Halifax Cablevision Limited, Dartmouth Cable Tv Limited v. Minister of National Revenue, [1983] CTC 2677, 83 DTC 630

Bonner, TCJ:—Halifax Cablevision Limited (hereinafter “Halifax”) appeals from assessments of income tax for the 1977 to 1980 taxation years. Dartmouth Cable TV Limited (hereinafter “Dartmouth”) appeals from assess- ments of income tax for the 1978 to 1980 taxation years. The appeals were heard together on common evidence. All appeals raise one issue only, namely, whether the cost to the appellants of installing so-called “drop lines” which run from distribution cables to customer’s homes are, as found by the respondent, capital costs.

Both appellants carry on the business suggested by their corporate names. They supply cable TV service to their customers in return for monthly fees. To do so each appellant utilizes a network of cables running throughout the area in which it is permitted to operate. The distribution cables which form part of the network are installed on the pole lines of the local telephone company.

When a householder desires the service offered by one of the appellants a cable connection must be effected between that householder’s television set and the distribution cable. The cost of supplying and installing that portion of the cable connection which is within the subscriber’s house has been treated by the respondent as a current cost. The appellants are satisfied with that treatment so far as it goes. The cost, however, in material and labour of installing a cable known as a “drop line” connecting the distribution cable located on the telephone company’s pole line to the cable installed within the subscriber’s house is the subject of the current dispute. The respondent say that the drop line cost is capital and the appellants say it is current. The quantum of the costs in issue is not in dispute.

It was the appellants’ thesis that a drop line:

(a) is installed and remains in place only at the sufferance of the owner or occupier of the building in question;

(b) is “vulnerable to replacement” for a wide variety of reasons, all of which were detailed in evidence; and

(c) may lose its utility either temporarily or permanently should the occupants of the dwelling wish service to be discontinued, either temporarily or permanently.

Thus, so the argument went, “A mere statistical probability that a drop line, once in place, will continue in use indefinitely does not make any given drop line a permanent or enduring asset.” The argument proceeded, “It is submitted that each drop line must be regarded as a separate asset for this purpose, rather than regarding all drop lines connected in different places and at different places and at different times to be a single asset the permanence of which can be determined on the basis of statistical probability.”

The respondent, on the other hand, submitted that drop lines are integral parts of the systems because service could not be supplied without them and that what is involved in their installation is not the operation of a business structure but, rather, its creation or extension.

The agreement between Halifax and its customers provides in part:

The Company will provide and install all cable and equipment necessary to bring a television signal to the Subscriber’s receiver in the premises hereinbefore designated, ...

and that:

... the ownership of all cable and equipment for the transmission of the signal, up to and including the matching device connection to the Subscriber’s receiver, shall be and remain in the Company.

The Dartmouth customer agreement was put in evidence as well. Its express terms are few and include nothing equivalent to the provisions previously quoted from the Halifax agreement. It was not suggested, however, that differences between the written contracts reflected material differences in relationships with customers or that they warranted different results in these appeals.

A drop line is first installed to serve a dwelling when, for the first time, an inhabitant of the dwelling becomes a subscriber. Each time that service to a dwelling ceases the appellants remove the hardware from the end of the cable at the connection to the distribution cable and at the point of entry into the dwelling. The ends of the cable are sealed to preserve and protect the cable so that it can be reused the next time an occupant of the dwelling requires service. Figures for the Dartmouth system show that fewer than one in five of all installations and reconnections over a three-year period required new drop lines.

Although many drop lines must be replaced it is likely that most will remain in place after installation and be, at any given point in time, either in use or capable after reconnection of further use. It would not be helpful to list the multitude of causes which can necessitate the replacement of drop lines. The range of risks is broad, but an event requiring replacement occurs in a minority of cases only.

The appellants’ counsel avoided admitted that his clients owned the drop lines which they installed. He submitted however that, if they did, then ownership of the lines did not create any enduring advantage because they were subject to removal or replacement and because, when removed, the lines had no economic value. He was referring, of course, to the test for capital expenditures laid down by Viscount Cave LC in Atherton v British Insulated and Helsby Cables Ltd, [1926] AC 205:

But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.

