General Diesel Inc v. Minister of National Revenue, [1980] CTC 2893, 80 DTC 1791

Guy Tremblay [TRANSLATION]:—This case was heard at Quebec (Québec) on May 23, 1979.

1. The Point at Issue

The issue is whether grants of $2,565.20 and $40,175, which the appellant received from the Quebec Industrial Development Corporation with respect to interest paid by the appellant in 1973 and 1974, are taxable in the appellant’s hands for the said years.

2. The Burden of Proof

The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof derives not from one particular section of the Income Tax Act, but from several judicial decisions, including the judgment of the Supreme Court of Canada in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. The Facts

A. The facts are not in dispute

3.01 The appellant is a corporation whose main objects are the manufacture of generators, and the conversion, sale and repair of Diesel motors.

3.02 In 1973, the appellant planned to acquire a piece of land for the construction of a building, to relocate and to purchase machinery and equipment.

3.03 On September 12, 1972, the appellant applied for financial assistance to the Quebec Industrial Development Corporation (QIDC) under the Quebec Industrial Development Assistance Act (Exhibit A-1).

3.04 On or about June 20, 1973, the QIDC sent the appellant an offer of financial assistance, as appears from the document filed as Exhibit A-2.

3.05 The QIDC’s offer of June 20, 1973 was based on the following invest ment plan:

3.06 On or about June 27, 1973, the QIDC’s offer was accepted by the appellant, as appears from the document dated June 20,1973 which is filed as Exhibit A-2.

3.07 On or about December 14, 1973, the QIDC informed the appellant that the amendments to the offer of financial assistance dated June 20, 1973 were approved, as appears from the document filed as Exhibit A-3.

3.08 On or about February 14, 1974, the QIDC entered into an agreement with the appellant, as appears from the document filed as Exhibit A-4; the said agreement came into force on June 13, 1973.

3.09 The QIDC’s assistance was calculated in terms of a loan of $700,000 which the appellant contracted with the Canadian National Bank with interest of 9 from July 1, 1973.

3.10 The actual cost of the project as of October 31, 1974 was the follow- ing:

3.11 For the 1973 and 1974 years in question, the financial years of the appellant were from November 1,1972 to October 31,1973 and from November 1, 1973 to October 31, 1974 respectively.

3.12 The nature of the QIDC’s assistance to the appellant is set out in clause 3.00 of the agreement (Exhibit A-4), which reads as follows:

The Corporation agrees to assume part of the cost of the above-mentioned loan equal to the lesser of the following two amounts: forty per cent (40%) of the annual interest paid on the said loan or the amounts set out in the table which appears in clause 3.01 hereinafter.

In clause 3.01 the amount specified for 1974 is $25,400 and for 1975 is $22,700. The QIDC’s payments for 1974 must be based on the actual interest payments made by the appellant in 1973 and mutatis mutandis for the other years. The total amount of the QIDC’s assistance was not to exceed $134,100, as the amount determined for each year including 1974 and 1975 was only approximate.

3.13 Clause 5.00 of the agreement (Exhibit A-4) reads as follows:

The Company must submit a claim accompanied by supporting documents no later than January 31 of each year, indicating the amount of interest paid or then owing on the loan and an auditor’s certificate relating thereto, the whole to the Corporation’s satisfaction.

3.14 On January 31, 1974, through its auditors Boulanger, Fortier, Rondeau & Co, the appellant sent the QIDC the claim in accordance with clause 5.00 cited above. The document indicates that the interest accrued and paid up to December 31, 1973 amounts to $16,005.78.

3.15 On April 5, 1974, in filing its income tax return for the 1973 taxation year, the appellant claimed a deduction for interest in the amount of $6,413 with respect to a loan which it contracted to carry out an investment project.

3.16 This accrued interest in the amount of $6,413 covered the period from July 1, 1973 to October 31, 1973.

3.17 On April 21, 1975, in filing its income tax return for the 1974 taxation year, the appellant claimed a deduction for interest in the amount of $100,438.25 with respect to a loan which it contracted to carry out the same investment project.

