Saskatchewan Wheat Pool v. R., [1997] 1 CTC 2627, 96 DTC 1795

Bonner T.C.C.J.: - Alberta Wheat Pool appeals from assessments of income tax for its 1980 to 1984 taxation years. Saskatchewan Wheat Pool appeals from assessments of income tax for its 1980 to 1986 taxation years. The appeals were heard together on common evidence. Both appellants were members of a joint venture which constructed a terminal grain elevator at Prince Rupert, British Columbia. Construction commenced before November 12, 1981 and was not completed for many years. The parties agreed that the elevator was property described in Class 29 of Schedule II to The Income Tax Regulations. During the taxation years in issue the appellants incurred interest expense on borrowed money used for the purpose of constructing the Class 29 property. Each appellant claimed capital cost allowance under paragraph 20(1 )(a) of the Income Tax Act (“Act”) and investment tax credits under section 127 of the Act on the basis that the capital cost of its interest in the terminal included interest on the borrowed money used to construct the terminal during the period prior to the completion of construction. By the assessments in issue the Minister of National Revenue denied claims for capital cost allowance and investment tax credits to the extent that they were founded on the capitalization of interest costs.

The parties agreed that the appellants did not elect under section 21 of the Act to effect the capitalization of the interest. They agreed further that he interest was not capitalized under subsection 18(3.1) of the Act. The -sole issue under appeal is whether the capital cost to the appellants of the property includes, as they contend, construction period interest or whether, as the respondent contends, it did not by reason of the failure to elect under section 21.

Subsection 21(1) provides that where a taxpayer acquires depreciable property in a taxation year, he may elect in his return to add to the capital cost of the depreciable property the amount of interest expense that would otherwise have been deductible in computing income for the current taxation year or the three immediately preceding taxation years. The interest expense which may be so added must have been in respect of borrowed money used to acquire the depreciable property ...” or in respect of “... the amount payable for the depreciable property acquired by him ...”. The taxpayer may specify any amount in his election up to the total amount which qualifies. The taxpayer may, under subsection 21(3) of the Act make a similar election in a subsequent taxation year in respect of interest that continues to be paid on borrowed money used to acquire the depreciable property or on the amount payable for the depreciable property so acquired. The interest in respect of which an election may be made must otherwise be deductible pursuant to paragraph 20(1 )(c) or paragraph 20(1 )(d) of the Act in computing income.

Subsections 21(1) and (3) in the form applicable at the beginning of the period now in issue read: [1]

21. (1) Where in a taxation year a taxpayer has acquired depreciable property, if he elects under this subsection in his return of income under this Part for the year,

(a) in computing his income for the year and for such of the 3 immediately preceding taxation years as the taxpayer had, if any, paragraphs 20(1 )(c),

(d) and (e) do not apply to the amount or to the part of the amount specified by him in his election that, but for this subsection, would have been deductible in computing his income (other that exempt income) for the year and for those immediately preceding years, if any, by virtue of those paragraphs in respect of borrowed money used to acquire the depreciable property or the amount payable for the depreciable property acquired by him; and

(b) the amount or the part of the amount, as the case may be, described in paragraph (a) shall be added to the capital cost to him of the depreciable property so acquired by him.

(3) In computing the income of a taxpayer for a taxation year, where the taxpayer

(a) in any preceding year made an election under subsection (1) in respect of borrowed money used to acquire depreciable property or an amount payable for depreciable property acquired by him, and

(b) in each taxation year, if any, after that preceding year and before the taxation year, made an election under this subsection covering the total amount that, but for this subsection, would have been deductible in computing his income (other than exempt income) for each such year by virtue of paragraphs 20(1 )(c), (d) or (e) in respect of the borrowed money used to acquire the depreciable property or the amount payable for the depreciable property acquired by him,

if he elects under this subsection in his return of income under this Part for the year, paragraphs 20(1 )(c), (d) and (e) do not apply to the amount or to the part of the amount specified by him in his election that, but for this subsection, would have been deductible in computing his income (other than exempt income) for the year by virtue of any of those paragraphs in respect of the borrowed money used to acquire the depreciable property or the amount payable for the depreciable property acquired by him, and the said amount or part of the amount, as the case may be, shall be added to the capital cost to him of the depreciable property so acquired by him.

Section 21 evolved from section 85J of the former Act. Section 85J was a legislative response to the decision of the Exchequer Court in Sherritt Gordon Mines Ltd. v. Minister of National Revenue^ [2] in which it was held 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.

Subsection 127(5) of the Act permits the deduction from tax otherwise payable under the Act of a taxpayer’s “investment tax credit at the end of the year”. Subsection 127(9) defines the term “investment tax credit” in such a way as to include a percentage of “...all amounts each of which is the capital cost to (the taxpayer) of a qualified property ...”. Subsection 127(11.2) excludes from the computation of capital cost for purposes of subsection 127(9) amounts added to capital cost by virtue of section 21 of the Act. Subsection 127(11.2) read at the beginning of the period now in issue: [3]

(11.2) For the purpose of subsection (9),

(a) the capital cost to a taxpayer of property shall be computed as if no amount were added thereto by virtue of section 21; ...

Essentially it is the position of the respondent that interest can be capitalized under section 21 and not otherwise. It is the position of the appellants that the rule in Sheritt Gordon lives on and that, because they did not elect under section 21 :

(a) construction period interest forms part of the “capital cost to the tax- payer of property” for purposes of capital cost allowance claimed under paragraph 20(1 )(a) of the Act and

(b) the rule in subsection 127(11.2) does not apply.

