
1986
and
1987,
the
decision
to
continue
with
the
planning
and
feasibility
process
was
primarily
motivated
by
the
following
considerations:
(a)
if
the
shopping
centre
was
sold
(and
this
alternative
continued
under
active
study),
the
plans,
drawings
and
approvals
relating
to
the
project
would
demonstrate
the
development
potential
of
the
leasehold
site
and
could
be
sold
at
a
profit
to
a
purchaser
together
with
the
other
shopping
centre
assets....
Counsel
concluded
that
the
development
of
the
Kapilano
200
Project
and
therefore
the
amounts
paid
to
the
architects
for
the
plans
were
capital
in
nature.
Analysis
With
respect
to
renovations
there
are
numerous
cases
addressing
their
deductibility.
Each
case
however
must
be
decided
on
its
own
facts.
In
the
present
case,
the
expenditures
were
extensive
and
were
essentially
replacements
or
renewals
as
opposed
to
maintenance
and
repairs.
This
is
evident
from
a
review
of
the
Program
quoted
above.
Moreover
the
fact
that
the
appellant
charged
them
to
the
tenants
over
a
15-year
period,
although
understandable
from
a
business
point
of
view,
is
an
indication
of
the
enduring
nature
of
the
renovations.
I
conclude,
therefore,
that
the
renovation
expenses
were
on
account
of
capital.
With
respect
to
the
Kapilano
200
expenses
the
most
relevant
cases
are
Algoma
Central
Railway
v.
M.N.R.,
[1967]
C.T.C.
130,
67
D.T.C.
5091,
Bowater
Power
Company
Ltd.
v.
M.N.R.,
[1971]
C.T.C.
818,
71
D.T.C.
5469
and
Oxford
Shopping
Centres
Ltd.
v.
The
Queen,
[1980]
C.T.C.
7,
79
D.T.C.
5458.
In
the
Algoma
case
the
company
operated
a
railway
in
an
unpopulated
area
of
Ontario.
It
arranged
with
a
firm
of
mining
geologists
for
a
survey
over
a
five-year
period
of
the
mineral
possibilities
in
the
area
at
an
average
cost
of
$100,000
per
year.
This
arrangement
was
made
with
the
intention
of
making
information
arising
from
the
surveys
available
to
interested
members
of
the
public
in
the
expectation
that
this
would
lead
to
development
of
the
area
which
in
turn
would
produce
traffic
for
the
company’s
transportation
system.
The
Supreme
Court
of
Canada
followed
the
decision
of
Jackett
J.
(as
he
then
was)
in
the
Exchequer
Court
and
allowed
the
company
to
deduct
these
expenditures
as
current
expenditures.
In
the
Exchequer
Court
decision
the
following
was
stated:
In
all
these
cases,
and
in
the
other
cases
referred
to
in
the
various
decisions
to
which
reference
was
made
during
the
argument,
the
"advantage
that
was
held
to
be
of
an
enduring
benefit
to
the
taxpayer’s
business
was
the
thing
contracted
for
or
otherwise
anticipated
by
the
taxpayer
as
the
direct
result
of
the
expenditure.
In
all
such
cases
it
was
the
"advantage”
so
acquired
that,
it
was
contemplated,
would
endure
to
the
benefit
of
the
taxpayer’s
business.
In
my
view,
the
information
received
by
the
appellant
here,
in
consideration
of
the
expenditures
in
dispute,
is
not
such
an
"advantage”
of
an
enduring
benefit
to
the
taxpayer’s
business.
Having
reached
that
conclusion,
it
is
not
necessary
to
say
more.
I
should
add,
however,
that
in
my
view,
once
it
is
accepted
that
the
expenditures
in
dispute.
were
made
for
the
purpose
of
gaining
income,
on
the
view,
as
I
understand
it,
that
they
were
part
of
a
programme
for
increasing
the
number
of
persons
who
would
offer
traffic
to
the
appellant’s
transportation
systems,
I
have
great
difficulty
in
distinguishing
them
in
principle
from
expenditures,
made
by
a
businessman
whose
business
is
lagging,
on
a
mammoth
advertising
campaign
designed
to
attract
substantial
amounts
of
new
custom
by
some
spectacular
appeal
to
the
public.
Such
an
advertising
campaign
is
designed
to
create
a
dramatic
increase
in
the
volume
of
business.
In
a
very
real
sense,
it
is
designed
to
benefit
the
business
in
an
enduring
way.
According
to
my
understanding
of
commercial
principles,
however,
advertising
expenses
paid
out
while
a
business
is
Operating,
and
directed
to
attracting
customers
to
a
business,
are
current
expenses.
They
are
not,
in
the
sense
of
Viscount
Cave’s
rule,
made
with
a
view
to
"bringing
into
existence"
an
"advantage"
for
the
enduring
benefit
of
the
business.
