The
Chairman:—The
appeals
of
Metropolitan
Properties
Co
Limited
are
from
notices
of
reassessment
with
respect
to
the
1974
and
1975
taxation
years.
A
waiver
having
been
filed
with
the
Minister
of
National
Revenue,
the
appeal
was
not
proceeded
with
for
the
1975
taxation
year.
There
are
two
issues
involved
in
the
1974
taxation
year:
one
involves
the
apportionment
of
income
from
a
partnership
in
which
the
appellant
and
a
company
called
“Signature
Homes
Ltd”
were
at
one
time
partners.
It
was
agreed
that
this
issue
would
not
be
debated
at
the
hearing
—
depending
on
the
results
of
current
negotiations
to
resolve
the
differences
between
the
said
former
partners;
the
matter
will
either
be
settled
out
of
court
or
dealt
with
at
a
separate
hearing
of
the
Board.
In
order
that
the
issue
relative
to
apportionment
of
income
from
the
partnership
not
be
considered
res
judicata
as
a
result
of
the
Board’s
decision
on
the
second
issue
in
the
1974
assessment,
the
parties
agreed
that
the
Board,
pursuant
to
subparagraph
171
(b)(iii)
of
the
Income
Tax
Act,
SC
1970-71-72,
c
63,
as
amended,
would
refer
the
“apportionment
income
issue”
back
to
the
Minister
for
reconsideration
and
reassessment
to
be
litigated
at
another
hearing
of
the
Board,
should
it
become
necessary
to
do
so.
The
issue
presently
before
the
Board
is
clearly
set
out
in
an
“Agreed
Statement
of
Facts”
filed
as
Exhibit
A-1,
and
reads
as
follows:
The
issue
in
this
Appeal
is
whether
the
aggregate
amount
of
$1,509,699
of
costs
expended
or
incurred
by
the
Appellant
in
respect
of
installing
certain
services
and
improvements
with
respect
to
residential
subdivisions
developed
by
the
Appellant
(“the
land
Development
Costs”):
(a)
were
deductible
as
current
expenses
in
the
1974
taxation
year;
OR
(b)
formed
part
of
and
were
to
be
taken
into
account
in
determining
the
cost
of
the
Appellant’s
inventory
on
hand
at
the
end
of
its
1974
taxation
year
(and
consequently
not
deductible
in
its
said
taxation
year).
Summary
of
Facts:
I
do
not
intend
to
repeat
all
that
is
contained
in
the
Agreed
Statement
of
Facts.
I
propose
to
summarize
the
principal
facts
and
review
those
factors
I
consider
essential
in
arriving
at
a
decision
on
an
issue
which,
though
legal,
involves
the
consideration
of
accounting
principles
and
practices.
The
appellant
company
came
into
existence
on
December
31,
1973
as
a
result
of
an
amalgamation
with
other
companies
which
in
turn
had
been
created
by
Letters
Patent
of
Amalgamation
dating
back
to
at
least
1969.
The
business
of
the
appellant
company
was
(as
was
that
of
all
its
predecessors)
land
development.
The
appellant’s
first
year
of
operation
was
1974,
the
taxation
year
under
appeal,
at
which
time
the
appellant
continued
the
land
development
activities
of
its
predecessors
and
assumed
certain
of
their
obligations.
In
1974
the
appellant
executed
two
Development
Agreements
with
the
City
of
Winnipeg,
Manitoba
(copies
of
the
Agreements
are
annexed
as
Schedules
A
&
B
of
the
Agreed
Statement
of
Facts
(Exhibit
A-1)).
In
the
Development
Agreements
between
the
City
of
Winnipeg
and
the
appellant,
dated
February
20,
1974
and
August
1,
1974,
the
appellant
assumed
the
obligation
of
installing
on
the
“development
land”
municipal
services
at
no
cost
or
expense
to
the
city.
These
services
included
the
installation
of
waste
water
sewers,
land
drainage
sewers,
the
construction
of
water
mains
and
hydrants,
water
lines,
lot
line
services,
street
pavements,
paved
lanes,
walkways/sidewalks
boulevards,
parks,
street
lights,
planted
trees
and
underground
electrical
and
telephone
wiring.
The
last
paragraph
of
Section
6
of
the
Agreement
(Schedule
A)
reads:
Subject
to
Clause
7,
all
municipal
services
and
improvements
required
to
be
installed
by
the
Developer
pursuant
to
this
Agreement,
snail
be
installed
by
the
Developer
at
its
sole
cost
and
expense.
The
City
acknowledges
that
the
costs
of
such
municipal
services
to
be
installed
by
the
Developer
under
this
Agreement,
are
being
paid
in
effect
as
a
prepayment
of
City
taxes
which
would
otherwise
be
levied
under
the
City
of
Winnipeg
Act
for
such
services;
provided
that
the
Developer
hereby
covenants
and
agrees
that
upon
completion
of
such
services,
the
Developer
shall
convey,
set
over
and
assign
unto
the
City
for
the
sum
of
$1,
free
and
Clear
in
perpetuity,
title
to
such
improvements
and
municipal
services
so
installed
without
any
cost
to
the
City,
and
from
the
date
of
such
installation
or
construction
of
such
improvement
or
municipal
service,
the
Developer
shall
have
no
further
claim
or
right
thereto
other
than
such
claim
or
right
as
accrues
to
the
Developer
as
an
owner
of
land
abutting
on
streets
in
which
such
services
are
installed.
Notwithstanding
the
sale
of
the
said
services
to
the
City
however,
the
parties
covenant
and
agree
that
the
Developer’s
obligations
to
repair
and
maintain
same
shall
remain
in
full
force
and
effect
as
and
during
the
terms
provided
for
in
this
Agreement.
Mr
William
John
Alexander
Rae,
a
chartered
accountant
and
vice-president
of
Metropolitan
Properties
Co
Limited,
a
witness
for
the
appellant,
had
been
vice-president
for
the
appellant
company
since
the
spring
of
1973
and
was
aware
that
the
appellant’s
business,
which
had
been
relatively
small,
was
growing
and
had
achieved
a
significant
market
in
Winnipeg
by
1972.
Mr
Myles
S
Robinson,
the
appellant’s
principal
shareholder,
had
at
that
time
been
advised
by
the
accounting
firm
of
Ernst
&
Ernst
that
there
would
be
advantages
in
making
the
appellant
—
whose
operations
were
planned
to
extend
beyond
Winnipeg
to
other
Canadian
cities
and
to
the
United
States
—
a
public
company.
According
to
Mr
Rae,
this
required
the
implementation
of
certain
managerial
changes
in
the
appellant
company’s
new
bank
relationships
and
(more
importantly
for
purposes
of
this
appeal)
alterations
in
the
accounting
methods
of
the
appellant,
so
that
they
would
conform
to
accounting
standards
for
real
estate
companies
which
the
Canadian
Institute
of
Chartered
Accountants
had
then
recently
published.
Mr
Rae
was
involved
in
the
preparation
of
the
1972
financial
statements
of
the
appellant’s
predecessor,
when
the
changes
in
accounting
methods
were
effected.
The
terms
with
respect
to
the
installation
and
the
payment
by
the
appellant
of
municipal
services,
as
set
out
in
Schedules
A
&
B,
had
to
be
complied
with
before
the
subdivision
and
the
zoning
of
land,
owned
by
the
appellant
for
purposes
of
development,
could
be
proceeded
with.
The
houses
subsequently
built
or
vacant
building
lots
were
obviously
not
sold
by
the
appellant
until
the
services
had
been
installed.
It
was
Mr
Rae’s
opinion
that
land
development
costs
and
the
cost
of
acquiring
the
land
would
only
be
recovered
by
the
sale
of
the
houses
or
lots
over
a
period
from
2
to
over
7
years,
depending
on
the
size
of
the
subdivision
and
the
market
conditions.
The
1972
financial
statements
of
the
appellant’s
predecessor
were
prepared
for
purposes
of
reporting
to
the
company’s
shareholders.
The
development
costs,
which
had
in
previous
years
been
deducted
as
current
expenses,
were,
in
accordance
with
the
Generally
Accepted
Accounting
Principles
(GAAP)
which
CICA
had
recently
approved
with
respect
to
real
estate
companies,
added
to
the
cost
of
the
appellant’s
land
inventory.
The
basis
for
the
appellant’s
predecessor’s
1972
tax
return
was
the
“annual
financial
statement’’
to
which
was
added
a
Department
of
National
Revenue
form
“Income
Tax
Information
T2S(1)”
for
the
reconciliation
of
net
income
per
financial
statement
with
net
income
for
income
tax
purposes.
This
accounting
method
initiated
in
1972
was
continued
by
the
appellant’s
predecessor
and
used
in
the
appellant’s
1974
tax
return.
Counsel
for
the
respondent
objected
to
the
irrelevancy
of
questions
on
the
accounting
methods
used
by
the
appellant’s
predecessor
and
submitted
that
the
issue
in
this
appeal
was
the
treatment
given
to
the
appellant’s
development
costs
in
1974.
I
allowed
the
questions.
The
appellant
is
a
legal
entity
which
came
into
effect
on
December
31,
1973.
The
appeal
is
indeed
from
reassessment
of
the
appellant’s
1974
taxation
year;
however,
the
appellant,
by
way
of
amalgamation,
continued
the
business
of
its
predecessor
and
assumed
its
liabilities
which,
as
pointed
out
by
the
appellant,
are
included
in
the
appellant’s
1974
tax
return
(Exhibit
A-2),
and
consist
of
figures
of
the
predecessor’s
closing
financial
statement
which
are
the
opening
figures
of
the
appellant’s
1974
financial
statement
(T2S-24).
An
understanding
of
the
financial
relationship
between
the
appellant
and
its
predecessors,
as
reflected
in
their
respective
financial
statements
based
on
the
same
accounting
methods,
is
not
prejudicial
to
the
respondent’s
position
but
is,
in
my
opinion,
necessary
in
ascertaining
the
appellant’s
income
or
profit
figure
for
1974.
As
suggested
earlier,
the
appellant’s
corporate
income
tax
return
for
1974
(Exhibit
A-2)
contained
a
financial
statement
based
on
accepted
accounting
principles
for
real
estate
corporations
issued
by
the
Canadian
Institute
of
Chartered
Accountants.
In
the
reporting
financial
statements,
the
land
development
costs
at
the
end
of
the
fiscal
period
were
included
as
part
of
the
appellant’s
inventory.
On
that
basis
the
financial
statement
showed
a
net
income
of
$1,674,259
for
the
year
ending
December
31,
1974.
Adjustments
to
the
reporting
financial
statement
for
tax
purposes
—
principally
the
deduction
of
land
development
costs
as
current
expenses
—
having
been
made,
the
Reconciliation
Form
T2S(1)
showed
the
appellant’s
net
income
for
tax
purposes
for
1974
as
$267,525.
The
details
of
the
treatment
of
land
development
costs
in
both
the
reporting
financial
statement
and
the
Reconciliation
Report
Form
T2S(1)
for
1974,
as
well
as
references
to
comparable
deductions
made
by
the
appellant’s
predecessor
in
computing
its
net
income
for
tax
purposes
in
prior
years
which
were
not
disallowed
are
set
out
in
paragraphs
13,
14
and
15
of
the
Agreed
Statement
of
Facts:
13.
In
fulfillment
of
its
requirements
under
the
Development
Agreements
and
Similar
development
agreements
entered
into
by
the
Appellant’s
predecessor
corporations,
the
Appellant
expended
or
incurred
Land
Development
Costs
in
its
1974
taxation
year.
In
arriving
at
its
net
income
for
income
tax
purposes
for
its
said
1974
taxation
year,
after
appropriate
adjustments,
the
Appellant,
in
effect,
deducted
as
current
expenses
the
amount
of
$1,509,699
of
such
Land
Development
Costs.
14.
The
said
amount
of
$1,509,699
was
arrived
at
as
the
result
of
the
following
procedure:
(a)
In
preparing
its
financial
statements
for
its
1974
financial
year,
the
Appellant,
in
effect,
treated
the
said
amount
of
$1,509,699
of
Land
Development
Costs
as
forming
part
of
its
inventory
on
hand
at
the
end
of
the
period
of
serviced
and
partially
serviced
residential
building
lots
for
sale,
rather
than
as
follows:
(i)
In
effect,
the
Appellant
included
as
part
of
its
inventory
on
hand
at
the
beginning
of
the
period
amounts
in
respect
of
serviced
and
partially
serviced
residential
building
lots
for
sale,
and
included
therein
was
an
amount
of
$495,765
as
Land
Development
Costs;
(ii)
In
effect,
the
Appellant
included
as
part
of
its
inventory
on
hand
at
the
end
of
the
period
amounts
in
respect
of
serviced
and
partially
serviced
residential
building
lots
for
sale
and
included
therein
was
an
amount
of
$2,005,464
as
Land
Development
Costs.
(b)
Consequently,
in
preparing
its
income
tax
for
its
1974
taxation
year,
in
reconciling
its
net
income
per
financial
statements
with
its
net
income
for
income
tax
purposes,
the
Appellant,
in
effect,
deducted
as
current
expenses
the
aforesaid
amount
of
$1,509,699
in
respect
of
Land
Develpment
Costs,
by
making
the
following
adjustments:
(i)
By
adding
to
its
net
income
per
financial
statements,
in
effect,
the
amount
of
$495,765
(referred
to
in
sub-paragraph
14(a)(i)
above):
(ii)
By
deducting
from
its
net
income
per
financial
statements
the
amount
of
$2,005,464
(referred
to
in
sub-paragraph
14(a)(ii)
above).
