Browning Harvey Limited v. Minister of National Revenue, [1983] CTC 2341, 83 DTC 311

Guy Tremblay:—This case was heard on July 15, 1982, at the City of St John’s, Newfoundland.

1. The Point at Issue

The point at issue is whether the appellant company is correct in deducting the amounts of $34,647 and $72,417 in the computation of its income for the 1977 and 1978 taxation years respectively. The expenses were disbursed for electric scoreboards and illuminated signs. The appellant considers these expenses as revenue expenditures of an income nature. The respondent contends that electric scoreboards and illuminated signs are tangible capital assets subject to capital cost allowance as described in Class 8 of Regulation 1100(1 )(k)(i) of the Income Tax Regulations.

2. The Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his assessments or reassessments are also deemed to be correct. In the present case, the assumed facts are described in the reply to notice of appeal as follows:

4. In so reassessing the Appellant’s income tax liability for its 1977 and 1978 taxation years, the Respondent relied, inter alia, on the following assumptions of fact:

(a) The Appellant is a Canadian resident corporation controlled by residents of Canada;

(b) The Appellant is a franchised manufacturer and distributor of soft drinks in Newfoundland;

(c) In 1977 and 1978 the Appellant installed (in public sports areas) electric scoreboards which promoted its product pursuant to 10 year written agreements whereby the ownership of the electric scoreboards remained with the appellant and that the Appellant was given an option to renew;

(d) In 1977 and 1978 the Appellant installed on the premises of various soft drink retailers illuminated signs which promoted its product pursuant to oral agreements whereby the ownership of the illuminated signs remained with the Appellant;

(e) The electric scoreboards and illuminated signs which were installed by the Appellant in 1977 and 1978 and which remain the Appellant’s property are separate and distinct assets and provide a benefit to the Appellant in more than one taxation year;

(f) Electric scoreboards and illuminated signs are depreciable property as described in Class 8(i).

2.03 Admission

At the beginning of the trial, the counsel for the appellant informed the Board that the assumptions of fact described above are all admitted except, in fact, the one described in subparagraph (f), which is an assumption of opinion.

3. The Facts

3.01 In his testimony Mr Blair Patrick, Assistant Branch Manager for the appellant, St John’s Division, Newfoundland, testified that:

(a) he has been working for the appellant for seven years: 4 years as market manager, 1 /2 years as financial officer and internal auditor and 1 /2 years as Assistant Manager (SN p 6-7);

(b) the appellant has three branches in Canada;

(c) as Assistant Manager, he has direct control over production, sales and the accounting of the Newfoundland Branch (SN p 6);

(d) there are about 330,000 people in the area (SN p 6);

(e) the appellant sells the following commercial brands of soft drinks: Pepsi-Cola, Orange Crush, 7-Up, Canada Dry, Countrytime Lemonade (SN p 6);

(f) the appellant is the major soft drink company within Newfoundland, however, it is very competitive. Advertising is an important factor in the current operations of the appellant. It is directly related to the growth of its sales. It spent in the vicinity of 7 to 8% of the gross income on advertising (SN p 8);

(g) the national franchise companies also contribute to the advertising expenses: TV, radio, menu boards, scoreboards, illuminated signs, etc;

(h) the scoreboards are put up in arenas, in stadiums and in schools;

(i) the appellant has an arrangement so that its products will be the only ones to be sold within the schools and stadiums for ten years;

(j) the main competitor is Wometco Enterprises Limited, which bottles Coca-Cola, Sprite, Schweppes Ginger Ale and Fanta flavours. Pepsi has about 70% of the cola market;

(k) the appellant has the major share of illuminated signs in Newfoundland. This came from its leading position within the communities as the illuminated signs are based on request from the storekeepers;

(l) the appellant (as well as the other agents) retains the ownership of the illuminated signs. It prevents the storekeeper from taking them down.