If
this
be
true
of
advertising
expenses,
in
my
view,
it
is
equally
true
of
other
expenses
incurred
while
the
business
is
running
with
a
view
to
increasing
the
volume
of
that
business-so
long
as
such
expenses
are
incurred
for
the
purpose
of
gaining
income
in
such
a
way
that
their
deduction
is
not
prohibited
by
paragrapg
12(1
)(a).
I
can
see
no
difference
in
principle
between
the
two
cases.
Counsel
for
the
appellant
points
to
the
Algoma
case
and
argues
that
in
the
case
of
an
abandoned
project
one
does
not,
by
virtue
of
the
expenditures,
acquire
anything
of
an
enduring
nature
or
enduring
value
and
indeed
in
the
case
at
bar
he
argues
that
the
plans
had
no
enduring
value
because
the
whole
of
the
project
disappeared
at
the
very
latest
in
1990.
I
do
not
believe
that
the
Algoma
decision
is
on
all
fours
with
the
present
case.
The
studies
conducted
in
the
Algoma
case
were,
in
my
view,
in
the
nature
of
feasibility
studies
directed
ultimately
to
increasing
the
transportation
revenues.
In
the
present
case
we
have
plans
specifically
for
the
construction
of
a
building
(Kapilano
200)
which
the
appellant
intended
to
construct
in
one
way
or
another.
Although
the
plans
did
not
ultimately
result
in
the
construction
of
a
building,
I
think
it
is
more
important
that
the
plans
were
contracted
with
the
intention
of
constructing
a
building.
I
do
not
believe
that
the
mere
fact
of
changing
that
intention
and
not
proceeding
with
the
building
affects
the
nature
of
the
expenditure.
In
Bowater
the
company
had
incurred
expenses
for
engineering
studies
conducted
to
examine
the
potential
of
the
company’s
drainage
area
and
to
determine
the
feasibility
of
constructing
power
developments
at
other
sites
and
the
question
was
whether
those
expenses
were
deductible
as
current
business
expenses.
On
this
issue
Noel
A.C.J.
of
the
Federal
Court-Trial
Division,
at
pages
833-34
(D.T.C.
5479)
and
following
stated:
I
now
come
to
the
third
issue,
the
survey
costs
and
engineering
studies.
The
appellant’s
submission
here
is
that
these
expenditures
occurred
in
1959
and
1960
and
were
properly
deductible
as
current
business
expenses.
Mr.
Sansome
explained
why
the
above
studies
were
made
as
follows:
A.
We
are
looking
continually
looking
into
the
feasibility
of
installing
thermo
power-power
produced
by
steam.
We
are
looking
at
our
own
existing
facilities
that
we
have
now,
the
two
stations,
the
Watson
Brook
Station
and
the
Deer
Lake
Station,
to
see
what
changes
can
be
made
to
increase
the
capacity
of
these
two
stations....
A.
I
might
say
that
in
the
power
business
we
have
to
do
these
studies
and
we
are
always
looking
at
our
resources
in
order
to
meet
our
customers’
demand
for
power.
The
demand
for
electrical
power
is
ever
increasing
and
we
always
have
to
look
to
new
sources
of
generation
and
so
on....
Looking
at
our
Deer
Lake
plant
we
have
carried
out
many
studies
on
the
plant
itself
with
a
view
to
increasing
the
capacity
and
capability
of
this
plant-some
of
the
things
that
we
have
finally
done
have
been
in
installing
new
runners,
runners
being
water
wheels,
in
our
seven
smaller
units
and
together
with
new
windings
for
these
units,
this
increased
their
capacity...by
a
further
ten
percent.
These
units
were
capable
of
supplying
or
producing
11,000
kilowatts.
We
looked
at
the
possibility
of
diverting
Perry’s
River,
which
is
a
river
that
flows
into
St.
George’s
Bay
which
now
does
not
flow
into
our
water
shed.
This
was
found
to
be
a
possible
diversion
that
could
be
made.
There
was
some
problem
with
the
Department
of
Fisheries
on
this-if
the
diversion
went
ahead
they
would
want
us
to
make
provisions
for
the
salmon
that
run
up
that
river.
We
looked
at
it
but
so
far
we
have
not
done
this.
We
did
look
at,
as
I
said,
Indian
Brook,
and
did
a
diversion
on
that
which
diverts
about
eight
billion,
or
eight
BCF
of
water
from
that
brook
into
our
reservoir.
The
job
description
of
the
Little
Grand
Lake
project,
for
which
Shawinigan
Engineering
Co.
produced
a
report
(Exhibit
A-4)
reads
as
follows:
With
the
increasing
demand
on
our
system
investigations
must
be
made
to
utilize
to
greater
advantage
the
power
potential
of
our
existing
water
shed.
It
is
proposed
to
do
a
report
of
Little
Grand
Lake,
one
of
the
tributaries
to
our
main
storage
basin.
All
field
information
presently
available
for
this
work
and
it
is
the
intention
to
retain
a
consultant
who
will
review
the
data
available
and
make
a
report
on
the
potential
of
this
site.
No
property
resulted,
however,
to
the
appellant
because
of
those
expenditures.
