Joseph C Wilson Holdings LTD v. Minister of National Revenue, [1981] CTC 2432, 81 DTC 375

D E Taylor:—This is an appeal heard in London, Ontario, on April 8, 1981, against income tax assessments for the years 1976 and 1977 in which the Minister of National Revenue disallowed an amount of $107,437,42 as an expense paid out to build a retaining wall in 1976, and classified it as on capital account. The Minister relied upon section 18 and Regulation 1100 of the Income Tax Act SC 1970-71-72, c 63, as amended. The general background of the appeal would appear to be:

— The appellant is the successor to a sole proprietorship operated by Joseph C Wilson that began the same business that is presently carried on by the appellant from the subject land in 1959.

— For a period of between 75 and 100 years prior to the year 1964, the subject land was used as a supply dock for aggregate material without the need of any type of retaining wall to protect the subject land and was so used by the sole proprietorship operated by the said Joseph Wilson between the year 1959 and the year 1964.

— In 1964 the sole proprietorship operated by Joseph Wilson found that erosion had taken place and it was necessary to construct an oak wooden retaining wall to protect the subject property.

— The continued effect of the elements, a rising water level, a rapid river current and storm damages caused the former retaining wall to deteriorate to such an extent that it eventually became useless in preventing erosion. A severe storm on or about March 13, 1973 caused substantial damage to the shoreline facing the river in Lambton County and resulted in such damage to the wooden retaining wall that a significant quantity of gravel was washed into the river.

— In the spring of 1976, the 1976 retaining wall that forms the subject matter of the present appeal was constructed to protect and maintain an existing asset

— the land — from damage caused by erosion. Steel was chosen as a replacement material for a variety of reasons, not the least of which was that it was cheaper to replace the existing wall with a steel wall rather than an oak wall.

— At all material times the appellant carried on the business of supplying aggregate material to its customers in Lambton County and elsewhere from its property located on the west side of St Clair Parkway (opposite the municipal number 1470) in the Village of Courtright, which is near Sarnia, Ontario. The legal description of the subject property is described as being the land lying west of the St Clair Parkway and the water lot in front thereof of the north one third of lot 28, front concession Moore Township (formerly Courtright) in the County of Lambton, the Province of Ontario.

— The subject land is used for the purpose of receiving and storing aggregate material used in the business of the appellant and which is shipped to the subject land by means of ship.

Contentions

For the appellant:

— The construction of the 1976 retaining wall constituted a repair which neither materially added to the value of the subject land nor appreciably prolonged its life but which merely kept it in an ordinary, efficient operating condition.

— The 1976 retaining wall did not add to the value of the subject realty but it did prevent the subject land from becoming worthless.

— The 1976 retaining wall did not create a lasting advantage or bring into existence a new asset but was intended to maintain an existing asset — the land — and to preserve the asset from the ravages of erosion.

— The 1976 retaining wall became an integral component of the subject land and had no value apart from its connection to the subject land.

— The events subsequent to the acquisition of the subject land by the appellant, namely the rising water level, the increasingly rapid river current and the storm damage that made the repair of the 1964 retaining wall vital to preserve the non-depreciable asset — the land — from further deterioration due to erosion, were the reasons for the construction of the retaining wall in 1976.

For the respondent:

— The new steel dock was extended further than the old wooden dock;

— the new steel dock appreciably prolonged the life of the property in question and arrested deterioration.

Evidence

Mr Joseph Wilson, president of the appellant company and Mr William Blumas, CA, company auditor, testified regarding the requirement for and nature of the wall in question. It was evident from photographs submitted that the old wall had badly deteriorated and that the new wall was abut 12 feet further out into the stream than the old wall. Mr Blumas estimated that the cost of that “extension” (if that is what it should be termed) would have been about $21,810.80 out of the total $107,437.42 claimed as expense.

Argument

While not conceding that any part of the new wall should be capitalized, counsel for the appellant noted that at the maximum the $21,810 estimated by Mr Blumas could be deductible. Under any circumstances, the balance should be expensed as repairs. Counsel had researched the matter in depth and presented both a substantial list of jurisprudence as follows, and the relevant argument from each case:

British Insulated and Helsby Cables, Limited v Atherton, [1926] AC 205;

Rhodesia Railways, Limited v Collector of Income Tax, Bechuanaland Pro-tectorate, [1933] AC 368;

Hudson’s Bay Company v MNR, [1947] CTC 86; 3 DTC 968;

Corporate Foods Limited v MNR, [1971] Tax ABC 955; 71 DTC 655;

Oakdale Court Limited v MNR, 10 Tax ABC 326; 54 DTC 229;

Wilson Boxes Limited v MNR, 22 Tax ABC 220; 59 DTC 367;

Graham & Vick Limited v MNR, 1 Tax ABC 343; 50 DTC 143;

No 705 v MNR, 24 Tax ABC 228; 60 DTC 301;

Edward A English Estate v MNR, 14 Tax ABC 225; 56 DTC 18.

