Nick Mourtzis v. Her Majesty the Queen, [1994] 1 CTC 2801

Bowman, J.T.C.C. (orally):—This is an appeal from the reassessment of Mr. Nickolas Mourtzis for his 1987 taxation year and it has to do with the question of whether an amount received by him was an eligible capital amount on the disposition of a taxi owner's licence.

In 1979, Mr. Mourtzis obtained a taxi owner's licence from the Metropolitan Licensing Commission for $1,500. He had applied for it in 1967 and waited twelve years for it. These licences are evidently very much in demand and have a considerable value. Thenceforth, he carried on his business of operating a taxi until 1987, when he sold the licence to a Mr. Singh Bal for $87,000. Initially, he did not declare this in his 1987 return, but subsequently filed an amended return treating 50 per cent of the difference between his costs and the proceeds; that is to say, $42,750, as a taxable capital gain and he claimed the same amount as a deduction under the lifetime capital gains exemption.

The Minister assessed him on the $42,750 on the basis that he had disposed of an eligible capital property. He appealed from this assessment on the basis that it is not eligible capital property but, rather, is depreciable property belonging to Class 14. Alternatively, it was argued that whether it falls within Class 14 or not, it is still not eligible capital property; it is not an eligible capital amount. I will deal with each of these arguments.

Section 14, which contains the rules relating to eligible capital property, came into the Act in the tax reform of 1971. It is designed to prevent valid business expenditures from being non-deductible as so-called “capital nothings". I would say, primarily, it was used to permit a limited deduction in respect of goodwill, but there are many other intangible benefits that people purchase for business reasons that do not fall within depreciable property rules.

In determining whether an amount received by a taxpayer upon the disposition of something is an eligible capital amount, the Court—and I suppose the taxpayer and the Minister of National Revenue—is required to go through a somewhat metaphysical exercise whereby the vendor is notionally transformed into a purchaser and we must ask whether if he bought the property, it would be an eligible capital expenditure. Let me deal first with the question of whether it would be an eligible capital expenditure if he had paid it, unless it falls within Class 14.

Section 14 of the Income Tax Act defines the “eligible capital expenditure" of a taxpayer as follows:

Eligible capital expenditure of a taxpayer in respect of a business means the portion of any outlay or expense made or incurred by him, as a result of a transaction occurring after 1971, on account of capital for the purpose of gaining or producing income from a business, other than any such outlay or expense. .. . .

I'll skip over what is irrelevant

. . that is, the cost of or any part of, the cost of. . .intangible property that is depreciable property of the taxpayer. . . .

Here we have, if we conjure up this notional purchaser, an amount that is "incurred as a result of a transaction occurring after 1971 on account of capital". Pausing there, clearly, the amount is on account of capital. There is no suggestion that Mr. Mourtzis was a trader in licences or that he bought them and flipped them.

Is it “for the purpose of gaining or producing income from a business"? If he had bought it, I believe it would have been for the purpose of gaining or producing income from a business. It would have no other purpose.

It was argued eloquently by counsel for the appellant that in order to fall within the eligible capital property definition, it had to be in respect of the sale of a business. I hope I do not do injustice to his argument when I say that you don't have to sell a business, or you don’t have to purchase a business, in order to have an eligible capital expenditure. It has to be for the purpose of gaining or producing income from a business. He sought to distinguish the cases referred to by counsel for the Minister on the basis that they all dealt with a business. Clearly, the amount of money the purchaser of a taxi licence spends is for the purpose of gaining or producing income from a taxi business, unless, of course, he is a trader, which is not the case here. People don't buy taxi licences for no good purpose at all. They aren't personal property or anything like that.

Is it a Class 14 asset? A Class 14 asset is depreciable property and, as set out in Schedule II to the Regulations of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), is a property that is:

. . .a patent, franchise, concession or licence for a limited period in respect of property, except. . . .

and there are certain exceptions which I will not read. The taxpayer writes off costs of such a franchise, concession or licence for a limited period, as set out in paragraph 1100(1 )(c) of the Regulations made pursuant to the Income Tax Act, and it requires that you apportion over the life of the property remaining at the time the cost was incurred.