The
sites
were
not
developed.
With
regard
to
the
Little
Grand
Lake
project,
it
was
not
economically
feasible
to
proceed
at
that
time
with
the
report.
As
for
the
Hinds
Brook
project,
although
it
was
economically
feasible
to
proceed
with
the
report
and
the
appellant
went
so
far
as
to
arrange
the
financing
for
the
job,
it
did
not
materialize.
Just
before
it
got
off
the
ground,
the
Provincial
Power
Commission
came
onto
the
scene
and
wanted
to
develop
a
fairly
large
hydro
site
at
Bay
Despair.
They
offered
to
sell
the
appellant
power
from
their
Bay
Despair
plant
at
a
cheaper
rate
than
the
appellant
could
produce
at
Hinds
Brook
at
that
time
and
the
plan
was
abandoned.
Once
again
I
believe
that
the
Bowater
decision
is
distinguishable.
In
Bowater
there
was
an
electric
power
company
which
constantly,
as
part
of
its
business,
was
seeking
alternative
power
sources.
This
in
my
view
is
vastly
different
from
a
shopping
centre
operator
who,
at
a
point
in
time,
decides
to
construct
a
large
office
building
on
the
centre
with
a
view
to
increasing
the
retail
business
in
the
centre.
Here
again
the
Bowater
expenses
were
more
in
the
nature
of
feasibility
studies
which,
as
mentioned,
were
carried
on
constantly
as
part
of
the
business
of
the
power
company.
In
Oxford
Shopping
Centres
Ltd.
the
company,
which
operated
a
shopping
centre,
agreed
with
the
municipality
that
the
municipality
would
improve
roadways
to
ease
traffic
congestion
and
provide
better
access
to
the
centre
and
as
part
of
these
agreements
the
company
paid
$490,050
to
the
municipality.
Thurlow
A.C.J.
of
the
Federal
Court-Trial
Division
held
that
the
expenditure
was
deductible
as
a
current
expense.
Its
aim
was
to
main
tain
or
increase
the
popularity
of
the
shopping
centre.
It
related
to
the
taxpayer’s
business
as
a
whole
rather
than
to
the
physical
premises.
The
only
expected
return
was
a
possible
increase
in
rent
chargeable
to
tenants.
From
a
practical
and
business
point
of
view
the
payment
resembled
an
expenditure
on
income
account
rather
than
a
capital
expenditure
and
was
deductible
when
paid.
At
pages
13-15
(D.T.C.
5463
ff.),
Thurlow
A.C.J.
stated
as
follows:
In
the
present
case,
the
plaintiffs
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
plaintiffs
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.
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.
Once
again
I
believe
that
the
Oxford
Shopping
Centre
case
is
distinguishable.
There
there
was
a
precise
payment
which
resulted
in
improvements
to
the
shopping
centre
accesses
with
the
intention
of
increasing
the
profitability
of
the
centre.
For
this
reason
and
although
the
expenditure
had
certain
features
of
a
capital
nature,
the
Court
held
that
it
was
deductible
as
a
current
expense.
This,
in
my
opinion
is
vastly
different
from
a
payment
to
architects
for
plans
for
a
specific
building
on
the
Centre.
Thurlow
A.C.J.
mentions
several
times
that
expenditures
directed
to
increasing
assets
on
the
shopping
centre
are
capital
in
nature.
In
the
present
case
considering
(a)
the
lengthy
period
of
time
during
which
the
expenditures
for
the
plans
were
incurred;
(b)
the
fact
that
the
plans
were
designed
for
the
construction
of
a
building;
(c)
the
large
amounts
involved;
(d)
that
the
expenditures
were
over
and
above
the
large
amounts
of
regular
maintenance
and
repairs;
(e)
that
a
sublease,
although
contemplated
was
only
one
alternative
and
did
not
occur;
and
(f)
that
the
Centre’s
assets
were
in
effect
sold
as
a
result
of
the
share
purchase
agreement
and
that
one
reason
for
the
expenditures
was
a
contemplated
sale,
I
am
of
the
opinion
that
the
expenditures
were
capital
in
nature.
Further
I
do
not
believe
that
this
conclusion
is
altered
by
the
historical
practices
of
the
appellant
in
other
developments.
It
is
also
clear
that
right
to
the
end,
which
I
would
suggest
is
the
sale
of
the
shares
of
the
company
or
at
least
practically
right
to
the
end,
one
of
the
alternatives
of
the
appellant
was
the
construction
by
the
appellant
itself
with
100
per
cent
of
the
required
funds
being
borrowed,
i.e.,
the
appellant
would
employ
the
plans,
build
the
building
itself
and
lease
it
out
or
sell
it.
This
was
clearly
one
of
the
alternatives
and
had
it
been
followed
the
cost
of
the
plans
would
clearly
not
have
been
deductible
on
a
current
basis.
In
conclusion,
for
the
above
reasons,
the
appeals
are
dismissed
with
costs.
Appeals
dismissed.
Email this Content