I do not agree with counsel’s submission.

First, on the evidence there appears to be no basis for doubt that the appellants owned the cable which they installed at their own expense. Nothing in the evidence suggests that the appellants transfer or abandon ownership of any cable after that cable is installed and before it is removed and thrown away. More importantly, the submission seems to suggest that no asset can be regarded as a capital asset if it might possibly cease to be useful and thereafter have no value. The test enunciated by Viscount Cave in the British Insulated case looks to purpose, not to result. In Collins v Joseph Adamson & Co, [1938] 1 KB 477, Lawrence, J stated the position as follows:

If the money is spent for the purposes of the trade, and the expenditure would, if successful, produce either a capital asset or an asset of an enduring nature, or an advantage of an enduring nature, which is of a capital nature, it is equally a capital payment if the expenditure is unsuccessful.

It was further submitted that:

Generally speaking, the installation of drop lines results in a loss to the company, because its installation costs exceed the installation charge. It is submitted that this loss is incurred’to promote business, in much the same way as were the expenses that were in issue in Algoma Central Railway v MNR, 67 DTC 5091 (Ex Ct), and not with a view to creating an enduring tangible asset.

Again, I do not agree. The evidence does not support a conclusion that the appellants were seeking some sort of intangible objective or advantage by means of a process of installing drop lines. There is no connection between the appellants’ motives in fixing the amounts charged to their customers for hook-up and the nature of the expenditure made in order to effect the hookup. The direct and immediate result of each installation was the acquisition of a physical asset capable of delivering signals for an indeterminate number of years to the inhabitant of or to successive inhabitants of a dwelling or other place. That is what the appellants had in view when making the expenditures in question.

A very useful review of many of the authorities which lay down the tests applicable in cases such as this may be found in the reasons for judgment of Thurlow, ACJ (as he then was) in Oxford Shopping Centres Ltd v The Queen, [1980] CTC 7; 79 DTC 5458. The application of the principles laid down in those cases can lead to only one conclusion, namely, that the costs in question here are capital costs. Drop lines collectively form an essential part of the physical plant necessary to carry on the business of a cable system. Without drop lines the appellants would be unable to earn any revenues. If the submission made by counsel for the appellants that the lines are to be viewed singly is intended to suggest that this reality should be overlooked, then I can see no force in it. In summary, what the appellants sought in expending money to install drop lines was a group of assets forming an essential part of the physical plant used continuously in the generation of revenues and intended to be so used for an indeterminate but relatively lengthy period of time amounting to many years. Such an expenditure is plainly one of capital.

Reliance was placed on the decisions of the Tax Appeal Board and the Tax Review Board in Jean Beauchemin v MNR, 24 Tax ABC 183; 60 DTC 265, Comox Reception Ltd and Courtenay-Comox Television Ltd v MNR, [1969] Tax ABC 297; 69 DTC 229 and Courtenay-Comox Television Ltd and Comox Reception Ltd v MNR, [1977] CTC 2070; 77 DTC 53. I must confess that I find the reasoning in Beauchemin rather hard to follow. At 272 of the reasons in Beauchemin Mr Panneton refers to the cost of connecting the service and says: “This expenditure is made once and for all, ..He says further that such expenditure should procure for the taxpayer a longterm asset, say for five years”. It is a little difficult to reconcile these findings with the conclusion reached at the bottom of 272 in relation to the deductibility of .. the amount charged to connect a private subscriber..In any event, both the Beauchemin and Comox Reception decisions turn on evidence substantially different from that which was before me. Nothing about the work done and the material used in the installation of the drop lines by the present appellants can be said to be “precarious”. The last of the three cases was decided on the basis of facts identical to those in the second and is to be distinguished for the same reason.

In the result I find that the costs in issue are capital costs and the appeals will therefore be dismissed.

Appeals dismissed.