3.02 In cross-examination, Mr Patrick testified that:

(a) he recognized signs of Pepsi-Cola (one reading Cornwall Superette, one reading Tucker’s Superette and one reading Capitol Drugs Limited) on three photographs filed as Exhibit R-1. They are the kind of signs for which the expenses under appeal are claimed;

(b) the appellant considered that kind of advertising as being the same as television advertising. The latter, in enduring more than 30 or 60 seconds, remains in the mind. However, it is not physically tangible;

(c) he recognized a document, filed as Exhibit R-2, as an agreement between the appellant and the Town Council of Port aux Basques. It is dated April 15, 1978 (SN p 21). It is the scoreboard agreement for a onesided score clock for the arena. It is the normal type of agreement that the appellant entered into with various arenas, stadiums and schools;

(d) paragraph 6 of the said agreement is the exclusivity clause. Paragraph 8 provides that the agreement will remain in force for the period of 10 years, at the end of which time, option for another 10 years is also provided;

(e) the signs in the photographs (Exhibit R-1) provide advertising value for more than one year;

(f) there is no exclusivity with an illuminated sign. Cornwall Superette for instance sells Coca-Cola.

3.03 In his examination-in-chief, Mr James Winsor, Registered Industrial Accountant (RIA) testified that:

(a) he was a member of the accounting firm Touche Ross & Co, Chartered Accountants (CA);

(b) Touche Ross & Co have been external auditors for the appellant for 7 years;

(c) the scoreboard or clock-board is a form of advertising which is used in a number of arenas throughout Canada;

(d) the bottlers consider all advertising expenditures as an expense in the year in which they occur.

3.04 In cross-examination, Mr Winsor said although he had not seen the records of any bottlers, other than the appellant, he had, however, heard from people who attended the meetings of the national organization of all independent bottlers, that the consistent approach is that all these advertising expenditures are considered as expenses of the year.

3.05 In examination-in-chief, Mr Connors, Chartered Accountant, testified that:

(a) he is a tax partner in the accounting firm of Touche Ross & Co;

(b) he agreed with the evidence given by Mr Patrick and Mr Winsor that the expenses must be treated as revenue expenditures:

I think Mr Chairman that the whole question of capital versus income expenditures, Mr O’Dea quantifies it, is rather a difficult one, in any circumstances, and I think as a tax partner; and looking at whether or not it was a deductible item, rather than simply look at the nature of the asset as to whether it is tangible or intangible. I intend, in those circumstances, to look at the purpose of the expenditure. . .for what purpose was the expenditure made, and I think in analyzing this situation, I would first of all have said to myself.. .is that a productive asset? Does it produce any soft drinks which the Company sells and obviously the question [sic] is no. And then I would say, does it deliver any of the product to the customers? And obviously the ques.. .the answer to that question is no. And then I would say to myself, what does this particular piece, score.. .whatever, signs whatever.. .what does it do? And to my mind it advertises, and it promotes the product to the public. Does it have enduring benefits? I would look at that situation, and I would say no, because tomorrow Pepsi-Cola may suddenly be determined to be a cancer Causing agent, and no one would buy the product any more. So, the enduring benefit.. .it it exists at all, can only, in my mind, exist as a promotional device, keep the product before the people, increase the sales, and unless those sales are generated on an ongoing basis, they these assets, that are so called have no value whatsoever. That would be my reason for deducting it in the year in which the expenditure was made.. .it produces income and I would use that as justification for the deduction. (SN p 37-38)

(c) he has no knowledge of how such items would be treated in other districts.

3.06 In cross-examination, Mr Connors said that:

(a) he disagreed that a sign in an arena with the exclusivity clause in the agreement formed some kind of asset to the benefit of the appellant

. .the whole purpose of the sign is advertising, and the purpose of advertising is to increase sales. And if sales have increased because of advertising then the advertising is a deduction” (SN p 40);

(b) it is virtually impossible to match depreciation of the advertising signs, over the period of ownership, to the income in the particular year “unless you can guarantee me what the revenue for the next year for Pepsi-Cola is going to be” (SN p 41);

(c) whatever process is used: TV, radio, scoreboard, clock board, illuminated signs, etc, the expense becomes deductible in the year it is done as an advertising expense;

(d) . no one has ever suggested to me that advertising is not a deductible item in the year in which the disbursement is made, and having that rule, or whatever, available to me, then I would suggest that all advertising is deductible in the year in which it is made.”