The difficulty that I have with the appellant's position on this point is that I do not see how this is a licence for a limited period of time. Accepting that it is a licence, what is the limitation? Mr. Burkman argues on behalf of the appellant that there are several limitations: one, that the holder of the licence continue in good health; two, that it, at the very least, is limited by his life, or, three, it is also limited by the possibility that it could be taken away for inappropriate behaviour. I do not regard such limitations as bringing such a licence into Class 14. In my view, a limited period means a fixed and ascertainable limited period which would enable the amortization of costs. In a sense, everything is limited, I suppose, by someone's life or continuation of a business or continuation of the universe, but that doesn't make it a limited period for the purpose of Class 14.

Now, there was considerable reference made to the Metropolitan Taxi case. That was a decision of the Exchequer Court, [1967] C.T.C. 88, 67 D.T.C. 5073, subsequently affirmed in the Supreme Court, [1968] S.C.R. 496, [1968] C.T.C. 163, 68 D.T.C. 5098, where a number of taxicabs were purchased that had with them licences. It was argued that that was for a limited period of time because there was “a month left on the life of the licence which was transferred" and the taxpayer, obviously, should be entitled to write off the entire cost in that year. Mr. Justice Cattanach held that what you were buying was essentially not the licence itself but, rather, the position of the vendor which would give rise to a reasonable and almost certain expectation of being able to get the licence renewed year after year. That makes a certain amount of economic sense. No one would pay the substantial amount that was paid in Metropolitan Taxi for a one month licence.

Counsel for the appellant sought to distinguish Metropolitan Taxi on the basis that the deal was preapproved and, therefore, there was a certainty that it would go through. I don't think that alters the fact that what the purchaser bought from Mr. Mourtzis was not the remaining life of the licence but the remaining life of the licence plus a reasonable certainty that, assuming he continued to behave himself, it would be renewed year after year.

I, respectfully, am unable to accept counsel for the appellant's distinguishment of the Metropolitan Taxi case.

Another case to which I was referred is a decision of this Court in Ruth Goldfarb, Executrix of the Estate of the late Hymie Goldfarb, v. The Queen (unreported). The case is almost on all fours with this one, with one exception. His Honour Judge Brulé held that the disposition of the taxicab licence was a transac- tion whereby an eligible capital property was sold. The difference between that case and this one, of course, is that it was not argued that the licence was for a limited period of time and, therefore, fell within Class 14. Otherwise, Judge Brulé found that it was an eligible capital receipt and, therefore, not subject to capital gains and not eligible for the lifetime capital gains exemption.

I am in respectful agreement with His Honour Judge Brulé and I follow the decision.

I could not leave this matter without making some comment about section 18.28 of the Tax Court of Canada Act, R.S.C. 1985, c. T-2. That section reads as follows:

A judgment on appeal referred to in section 18 shall not be treated as a precedent for any other case.

Appeals referred to in section 18 are heard in what is known as an “informal procedure" of the Court, and the Goldfarb case was heard in an informal procedure of the Court.

I regard that section as being of very limited application. I am prepared to accept it insofar as it means nothing more than this: If I do not choose to follow the decision of one of my brethren in an informal procedure, I am not bound by the strict rules of stare decisis. If that section is interpreted to mean that counsel is not entitled to refer to informal procedure cases or that I am not prepared to cite them or follow them if I choose to do so, then I regard that as a most unreasonable interpretation of the Act and, indeed, I would regard it as an unwarranted attempt by Parliament to interfere with my judicial independence and with the independence of the bar in this country to refer to such authorities if they see fit to refer to them. After all, the decisions of the House of Lords are not binding on me. Does that mean they should not be referred to? The decisions of the Supreme Court of the United States are not binding upon me. Does that mean that if counsel find a good decision by Mr. Justice Oliver Wendell Holmes or Judge Benjamin Cardozzo or Judge Learned Hand, they should not refer to them? I find that interpretation patently unacceptable and, as I understand the rule, if a statute can bear one of two interpretations, one of which leads to an absurdity and one which does not, one should adopt the interpretation which leads to a reasonable result rather than an absurd result. And if one wants authority for that, it is found in the decision of the House of Lords in Victoria (City) v. Vancouver Island (Bishop), [1921] 2 A.C. 384 (P.C.).

That view of section 18.28 may not be shared by all my brethren, but, certainly, it is mine.

I feel considerable sympathy for the taxpayer in this case. He acted in good faith based on what his colleagues in the taxi business told him, but that doesn't make his position correct.

In the circumstances, I am dismissing the appeal.

Appeal dismissed.