Each of the parties called an expert witness to testify regarding generally accepted accounting principles in relation to the capitalization of construction period interest and regarding the meaning to accountants of the term “capital cost”. In my view the evidence was not helpful, not because of any lack of expertise on the part of either expert regarding accounting principles and practices, but rather because the meaning of the phrase in paragraph 127(9)(a) of the Act, “... all amounts each of which is the capital cost to him of a qualified property ...” is a matter of law to be determined by the application of appropriate principles of statutory construction.

It is not necessary to embark on an exhaustive review of recent decisions on statutory construction. It should be noted that the legislature is compelled to express its intention by the use of the written word. Thus, the words of the legislation are of considerable importance. They must however be read in context. It would be well to remember:

(a) The words of Cartwright J. in Highway Sawmills Ltd. v. Minister of National Revenue, [1966] S.C.R. 384, [1966] C.T.C. 150, 66 D.T.C. 5116 at pages 157-58 (D.T.C. 5120):

The answer to the question what tax is payable in any given circumstances depends, of course, upon the words of the legislation imposing it. Where the meaning of those words is difficult to ascertain it may be of assistance to consider which of two constructions contended for brings about a result which conforms to the apparent scheme of the legislation.

(b) The words of Estey J. in Stubart Investments Ltd. v. R., (sub nom. Stubart Investments Ltd. v. The Queen), [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305, at page 316 (D.T.C. 6323):

While not directing his observations exclusively to taxing statutes, the learned author of “Construction of Statutes”, 2nd ed., (1983), at page 87 E. A. Dreidger, put the modern rule succinctly:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

(c) The words of Iacobucci J. in Antosko v. Minister of National Revenue, (sub nom. Canada v. Antosko) [1994] 2 S.C.R. 312, [1994] 2 C.T.C. 25, (sub nom. Antosko v. R.) 94 D.T.C. 6314, at pages 326-27 (C.T.C. 31):

While it is true that the courts must view discrete sections of the Income Tax Act in light of the other provisions of the Act and of the purpose of the legislation, and that they must analyze a given transaction in the context of economic and commercial reality, such techniques cannot alter the result where

the words of the statute are clear and plain and where the legal and practical effect of the transaction is undisputed: Mattabi Mines Ltd. v. Ontario (Minister of Revenue), [1988] 2 S.C.R. 175, at page 194; see also Symes v. Canada, [1993] 4 S.C.R. 695.

It is not to be assumed that the legislature has been careless in its choice of words especially when that assumption leads to a bizarre result. In both section 21 and subsection 127(11.2) the process of capitalizing is described as adding the interest in question to the cost of the property. If the appellant is right in asserting that, by reason of generally accepted accounting principles, construction period interest forms part of the capital cost of property for purposes of the Act, then section 21 would have to be regarded as expressly conferring authority on a taxpayer to elect to “add to the capital cost to him of depreciable property” interest costs which have already been included. It is inconceivable that the legislative reaction to Sheritt Gordon was to enact a provision expressly permitting interest to be counted twice in the computation of cost and yet that is the result which flows from the application of the appellants’ argument to the plain language of the statute.

The appellants’ contention is inconsistent with the scheme of the Act having regard to subsection 127(11.2). I start from the premise that interest, when deducted under paragraphs 20(1 )(c) or (d), does not qualify for an investment tax credit. Subsection 127(11.2) is plainly intended to ensure that the base on which the investment tax credit is calculated is no larger in the case of a taxpayer who capitalizes construction period interest than in the case of a taxpayer who deducts interest under paragraphs 20(1 )(c) or d). The appellants’ contention that capitalization can be effected by reliance on generally accepted accounting principles, with the result that construction period interest can form part of the base for the investment tax ‘redit, renders subsection 127(11.2) ineffectual. As well it renders much of section 21 surplusage. I therefore conclude that the respondent is correct ■mi asserting that capitalization can be effected under section 21 and not —otherwise.

Quite apart from the legislative reaction to Sheritt Gordon I might add lat, in my view, that case was not correctly decided. It is difficult to omprehend how “... the return or consideration or compensation for the ■se or retention by one person of a sum of money, belonging to, in a 311oquial sense, or owed to, another...” [4] can, in the absence of express tutory direction, be regarded as part of the “...capital cost to the tax- xyer of property …” within paragraph 20(1)(a). In the Sterling v. R., (sub m. Sterling v. The Queen) [5] the Federal Court of Appeal held that interest and safekeeping charges were not part of the cost of property for purposes of subparagraph 40(l)(c)(i) and section 54 of the Act. Pratte J. stated:

In our opinion, they were not. As we understand it, the word “cost” in those sections means the price that the taxpayer gave up in order to get the asset; it does not include any expense that he may have incurred in order to put himself in a position to pay that price or to keep the property afterwards.

In my view there is a clear difference between a cost incurred in connection with the acquisition of an asset and the cost of the asset itself. The assertion that interest on borrowed money used to acquire property forms part of the capital cost to the taxpayer of that property is also inconsistent with the decision of the House of Lords in Birmingham (City) v. Barnes (Inspector of Taxes), (sub nom. Birmingham Corp. v. Barnes)^ [6] where it was held that “the actual cost to” a taxpayer of depreciable property is equal to the amount paid by the taxpayer. As Lord Atkin said:

What a man pays for construction or for the purchase of a work seems to me to be the cost to him: and that whether someone has given him the money to construct or purchase for himself; or, before the event, has promised to give him the money after he has paid for the work; or, after the event, has promised or given the money which recoups him what he has spent.

The appeal of Alberta Wheat Pool will be dismissed with costs.

The appeal of Saskatchewan Wheat Pool will be allowed solely to give effect to the Consent to Judgment filed. The respondent shall have her costs to the extent that they have not been excluded by the Consent.

Appeal dismissed.