4. Law—Cases at Law—Analysis

4.01 Law

The main provisions of the Income Tax Act, SC 1970-71-72, c 63 as amended, involved in the present case are sections 3, 4, 9, 13(21 )(b), 18(1)(a) and (b), 20(1)(a) and 248, and Regulation 1100, Class 8(1) of Schedule II of the Income Tax Regulations, CRC 1978, c 945. They shall be quoted in the analysis, if necessary.

4.02 Cases at Law

The parties referred the Board to the following cases at law:

1. Algoma Central Railway v MNR, [1967] CTC 130; 67 DTC 5091: [1968] CTC 161; 68 DTC 5096:

2. BP Australia, Ltd v Commissioner of Taxation, [1965] 3 All ER 209;

3. Canada Starch Company Limited v MNR, [1968] CTC 466; 68 DTC 5320;

4. MNR v MP Drilling Ltd, [1976] CTC 58; 76 DTC 6028;

5. Associated Investors of Canada Limited v MNR, [1967] CTC 138; 67 DTC 5096;

6. The Queen v F H Jones Tobacco Sales Co Ltd, [1973] CTC 784; 73 DTC 5577;

7. Harry H Wilson v MNR, [1980] CTC 2431; 80 DTC 1379.

4.03 Analysis

4.03.1 The appellant’s contention is based fundamentally on the decisions in Algoma Central Railway, (supra), and on the cases to which the Exchequer Court of Canada and the Supreme Court of Canada refer in giving the decisions in that case.

The facts in that case are summarized as follows:

The appellant company operated a railway and steamships in an area of Ontario that was, to a substantial extent, unpopulated. In 1960 the company arranged with a firm of mining geologists for a survey over a five-year period of the mineral possibilities of 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 arising from the surveys available to interested members of the public in the hope and expectation that it would lead to development of the area that would produce traffic for the company’s transportation system. The company sought to deduct as current expenses the amounts paid in 1960, 1961 and 1962 to the firm of geologists. The Minister disallowed the deductions, ruling that the amounts paid were capital outlays. The company appealed. There was another matter in dispute, but the parties agreed that it should be referred back to the Minister for reconsideration.

Mr Justice Jackett of the Exchequer Court explained the “usual test” as follows:

The “usual test” applied to determine whether such a payment is one made on account of capital is, “was it made ‘with a view of bringing into existence an advantage for the enduring benefit of the appellant’s business’”? See BC Electric Ry Co Ltd v Minister of National Revenue, (1958) SCR 133, 58 DTC 1022, per Abbott J at pages 137-8, where he applied the principle that was enunciated by Viscount Cave in British Insulated and Helsby Cables, Ltd v Atherton, supra, and that had been applied by Kerwin J, as he then was, in Montreal Light, Heat & Power Consolidated v Minister of National Revenue, (1942) SCR 89 at 105, 2 DTC 535 at 537.

The question is therefore whether what the appellant in this mind had in “view” when it made the expenditures in dispute was “an advantage for the enduring benefit” of its business within the meaning of the test as it has been developed by the decisions.

After summarizing and studying six cases (1. British Columbia Electric Railway Co Ltd v MNR, [1958] SCR 133; 2. British Insulated and Helsby Cables v Atherton, [1926] AC 205; 3. Sun Newspapers Limited v Federal Commission of Taxation, [1938] 61 CLR 337; 4. Ounsworth & Vickers, Limited, [1915] 3 KB 267; 5. Regent Oil Co Ltd v Strick, [1965] 3 WLR 636; and 6. Van Den Berghs, Ltd v Clark, (1935) AC 431) in which the test had been applied, Mr Justice Jackett arrived at this first conclusion that the advantage which was held to be an enduring benefit to the taxpayer’s business was the thing contracted for or otherwise anticipated by the taxpayer as a direct result of the expenditures. What Algoma contracted for and immediately received for the expenditures in dispute was information produced by geological surveys that could be placed in the hands of interested members of the public. That was the direct result of the expenditure. As the expenditure was “part of a programme for increasing the number of person who would offer traffic to the appellant’s transportation systems”, therefore it was made for the purpose of gaining income. According to the Court, this kind of advertising is not different from a “mammoth” advertising campaign to create an increase in the volume of business:

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 section 12(1)(a). I can see no difference in principle between the two cases.