3.18 This accrued interest in the amount of $100,438.25 covered the period from November 1, 1973 to October 31, 1974.

3.19 During 1973, the appellant did not receive any assistance from the QIDC.

3.20 During the 1974 taxation year, the appellant received a payment of $6,402 from the QIDC, representing 40% of the cost of the loan in the amount of $16,005 for the period from July 1, 1973 to December 31, 1973.

3.21 The amount of $6,402 received from the QIDC was allocated as follows by the appellant in its financial statements and tax return (Canada) for 1974:

B. Assessments, facts assumed and respondent’s position

3.22 The respondent added $2,565.20 to the appellant’s income for 1973.

3.23 The respondent added $40,175 to the appellant’s income for 1974.

3.24 Among the facts assumed by the respondent to establish the assessments, it is stated that at the end of the 1973 taxation year, namely at October 30, 1973, the appellant had an unconditional right to receive a sum of $2,565.20 (or 40% of the $6,413 interest which the appellant paid in 1973 to carry out the planned project). At the end of the 1974 year, (namely at October 30, 1974), this unconditional right amounted to $40,175 (or 40% of $100,438.25).

3.25 According to the respondent, the QIDC’s assistance was specifically intended to reduce the cost of financing the investment project and not to pay part of the capital cost of depreciable property which the appellant had to purchase, and the assistance was not given to the appellant to purchase depreciable property.

3.26 According to the respondent, the appellant received interest from QIDC in the normal course of its business.

3.27 According to the respondent, the appellant did not incur interest expense in the amounts of $2,565.20 and $40,175 during the 1973 and 1974 taxation years to the extent that it had an unconditional right to be repaid these amounts by the QIDC.

C. Appellant’s position

3.28 The appellant submits that the sums received from the QIDC are not taxable, and also that these sums of $2,565.20 and $40,175 at the end of the 1973 and 1974 years were not owed unconditionally by the QIDC but were, on the contrary, subject to the approval of the QIDC.

4. Act—Case Law-Comments

4.1 Act

The respondent bases his position on subsection 9(1), paragraphs 18(1)(a), 20(1 )(c) and section 67 of the new Income Tax Act. These sections will be cited, if necessary, during the comments.

On the other hand, the appellant bases its position on paragraph 13(7)(e) of the new Income Tax Act for 1973 and subsection 13(7.1) of the new Act, and on the temporary provision of subsection 14(1) of c 71, SC 1974-75-76. These two provisions read as follows:

13.(7) For the purpose of this section and any regulations made under paragraph 20(1)(a) the following rules apply:

(e) where a taxpayer has received or is entitled to receive from a government, municipality or other public authority, in respect of or for the acquisition of property, a grant, subsidy or other assistance other than an amount authorized to be paid under an Appropriation Act and on terms and conditions approved by the Treasury Board for the purpose of advancing or sustaining the technological capability of Canadian manufacturing or other industry, the capital cost of the property shall be deemed to be the capital cost thereof to the taxpayer minus the amount of the grant, subsidy or other assistance.

13.(7.1) For the purposes of this Act, where a taxpayer has deducted an amount under subsection 127(5) in respect of a depreciable property or has received or is entitled to receive assistance from a government, municipality or other public authority in respect of, or for the acquisition of, depreciable property, whether as a grant, subsidy, forgiveable loan, deduction from tax, investment allowance or as any other form of assistance other than

(a) an amount authorized to be paid under an Appropriation Act and on terms and conditions approved by the Treasury Board in respect of scientific research expenditures incurred for the purpose of advancing or sustaining the technological capability of Canadian manufacturing or other industry,

(b) an amount deducted as an allowance under section 65, or

(b.1) an amount received under a program that is a prescribed program of the Government of Canada relating to home insulation for the purposes of paragraph 56(1)(s),

the capital cost of the property to the taxpayer shall be deemed to be the amount by which the aggregate of

(c) the capital cost thereof to the taxpayer, otherwise determined, and

(d) such part, if any, of the assistance as has been repaid by the taxpayer pursuant to an obligation to repay all or any part of that assistance,

exceeds the aggregate of

(e) all amounts deducted under subsection 127(5) in respect of that property,

and

(f) the amount of the assistance.