Certain significant portions from Mr Adams’ argument are quoted:

Here, this was not a dock being built — this is a retaining wall to protect an existing asset. If it had been a dock stretching out into the river we wouldn't be here today. Our submission is that this is a necessary expenditure to protect an existing asset.

. . . the expenditure on the 1976 wall, the steel wall that is the subject matter of the present dispute, this expenditure was not necessarily made once and for all. You have heard evidence today that repairs have been required every year and this year about $10,000 of repairs are required to this wall. Here we have money spent in 1976 and money is to be spent every year subsequent to it to protect the taxpayer’s asset which is the land. The taxpayer didn’t build a new asset such as a dock, but merely a retaining wall. . . . I submit that there is no asset or other advantage for the enduring advantage of trade that was brought into existence, if I can quote Viscount Cave. (From British Insulated and Helsby Cables (supra)).

. . . Rhodesia Railways (supra) spent some 252,174 pounds sterling in replacing rails and sleepers or ties as we call them in Canada along and under some 74 miles of railway track. The judgment indicates that the steel rails were physically removed and replaced with new steel rails. The sleepers or wooden ties were removed and replaced with new wooden ties. Some 74 miles of the track was replaced in this way. The Judicial Committee of the Privy Council reversed the lower court and found the entire sum to be deductible because it was an expense not of a capital nature and was expended for the repair of property occupied for the purpose of trade.

. . . I want to emphasize that in this case the steel rails were physically replaced with new steel rails, not welded or otherwise repaired and the wooden ties were physically replaced rather than being merely patched.

What it did (the new wall) is prevent erosion. If he had not built the wall I submit . . . he would have very soon not been able to pile the sand and gravel where he had been piling it for years.

. . . in the present case the steel retaining wall was not installed on a whim. It was installed because it was abundantly necessary to replace the old wall. You heard evidence, sir, that the steel was used because it was cheaper than oak and the new location was selected because it was cheaper to build there. . .

... the 1976 retaining wall was repaired, which neither materially added to the value of the land nor prolonged its life, but merely prevented it from becoming worthless.

. . . In the case of Shabro Investments Limited v Her Majesty the Queen, ([1979] CTC 125; 79 DTC 5104), we had the situation of a factory or whatever being built on top of a sanitary landfill site. As Chief Justice Jackett says, “There was a hidden defect”.

At page 5106(DTC), he talks about when that part of the building in question was erected there was a hidden defect in the structure thereof which adversely affected its intrinsic value but being unrecognized would not have affected its market value. That, sir, I think makes the entire case distinguishable.

Here we have a sand and gravel business built on the banks of the river. There is no hidden defect here, sir. It’s well known to be a very busy river. The taxpayer had to have its business on the river. You have heard, sir that the sand comes in, the sand and gravel come in from the United States by ship. The ships anchor out and the property is conveyed over and is carried over by the self-unloaders on board the vessels. He had to build by a river or someplace with access to water. There was no hidden defect (in this situation). . . .

. . . in the present case that you are called upon to decide, a simple replacement would have been satisfactory, except it was cheaper on the evidence to build it in a new location with different materials.

In argument, counsel for the respondent noted:

... I believe it is merely that an asset has been created and that is the single criterion, that this land has been improved what would happen to the land if the new retaining wall was not built? The new retaining wall was necessary. Obviously the land is worth more now by virtue of its protection by this new retaining wall than if no retaining wall was built. I suggest the location of the new asset is not a repair of an old asset.

(In) Rhodesia Railways (supra), it would appear that . . . these boilers, although they were new, in all probability did not add to the income or capacity of the ship itself, but merely replaced the old boilers. . . . they look at the whole railroad line as one asset. .. .

Now, probably the best authority for cases of this kind in Canada now is a very recent decision of the Federal Court of Appeal, Shabro Investments Limited v Her Majesty the Queen, and that can be found at 79 DTC 5104 and the panel of the Court was the Chief Justice, Mr Justice Jackett, Mr Justice Urie and Mr Justice Kelly. There are two sets of reasons, one by the chief Justice and one by Mr Justice Urie. This was a case involving construction of a large building on what was a former garbage site, and as it turned out, unfortunately, the garbage site was not quite as stable as it had been hoped and there was damage to the building, new steel pilons had to be put down and a new floor had to be constructed, the main floor and then there were other repairs.

