Harwill Investment Corp. v. R., [1999] 2 CTC 342, 99 DTC 5207

Noël J.A. (Décary J.A. concurring):

I have had the benefit of reading the reasons of my colleague Mr. Justice Létourneau and with respect, cannot agree with his conclusion. In my view, the Tax Court Judge arrived at the correct result in this case.! [1]

In order to determine whether a given expenditure is made on a capital or revenue account, one must identify the advantage sought by the payor in incurring the expenditure. As stated by Jacket! P. in Minister of National Revenue v. Algoma Central Railway [2] and quoted by the Tax Court Judge:

In all these cases, and in the other cases referred to in the various decisions to which reference was made during the argument, the “advantage” that was held to be of an enduring benefit to the taxpayer’s business was the thing contracted for or otherwise anticipated by the taxpayer as the direct result of the expenditure. In all such cases it was the “advantage” so acquired that, it was contemplated, would endure to the benefit of the taxpayer’s business....3 [3] [emphasis added]

An expenditure may be associated with more than one goal. In Algoma, the direct result of the expenditure from the perspective of the payor was information produced by geological surveys which could be made available to the public. A further advantage also resulted from:

...the possibility that, as a consequence of placing such information in the hands of appropriate members of the public, some of them would be attracted to the area through which the appellant’s railway ran, would conduct exploration operations, would make mineral finds, and would develop mines, with the consequence that businesses of various kinds would be established in the area and thus a substantial volume of traffic would find its way on to the appellant’s transportation systems, which traffic would otherwise not find its way there. [4]

While Jackett P. was of the view that this second benefit might have been within the contemplation of Algoma when the expenditure was made it was not the direct advantage sought.

Here, the Tax Court Judge noted that the appellants in incurring the expenditure in issue probably contemplated that the popularity of Place Versailles would thereby be enhanced. She found however that the direct advantage sought was the expansion of the parking facilities of Place Versailles.* [5] In my view, this conclusion is supported by the evidence and should not be overturned.

From the perspective of the appellants, it was a given throughout the negotiations which led to the transaction that an expansion of the parking facilities required both an exchange of land with the City and the relocation of the Pierre Corneille Street northward. An internal memorandum of the City of Montréal reveals that:

Dans le but d’agrandir le terrain de stationnement du centre commercial “Place Versailles”, le requérant demande à la Ville le déplacement vers le nord, sur une distance approximative de 150 pied, d’une partie de la rue Pierre Corneille à même les terrains qui lui appartiennent, et se dit prêt à en assumer tous les frais. [6] frais.®

[emphasis added]

The Offer of Exchange from Place Versailles to the City in fact provides for the exchange of land, on condition inter alia that Place Versailles pay the costs for the relocation of the Pierre Corneille Street, that the City close a portion of the Street, and that the City also construct a new street in 1985.’ [7] According to William Gregory, who testified on behalf of the appellants:

this was the offer that we were making to the City, saying we were going to pay all of the costs that the City incurs to take the street where it is now and put it into the new place. Since we owned the land where it was going, there was no need to discuss land cost because we would give them the land and take the other. So that was just a straight exchange and we were going to cover all of the City’s out-of-pocket expenses.^ [8]

The intent of the appellants in proceeding with the transaction was again reiterated in the preamble to the Deed of Exchange as follows:

ATTENDU que (Place Versailles) désir agrandir et moderniser son centre d’achats...9 [9]

A further condition was added to the Deed of Exchange at the request of the City, namely that the appellants undertake to proceed with a six million dollar expansion of Place Versailles subject to the forfeiture of a one million dollar bond which had been posted to guarantee this obligation. There is no doubt that this bond operated to guarantee that the appellants would make good on their promise to expand the shopping centre independently of any other obligation arising under the Deed of Exchange. However, this does not alter the fact that from the perspective of the appellants, the exchange of land and the relocation of the street were not severable and were integral parts of the agreement which would allow for the expansion of the parking lot.

This is to be contrasted with the situation in Oxford Shopping Centres Ltd. v. R. [10] where Thurlow A.C.J. held that the expenditure in question was on account of revenue. In Oxford, preliminary plans had been developed by the City for a clover-leaf type of interchange in order to control traffic congestion at a specific intersection. The interchange,

if constructed, would have taken a considerable portion of the plaintiff’s parking area and would have made it necessary for the plaintiff to find other parking space, either by constructing a parking garage or otherwise, in order to fulfill its commitment to its tenants with respect to the provision of adequate parking. The plaintiff objected to the proposal on several grounds and succeeded in persuading the City to join with it in having a study made by traffic consultants. As a result of this, the plan for a clover-leaf interchange was abandoned in favour of what was referred to as a “tight-diamond” interchange. I *

That is the background against which Thurlow A.C.J. found as a fact that the purpose of the expenditure was to alleviate the undesirable effects of traffic congestion on the ongoing operations of the shopping centre:

The need or occasion for the expenditure, in my view, was the undesirable effects which traffic congestion was causing and could be expected to cause on the popularity of the shopping centre..? [12]

Earlier, Thurlow A.C.J. had said:

...I [do not] think the question is resolved and the expenditure characterized as capital simply because the agreement was one of several related agreements some of which plainly dealt with matters of a capital nature and which altogether made up a single complex transaction. If there had been but a single agreement in which the expenditures were not segregated or severable, the eas eas- ily recognizable capital nature of what was involved in the other agreements might well have served to characterize the whole. But I do not think that the same result follows where the particular expenditure has been carefully segregated in a separate agreem which demonstrat what the particular expenditure was for.