(c)
The
mathematical
result
of
the
foregoing
applications
is
as
follows:
(i)
End
of
year
amount
|
(sub-paragraphs
14(a)(ii)
and
14(b)(ii)
above)
|
$2,005,464
|
|
(11)
Beginning
of
year
amount
|
|
|
(sub-paragraphs
14(a)(i)
and
14(b)(i)
above)
|
-495,765
|
|
$1,509,699
|
15.
The
deduction
by
the
Appellant
of
the
said
amount
of
$1,509,699
of
Land
Development
Costs
as
a
current
expense
in
its
1974
taxation
year
was
consistent
with
the
manner
in
which
the
Appellant’s
predecessor
corporations
had
arrived
at
their
respective
net
incomes
for
income
tax
purposes
in
prior
taxation
years.
Similar
deductions
of
amounts
of
land
development
costs
as
current
expenses
in
previous
taxation
years
had
not
been
disallowed
by
the
Respondent
by
Assessment
in
respect
of:
(a)
Metropolitan
Properties
Limited
for
its
1973
taxation
year.
(b)
International
Development
Corporation
(1970)
Ltd
for
its
1972,
1971,
and
1970
taxation
years.
(c)
Metropolitan
Construction
Ltd
for
its
1970,
1969
and
1968
taxation
years.
(d)
Iroquois
Enterprises
Ltd
for
its
1970
taxation
year.
In
reassessing
the
appellant
for
the
1974
taxation
year,
the
Minister
disallowed
as
current
expenses
the
development
costs
and
added
them
to
the
cost
of
land
inventory
held
by
the
appellant
at
the
end
of
the
1974
taxation
year.
The
grounds
upon
which
the
appeal
is
based
is
set
out
in
the
Notice
of
Appeal:
5.
The
Appellant
states
that
the
Minister
has
erred
in
disallowing
the
deduction
of
such
costs
and
in
attempting
to
add
those
amounts
to
the
cost
amount
of
the
land
inventory
owned
by
the
Appellant
at
the
end
of
its
1974
taxation
year.
6.
Such
costs
and
expenditures
in
the
total
amount
of
$1,509,699
were
incurred
for
the
purpose
of
gaining
or
producing
income
from
the
said
business
and
were
a
proper
deduction
in
computing
the
Appellant’s
income
for
its
1974
taxation
year
in
accordance
with
the
Income
Tax
Act,
and
there
is
no
prohibition
against
such
deduction.
7.
The
said
costs
so
expended
or
incurred
during
the
Appellant’s
1974
taxation
year
were
not
expended
for
the
purpose
of
acquiring
or
adding
to
its
inventory
of
assets,
but
were
expenditures
incurred
for
the
purpose
of
carrying
on
the
business
and
gaining
or
producing
income
therefrom.
8.
The
said
costs
so
expended
or
incurred
during
the
Appellant’s
1974
taxation
year
did
not
result
in
the
acquisition
of,
or
addition
to,
any
form
of
asset
owned
by
the
Appellant
but
were
amounts
expended
on
property
owned
by
the
local
municipal
authority
and
were
paid
and
incurred
pursuant
to
a
legal
obligation
of
the
appellant
to
the
said
municipal
authority
to
expend
such
sums
which
obligation
was
necessarily
incurred
by
the
Appellant
in
the
ordinary
course
of
carrying
on
the
Said
business.
In
his
Reply
to
the
Notice
of
Appeal
the
Minister
states:
4.
In
reassessing
the
Appellant
for
its
1974
taxation
year,
the
Respondent
proceeded
on
the
basis
that
the
costs
of
installing
the
services
and
improvements
in
issue
formed
part
of
and
were
to
be
taken
into
account
in
determining
the
cost
of
the
Appellant’s
inventory
on
hand
at
the
end
of
its
1974
taxation
year
with
the
consequence
that
the
said
amounts
could
not
be
deducted
as
current
expenses
in
the
said
taxation
year.
In
so
reassessing
the
Appellant,
the
Respondent
assumed
that
this
treatment
of
the
costs
in
issue
was
in
accordance
with
generally
accepted
accounting
principles.
7.
He
submits
that
according
to
generally
accepted
accounting
practices
the
costs
incurred
by
a
developer
in
the
installation
of
services
and
improvements
to
land
that
forms
part
of
his
inventory
must
be
taken
into
account
in
determining
the
cost
of
such
inventory
so
that
they
may
be
properly
matched
with
revenues.
8.
He
further
submits
that
there
exists
no
section
in
the
Income
Tax
Act
under
which
these
costs
could
be
deducted
by
the
Appellant
so
as
to
vary
those
generally
accepted
accounting
practices.
The
pertinent
sections
of
the
Income
Tax
Act
are
sections
2,
3,
4,
9,
10,
paragraph
18(1
)(a)
and
section
248.
Contentions
The
appellant’s
general
position
is
that
GAAP
have
no
relationship
to
the
interpretation
or
the
application
of
the
Income
Tax
Act
and
the
Minister
erred
in
assuming
that
development
costs
are
part
of
and
should
be
added
to
the
costs
of
inventory
of
serviced
lots
on
hand
for
tax
purposes.
In
his
opinion,
the
deductibility
of
land
development
costs
has
been
settled
by
case
law
in
favour
of
the
appellant
and
no
relevant
changes
have
since
been
made
to
the
Income
Tax
Act
to
alter
that
position.
The
appellant
suggests
that
the
Minister
wrongfully
and
arbitrarily
changed
his
assessing
policy
in
1974
without
statutory
authority
and
without
the
support
of
case
law
warranting
such
a
change.
The
respondent’s
position
is
that
the
appellant’s
financial
statement
for
1974
which,
according
to
GAAP,
included
in
the
cost
of
land
inventory
the
costs
of
land
development,
represents
a
true
and
fair
position
of
the
appellant’s
affairs
for
the
period
ending
December
31,
1974.
The
deduction
of
land
development
costs
as
current
expenses
is
not,
he
claims,
in
accordance
with
GAAP
and
there
is
no
provision
in
the
Act
under
which
such
costs
can
be
deducted
so
as
to
vary
those
generally
accepted
accounting
principles.
The
respondent
also
alleges
that
the
land
development
costs
have
a
casual
relationship
to
the
overall
cost
of
the
land
and
houses
and
will
be
charged
against
income
from
the
disposition
of
the
lots
and
houses
when
they
are
eventually
sold
to
third
parties.
Some
common
ground
between
the
parties
appears
in
the
pleadings
and
in
argument
which
narrows
the
issue
somewhat:
1.
There
is
agreement
that
the
appellant’s
1974
financial
statement
prepared
in
accordance
with
GAAP
fairly
reflects
the
appellant’s
financial
position
for
the
period
ending
December
31,
1974;
2.
The
appellant
admits
that
the
deduction
of
development
costs
for
tax
purposes
is
not
in
accordance
with
GAAP;
3.1
The
respondent
admits
that
the
deduction
of
development
costs
having
been
laid
out
to
earn
income
is
not
prohibited
by
paragraph
18(1)(a)
of
the
Act.
The
questions
to
be
answered
in
determining
the
issue,
as
I
see
it,
are:
(a)
Does
the
financial
statement
also
accurately
reflect
the
appellant’s
1974
profit
within
the
meaning
of
section
9
of
the
Act
from
which
its
taxable
income
can
properly
be
computed?
(b)
If
not,
according
to
GAAP,
is
the
deduction
of
development
costs
in
computing
the
appellant’s
profit
for
the
1974
taxation
year
in
accordance
with
ordinary
principles
of
commercial
trading
or
accepted
business
practices?
(c)
Is
the
concept
of
what
is
now
referred
to
as
“GAAP”
interchangeable
with
that
of
“ordinary
principles
of
commercial
trading”
referred
to
in
several
leading
cases
on
point?
(d)
Was
the
Minister
correct
in
assessing
the
appellant
by
adding
development
costs
to
the
cost
of
inventory
on
the
assumption
that
it
was
in
accordance
with
GAAP?
(e)
Are
land
development
costs
an
integral
part
of
the
overall
land
inventory
costs?
Since
the
Minister
in
his
assessment
added
to
the
cost
of
land
inventory
the
appellant’s
land
development
costs
on
the
assumption
that
it
was
in
accordance
with
GAAP,
it
appears
necessary
at
the
outset
to
review
the
argument
on
that
point
and
determine
whether
that
is
a
valid
basis
for
the
Minister’s
reassessment.
Application
of
GAAP
For
Tax
Purposes
The
Board
was
fortunate
in
having
the
opportunity
of
hearing
the
interesting
and
informative
evidence
of
two
expert
witnesses,
both
chartered
accountants:
Mr
Glen
E
Cronkwright,
partner
and
the
National
Director
to
Tax
with
the
firm
of
Clarkson,
Gordon
&
Co,
whose
accounting
specialty
has
been
in
the
tax
field,
appeared
on
behalf
of
the
appellant
(Exhibit
A-3);
Mr
B
P
Duggan,
Associate
Professor
of
Accounting,
Faculty
of
Administrative
Studies
at
the
University
of
Manitoba
(Exhibit
R-3)
appeared
on
behalf
of
the
respondent.
Neither
witness
during
the
pertinent
period
acted
professionally
for
the
appellant.
In
giving
evidence,
the
witnesses
both
referred
to
the
study
made
by
the
Canadian
Institute
of
Chartered
Accountants
(CICA)
in
1971
“Accounting
for
Real
Estate
Development
Operations”
(Exhibit
R-1).
The
witnesses
agreed
that
in
adding
development
costs
to
land
inventory,
the
GAAP
were
followed
and
the
resulting
financial
statement
accurately
respresented
the
appellant’s
financial
position
at
the
end
of
1974.
Both
Mr
Duggan
and
Mr
Cronkwright
stated
they
would
not
have
signed
the
financial
statement,
had
it
not
been
in
accordance
with
GAAP.
While
evidently
of
concern
to
the
accountants,
the
appellant’s
general
financial
position
in
1974
is
not
in
my
opinion
material
to
the
tax
issue
in
this
appeal.
The
witnesses
differed
as
to
whether
or
not
the
appellant’s
net
income
arrived
at
in
accordance
with
GAAP
represents
its
true
profit
and
is
the
proper
basis
on
which
to
compute
the
appellant’s
taxable
income
for
1974
—
precisely
the
issue
the
Board
must
determine.
Mr
Duggan,
the
respondent’s
expert
witness
whose
expertise
is
primarily
in
“financial
accounting”,
rendered
his
opinion
in
a
written
document
produced
as
Exhibit
R-3.
In
his
opinion,
the
fundamental
accounting
principle
to
be
applied
in
the
treatment
of
development
costs
in
this
instance
is
the
matching
principle:
“the
process
of
correlating
expenses
and
revenues
in
order
to
determine
the
net
income
of
an
accounting
period”
as
defined
in
the
CICA
Handbook.
He
noted
that
this
Handbook
was
silent
as
to
special
accounting
practices
of
the
real
estate
development
industry
and
referred
to
the
1971
research
study
“Accounting
for
Real
Estate
Development
Operations”
(Exhibit
R-1),
adding
that
the
principles
set
out
in
the
study
“do
not
change
from
one
industry
to
the
next”.
He
quoted
the
conclusion
of
the
study
which
in
effect
sets
out
as
a
GAA
principle
that
land
development
costs
should
be
capitalized
as
part
of
the
cost
of
the
land.
Mr
Duggan
also
suggested
that
there
was
a
similarity
between
land
development
costs
in
real
estate
development
industry
and
research
and
development
costs
in
certain
other
industries
and
applied
to
land
development
costs
the
criteria
set
out
in
a
study
of
CICA
in
1978
in
the
“Research
and
Development
Costs”
to
the
subject
of
this
issue
(Exhibit
R-2).
In
Mr
Duggan’s
opinion,
the
development
costs
should
be
included
in
the
cost
of
providing
serviced
land
and
their
deduction
prior
to
sale
of
the
land
would
not
be
in
keeping
with
the
principle
of
matching
revenues
and
expenses.
Mr
Duggan’s
statement
that
the
fundamental
accounting
principles
do
not
change
from
one
industry
to
the
next
was
taken
from
Paragraph
4,
Page
8
of
the
CICA’s
research
study
“Accounting
for
Real
Estate
Development
Operations”
(Exhibit
R-1)
which
reads:
These
fundamental
accounting
principles
do
not
change
from
one
industry
to
the
next.
It
is
the
application
of
these
principles
that
can,
quite
properly
be
varied
from
industry
to
industry,
and
from
company
to
company
within
an
industry.
Furthermore,
subject
to
the
dictates
of
consistency
so
far
as
financial
reporting
is
concerned,
circumstances
can
and
do
arise
in
which
it
is
appropriate,
within
a
company,
to
vary
the
application
of
accounting
principles
from
one
period
to
the
next.
Mr
Cronkwright,
the
appellant’s
witness,
to
summarize
his
evidence,
is
of
the
opinion
that
financial
statements
may
be
prepared
for
a
variety
of
legitimate
business
purposes
and
GAAP
have
become
a
set
of
rules
or
guidelines
based
on
broad
fundamental
accounting
principles
to
be
used
as
an
internal
tool
in
financial
accounting
for
whatever
external
or
public
reason
other
than
for
tax
purposes
which
a
company
may
have
had
in
mind.
Some
aspects
of
GAAP
for
financial
accounting
purposes
may,
according
to
Mr
Cronkwright,
vary
from
one
industry
to
another.