The appellant, the taxpayer, suggested that the cost of putting the new steel pilons down, of replacing the floor, putting in the new floor and these other expenditures, were not capital expenditures. They were merely repairs.

The decision was that the cost of the pilons, the steel pilons and the cost of the floor were capital expenditures. The other minor costs were not. But at 5106 in the right-hand column the Chief Justice states:

“In my view, on the uncontested facts, the learned trial judge reached the correct conclusion at least with reference to the installation of the steel piles for support of the floor.

When that part of the building in question was erected, there was a hidden defect in the structure thereof which adversely affected its intrinsic value but, being unrecognized, would not have affected its market value.”

He goes on to explain why in a sense this is not a repair, it is something new, but the floor is a more interesting one.

At 5107 in the right-hand column:

“My conclusion is that, prior to the change, the part of the building in question had a floor (consisting of concrete slabs resting on garbage fill) which made the lower floor of that part of the building unusable and that to remedy that situation and to improve the building by making the space in question usable it was necessary to replace that floor by a floor consisting of a concrete slab reinforced by steel resting on steel piles. With some hesitation, my view is that the improvement operation was the whole replacement work and not merely the sinking of the steel piles.

Again, I return to the fact that, while the difference between repairs and capital additions or improvements is obvious in certain cases, . . ..”

In my submission it is obvious in this case.

. . . it becomes a matter of difficulty in others. Examples of cases that, I suggest, are evident, are

(a) if a building were built with a thatched roof, while filling in holes in the roof would be repairs, replacing the thatched roof, by reason of its unsuitability to modern living, with a modern roof, metal or wooden, would be a capital improvement in the structure of the building;”

In this case we have an oak retaining wall. It is completely replaced. It is not repaired. It is replaced by a new one, by a steel one and I agree with my friend, it doesn't matter if this new one is steel, oak, anything else. The fact that is important is it is a new one.

Findings

While sometimes referred to as a “dock” or a “wall” in the documentation, the term “wall” will be used in this decision to refer to the physical structure involved, whether erected in 1964 — “the old wall”, or in 1976, “the new wall”. It should also be noted that the old wall (called “dock”) was apparently shown in the capital assets of the appellant and depreciated accordingly. I would also note that on the evidence I am quite convinced that at a minimum the cost of $21,810.80 calculated by Mr Blumas to reflect the “extension” must be considered as a capital asset. It served a larger function than the original wooden wall, and it was in an entirely different location, thereby preserving a greater area of the water lot adjacent to the land used for stockpiling. The first part of the Minister’s contention “that the new steel dock was extended further than the old wooden dock” has been upheld, and for that portion of the cost, the Minister’s assessment is valid. It only remains therefore to examine how the balance of the outlay should be treated — theoretically to “replace” (according to the Minister), or “repair” (according to the appellant).

According to the Minister,“the new steel dock appreciably prolonged the life of the property in question and arrested deterioration”. I would venture to suggest that there is nothing in that contention with which the appellant would disagree and so, I cannot see in what manner its proof or disproof could aid either the appellant or the respondent, To quote counsel for the appellant (noted above): “Obviously, the land is worth more now by virtue of its protection by this new retaining wall than if no retaining wall was built.” However, it would appear to me that at the hearing counsel for the minister relied on the fact that a new asset had been created, one which replaced the old one from both a physical and a utilitarian viewpoint. As I see it, counsel is correct — it would not have made any difference if the appellant had taken out and replaced the old wall in the same place, with either steel or oak, no matter what the economics of the choices might have been. The old wall had served its purpose and, to quote counsel for the appellant . a simple replacement would have been satisfactory, except it was cheaper on the evidence to build it in a new location with different materials.”

It can be expected that even the new wall will require repairs and possibly, at some time, replacement itself. In the current year some $10,000 was already spent on it for maintenance. While the old wall and the new wall both serve to preserve the land, they also provide some stability for the main purpose for which that land is used — to stockpile aggregate. The photographs presented by the appellant as part of his evidence would indicate that the stockpiling of the aggregate on the water’s edge of the land used could have been a factor contributing to the deterioration of the old wall, in addition to the factors such as ‘’elements, a rising water level, a rapid river current, and storm damages”, noted by the appellant. In my view, the case of Shabro (supra) is virtually on point with the instant case and must be the jurisprudence to be relied upon by the Board. The fact that there was a “hidden defect” in Shabro (supra) while important in that case, does not render Shabro invalid for application to the facts of this case — the important factor to me is that in both instances the original asset was replaced when it could no longer serve the function for which it had been constructed.

Decision

The appeal is dismissed.

Appeal dismissed.