This decision of the Exchequer Court was confirmed by the Supreme Court of Canada. Mr Justice Fauteux said:

Parliament did not define the expressions “outlay.. .of capital” or “payment on account of capital”. There being no statutory criterion, the application or nonapplication of these expressions to any particular expenditures must depend upon the facts of the particular case. We do not think that any single test applies in making that determination and agree with the view expressed, in a recent decision of the Privy council, BP Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia, (1966) AC 224, by Lord Pearce. In referring to the matter of determining whether an expenditure was of a capital or an income nature, he said, at p 264:

The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer.

In 1968, the Exchequer Court, in the Canada Starch Company Limited, (supra) case, decided that an amount of $15,000 paid out to a competitor in order to induce it to drop its opposition to the registration of the starch company’s trademark was a current expense. This decision was based on the Algoma case.

It is also on the basis of that same case, and on the cases referred to therein, that the Federal Court in 1973 decided in the F H Jones Tobacco Sales Co Ltd, (supra) case that an amount of $115,369 paid to a creditor of a manufacturer-distributor of a certain cigarette which Jones Tobacco’s controlling shareholder had endorsed was a business loss. The endorsement was made in return for the privilege of having Jones Tobacco thenceforth supply tobacco to the manufacturer, albeit “at the best possible price having regard to market conditions”.

In this judgment, Mr Justice Noël said:

For some years, however, our courts have been inclined to accept certain expenses or losses as deductible considering not so much the legal aspect of the transaction, but rather the practical and commercial aspects.

4.03.2 The board thinks that in that field of advertising, a distinction must be made between an advertising campaign (newspaper, radio, TV) which lasts a few months, and physical signs which last many years. Both expenses are made to produce income, but it is obvious that the direct and immediate result of an advertising campaign is to increase the commercial sales, at least during the period of the said campaign, even though it is hoped that it shall last more than the period of the campaign.

For a physical sign, however, it seems that the direct effect shall last throughout the existence of the said sign.

4.03.3 The judgment quoted above and the other judgments which are referred to above did not make the distinction between an advertising campaign and the physical signs because this point was not in dispute. Even if the fundamental point was the same, is the expense a current expense, or made with a view of bringing into existence an advantage for the enduring benefit of the appellant’s business?

As Lord Pearce said in the BP Australia, Limited (Supra) case quoted above the the Supreme Court of Canada in the decision confirming the Exchequer Court in Algoma Central Railway (supra): “The solution to the problem is not to be found by any rigid test. . .. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer.” As advertising physical signs are commonly used in business, and as the legislator provides in the regulations for capital cost allowance of 35% for electrical advertising signs and outdoor advertising poster panels when used to earn rental income (Class II), therefore, since in the instant case, the illuminated signs are made to last many years and the electric scoreboards are under a 10-year contract with another 10-year option, it is my commonsense appreciation to conclude that the advertising physical signs must be considered as bringing into existence an advantage for an enduring benefit.

This conclusion is correct, despite the fact that the Class II does not apply in the instant case, because the appellant’s signs are not used to earn rental income. The legislator in enacting a specific provision allowing depreciation on physical signs confirms commonly commercial fact that a physical sign has an advantage of an enduring benefit.

The class applied by the respondent is Class 8 where it is said that 20% of capital cost allowance must apply for property not included in classes 2, 7 and 9 where a tangible asset is not included in another class in the schedules except in eleven exceptions. The exceptions do not include advertising signs so they fall in this class.

4.03.4 According to the tax specialist witness (para 3.05(b)) the physical signs cannot be considered to have enduring benefit because “tomorrow Pepsi-Cola may suddenly be determined to be a cancer causing agent, and no one would buy the product any more”. I would say first that it is difficult to base a principle on such hypothesis. Secondly, even if this hypothesis would occur, the appellant could claim the terminal loss.

4.03.5 The reassessments issued by the respondent must be maintained.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.