He
admitted
that
in
real
estate
development
industry,
land
development
costs
for
financial
accounting
purposes
must
now
be
added
to
the
costs
of
land
inventory
to
be
in
accordance
with
GAAP.
Mr
Cronkwright
also
stated
that
the
GAAP,
which
arose
from
the
study
of
accounting
for
real
estate
development
operations,
do
not
apply
nor
were
they
meant
to
be
applied
to
the
computation
of
profit
for
tax
purposes.
In
the
study
“Accounting
for
Real
Estate
Development
Operations”
at
page
11,
paragraph
16,
we
read:
While
recognizing
that
consideration
of
income
tax
can
rarely
be
divorced
from
day-to-day
management
decisions
within
the
industry,
the
study
group
considers
it
to
be
of
more
importance
for
present
purposes
to
examine
the
underlying
purpose
and
function
of
accountancy
in
the
industry.
Accordingly
this
study
does
not
consider
the
subject
of
income
taxes
within
the
industry.
It
was
also
Mr
Cronkwright’s
opinion
that
GAAP
were
not
generally
appropriate
in
determining
income
for
tax
purposes
and
were
not
developed
with
that
purpose
in
mind.
The
respondent
contests
the
appellant’s
position
that
financial
statements
can
be
prepared
for
various
business
purposes
and
contends
that
the
financial
statements
prepared
in
accordance
with
GAAP
represent
the
taxpayer’s
only
financial
position
and
is
the
proper
basis
on
which
taxable
income
must
be
computed.
Mr
Duggan,
however,
made
no
comment
as
to
the
general
application
of
GAAP
for
the
determination
of
income
for
tax
purposes.
I
can
accept
Mr
Cronkwright’s
evidence
that
the
principles
of
accounting
are
rapidly
evolving
and
that
its
objectives
extend
well
beyond
the
computation
of
profit
for
tax
purposes
and
I
also
accept
that
the
CICA
may
well
have
had
to
devise
a
variety
of
accounting
practices
in
the
varying
circumstances
of
different
industries.
However,
the
only
pertinence
that
these
factors
may
have
in
the
determination
by
the
Courts
of
profit
for
tax
purposes
—
once
the
legal
requirements
have
been
met
—
is
the
necessity
of
scrutinizing
even
more
carefully
which
of
a
variety
of
GAAP
are
being
invoked
—
as
they
are
in
this
appeal
—
as
an
acceptable
basis
for
the
computation
of
income
for
tax
purposes.
There
is
no
longer
any
doubt
that
the
meaning
to
be
given
to
the
word
“profit”
in
subsection
9(1)
of
the
Act
is
a
question
of
law
and
the
profit
figure
for
tax
purposes
in
a
given
circumstance
must
be
determined
according
to
legal
concepts
which
are
not
limited
to
or
bound
by
any
one
accounting
principle.
However,
because
it
was
raised
as
an
issue
and
because
of
important
differences
that
now
appear
to
exist
in
the
scope,
the
variations
and
the
objectives
of
GAAP
on
which
the
Minister
based
his
assessment
as
opposed
to
the
basic
principles
of
ordinary
commercial
trading
and
business
practices
referred
to
in
many
decisions
of
the
Federal
Court
as
being
in
certain
cases
an
acceptable
aid
in
the
determination
of
a
company’s
true
profit
—
which
concept
the
respondent
in
argument
often
arbitrarily
interchanged
for
that
of
GAAP
—
I
felt
compelled
to
examine
more
closely
the
relationship
between
the
two
concepts
in
their
application
for
tax
purposes.
My
study
has
revealed
nothing
new
but
it
has
confirmed
in
my
own
mind
that
the
two
concepts
are
not
identical
and
not
interchangeable.
Commercial
trading
and
business
principles
and
practices
are,
in
my
view,
more
restricted
in
scope
and
more
flexible
in
application
than
GAAP;
they
are
also
more
in
keeping
with
what
is
ordinarily
understood
by
business
men
as
the
basic
method
for
determining
the
income
or
profit
of
a
company
in
a
given
year.
There
is
considerable
case
law
which
tend
to
confirm
the
proposition
that
accounting
principles
are
not
in
themselves
acceptable
in
interpreting
the
provisions
of
the
Income
Tax
Act
—
in
this
instance,
the
determination
of
profit
for
tax
purposes
within
the
meaning
of
subsection
9(1)
of
the
Act,
are
the
following:
Guaranteed
Homes
Ltd
v
MNR,
[1977]
CTC
2287;
77
DTC
202;
Jack
L
Cummings
v
The
Queen,
[1981]
CTC
285;
81
DTC
5207;
J
L
Guay
Ltée
v
MNR,
[1971]
CTC
686;
71
DTC
5423;
Oxford
Shopping
Centres
Ltd
v
The
Queen,
[1980]
CTC
7;
79
DTC
5458;
Neonex
International
Ltd
v
The
Queen,
[1978]
CTC
485;
78
DTC
6339.
The
above
cases
are
included
in
the
appellant’s
Book
of
Authorities,
Volumes
I
and
II
and
are
reproduced
in
part
in
Annex
“A”.
(For
convenience,
I
have
grouped
the
decisions
on
particular
points
of
law
in
a
series
of
Annexes,
attached
to
these
Reasons.)
Counsel
for
the
appellant
also
referred
the
Board
to
several
interesting
current
papers
on
the
subject
of
the
relationship
of
GAAP
to
the
Income
Tax
Act
which
are
to
be
found
in
Volume
II
of
the
appellant’s
authorities.
None
of
those
papers
were
cited
nor
are
they
accepted
by
the
Board
as
authorities
but
are
viewed
as
the
considered
opinions
of
knowledgeable
persons
on
a
controversial
subject
which
is
germane
to
the
issue
before
us.
I
have
decided
to
include
in
Annex
“B”
some
of
the
remarks
on:
“The
Computation
of
Business
Profits
for
Tax
Purposes”
made
by
the
former
Chief
Justice
of
the
Federal
Court,
Mr
W
Jackett
at
the
Corporated
Management
Tax
Conference
in
Toronto
in
1981.
These
remarks
have
no
weight
as
judicial
authority
but
they
do
summarize
well
the
state
of
the
law
on
point.
(See
Annex
“B”.)
While
counsel
for
the
respondent
contends
that
the
appellant’s
profit
must
be
ascertained
on
ordinary
commercial
principles,
he
refers
specifically
in
his
Reply
to
the
Notice
of
Appeal
to
GAAP
as
being
the
basis
for
reassessment.
In
support
of
this
submission,
the
respondent
cited
several
decisions
to
be
found
in
his
Book
of
Authorities,
among
which
are:
Gordon
Kenneth
Daley
v
MNR,
[1950]
CTC
254;
50
DTC
877;
The
Royal
Trust
Company
v
MNR,
[1957]
CTC
32;
57
DTC
1055;
The
Queen
v
Sylvio
Marchand,
[1978]
CTC
763;
78
DTC
6507;
Whimster
&
Co
v
CIR,
(1925),
12
TC
813.
(These
decisions
are
reproduced
in
part
in
Annex
“C”.)
The
respondent’s
position,
as
I
understand
it,
is
that
while
admitting
that
the
development
costs
are
deductible,
they
must,
according
to
GAAP,
be
matched
to
related
earnings,
as
was
done
in
the
appellant’s
1974
financial
statement
by
adding
the
development
cost
to
land
inventory.
The
respondent
further
contends
that
the
appellant
must
bring
himself
within
a
specific
provision
of
the
Income
Tax
Act
before
he
can
deduct
the
costs
in
the
1974
taxation
year.
Referring
to
the
Reconciliation
Form
T2S(1)
included
in
the
appellant’s
1974
tax
return
(Exhibit
A-4)
counsel
pointed
out
that
each
addition
or
subtraction
made
to
the
appellant’s
financial
statement
to
arrive
at
a
profit
for
tax
purposes,
must
be
covered
by
a
specific
section
of
the
Act
and
that
no
provision
exists
which
permits
the
appellant
to
deduct
development
costs
in
the
1974
taxation
year.
On
review
of
the
case
law,
it
becomes
clear
that
the
Board
cannot
determine
the
instant
issue
without
having
to
choose
one
or
the
other
of
the
pertinent
fundamental
principles
enunciated
by
the
higher
Courts,
some
of
which,
on
the
basis
of
the
decisions
cited
here,
appear
to
be
contradictory.
The
decision
which
causes
me
the
greatest
difficulty
is
that
in
The
Queen
v
Sylvio
Marchand
(supra)
where
it
is
stated
by
Mr
Justice
Addy
of
the
Federal
Court:
I
am
of
the
opinion
that
a
taxpayer
can
now
deduct
an
amount
only
on
two
conditions:
first,
it
would
be
normal
practice
according
to
generally
accepted
accounting
principles
to
deduct
this
sum
from
an
income
account
and
secondly,
that
the
prohibitory
provisions
of
Section
18(1)
do
not
prevent
such
a
deduction.
In
this
instance
the
respondent
having
admitted
that
the
deduction
of
development
costs
was
not
prohibited
by
paragraph
18(1
)(a)
of
the
Act,
the
Board
—
in
following
the
above
principle
—
would
have
no
alternative
but
to
be
governed
by
GAAP
which,
for
accounting
purposes,
require
that
development
costs
be
added
to
land
inventory.
In
effect,
the
Board
would
be
determining
profit
for
tax
purposes
on
the
basis
of
an
accounting
principle
and
not
on
legal
concepts.
According
to
the
decision
in
Marchand
(supra),
it
would
no
longer
be
open
to
the
Courts
or
the
Board
to
consider
in
determining
profit
for
tax
purposes
the
nature
of
the
expenses
or
other
pertinent
factors
—
as
would
a
businessman
in
applying
the
principles
of
ordinary
commercial
and
business
practices
—
which
might
warrant
a
different
treatment
and
result
in
a
profit
figure
for
the
year
different
from
that
arrived
at
under
GAAP.
I
have
serious
reservations
that
the
application
of
GAAP
would
necessarily
and
always
reflect
a
true
profit
figure
in
any
given
year
for
tax
purposes
—
particularly
when
it
is
recognized
that
that
is
not
the
function
nor
the
purpose
of
GAAP.
I
have
even
greater
reservations
that
GAAP
by
themselves
can
constitute
a
proper
assumption
and
basis
for
an
assessment
with
respect
to
the
determination
of
profit
for
tax
purposes.
In
arriving
at
my
conclusion
on
that
point,
I
have
chosen
to
follow
the
fundamental
principle
that
profit
for
tax
purposes
must
be
arrived
at
by
the
application
of
legal
concepts.
I
hold
that
GAAP
are
no
synonymous
nor
interchangeable
with
the
concept
of
ordinary
principles
of
commercial
trading
and
that,
while
it
might
conceivably
be
proper
for
other
reasons,
the
Minister
was
not
correct
in
adding
development
costs
to
land
inventory
in
determining
profit
for
tax
purposes
on
the
assumption
or
because
that
method
of
accounting
is
in
accordance
with
GAAP.
True
Income
Position
for
Tax
Purposes
The
respondent
advanced
a
second
proposition:
That
the
accounting
method
which
will
most
accurately
reflect
the
true
income
position
of
the
taxpayer
—
which,
in
counsel’s
opinion,
is
the
application
of
GAAP
—
ought
to
be
accepted
in
computing
profit
for
tax
purposes.
In
support
of
that
proposition,
counsel
again
cited
several
cases
which,
because
of
the
extent
of
the
issue,
I
feel
must
also
be
referred
to,
at
least
in
part:
MNR
v
Anaconda
American
Brass
Ltd,
[1955]
CTC
311;
55
DTC
1220;
MNR
v
Publishers
Guild
of
Canada
Limited,
[1957]
CTC
1;
57
DTC
1017;
Ken
Steeves
Sales
Limited
v
MNR,
[1955]
CTC
47;
55
DTC
1044;
The
Queen
v
F
H
Jones
Tobacco
Sales
Co
Ltd,
[1973]
CTC
784;
73
DTC
5577.
(These
decisions
are
to
be
found
in
Annex
“D”.)
(Counsel
for
the
respondent
in
argument
also
referred
to
the
following
cases
cited
by
the
appellant:
Jack
L
Cummings
v
The
Queen
(supra);
Oxford
Shopping
Centres
Ltd
v
The
Queen
(supra);
J
L
Guay
Ltée
v
MNR
(supra).
(See
Annex
“E”)
)
A
review
of
the
decisions
contained
in
Annex
“D”
will
reveal
that
the
cases
cited
there
are
relevant
to
the
present
issue
only
if
the
cost
of
land
development
is
found
to
be
an
integral
part
of
the
appellant’s
cost
of
land
inventory.
Counsel
suggests,
because
the
parties
and
their
expert
witnesses
agree
that
the
financial
statement
arrived
at
by
applying
GAAP
represents
its
income
position
for
accounting
purposes,
it
must
necessarily
reflect
the
appellant’s
true
income
position
for
tax
purposes.
In
my
view,
that
is
the
heart
of
the
growing
confusion
and
the
nub
of
the
problem
with
respect
to
the
application
of
GAAP.
If
a
distinction
between
the
basic
concept
of
“ordinary
principles
of
commercial
trading”
and
that
of
the
more
elaborate
and
far
reaching
concept
of
“GAAP”
is
warranted,
as
I
believe
it
is,
then
it
would
follow
that
a
difference
might
well
exist
between
an
income
position
computed
according
to
GAAP
and
an
income
or
profit
position
arrived
at
by
the
application
of
ordinary
principles
of
commercial
trading.