Moreover, while the undesirable effects of traffic congestion on the popularity of the shopping centre and on its prospects for competing with a rival shopping centre might conceivably have led to some other whole or partial solution involving an outlay of a capital nature, such as to restructure the shopping centre or its buildings or its means of access, and ress and some such outlays may indeed have been made), this is 0t whal t expimditure here in es on was for The mane ’ was not cid or change in 0r additions to the la' li " ULeilk. ises or the buildings thereon or in connection with the structure s of the plaintiff's business^ Rather, it was paid to induce the City to make changes on City property that could be beneficial to the plaintiff in achieving its object of promoting its business by enhancing the popularity of its shopping centre. [13] *[emphasis added]

Here, the exchange of land and the payment for the relocation of Pierre Corneille Street are not severable. The evidence is clear that both were viewed by the appellants as part and parcel of a single arrangement the purpose of which was to allow for the expansion of the parking facilities. As such the decision of this Court in Oxford can be of no assistance to the appellants.

I would therefore dismiss the appeal with one set of costs for all six related appeals.

Létourneau J.A. (dissenting):

This is an appeal by Harwill Investment Corporation from a judgment of a judge of the Tax Court of Canada dismissing its appeal from an assessment by the Minister of National Revenue (Minister) in respect of the 1986 taxation year.

The sole issue before us consists in determining whether the payment of $480,900 made by the appellant to the City of Montreal is or is not a capital expense for taxation purpose. Such payment was to reimburse the City of Montreal for the cost it incurred as a consequence of the relocation of Pierre Corneille Street. The Tax Court concluded that the payment was on account of capital and the deduction claimed by the appellant was denied pursuant to paragraph 18(1)(b) of the Income Tax Act (Act). Hence the appeal.

Facts

The appellant is a co-owner of Place Versailles Shopping Centre (Place Versailles) in Montreal. All the co-owners appealed against the assessment made by the Minister, but it was agreed to proceed only in the file of the appellant. However, the decision rendered in the present appeal will affect the appeals of the other co-owners in files A-229-93, A-230-93, A-231-93,

A-232-93 and A-234-93.

It became apparent to the co-owners of Place Versailles in the mid eighties that, in order to remain competitive with another shopping centre that operated only one mile away from them, they had to improve and upgrade the services to their tenants as well as to the customers so that their rental income could increase. To that end, they had hoped to expand Place Versailles to the north by enlarging its parking lot.

I hasten to add that this was not the first time that Place Versailles expanded its operations. Such operations started in 1963 and the first expansion came in 1965. A second expansion came in 1969 to the north and, interestingly enough, this expansion, as in the present instance, involved an exchange of lands between Place Versailles and the City of Montreal. As a matter of fact, Place Versailles reacquired title to the former Paul Racine Street; [14] and ceded to the City title to lands located approximately 825 feet to the north for the purpose of constructing Pierre Corneille Street. This street then became the northern boundary of Place Versailles.

Place Versailles owned undeveloped lands north of Pierre Corneille Street which, along with that street, were used by its customers for parking. The co-owners felt that, if they could exchange lands with the City and used the actual situs of Pierre Corneille Street as parking lot, it would increase their commercial competitiveness and their income.

As for the second expansion in 1969, they entered into an agreement to exchange titles with respect to Pierre Corneille Street and a piece of land north to the street which would become the new situs of that street and the new boundary to Place Versailles. In this process, the co-owners received 3,041.37 square metres of land, but ceded in return to the City some 3,486.37 square metres. The net result was a diminution of the size of the physical assets they owned close to the shopping centre, but an improvement in the operativeness of the assets of Place Versailles which was most likely to increase its business operations and income as a result of the exchange.

The co-owners agreed to pay to the City of Montreal the cost of the relocation of Pierre Corneille Street, such cost involving the cost of attendant sidewalks and the usual services. They had made a similar undertaking in 1969 when Pierre Corneille Street was first constructed pursuant to the exchange that took place. At that time, such cost took the form of a local improvement tax collected from the co-owners over a period of approximately 10 years. These taxes were deducted by the appellant in computing its taxable income.

However, this time, the cost of relocation of Pierre Corneille Street took a different facet. The amount of $480,900 was not levied as a yearly tax. It was payable in a lump sum as direct compensation for the improvements to the street, the reason being that the City of Montreal was no longer able to charge local improvement taxes without having to go through the Quebec Government for a special budget. The process would have been time-consuming and the elected representatives of the City of Montreal were not too eager to engage in it. It is against this background that the decision of the Tax Court judge was rendered.