14.(1), Chap 71, 1974-75-76 (Application of section 13(7.1).

Subsection 13(7.1) of the said Act as enacted by subsection (4) is applicable after May 6, 1974, except that in its application to acquisitions of property occurring before November 19, 1974, subsection 13(7.1) of the said Act shall be read as follows:

(7.1) For the purpose of this section and any regulations made under paragraph 20(1)(a), where a taxpayer has received or is entitled to receive from a government, municipality or other public authority, in respect of or for the acquisition of property, a grant, subsidy or other assistance other than an amount authorized to be paid under an Appropriation Act and on terms and conditions approved by the Treasury Board for the purpose of advancing or sustaining the technological capability of Canadian manufacturing or other industry, the capital cost of the property to the taxpayer shall be deemed to be the amount by which the aggregate of

(a) the capital cost thereof to the taxpayer, otherwise determined, and

(b) such part, if any, of the grant, subsidy or other assistance as has been repaid by the taxpayer pursuant to an obligation to repay all or any part of that grant, subsidy or other assistance,

exceeds

(c) the amount of the grant, subsidy or other assistance.

4.2 Case Law

The following case law was cited by the parties:

1. GTE Sylvania Canada Limited v The Queen, [1974] CTC 408; 74 DTC 6315;

2. The Queen v GTE Sylvania Canada Limited, [1974] CTC 751; 74 DTC 6673;

3. Reliance Products Ltd v MNR, [1974] CTC 2214; 74 DTC 1157;

4. Jack Spratt Mfg Inc v MNR, [1975] CTC 2377; 76 DTC 1007;

5. Brown v CRI, 12 Tax Case 1256;

6. Texas and Pacific Ry Co v US (1932), 286 US 285;

7. Helvering v Clairborne-Annapolis Ferry Co, 286 US p 128;

8. Blake v Imperial Brazilian Railway (1884), 2 TC 58;

9. Nizam’s Guaranteed State Railway v Wyatt (1890), 2 TC 584;

10. Higgs v Wrightson (1944), 26 TC 73;

11. Maple Leaf Mills Ltd v MNR, [1976] CTC 324; 76 DTC 6182;

12. St John Dry Dock v MNR, [1944] CTC 106; 2 DTC 663;

13. Nuclear Enterprises Ltd v MNR, [1971] CTC 449; 71 DTC 5243;

14. Okalta Oils Ltd v MNR, [1955] CTC 271; 55 DTC 1029;

15. Radio Engineering Products Ltd v MNR, [1973] CTC 29; 73 DTC 5071;

16. Pretoria-Pietersburg Railway Company Ltd v Elwood (1908), 6 TC 508;

17. Order in Council, no 1955, Quebec Official Gazette, June 5, 1971, 103rd year, no 23;

18. John Col ford Contracting Co Ltd v MNR, [1962] CTC 546; 62 DTC 1338.

4.3 Comments

4.3.1 The problem is, first of all, to determine whether the grant is taxable. To properly answer this question, it must be determined whether paragraph 13(7)(e) cited above and subsection 13(7.1) of the new Income Tax Act apply. If they do, it will be unnecessary to include the sums received in the appellant’s income, because the application of the sections cited above is in fact the form used when the legislator does not want the grant to be included in income.

In addition, it will be necessary to determine whether the sum which the appellant may claim from the QIDC at the end of a financial year is unconditional, in the sense that it can be considered an amount to be received at the end of this year and therefore included in the computation of income.

4.3.2 Do paragraph 13(7)(e) and subsection 13(7.1) apply?

The sections cited above describe the treatment for tax purposes of a grant received by a taxpayer from a public authority in respect of or for the acquisition of property. The cost of the property for the taxpayer is deemed to be the price paid minus the grant which applies to that property. The legislator did not want the taxpayer to benefit from depreciation on the part of the property paid for by public funds.