In
determining
profit
for
tax
purposes
legal
concepts
must
be
applied;
then
it
is
the
findings
by
the
courts
or
the
Board
on
the
facts
and
circumstances
of
a
given
case
which
will
govern
in
deciding
whether
a
particular
accounting
treatment
is
appropriate.
It
would
appear
to
me
contrary
to
the
preponderance
of
case
law
and
indeed
a
denial
of
their
judicial
authority
and
responsibilities
for
the
courts
or
the
Board
in
applying
the
Income
Tax
Act
to
be
compelled
to
follow
any
one
method
of
accounting
and
to
forfeit
thereby
the
necessary
latitude
it
has
had
in
the
past
in
arriving
—
on
the
basis
of
all
the
facts
—
at
a
taxpayer’s
true
and
fair
profit
in
a
fiscal
year.
My
second
conclusion
is
that
the
appellant’s
1974
financial
statement
prepared
in
accordance
with
GAAP,
while
perhaps
reflecting
the
appellant’s
financial
position
in
1974
from
an
accounting
point
of
view,
does
not
necessarily
represent
the
appellant’s
1974
profit
position
within
the
meaning
of
section
9
of
the
Act
from
which
its
taxable
income
can
properly
and
fairly
be
computed.
Land
Development
Costs
an
Integral
Part
of
Cost
of
Land
Inventory?
The
respondent’s
third
proposition
is
that
land
development
costs
are
an
integral
part
of
the
cost
of
land
inventory.
The
cases
cited
in
this
respect
are:
Sherritt
Gordon
Mines
v
MNR,
[1968]
CTC
262;
68
DTC
5180;
Jan
V
Weinberger
v
MNR,
[1964]
CTC
103;
64
DTC
5060;
Crystal
Spring
Beverage
Co
Ltd
v
MNR,
[1964]
CTC
408;
64
DTC
5253.
(These
decisions
are
to
be
found
in
Annex
“F”.)
The
cases
cited,
though
relevant,
are
not
on
point;
but
perhaps
the
most
Significant
single
factor
is
that
in
all
the
cases
cited,
the
various
expendi
tures,
whether
as
consultant
fees,
for
a
patent
or
for
a
franchise,
were
incurred
in
the
process
of
acquiring
capital
assets
which
were
in
the
legal
possession
and
for
the
enduring
benefit
of
the
taxpayer.
In
this
appeal,
the
land
development
costs
incurred
did
not
result
in
a
legal
acquisition
of
any
capital
assets
but
they
were
necessary
in
permitting
the
taxpayer
to
continue
operating
his
land
development
business.
In
my
view,
the
nature
of
the
development
costs
is
quite
different
from
the
original
cost
of
the
land
and
other
costs
directly
related
to
its
acquisition
by
the
appellant.
The
respondent
suggests
that
a
casual
relationship
exists
between
the
expenditures
incurred
for
the
installation
of
the
municipal
services
and
the
houses
that
will
eventually
be
sold
to
third
parties
in
that
the
costs
are
necessary
to
carry
on
the
appellant’s
business
of
building
houses
and
selling
them
at
a
profit.
The
existence
of
designated
lands,
sewer
mains,
roads
and
parks
which
were
assigned
to
the
city
would
undoubtedly
increase
the
value
of
the
appellant’s
property
by
an
amount
which,
however,
cannot
be
accurately
estimated.
The
relationship
between
the
development
costs
and
the
ultimate
value
of
the
appellant’s
assets,
if
one
exists,
can
be
but
indirect.
In
my
view,
it
would
be
impossible
with
any
degree
of
accuracy
and
not
in
accordance
with
ordinary
business
practices
to
attempt
to
match
costs
for
the
development
of
land
which
the
taxpayer
no
longer
owns
with
the
income
generated
from
the
sale
of
some
other
property,
the
original
cost
of
which
is
not
in
issue
and
whose
selling
price
is
entirely
dependent
on
the
real
estate
market
at
some
future
period
of
time.
My
third
conclusion
therefore
is
that.
development
costs
are
not
in
the
circumstances
of
this
appeal
an
integral
part
of
the
appellant’s
land
inventory.
Ordinary
Business
Practices
in
Determining
Profit
for
Tax
Purposes
To
determine
the
appellant’s
1974
profit
for
tax
purposes
according
to
ordinary
principles
of
business
practices
the
Board
must,
in
my
opinion,
consider
the
nature
of
the
business
and
the
facts
which,
in
this
instance,
present
different
if
not
unusual
circumstances.
The
land
development
industry,
whose
operations
are
quite
different
in
many
respects
to
most
businesses,
has
been
given
special
consideration
not
only
by
CICA,
as
a
result
of
the
1971
study,
but
also
by
the
Minister
of
National
Revenue
who,
until
1973,
permitted
land
developers
to
deduct
carrying
charges
and
municipal
taxes
as
current
expenses.
After
disallowing
these
deductions
for
a
period
of
four
years
the
Minister,
again
in
1978,
allowed
the
said
costs
to
be
deducted.
There
can
be
no
doubt
that
it
is
the
unquestionable
prerogative
of
the
Minister
of
National
Revenue
to
amend
the
Income
Tax
Act
as
he
wills.
Whether
the
Minister
changed
his
assessing
policy
by
disallowing
in
1974
development
costs
which
had
“not
been
disallowed”
in
previous
years
and
whether
he
altered
his
Interpretation
Bulletins
accordingly,
as
suggested
by
the
appellant,
are
not
factors
which
in
themselves
are
material
to
the
determination
of
the
issue.
As
pointed
out,
section
9
and
paragraph
18(1)(a)
of
the
Income
Tax
Act
have
not
substantially
changed
over
the
years
and
it
is
on
the
basis
of
the
interpretation
of
those
sections
by
the
courts
that
the
issue
must
be
decided.
Although
carrying
charges
and
municipal
taxes
are
not
the
issue
in
this
appeal,
and
the
pertinent
GAAP
introduced
in
1971
were
not
meant
to
have
any
impact
on
the
computation
of
income
for
tax
purposes,
the
reasons
that
motivated
such
changes
make
it
even
more
necessary
to
examine
the
conditions
and
circumstances
particular
to
the
land
development
industry
and
to
ascertain
whether
or
not,
in
computing
the
appellant’s
profit
for
tax
purposes,
special
consideration
for
land
development
costs
is
warranted.
In
examination
in
chief,
Mr
Cronkwright
was
asked
to
give
his
opinion
as
to
the
nature
of
the
development
costs
and
how
they
should
be
characterized
for
income
tax
purposes.
The
respondent
objected
strongly
to
the
question
on
the
ground
that
the
witness
was
being
asked
to
interpret
the
law.
Mr
Duggan,
the
respondent’s
expert
witness,
expressed
the
opinion
that
the
appellant’s
only
income
position
—
the
basis
of
the
Minister’s
reassessment
—
was
arrived
at,
according
to
the
matching
principle,
by
adding
the
development
cost
to
the
cost
of
inventory
and
stated
that
it
would
be
contrary
to
GAAP
to
deduct
the
costs
from
income
in
1974.
The
Board
therefore
already
had
one
expert
opinion
with
respect
to
the
treatment
by
the
Minister,
in
his
reassessment,
of
the
development
costs
for
tax
purposes.
In
allowing
the
question,
I
was
not
seeking
Mr
Cronkwright’s
opinion
or
interpretation
of
the
law;
rather
I
wanted
to
know
what
set
of
facts
he
thought
justified
the
deduction
of
the
development
costs
from
income
in
1974
and
why?
Mr
Cronkwright
answered
that
he
would
deduct
the
costs
only
after
advising
his
clients
that
the
method
of
computing
profit
for
tax
purposes
was
contrary
to
the
views
of
the
tax
authorities
and
might
well
be
challenged.
The
reasons
advanced
by
Mr
Cronkwright
for
deducting
the
development
costs
were
that
the
operations
of
the
land
development
industries
are
unique
and
cannot
be
compared
to
other
industries
in
that
land
development
involves
the
expenditure
of
very
large
amounts
of
money
on
roadways,
parks
and
other
property
which
the
appellant
no
longer
owns
and
does
not
have
to
sell.
He
considers
these
outlays
to
be
running
expenses
necessary
in
operating
the
business
which
should
be
deducted
in
computing
profit
for
purposes
of
assessing
tax.
The
reasons
advanced
by
Mr
Cronkwright
for
deducting
the
development
costs
in
1974
reflect
some
of
the
factors
which
counsel
for
the
appellant,
in
his
pleadings,
pointed
out
as
being
particular
to
the
land
development
industry
justifying
special
treatment:
the
large
amount
of
money
that
must
be
laid
out
before
the
appellant’s
operations
can
commence
and
a
building
lot
sold;
the
assignment
to
the
city
of
certain
land
and
the
services
thereon
do
not
add
to
the
appellant’s
land
inventory;
the
city,
in
its
agreement
with
the
appellant
(Exhibit
A-1,
Schedules
A
&
B),
refers
to
the
development
costs
as
prepaid
city
taxes.
On
that
point
the
respondent
contends,
though
it
may
take
the
appellant
seven
(7)
years
to
do
so,
it
will
nevertheless
recoup
its
expenses
by
including
them
in
the
selling
price
of
the
land
and
houses
and
charging
them
against
the
income
generated
from
their
eventual
sale.
He
adds
that,
even
if
the
development
costs
were
to
be
considered
as
municipal
taxes,
their
deduction
would
nevertheless
have
to
be
pro-rated
over
a
period
of
years.
Whether
or
not
expenses
to
earn
income
are
deductible
in
the
year
in
which
they
were
incurred
is
also
a
matter
of
law.
The
courts,
in
applying
legal
concepts
in
determining
the
true
and
fair
profit
figure
of
a
taxpayer’s
business
operations
for
a
taxation
year
on
the
basis
of
the
evidence
presented,
are
free
to
accept
or
reject
any
given
accounting
principle,
including
the
fundamental
principle
of
matching
expenses
and
income
in
a
fiscal
period.
This,
in
my
opinion,
is
not
inconsistent,
once
the
legal
requirements
have
been
met,
with
the
application
of
ordinary
principles
of
commercial
trading
or
accepted
business
practices.
In
this
appeal
the
parties
are
agreed
that
the
deduction
of
development
costs
is
not
prohibited
by
paragraph
18(1
)(a)
of
the
Act.
The
costs
having
been
incurred
to
earn
income,
their
deduction
is
not
only
not
prohibited
by
paragraph
18(1
)(a)
but
there
is
nothing
in
the
Act
which
prohibits
their
deduction
in
the
year
in
which
the
expenses
were
incurred.
Paragraph
18(1
)(a)
of
the
Act
reads:
(a)
General
limitation.—an
outlay
or
expense
except
to
the
extent
that
it
was
made
or
incurred
by
the
taxpayer
for
the
purpose
of
gaining
or
producing
income
from
the
business
or
property.
Subsection
9(1)
of
the
Act
reads:
Income
from
business
or
property.
(1)
Subject
to
this
Part,
a
taxpayer’s
income
for
a
taxation
year
from
a
business
or
property
is
his
profit
therefrom
for
the
year.
The
respondent’s
position
is
that
there
must
be
a
specific
provision
in
the
Act
in
order
to
deduct
development
costs
in
the
1974
taxation
year.
In
my
view
the
legislators,
having
written
the
law
as
they
did,
left
to
the
courts
the
ultimate
responsibility
and
authority
of
deciding
under
what
circumstances
the
expenses
could
properly
be
deducted
in
the
year
in
which
they
were
incurred.
The
sections
of
the
Act
pertinent
to
the
issue
have
not
been
changed
for
many
years.
If
indeed,
as
suggested
by
the
respondent,
a
special
provision
of
the
Act
is
now
required
before
land
development
costs
can
be
deducted
as
Current
expenses,
the
question
arises
as
to
how
such
expenses
could
have
“not
been
disallowed”
by
the
Minister
over
a
period
of
several
years
in
the
absence
of
such
a
provision.
It
is
not
unreasonable
to
assume
that
the
Minister
changed
his
assessing
policies
on
the
basis
of
the
conclusion
of
the
CICA
Study
of
“Accounting
principles
for
land
development
industries”
(Exhibit
R-1).
Although
the
Minister
can
reassess
as
he
wishes,
the
changes
made
in
1971
to
GAAP
with
respect
to
the
treatment
of
development
costs
in
the
land
development
industry
have
no
relationship
with
the
existing
provisions
of
the
Income
Tax
Act
and
no
bearing
on
the
interpretation
to
be
given
to
them
by
the
courts
in
adjudicating
tax
issues.
I
do
not
know
of
any
provision
of
the
Act
which
precludes
the
Board
from
allowing
the
deduction
of
development
costs
in
the
year
incurred
if
that
treatment
is
not
prohibited
by
the
Act
and
is
in
accordance
with
the
ordinary
principles
of
commercial
trading
and
business
practices.
The
appellant
submitted
that
his
authority
for
deducting
the
development
costs
in
1974
is
the
decision
of
the
Tax
Appeal
Board
in
Dartmouth
Developments
Ltd
v
MNR,
[1967]
Tax
ABC
780;
67
DTC
551.
The
Dartmouth
decision
(supra)
which
allowed
the
deduction
of
land
development
costs
in
the
year
in
which
they
were
incurred
was
never
appealed.
The
appellant
suggested
that
the
decision
in
Dartmouth
(supra)
was
affirmed
by
the
Federal
Court
Trial
Division
in
Neonex
International
Ltd
v
The
Queen,
[1978]
CTC
485;
78
DTC
6339.
(See
Annex
“G”.)
Dartmouth
(supra),
in
the
appellant’s
view,
established
the
law
on
point
and
since
the
pertinent
sections
of
the
law
have
not
changed
since
1967,
it
is
still
the
applicable
law
and
the
authority
to
deduct
development
costs
in
1974.
The
facts
in
Dartmouth
have
a
great
similarity
to
those
of
the
appeal
under
review
in
that
Dartmouth
was
in
the
business
of
developing
and
holding
real
estate;
an
agreement
has
been
entered
into
with
the
municipal
authorities
by
which
Dartmouth
was
obligated
to
provide
and
pay
for
municipal
services
on
certain
Dartmouth
lands;
the
said
lands
and
services
thereon
were
assigned
to
the
Municipality
and,
in
return,
Dartmouth
was
relieved
from
payment
of
local
improvement
taxes.
The
facts
and
the
issue
in
Dartmouth
however
were
the
deductibility
of
development
costs
with
respect
to
lots
leased
under
a
50-year
leasing
plan.
The
appellant
quoted
extensively
from
Dartmouth
(supra)
which
is
reproduced
in
Annex
“G”.
In
summary,
in
his
ratio
decidendi
Mr
J
O
Weldon,
the
presiding
Member
of
the
Tax
Appeal
Board
gave
three
reasons
for
his
conclusion
that
all
the
expenses
incurred
under
the
agreement
with
City
of
Transcona
for
municipal
services
were
current
operational
expenses
deductible
in
the
year
incurred:
(a)
the
expenses
did
not
produce
an
asset
which
appeared
or
was
contained
in
the
appellant’s
land
inventory;
(b)
the
expenses
were
part
of
a
series
of
preliminary
expenses
whose
object
was
to
turn
Dartmouth
land
inventory
to
account
and
produce
saleable
building
lots;
(c)
the
expenses
incurred
were
tantamount
to
the
prepayment
of
what
might
otherwise
have
been
a
number
of
annual
improvement
taxes
levied
over
a
period
of
10
to
15
years.
On
that
basis,
Mr
Weldon
concluded
at
792
[559]:
Having
given
this
whole
matter
considerable
thought,
especially
the
1961
agreement
which,
because
of
its
importance
has
been
carefully
summarized
in
these
reasons,
I
have
come
firmly
to
the
conclusion
that
Dartmouth
should
be
entitled
to
treat
any
expenses
incurred
by
it
under
the
1961
Agreement
in
connection
with
the
putting
in
and
installing
of
municipal
services
for
the
benefit
of
the
lands
therein
described
on
the
same
basis
as
any
other
general
expenses
incurred
by
it,
which
are
immediately
deductible
from
income
in
the
ordinary
course
of
carrying
on
its
land
trading
business,
regardless
as
to
whether
the
taxpayer’s
lots
have
been
sold
Outright
or
dealt
with
on
its
50-year
leasing
plan
.
.
.
The
issue
and
the
facts
in
Dartmouth
(supra)
are
not
distinguishable
from
those
in
the
instant
appeal
and
the
reasons
given
by
the
presiding
Member
of
the
Tax
Appeal
Board
in
his
decision
are,
in
my
opinion,
valid
and
applicable
to
the
facts
presented
in
this
appeal.
The
respondent
submitted
that
the
Board
should
not
follow
the
Dartmouth
decision
and
appointed
out
that
no
accounting
evidence
was
adduced
and
accounting
principles
were
not
in
issue
in
Dartmouth.
Counsel
cited
further
from
Guaranteed
Homes
(supra)
and
Neonex
International
Ltd
(supra)
in
opposition
to
Dartmouth
(supra).
In
all
the
cases
cited,
the
facts
or
the
issues
were
quite
different
from
those
in
the
instant
appeal
but,
more
importantly,
in
none
of
them
were
accounting
principles
a
major
issue.
In
the
Marchand
decision
(supra)
which
the
respondent
contends
is
binding
on
the
Board,
the
term
“Generally
Accepted
Accounting
Principles”
—
whose
very
existence
in
the
consideration
of
profit
for
tax
purposes
is
questioned
in
several
decisions
of
the
Federal
Court
—
was
not
an
issue
and
was
not
in
any
way
defined.
In
that
respect,
the
issue
in
Marchand
(supra)
is
distinguishable
from
that
of
the
case
at
bar.
In
the
appeal
before
me
the
term
“Generally
Accepted
Accounting
Principles”
is
the
basis
of
the
Minister’s
assessment
and
the
source
of
the
issue
to
be
determined.
In
deciding
the
issue,
I
have
relied
on
the
concept
of
ordinary
commercial
principles
and
business
practices
whose
general
application
in
tax
matters
has,
to
my
knowledge,
never
been
questioned
by
any
court.
In
arriving
at
my
conclusion
on
the
deductibility
of
development
costs
in
1974,
I
cannot
ignore
the
reasons
and
the
decision
in
Dartmouth
(supra)
since
no
other
case
presenting
the
same
issue
and
the
same
facts
as
those
of
the
present
appeal
has
since
been
adjudicated.
The
Minister
of
National
Revenue
never
appealed
the
Dartmouth
decision
(Supra)
and
the
Federal
Court
affirmed
it,
at
least
on
one
occasion.
To
summarize
my
findings
on
the
basis
of
the
evidence:
(a)
GAAP
are
not
synonymous
nor
interchangeable
with
the
concept
of
Ordinary
principles
of
commercial
trading
and
the
Minister
in
his
reassessment
erred
in
adding
land
development
costs
to
the
cost
of
the
appellant’s
land
inventory
simply
on
the
assumption
that
that
method
of
accounting
was
in
accordance
with
GAAP;
(b)
the
financial
statement
prepared
in
accordance
with
GAAP
does
not
represent
the
appellant’s
profit
for
the
1974
taxation
year
within
the
meaning
of
section
9
of
the
Act.
(c)
land
development
costs
are
not
an
integral
part
of
the
cost
of
the
appellant’s
land
inventory;
(d)
the
appellant
satisfied
the
onus
and
has
established
that
the
land
development
costs
are
in
the
nature
of
current
expenses
in
the
operation
of
its
business
and
are
deductible
in
the
appellant’s
1974
taxation
year.
For
these
reasons,
the
appeal
from
its
reassessment
with
respect
to
the
1974
taxation
year
is
allowed
and
the
matter
referred
back
to
the
Minister
for
reconsideration
and
reassessment
on
the
basis
that
the
land
development
costs
in
the
amount
of
$1,509,699
are
in
the
nature
of
current
expenses
and
deductible
in
the
1974
taxation
year;
the
second
issue
in
the
appellant’s
appeal
for
the
1974
taxation
year
—
“apportionment
of
income”
—
Is,
as
requested
by
the
parties,
also
referred
back
to
the
Minister
for
reconsideration
and
reassessment
pursuant
to
subparagraph
171
(1)(b)(iii)
of
the
Income
Tax
Act.
Appeal
allowed.
ANNEX
“A”
APPELLANT’S
AUTHORITIES
Re:
Accounting
Principles
in
applying
the
Income
Tax
Act
In
Guaranteed
Homes
Ltd
v
MNR,
[1977]
CTC
2287;
77
DTC
202,
a
decision
of
the
Tax
Review
Board
in
which
it
is
stated
at
2288
[203]:
In
the
opinion
of
the
Board
the
Minister’s
position
is
commercially
sound
and
follows
generally
accepted
accounting
principles.
For
this
reason,
the
Board
would
like
to
agree
with
the
respondent,
but
there
is
no
provision
in
the
Act
which
Says
generally
accepted
accounting
principles
govern
in
taxation.
In
Jack
L
Cummings
v
The
Queen,
[1981]
CTC
285;
81
DTC
5207,
Mr
Justice
Heald
of
the
Federal
Court
(Appeal
Division)
in
delivering
judgment,
Stated
at
294
[5214]:
Before
leaving
this
$500,000
item,
I
should
deal
with
the
reference
by
counsel
for
the
appellant
to
the
evidence
of
Emmanuel
Veinish,
the
expert
witness
called
by
the
respondent,
to
the
effect
that,
on
the
facts
as
established
in
this
case,
it
would
have
been
in
accordance
with
generally
accepted
accounting
principles
to
show
the
$500,000
on
the
balance
sheet
as
a
fixed
or
certain
rather
than
a
contingent
liability.
The
answer
to
this
submission
is
that
the
fact
of
the
acceptability
in
accounting
practice
of
dealing
with
a
particular
item
in
a
particular
manner,
cannot,
by
itself,
make
that
practice
a
proper
deduction
for
income
tax
purposes.
Notwithstanding
the
evidence
of
accounting
practice,
the
fact
remains
that,
on
the
facts
here
present,
the
deduction
is
prohibited
by
paragraph
12(1
)(e)
of
the
Act.
A
similar
situation
was
dealt
with
by
Noël
ACJ,
in
the
J
L
Guay
case
discussed
earlier
herein.
At
page
245
of
the
report,
the
learned
ACJ
said:
In
most
tax
cases
only
amounts
which
can
be
exactly
determined
are
accepted.
This
means
that,
ordinarily,
provisional
amounts
or
estimates
are
rejected,
arid
it
is
not
recommended
that
data
which
are
conditional,
contingent
or
uncertain
be
used
in
calculating
taxable
profits.
If
indeed,
provisional
amounts
or
estimates
are
to
be
accepted,
they
must
be
certain.
But
then
it
is
always
difficult
to
find
a
procedure
by
which
to
arrive
at
a
figure
which
is
certain
.
.
.
Accountants
are
always
inclined
to
set
aside
reserves
for
unliquidated
liabilities,
for,
if
they
do
not
do
so,
the
financial
statement
will
not
reflect
the
true
position
of
the
client’s
affairs.
The
difficulty
arises
from
the
fact
that
making
it
possible
to
determine
the
taxpayer’s
tax
liability
is
not
the
main
purpose
of
accounting.
The
accountant's
report
is,
in
fact,
intended
to
give
the
taxpayer
a
general
picture
of
his
affairs
so
as
to
enable
him
to
carry
on
his
business
with
full
knowledge
of
the
facts.
To
achieve
this
end,
it
is
not
necessary
for
the
profit
shown
to
be
exact,
but
it
must
be
reasonably
close,
while
the
Income
Tax
Act
requires
it
to
be
exact,
and
it
is
thus
necessarily
arbitrary.
Mr
Justice
Noel
of
the
Federal
Court
(Trial
Division)
in
J
L
Guay
Ltée
v
MNR,
[1971]
CTC
686;
71
DTC
5423
said
at
691
[5426]:
The
Income
Tax
Act
does
not
always
give
a
complete
answer
to
the
question
as
to
what
the
total
amount
of
profits
and
earnings
in
the
year
assessed
is.
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.
The
profit
and
loss
statement,
indeed,
is
really
a
statement
of
fact,
and,
consequently,
a
matter
of
evidence.
It
includes
facts
which
cannot
be
questioned
and
statements
of
facts
which
may
be
called
provisional.
The
difficulty
arises
from
the
fact
that
making
it
possible
to
determine
the
taxpayer’s
tax
liability
is
not
the
main
purpose
of
accounting.
The
accountant’s
report
is,
in
fact,
intended
to
give
the
taxpayer
a
general
picture
of
his
affairs
so
as
to
enable
him
to
carry
on
his
business
with
full
knowledge
of
the
facts.
As
a
general
rule,
if
an
expenditure
is
made
which
is
deductible
from
income,
.
.
.
it
must
be
deducted
by
computing
the
profits
for
the
period
in
which
it
was
made,
and
not
some
other
period.
In
Oxford
Shopping
Centres
Ltd
v
The
Queen,
[1980]
CTC
7;
79
DTC
5458,
Mr
Justice
Thurlow
in
allowing
certain
expenditures
as
a
running
business
expense,
stated
at
15
[5464],
18
[5466]
and
[5467]:
With
respect
to
how
the
expenditure
should
be
treated
according
to
the
principles
of
commercial
accounting,
I
see
no
reason
to
doubt
that
what
was
done
by
the
plaintiff
in
its
accounts
in
charging
the
expenditure
to
revenue
and
writing
off
the
amount
over
a
fifteen-year
period
so
as
not
to
distort
the
profit
and
loss
results
in
the
year
of
payment,
rather
than
treating
the
advantage
as
an
asset
and
charging
depreciation
in
respect
of
it
was
in
accordance
with
such
principles,
in
particular
as
no
asset
was
acquired
for
the
payment
and
all
that
it
could
ever
produce
for
the
business
was
an
intangible
advantage
to
be
realized
in
enhanced
revenues
of
the
business,
the
duration
of
which
could
only
be
estimated
and
then
not
with
precision.
Moreover,
it
seems
to
me
that
the
intangible
advantage
to
be
realized
for
the
expenditure
would
have
made
an
odd
sort
of
entry
as
a
capital
asset
in
a
balance
sheet.
This
consideration
as
well,
therefore,
appears
to
me
to
suggest
the
revenue
nature
of
the
expenditure.