At first glance, these sections seem to apply.

Section 4 of the Quebec Industrial Development Assistance Act (SQ 1971, c 64) provides, among other things:

Financial assistance may be granted to a manufacturing business for one or more of the following purposes:

(a) the purchase, construction, improvement or extension of works or manufactories and the purchase of the land required for the operation of such works or manufactories;

(b) the purchase of machinery, tools and equipment for operating works or manufactories and their installation;

As in the present case, the grant is for an investment project relating to, among other things, the acquisition of buildings and machinery (see par 3.05 of the Facts), and it therefore appears that paragraph 13(7)(e) (1973) and subsection 13(7.1) (1974) should be applied.

However, the form of the financial assistance provided for by the Quebec Industrial Development Assistance Act must be considered. According to sections 5 to 10 of that statute, the form of financial assistance may be, among others, a guaranteed loan to the manufacturing business, the acquisition of property, machinery, etc by the QIDC for resale or lease to the business, the construction of a building by the QIDC for resale or lease to the business, etc.

Another form of assistance which is used in this case is the “assumption by the Corporation of part of the cost of loans contracted by the business,” (section 8(a) of the said Act).

Clause 3 of Exhibit A-4 is clear to that effect (see par 3.12 of the facts). In short, the QIDC assumes part of the cost of the loan equal to 40% of the annual interest paid in the years in question. On the other hand, by its very nature interest is not part of the cost of the depreciable property. The full amount of the annual interest is in fact allowed as a deduction in the computation of the net income of the business.

Accordingly, paragraph 13(7)(e) and subsection 13(7.1) of the new Income Tax Act, which were cited by the appellant, cannot be applied. As explained above, the effect of these sections is to reduce the cost of the depreciable property by the amount of the grant which was used in part to purchase the property.

This conclusion cannot be attacked by saying that the 40% of the interest paid is merely a yardstick to determine the amount of the grant and that therefore the interest must not be considered as such, that is, as being excluded from the cost of the depreciable property. On the contrary, section 5.04 of the agreement is clear on this point:

However, the Corporation may, if it considers it appropriate, pay the said sum jointly to the order of the Company and the creditor in the loan agreement referred to in clause 1.00 above, if the interest owing to the creditor is overdue on the date of the payment by the Corporation.

The emphasis is the Board’s. This section clearly shows that the reference to interest is not simply a yardstick to determine the grant. On the contrary, the grant is made to pay part of the interest and once again, it is not part of the cost of the depreciable property.

The grant must therefore be simply applied to reduce the interest paid, or another way of accounting for it would be to include it in income after deducting the full amount of interest paid.

4.3.3 Does the appellant have an unconditional right to the annual claim?

The respondent included in the appellant’s income for its financial year ending on October 31, 1973 the sum of $2,565.20, and the sum of $40,175 for the financial year ending on October 31, 1974 (see par 3.24 of the facts).

According to the respondent, on those dates the appellant had an unconditional right to receive the said sums.

In order for an amount to be considered as an account receivable on a given date, the alleged creditor must be entitled on that date to successfully sue the debtor.

In the present case, was the appellant entitled on October 31, 1973 to claim the sum of $2,565.20? The Board does not think so. The QIDC in fact paid the claim on the basis of the calendar year and not the appellant’s financial year. The payment of $6,402 received in 1974 was 40% of the amount of $16,005 in interest paid by the appellant for the period ending on December 31, 1973 (see par 3.20 of the facts).

The appellant had until the end of January, 1974 to submit its claim and it did so (see par 3.13 and 3.14 of the facts).

The Board is of the opinion that the sum of $2,565.20 was not an account receivable on October 31, 1973. The same is true for 1974 with respect to the sum of $40,175.

5. Conclusion

For all practical purposes, the appeal for the 1973 taxation year is allowed, and the appeal for the 1974 taxation year is allowed in part, and the matter is referred back to the respondent for reassessments according to the reasons for judgment.

Appeal allowed in part.