I
think
it
follows
from
this
that
for
income
tax
purposes,
while
the
“matching
principle”
will
apply
to
expenses
related
to
particular
items
of
income,
and
in
particular
with
respect
to
the
computation
of
profit
from
the
acquisition
and
sale
of
inventory
(compare
Neonex
International
Ltd
v
The
Queen
(78
DTC
6339
at
p
6348,
[1978]
CTC
485
at
p
497),
it
does
not
apply
to
the
running
expense
of
the
business
as
a
whole
even
though
the
deduction
of
a
particularly
heavy
item
of
running
expense
in
the
year
in
which
it
is
paid
will
distort
the
income
for
that
particular
year.
Thus
while
there
is
in
the
present
case
some
evidence
that
ac-
cepted
principles
of
accounting
recognize
the
method
adopted
by
the
plaintiff
in
amortizing
the
amount
in
question
for
corporate
purposes
and
there
is
also
evidence
that
to
deduct
the
whole
amount
in
1973
would
distort
the
profit
for
that
year,
it
appears
to
me
that
as
the
nature
of
the
amount
is
that
of
a
running
expense
that
is
not
referable
or
related
to
any
particular
item
of
revenue
—
the
footnote
to
the
Associated
Industries
case
and
the
authorities
referred
to
by
Jackett,
P,
and
in
particular
ihe
Vallambrosa
Rubber
case
and
the
Naval
Colliery
case,
indicate
that
the
amount
is
deductible
only
in
the
year
in
which
it
was
paid.
All
that
appears
to
me
to
have
been
held
in
the
Tower
Investment
case
and
by
the
Trial
Judge
and
LeDain,
J
in
the
Canadian
Glassine
case
is
that
it
was
nevertheless
open
to
the
taxpayer
to
spread
the
deduction
there
in
question
over
a
number
of
years.
it
was
not
decided
that
the
whole
expenditure
might
not
be
deducted
in
the
year
in
which
it
was
made,
as
the
earlier
authorities
hold.
And
there
is
no
specific
provision
in
the
Act
which
prohibits
deduction
of
the
full
amount
in
the
year
it
was
paid.
I
do
not
think,
therefore,
that
the
Minister
is
entitled
to
insist
on
an
amortization
of
the
expenditure
or
on
the
plaintiff
spreading
the
deduction
in
respect
of
it
over
a
period
of
years.
Mr
Justice
Urie
of
the
Federal
Court
(Appeal
Division)
in
Neonex
International
Ltd
v
The
Queen,
[1978]
CTC
485;
78
DTC
6339,
stated
at
499
[6348]:
There
is
no
doubt
that
the
proper
treatment
of
revenue
and
expenses
in
the
calculation
of
profits
for
income
tax
purposes
with
a
view
to
obtaining
an
accurate
reflection
of
the
taxable
income
of
a
taxpayer,
is
not
necessarily
based
on
generally
accepted
accounting
principles.
Whether
it
is
so
based
or
not
is
a
question
of
law
for
determination
by
the
Court
having
regard
to
those
principles
(see:
MNR
v
Anaconda
Brass
Ltd,
[1956]
AC
85;
[1955]
CTC
311;
see
also
Associated
Investors
of
Canada
Ltd
v
MNR,
[1967]
2
Ex
CR
96
at
pages
101
and
102;
[1967]
CTC
138).
The
question
then
to
be
asked
is
whether
the
Income
Tax
Act
requires
or
permits
a
different
accounting
treatment
in
the
calculation
of
the
Appellant’s
income
for
income
tax
purposes
than
that
which
is
applicable
for
the
purpose
of
accurately
portraying
he
financial
picture
of
the
company
for
shareholders
and
creditors.
ANNEX
“B”
Extracts
of
Mr
Jackett’s
Comments
at
1981
Corporate
Management
Tax
Conference
in
Toronto
COMPUTATION
OF
BUSINESS
PROFITS
FOR
TAX
PURPOSES
The
commencement
point
for
the
computation
of
business
profits
for
income
tax
purposes
in
Canada
is
the
rule
to
be
found
in
section
9(1)
of
the
Income
Tax
Act,
that
is
prima
facie,
a
taxpayer’s
income
for
a
year
from
a
business
in
his
“profit
therefrom
for
the
year”.
I
begin
with
certain
preliminary
considerations
concerning
the
concept
of
a
taxpayer’s
profit
from
a
business
for
a
year,
viz:
1.
The
word
“profit”
or
“bénéfice”
is
used
in
income
tax
legislation
as
an
ordinary
word
in
the
English
or
French
language
of
which
there
is
no
special
statutory
definition
at
least
in
our
Income
Tax
Act.
I
might
add
that
I
think
that
it
is
very
important
that
there
should
be
no
such
definition
because
there
is
an
infinite
variety
of
situations
to
which
the
word
“profit”
or
“bénéfice”
may
have
to
be
applied
and
it
is,
in
my
view,
beyond
the
wit
of
any
legislative
draughtsman
to
frame
a
definition
that
would
make
sense
with
regard
to
all
of
them.
I
might
further
add
that,
where
there
is
a
perfectly
good
word
such
as
profit
that
is
sufficiently
flexible
to
be
applied
to
all
situations,
in
my
view,
it
is
bad
legislative
policy,
to
give
it
a
rigid
meaning,
by
statutory
definition,
that
may
well
produce
bizarre
results
in
unforeseen
cases.
2.
Generally
speaking,
the
meaning
of
a
word
such
as
“profit”
in
a
statute
is
regarded
by
the
Courts
as
a
question
of
law;
and
there
is
a
wealth
of
income
tax
jurisprudence
as
to
what
the
word
“profit”
means,
and
as
to
how
it
should
be
applied,
in
particular
circumstances.
3.
The
great
judges
of
the
past,
without,
as
far
as
I
know,
taking
evidence
from
businessmen,
attempted
to
determine
the
meaning
of
the
word
“profit”
in
income
tax
legislation
in
the
sense
in
which
that
word
is
understood
by
businessmen,
or
as
has
been
frequently
said
“in
accordance
with
business
or
commercial
principles”,
which,
in
my
view,
is
merely
a
metaphorical
way
of
saying
the
same
thing.
4.
It
follows
from
the
jurisprudence
that
establishes
that
profit
is
used
in
a
tax
act
in
the
businessman’s
sense
of
that
word,
that
profit
is
not
determined
in
accordance
with
any
accounting
principle,
if
such
there
be,
that
has
been
formulated,
not
merely
so
as
to
ensure
that
the
facts
of
business
life
be
reflected
in
the
business
records,
but
so
as
to
change
the
substantive
result
from
that
obtained
by
applying
the
ordinary
business
concept
of
profit
as
established
by
the
Courts.
5.
This
does
not
mean
that
a
Court
will
not
accept,
in
a
suitable
case,
what
assistance
it
can
obtain
from
evidence
of
an
accountant.
What
it
does
mean
is
that
the
meaning
of
the
word
“profit”
in
an
income
tax
act
does
not
vary
from
case
to
case,
or
from
decade
to
decade,
according
to
the
evidence
of
“expert”
accountants
as
to
current
“accounting
principles”
when
the
applicable
legislative
language
is
the
same
for
all
cases
and
remains
unchanged
over
the
decades.
As
I
have
already
said,
generally
speaking,
the
meaning
of
the
word
“profit
in
tax
legislation
is
a
question
of
law.
Clearly,
in
my
view,
it
is
not
a
question
of
fact
to
be
determined
on
expert
evidence
given
in
particular
cases.
It
should
be
understood,
however,
that
the
Anaconda
case
does
not
rule
out
the
use
of
“Lifo”,
or
any
other
rule
of
thumb,
where
it
results
in
an
amount
for
profit
on
the
facts
of
the
particular
case
that
is
nearer
to
the
true
profit,
as
that
word
is
understood
by
the
Courts,
than
the
amount
that
any
alternative
method
would
produce.
Early
in
these
remarks,
I
expressed
a
reservation
with
reference
to
resort,
in
computing
profit
for
income
tax
purposes,
to
modern
accountancy
principles
(if
such
there
be)
which
presume
to
change
the
basic
character
of
profit
as
that
word
is
ued
in
the
income
tax
acts
and
do
not
restrict
themselves
to
reflecting
business
facts
on
the
businessman’s
records.
In
my
view
the
“Lifo”
and
“Fifo”
case
was
an
example
of
an
attempt
to
apply
accountancy
principles
for
a
purpose
for
which
they
are
inadmissible
for
income
tax
purposes.
This
is
not
to
say
that
a
businessman
is
not
quite
entitled
—
either
himself
or
by
his
accountant
—
to
keep
books
for
his
own
purposes
in
which
he
shows
what
he,
as
a
conservative
and
prudent
businessman,
regards
as
profits
that
can
safely
be
taken
from
the
business.
For
example,
he
is
entitled
to
set
up
reserves
—
either
expressly
or
implicitly
—
against
unrealized
losses.
When
however,
it
is
a
question
of
computing
profit
for
tax
purposes,
the
same
rules
must
apply
to
everybody
and
the
books
must
show
the
full
“profits”
from
the
business
for
the
year
regardless
of
whether
the
clouds
on
the
business
horizon
throw
a
shadow
on
them.
ANNEX
“C”
In
support
of
his
submissions
the
respondent
also
cited
several
decisions:
Gordon
Kenneth
Daley
v
MNR,
[1950]
CTC
254;
50
DTC
877:
President
Thorson,
for
purposes
of
that
case,
stated
at
260
[879]
and
261
[880]:
Since
the
decision
in
the
Imperial
Oil
Limited
case
(supra)
I
have
given
further
consideration
to
the
statement
or
implication
in
that
case,
and
in
several
others,
that
section
6(a)
inferentially
permits
the
deductibility
of
the
disbursements
and
expenses
that
fall
outside
its
exclusions,
and
am
now
of
the
opinion
that
such
a
statement
or
implication
is,
strictly
speaking,
not
correct.
If
any
inference
of
deductibility
is
to
be
drawn
it
can
only
be
from
the
opening
words
of
section
6
“In
computing
the
amount
of
the
profits
or
gains
to
be
assessed”
and
not
from
paragraph
(a),
which
is
concerned
only
with
the
exclusion
from
deductibility
of
the
disbursements
or
expenses
therein
specified
and
not
at
all
with
the
deductibility
of
any
disbursements
or
expense.
The
correct
view,
in
my
opinion,
is
that
the
deductibility
of
the
disbursements
and
expenses
that
may
properly
be
deducted
“in
computing
the
amount
of
the
profits
or
gains
to
be
assessed”
is
inherent
in
the
concept
of
“annual
net
profit
or
gain”
in
the
definition
of
taxable
income
contained
in
section
3.
The
deductibility
from
the
receipts
of
a
taxation
year
of
the
appropriate
disbursements
or
expenses
stems,
therefore,
from
section
3
of
the
Act,
if
it
stems
from
any
section,
and
not
at
all,
even
inferentially,
from
paragraph
(a)
of
section
6.
There
is
another
way
of
looking
at
the
matter.
The
appellant’s
taxable
income
for
1946
consisted
basically
of
the
receipts
from
his
law
practice
in
that
year
less
the
costs
and
expenses
of
his
practice
in
that
year.
It
is
inconceivable
that
any
accountant
or
professional
or
business
man
could
reasonably
consider
that
the
fee
of
$1,500
which
the
appellant
paid
for
his
call
and
admission
could
properly
be
offset
against
his
receipts
from
his
first
year
of
practice.
There
is
an
implied
admission
of
this
in
the
fact
that
the
appellant
claims
a
deduction
of
only
$500.
But
if
$1,500
is
not
deductible,
how
can
$500
be
deductible?
And
why
should
the
deduction
be
spread
over
only
three
years?
And
if
three
years
is
too
short
a
period
over
how
long
a
period
should
the
deduction
be
spread?
The
fee
was
not
paid
for
any
year
or
number
of
years.
It
is,
in
my
view,
quite
different
from
the
annual
licence
fee
that
was
held
to
be
deductible
in
Bond
v
MNR
(supra).
The
call
and
admission
for
which
the
fee
was
paid
is
not
like
a
depreciable
asset.
It
does
not
lend
itself
to
an
annual
write-off
and
no
one
could
reasonably
apportion
it
over
any
given
period
of
time.
There
is
no
portion
of
it
that
could
have
any
relationship
to
the
appellant’s
practice
in
any
one
year.
The
fee
is
not
the
kind
of
disbursement
or
expense
that
could
properly
enter
into
the
ascertainment
or
estimation
of
his
“annual
net
profit
or
gain’.
There
could
be
no
place
for
any
portion
of
it
in
any
annual
statement
of
profit
or
loss
prepared
with
proper
regard
to
the
ordinary
principles
of
commercial
trading
or
accepted
business
and
accounting
practice.
Royal
Trust
Company
v
MNR,
[1957]
CTC
32;
57
DTC
1055;
President
Thorson
reviewed
the
statement
he
had
made
in
the
Daley
decision
(Supra):
The
statement
in
the
Daley
case
(Supra)
that
the
deductibility
of
a
disbursement
or
expense
was
inherent
in
the
concept
of
“annual
net
profit
or
gain’,
and
stemmed
from
section
3
of
the
Act,
if
from
any
section,
and
not
from
section
6(a)
was
implicit
in
the
reasons
for
judgment
in
the
Imperial
Oil
Limited
case
(supra),
but
not
expressed.
For
there,
at
page
530,
I
stated
that
the
“profits
or
gains
to
be
assessed”,
to
use
the
opening
words
of
section
6,
were
the
net
profits
or
gains
described
in
section
3
as
being
taxable
income,
subject
to
section
6
with
which
section
3
must
be
read
and
pointed
out
that
the
principles
for
the
computation
of
such
profits
or
gains
were
not
defined
in
the
Act
but
were
stated
in
judicial
decision,
and
I
referred
to
the
statement
of
Lord
Halsbury,
LC
in
Gresham
Life
Assurance
Society
v
Styles,
[1892]
AC
309
at
316:
Profits
and
gains
must
be
ascertained
on
ordinary
principles
of
commercial
trading.
Consequently,
if
the
correct
approach
to
the
question
of
whether
a
disbursement
or
expense
was
properly
deductible
in
a
case
under
the
Income
War
Tax
Act
was
the
one
wich
I
have
outlined,
it
follows,
a
fortiori,
that
it
is
the
correct
approach
to
the
question
of
whether
an
outlay
or
expense
is
properly
deductible
in
a
case
under
the
Income
Tax
Act.
The
Queen
v
Sylvio
Marchand,
[1978]
CTC
763;
78
DTC
6507:
Mr
Justice
Addy
stated:
The
by-laws
of
each
of
the
Caisses
d’entraide
in
Quebec
provide
that
a
sum
equal
to
4%
per
cent
of
each
amount
subscribed
for
the
purchase
of
shares
must
be
paid
to
the
Caisse
in
addition
to
the
purchase
price.
In
accordance
with
these
provisions
the
defendant
paid
the
sum
of
$90,
in
addition
to
the
purchase
price
of
$2,000.
As
Thorson,
P
of
the
former
Exchequer
Court
said
in
Daley
v
MNR,
where
he
altered
somewhat
his
earlier
interpretation
of
the
Act
as
set
out
in
Imperial
Oil
Limited
v
MNR,
paragraphs
6(a)
and
(b)
of
the
1927
Act
are
sections
worded
in
a
negative
or
prohibitory
manner,
and
the
fact
that
deduction
of
an
amount
from
income
is
not
prohibited
under
these
sections
does
not
in
itself
mean
that
it
can
be
deducted
for
tax
purposes.
Although
the
wording
of
paragraphs
18(1)(a)
and
(b)
is
not
identical
to
that
of
paragraphs
6(a)
and
(b)
of
the
1927
Act,
I
am
of
the
opinion
that
a
taxpayer
can
now
deduct
an
amount
from
income
only
on
two
conditions:
first,
that
it
would
be
normal
practice
according
to
generally
accepted
accounting
principles
to
deduct
this
sum
from
an
income
account,
and
secondly,
that
the
prohibitory
provisions
of
section
18(1)
do
not
prevent
such
a
deduction.
It
is
recognized
that
the
burden
of
proof
is
always
on
the
taxpayer
(in
this
case
the
defendant)
when
an
assessment
for
tax
purposes
is
being
challenged.
I
find
that
on
the
evidence
presented,
the
defendant
has
not
discharged
this
burden,
since
he
has
not
established
that
the
outlay
was
of
the
type
which,
according
to
generally
accepted
accounting
principles,
would
be
chargeable
to
income
account,
and
in
particular,
that
it
would
be
chargeable
to
this
account
as
an
expenditure
attributable
to
income
for
1972.
Whimster
&
Co
v
CIR,
(1925),
12
TC
813.
The
Lord
President
stated:
In
computing
the
balance
of
profits
and
gains
for
the
purposes
of
income
tax,
or
for
the
purposes
of
Excess
Profits
Duty,
two
general
and
fundamental
commonplaces
have
always
to
be
kept
in
mind.
In
the
first
place,
the
profits
must
be
taken
to
consist
of
the
difference
between
the
receipts
from
the
trade
or
business
during
such
year
or
accounting
period
and
the
expenditure
laid
out
to
earn
those
receipts.
In
the
second
place,
the
account
of
profit
and
loss
to
be
made
up
for
the
purpose
of
ascertaining
that
difference
must
be
framed
consistently
with
the
ordinary
principles
of
commercial
accounting,
so
far
as
applicable,
and
in
conformity
with
the
rules
of
the
Income
Tax
Act,
or
of
that
Act
as
modified
by
the
provisions
and
schedules
of
the
Acts
regulating
Excess
Profits
Duty,
as
the
case
may
be.
ANNEX
“D"
Re:
True
Income
Position
for
Tax
Purposes
RESPONDENT’S
AUTHORITIES
In
MNR
v
Anaconda
American
Brass
Ltd,
[1955]
CTC
311;
55
DTC
1220,
Viscount
Simonds
states
at
318
[1223]:
He
urges
that
it
is
a
principle
of
income
tax
law
which
has
been
adopted
from
commercial
accounting
practice
that
the
values
of
the
stock-in-trade
at
the
beginning
and
end
of
the
period
covered
by
the
account
should
be
entered
at
a
cost
or
market
value
whichever
is
the
lower
and
he
says
that
for
this
purpose
the
actual
stock
in
hand
must
be
regarded
and
its
actual
cost
so
far
as
possible
ascertained
and
that
an
assumption
or
estimate
is
necessary
only
so
far
as
ascertainment
is
not
possible.
Upon
this
basis
he
says
that
the
FIFO
method
more
nearly
than
the
LIFO
method
represents
the
facts
and
supports
that
contention
by
reference
not
only
to
the
large
purchases
of
metal
during
the
last
months
of
1947
which
can
hardly
have
been
processed
during
that
year
but
also
the
fact
that
the
LIFO
method
involves
the
assumption
of
6,500,000
pounds
of
copper
purchased
in
or
before
1936
being
still
in
stock
at
the
end
of
1947.
He
says
therefore
that
his
assessment
has
not
been
displaced
by
any
evidence
that
the
LIFO
method
more
nearly
represents
the
true
income
of
the
company.
He
is
not
concerned
to
contend
that
the
company
(or
some
other
taxpayer)
may
not
be
able
to
establish
that
some
other
method
than
FIFO
more
accurately
represents
the
income
for
tax
purposes
where
the
raw
material
used
is
homogeneous
and
no
substantial
part
of
it
can
be
identified.
Nor
is
it
necessary
for
their
Lordships
to
determine
whether
some
other
method,
as
for
instance
the
“average
cost”
method,
may
not
in
some
circumstances
be
properly
adopted
for
tax
purposes.
What
the
Minister
urges
is
that
the
LIFO
method
does
not
more
nearly
than
FIFO
produce
the
true
income
in
the
present
case
and
that
is
the
question
for
their
Lordships’
decision.
So
also
in
the
United
Kingdom,
an
attempt
has
been
vainly
made
to
uphold
the
base
stock
method
for
income
tax
purposes.
In
the
recent
case
of
Partick
v
Broadstone
Mills
Ltd
(1954
1
WLR
158)
Lord
Justice
Singleton
in
words
that
are
equally
apt,
if
applied
to
the
LIFO
method,
declined
to
accept
the
base
stock
method
as
conformable
to
income
tax
law,
though
it
might
be
approved
by
accountancy
practice.
In
MNR
v
Publishers
Guild
of
Canada
Limited,
[1957]
CTC
1;
57
DTC
1017,
President
Thorson
stated:
Thus
the
prime
consideration,
where
there
is
a
dispute
about
a
system
of
accounting,
is,
in
the
first
place,
whether
it
is
appropriate
to
the
business
to
which
it
is
applied
and
tells
the
truth
about
the
taxpayer’s
income
position
and,
if
that
condi-
tion
is
satisfied,
whether
there
is
any
prohibition
in
the
governing
income
tax
law
against
its
use.
It
could,
therefore,
be
held,
even
on
the
brief
summary
of
the
reasons
given
by
the
accountancy
experts
which
I
have
set
out,
that
the
instalment
system
of
accounting
as
adopted
by
the
taxpayer
is
an
acceptable
system,
is
appropriate
to
the
taxpayer’s
business
and
more
accurately
reflects
its
income
position
than
any
other
system
of
accounting
would
do.
In
Ken
Steeves
Sales
Limited
v
MNR,
[1955]
CTC
47;
55
DTC
1044,
in
the
head
notes,
we
read:
In
its
income
tax
return
for
that
year
appellant
used
the
form
of
accounting
known
as
“Cash
Receipts
and
Expenditure”
method
under
which
only
cash
actually
received
is
taken
into
account
as
income,
all
accounts
and
notes
receivable
being
excluded,
and
the
expenditure
includes
not
only
disbursements
actually
made
but
also
accounts
payable.
Mr
Justice
Cameron
states
at
53
[112]:
The
neat
question
is
whether
these
“receivables"
should
be
taken
into
account
in
computing
the
income
of
a
taxpayer
who
is
a
trader,
for
that
year.
In
my
opinion,
that
question
must
be
answered
in
the
affirmative
and
the
“Cash
Receipts
and
Expenditures”
method
must
be
rejected
as
one
which
does
not
accurately
reflect
the
true
profit
or
gain
of
the
trader.
I
was
not
referred
to
any
case
in
Canada
in
which
the
problem
in
relation
to
a
trader
has
been
directly
discussed,
nor
do
I
know
of
any
such
case.
It
is
highly
probable,
I
think,
that
the
question
has
not
previously
been
raised
because
of
the
general
acceptance
that
such
receivables
should
be
included
and
that
it
would
be
contrary
to
generally
accepted
accounting
practice
to
exclude
them.
ANNEX
“E"
Reference
by
Respondent
to
Authorities
Cited
by
Appellant
In
Jack
L
Cummings
v
The
Queen,
[1981]
CTC
285;
81
DTC
5207,
Before
leaving
this
$500,000
item,
I
should
deal
with
the
reference
by
counsel
for
the
appellant
to
the
evidence
of
Emmanuel
Veinish,
the
expert
witness
called
by
the
respondent,
to
the
effect
that,
on
the
facts
as
established
in
this
case,
it
would
have
been
in
accordance
with
generally
accepted
accounting
principles
to
show
the
$500,000
on
the
balance
sheet
as
a
fixed
or
certain
rather
than
a
contingent
liability.
The
answer
to
this
submission
is
that
the
fact
of
the
acceptability
in
accounting
practice
of
dealing
wih
a
particular
item
in
a
particular
manner,
cannot,
by
itself,
make
that
practice
a
proper
deduction
for
income
tax
purposes.
Notwithstanding
the
evidence
of
accounting
practice,
the
fact
remains
that,
on
the
facts
here
present,
the
deduction
is
prohibited
by
subsection
12(1
)(e)
of
the
Act.
A
similar
situation
was
dealt
with
by
Noel,
ACJ,
in
the
J
L
Guay
case
discussed
earlier
herein.
At
page
245
of
the
report,
the
learned
ACJ
said:
In
most
tax
cases
only
amounts
which
can
be
exactly
determined
are
accepted.
This
means
that,
ordinarily,
provisional
amounts
or
estimates
are
rejected,
and
it
is
not
recommended
that
data
which
are
conditional,
contingent
or
uncertain
be
used
in
calculating
taxable
profits.
If
indeed,
provisional
amounts
or
estimates
are
to
be
accepted,
they
must
be
certain.
But
then
it
is
always
difficult
to
find
a
procedure
by
which
to
arrive
at
a
figure
which
is
certain.
Accountants
are
always
difficult
to
find
a
procedure
by
which
to
arrive
at
a
figure
which
is
certain.
Accountants
are
always
inclined
to
set
aside
reserves
for
unliquidated
liabilities,
for,
if
they
do
not
do
so,
the
financial
statement
will
not
reflect
the
true
position
of
the
client’s
affairs.
The
difficulty
arises
from
the
fact
that
making
it
possible
to
determine
the
taxpayer’s
tax
liability
is
not
the
main
purpose
of
accounting.
The
accountant’s
report
is,
in
fact,
intended
to
give
the
taxpayer
a
general
picture
of
his
affairs
so
as
to
enable
him
to
carry
on
his
business
with
full
knowledge
of
the
facts.
To
achieve
this
end,
it
is
not
necessary
for
the
profit
shown
to
be
exact
but
it
must
be
reasonably
close,
while
the
Income
Tax
Act
requires
it
to
be
exact,
and
it
is
thus
necessarily
arbitrary.
I
adopt
that
statement
as
applying
with
equal
force
to
the
situation
in
the
case
at
bar.
In
Oxford
Shopping
Centres
Ltd
v
The
Queen,
[1980]
CTC
7;
79
DTC
5458
at
15
[5464],
the
learned
judge,
Thurlow,
ACJ
stated:
With
respect
to
how
the
expenditure
should
be
treated
according
to
the
principles
of
commercial
accounting,
I
see
no
reason
to
doubt
that
what
was
done
by
the
plaintiff
in
its
accounts
in
charging
the
expenditure
to
revenue
and
writing
off
the
amount
over
a
fifteen-year
period
so
as
not
to
distort
the
profit
and
loss
results
in
the
year
of
payment,
rather
than
treating
the
advantage
as
an
asset
and
charging
depreciation
in
respect
of
it
was
in
accordance
with
such
principles,
in
particular
as
no
asset
was
acquired
for
the
payment
and
all
that
it
could
ever
produce
for
the
business
was
an
intangible
advantage
to
be
realized
in
enhanced
revenues
of
the
business,
the
duration
of
which
could
only
be
estimated
and
then
not
with
precision.
Moreover,
it
seems
to
me
that
the
intangible
advantage
to
be
realized
for
the
expenditure
would
have
made
an
odd
sort
of
entry
as
a
capital
asset
in
a
balance
sheet.
This
consideration
as
well,
therefore,
appears
to
me
to
suggest
the
revenue
nature
of
the
expenditure.
ANNEX
“F"
Respondent’s
Authority
re
Land
Development
Costs
an
Integral
Part
of
Cost
of
Land
Inventory
In
Sherritt
Gordon
Mines
Limited
v
MNR,
[1968]
CTC
262;
68
DTC
5180,
Mr
Justice
Kerr
at
283
[5193]
states:
I
am
satisfied
that
at
least
where
the
amount
is
significant
in
relation
to
the
business
of
a
company,
it
is
in
accordance
with
generally
accepted
business
and
commercial
principles
to
charge,
as
a
cost
of
construction,
payments
of
interest
in
respect
of
the
construction
period
on
borrowed
money
expended
by
the
company
for
such
construction
and
to
write
such
payments
off
over
a
period
of
years.
The
practice
of
doing
so
is
not
as
common
outside
the
public
utility
field
as
within
that
field
but
it
has
extended
to
companies
outside
that
field.
Having
reached
this
conclusion,
it
is
necessary
to
ask
whether
interest
expense
of
this
character
may
be
deducted
for
income
tax
purposes
in
those
years
in
which
it
is
written
off.
I
think
there
is
no
doubt
that
the
interest
is
a
capital
outlay,
the
deduction
of
which
in
computing
income
for
a
taxation
year,
is
prohibited
by
section
12(1)(b)
unless
its
deduction
is
expressly
permitted
by
some
other
provision
of
the
Act.
This
leads
to
consideration,
firstly,
whether
such
interest
is
part
of
the
cost
of
the
assets
acquired
by
the
taxpayer
with
borrowed
capital
and,
secondly,
whether
it
is
part
of
a
capital
cost
within
section
11
(1
)(a).
At
287
[5195]
Mr
Justice
Kerr
concludes:
In
the
absence
of
any
definition
in
the
statute
of
the
expression
“capital
cost
to
the
taxpayer
of
property”
and
in
the
absence
of
any
authoritative
interpretation
of
those
words
as
used
in
section
11
(1
)(a),
insofar
as
they
are
being
considered
with
reference
to
the
acquisition
of
capital
assets.
I
am
of
opinion
that
they
should
be
interpreted
as
including
outlays
of
the
taxpayer
as
a
business
man
that
were
the
direct
result
of
the
method
he
adopted
to
acquire
the
assets.
In
the
case
of
the
purchase
of
an
asset,
this
would
certainly
include
the
price
paid
for
the
asset.
It
would
probably
include
the
legal
costs
directly
related
to
its
acquisition.
It
might
well
include,
I
do
not
express
any
opinion
on
the
matter,
the
cost
of
moving
the
asset
to
the
place
where
it
is
to
be
used
in
the
business.
When,
instead
of
buying
property
to
be
used
in
the
business,
the
taxpayer
has
done
what
is
necessary
to
create
it,
the
capital
cost
to
him
of
the
property
clearly
includes
all
monies
paid
out
for
the
site
and
to
architects,
engineers
and
contractors.
It
seems
equally
clear
that
it
includes
the
cost
to
him
during
the
construction
period
of
borrowing
the
capital
required
for
creating
the
property,
whether
the
cost
is
called
interest
or
commitment
fee.
Such
cost
is
a
capital
cost
that
could
not
be
deducted
as
an
operating
expense,
without
special
authority.
Possibly
as
good
a
way
as
any
of
testing
the
matter
is
to
consider
the
possibility
of
a
third
person
creating
the
required
assets
to
the
taxpayer’s
specifications
to
sell
them
to
him
when
completed.
All
their
financing
costs
would
enter
into
the
price
that
the
taxpayer
would
have
to
pay
for
the
assets
and
there
would
be
no
doubt
that
the
price
would
be
the
capital
cost
of
the
property
to
him
if
he
bought
it
ready
to
use.
If
that
be
so,
why
should
those
costs
be
classified
otherwise
when
he
creates
the
asset
himself?
In
Jan
V
Weinberger
v
MNR,
[1964]
CTC
103;
64
DTC
5060,
Mr
Justice
Thurlow
states
at
108
[5063]:
The
first
and
the
most
substantial
problem
which
arises
on
these
provisions
is
whether
the
expenses
incurred
by
the
appellant
in
perfecting
his
invention
are
part
of
the
“actual
capital
costs”
of
the
patent
which
he
obtained
therefor
within
the
meaning
of
that
expression
in
s
144(1)(a).
There
appears
to
be
no
decided
case
offering
any
guidance
on
this
question
but,
in
my
opinion,
such
expenses
do
form
part
of
the
actual
capital
cost
of
the
patent.
The
significant
property
right
in
the
case
of
a
patent
is
the
monopoly
which
it
evidences
and
confers.
That
monopoly
is
an
exclusive
right
granted
for
the
term
of
17
years
to
make
use,
construct
and
vend
to
others
to
be
used
the
invention
in
respect
of
which
the
patent
has
been
granted
and
in
the
theory
of
the
patent
law
that
monopoly
is
granted
in
consideration
of
the
disclosure
of
the
invention
to
the
public.
A
patent
under
the
statute
is
thus
obtainable
by
an
inventor
only
when
he
has
in
fact
invented
something
for
which
a
patent
may
be
obtained,
that
is
to
say,
something
which
is
new
and
useful
in
the
sense
of
the
patent
law
and
when
he
has
complied
with
the
requirements
of
the
law
by
disclosing
the
invention
in
the
appropriate
manner.
It
seems
to
me
therefore
to
follow
that
the
cost
of
a
patent
to
an
inventor
would
ordinarily
include
not
only
what
it
has
cost
him
to
disclose
his
invention
to
the
public
in
the
prescribed
manner
and
to
satisfy
the
Commissioner
of
Patents
that
he
is
entitled
to
a
patent
therefor
but
whatever
other
costs
he
has
in
fact
incurred
in
producing
the
invention
for
which
the
patent
is
sought
and
in
perfecting
it
to
the
point
where
its
utility
can
be
demonstrated
and
a
patent
can
be
obtained
under
the
law
relating
thereto.
In
Crystal
Spring
Beverage
Co
Ltd
v
MNR,
[1964]
CTC
408;
64
DTC
5253,
I
am
of
the
opinion
on
the
evidence
adduced
that
the
respondent
would
not
have
received
the
franchise,
Exhibit
A-1,
from
the
parent
company
of
Seven-Up
if
it
had
not
caused
Seven-Up
Vancouver
Ltd
to
relinquish
its
franchise
rights
in
the
territory
of
South
Vancouver
Island;
and
that
Seven-Up
Vancouver
Ltd
would
not
have
relinquished
the
said
franchise
without
the
payment
to
it
of
$18,000
by
the
appellant.
There
is,
in
this
case,
therefore,
in
my
opinion,
direct
causal
connection
between
the
issuance
of
the
franchise,
Exhibit
A-1,
to
the
appellant
and
the
payment
by
the
appellant
to
Seven-Up
Vancouver
Ltd
of
the
sum
of
$18,000.
The
appellant
paid
this
sum
for
the
purpose
of
earning
income
and
in
fact
by
reason
of
this
payment
resulting
in
the
obtaining
of
the
franchise,
Exhibit
A-1,
the
appellant
did
increase
his
income
and
as
a
consequence
the
capital
cost
of
this
payment
should
be
allowed
pursuant
to
the
provisions
of
section
11(1)(a)
of
the
Income
Tax
Act,
section
1100(1)(c)
of
and
Class
14
of
Schedule
B
to
the
Income
Tax
Regulations.
ANNEX
“G"
Appellant’s
Basic
Authority
—
Dartmouth
Developments
Ltd
v
MNR
In
Dartmouth
Developments
Ltd
v
MNR,
[1967]
Tax
ABC
780;
67
DTC
551,
the
appellant
cited
the
following
passages
from
the
head
notes:
The
appellant
company
appealed
on
the
following
grounds:
(1)
It
should
not
be
obliged
to
defer
the
deduction
of
the
local
improvement
costs
for
as
long
as
50
years
(the
maximum
period
under
the
1963
agreement).
The
appellant
never
acquired
full
ownership
of
the
improvements
which
at
all
times
were
the
property
of
the
city.
The
Appeal
was
allowed.
The
terms
of
the
1961
agreement
with
the
city
were
very
beneficial
to
it
because
the
contract
relieved
the
city
from
any
responsibility
for
installing
municipal
services
on
the
lots
and
gave
to
it
absolute
ownership
of
the
improvements.
Under
that
agreement
the
companies,
and,
after
the
assignment,
the
appellant,
were
engaged
in
activities
best
described
as
of
a
type
essential
for
the
development
of
residential
land,
ie,
preparing
and
planning
the
subdivision,
obtaining
municipal
approvals
and
financial
arrangements.
The
installation
of
Municipal
services
by
the
appellant
was
part
of
these
activities
and
was
the
last
of
many
steps
designed
to
turn
its
inventory
of
land
into
saleable
building
lots.
Mr
Weldon,
at
792
[559],
stated:
Having
given
this
whole
matter
considerable
thought,
especially
the
1961
Agreement
which,
because
of
its
importance,
has
been
carefully
summarized
in
these
reasons,
I
have
come
firmly
to
the
conclusion
that
Dartmouth
should
be
entitled
to
treat
any
expenses
incurred
by
it
under
the
1961
Agreement
in
connection
with
the
putting
in
and
installing
of
municipal
services
for
the
benefit
of
the
lands
therein
described
on
the
same
basis
as
any
other
general
expenses
incurred
by
it,
which
are
immediately
deductible
from
income
in
the
ordinary
course
of
carrying
on
its
land-trading
business,
regardless
as
to
whether
the
taxpayer’s
lots
have
been
sold
outright
or
dealt
with
on
its
50-year
leasing
plan.
Mr
Weldon
bases
his
conclusion
on
the
following
three
points:
First,
the
costs
or
expenses
incurred
by
Dartmouth
under
the
1961
Agreement
have
not
produced
an
asset
which
now
appears
or
is
contained
in
the
appellant’s
inventory
of
land.
Indeed,
that
statement
can
be
made
with
some
confidence
because
under
the
said
Agreement
the
City
of
Transcona
acquired
the
absolute
ownership
of
all
municipal
services
as
they
were
being
put
in
and
installed.
Secondly,
in
view
of
the
wide
scope
of
the
1961
Agreement,
it
can
reasonably
be
assumed,
in
my
view,
that
the
City
of
Transcona
was
quite
relieved
to
have
the
three
experienced
construction
companies,
of
which
Dartmouth
is
the
assignee,
take
the
responsibly
under
the
said
Agreement
for
putting
in
and
installing
the
municipal
services
therein
specified
for
the
benefit
of
not
only
the
Company
Owned
Lots
but
also
the
City
Owned
Lots
and
the
Privately
Owned
Lots
pursuant
to
the
plans
and
specifications
prepared
by
its
own
engineer
and
under
his
direct
supervision
and
control.
Thus,
it
would
seem
to
be
in
order
to
conclude
that
the
1961
Agreement
had
broad
implications
in
the
City
of
Transcona
as
an
extensive,
idependent,
municipal
contract
involving
many
of
its
citizens.
Earlier
in
these
reasons,
it
was
brought
out
that
the
company,
ie
the
appellant
herein,
was
compensated
indirectly
in
various
ways
for
its
participation
in
the
said
Agreement.
On
the
basis
of
the
above
observations,
I
have
characterized
the
appellant’s
general
activities
under
the
1961
Agreement
in
my
mind
as
being
of
the
type
of
essential,
preliminary
activities
such
as
were
involved
in
the
planning
and
preparation
of
the
plans
of
subdivision,
in
obtaining
the
all-important
approval
of
the
said
plans
by
the
Municipal
Planning
Board,
in
making
all
of
the
necessary
financial
arrangements
having
in
mind,
especially,
that
the
City
of
Transcona
was
at
all
relevant
times
making
a
concerted
effort
to
upgrade
its
municipal
services
as
a
progressive
measure,
and
in
the
many,
varied
and
intricate
negotiations
which
must,
undoubtedly,
have
taken
place
between
the
officers
of
the
three
construction
companies,
of
which
the
appellant
is
the
assignee,
and
all
types
of
persons
such
as
surveyors,
solicitors,
engineers,
sub-contractors,
officials
of
the
City
of
Transcona,
Province
of
Manitoba,
Land
Titles
Office,
private
land
owners
and
many
others.
In
brief,
the
expenses
incurred
by
Dartmouth,
in
putting
in
and
installing
the
municipal
services
under
scrutiny
herein,
represented
just
about
the
last
of
a
great
many
steps
which
had
to
be
taken
by
it
for
the
purpose
of
turning
its
inventory
of
land
to
account
thereby
producing
the
desired,
saleable,
building
lots
suitable
for
house-building.
Thirdly,
if
the
expenses
incurred
by
the
appellant
under
the
1961
Agreement
are
tantamount
to
the
prepayment
of
what
might
otherwise
have
been
a
number
of
annual
local
improvement
tax
levies
over
a
period
of
from
say
15
to
20
years,
there
is
ample
authority
for
that
procedure
in
the
following
cases
cited
by
Mr
Irving:
Val-
lambrosa
Rubber
Co
Ltd
v
Farmer,
5
TC
529;
Consolidated
Textiles
Ltd
v
MNR,[1947]
EX
CR
77
[1947]
CTC
63;
Premium
Iron
Ores
Ltd
v
MNR,
[1966]
CTC
391;
66
DTC
5280;
Bolam
v
Regent
Oil
Co,
Ltd,
37
TC
56
and
Johnston
Testers
Ltd
v
MNR,
[1965]
2
Ex
CR
243;
[1965]
CTC
116.
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