The Decision of the Tax Court of Canada

In a short decision, the Tax Court judge concluded that the true ultimate goal of the expenditure made by Place Versailles was to enhance the popularity of the shopping centre. However, she was of the view that the direct purpose of the payment for the outlay was to expand the parking capacity of Place Versailles and, therefore, that the direct advantage of such expenditure was an acquisition of land which was an asset of an enduring nature which the appellant had contracted for or anticipated. She wrote at page 7 of her decision:

In this instance the direct advantage is the acquisition of the former Pierre Corneille Street, that is to say, acquisition of land. This land, used in the expansion of a parking lot, is an asset of an enduring nature.

Analysis of the decision

There is no dispute between the parties that the test to be applied in determining whether an expenditure is a capital or a business outlay is the “common sense” or “businessman’s” approach, the application of which requires the appreciation of all the circumstances or features surrounding the transaction [15] . In addition, the weight to be given to a particular circumstance depends on common sense rather than on a strict application of any single legal principle [16] .

In Oxford Shopping Centres Ltd, v. R. [17] , a decision affirmed by this Court, Thurlow A.C.J. stressed that it is “the nature of the advantage to be gained which more than any other feature of the particular situation will point to the proper characterization of the expenditure as one of capital or of revenue expense”.

The appellant relied heavily upon the Oxford case both because of the legal principles it sets out and the striking resemblance between a great many of its facts and the facts of the present instance.

In the Oxford case as in the present appeal, the appellant wanted to expand its shopping centre and its parking area and required certain lands from the City of Calgary for this purpose. Pursuant to an agreement, it sold some portions of its lands to the City of Calgary and bought from the City the portions of 60th Ave. S.W., 5th Street S.W. and a laneway north of 60th Ave. S.W. which were no longer to be required as streets.

It, too, was required to pay to the City an amount in lieu of local improvement taxes and rates. The Oxford Shopping Centre then paid in three instalments to the City of Calgary an amount of $490,0505 [18] which is comparable to the amount of $480,900 paid in the present instance to the City of Montreal by the appellant.

Both in the Oxford case and in the present instance, the owners of their respective shopping centres were trying to enhance the popularity of their commerce and meet with success the increasing competition from other shopping centres.

The learned Tax Court judge acknowledged all these common features, but distinguished the Oxford case on the basis that the appellant’s payment to the City of Montreal was not made, as in the Oxford case, to satisfy the City’s needs in remedying a problem of congested traffic. In her view, it was made “for the purpose of the appellant’s operating structures by acquiring land to expand the surface allocated to parking”.

With respect, I think she misconstrued and mischaracterized the nature of the transaction which took place and for which the expenditure was made by the appellant as well as the deed which sealed the transaction.

Nature of the transaction and severability of the expenditures

It is worth noting that, in the present instance, there was, as in the Oxford case, a single transaction contained, it is true, in a single written agreement as opposed to the six agreements which materialized the transaction in the Oxford case. The Tax Court judge alluded to such difference, but I am not altogether sure what importance, if any, she attached to that fact. The Oxford case stands for the proposal that none is to be given as long as the single agreement identifies what the expenditures are incurred for and such expenditures are segregated or severable [19] .

In the present instance, the agreement revealed three different undertakings by the appellant involving three clearly identified expenditures: (1) an exchange of lands between the appellant and the City of Montreal; (2) a deposit in the amount of $480,900 in eventual payment for the relocation of Pierre Corneille Street, subject to adjustments to the real cost and, (3) an expansion of the amenities worth $6 million guaranteed by a bond of $1 million to be forfeited in favour of the City of Montreal in case the appellant decided not to proceed with the expansion.

Nothing in the Tax Court judge’s decision indicates that she considered the severability of these three expenditures. It does no violence to her reasoning to infer that she believed that these three expenditures were all part of the acquisition cost of a portion of land to expand the surface allocated to parking. With respect, this was an error.

As a matter of fact, a close reading of the agreement reveals that the additional parking space obtained by the appellant resulted from the exchange of titles, between the appellant and the City of Montreal, over portions of land they reciprocally owned. There was no acquisition cost involved for the appellant in that aspect of the transaction because the value of the portions exchanged was comparable ($81,800 for the land owned by the City and $86,212 for the one owned by the appellant). As the figures reveal, the appellant received in return a slightly smaller portion of land than the one it gave (3,041.37 sq. meters v. 3,486.37). The reciprocal value of the lands appearing in the agreement was based on the municipal evaluation and served to fix the mutation taxes payable by the appellant.

The agreement was signed on November 5, 1985 and registered with the Land Registration Office two weeks later. As of the signature and subsequent registration of the deed, the exchange of titles was completed irrespective of the two other appellant’s undertakings for expenditures. In addition, no other acquisition costs can be traced in this exchange to the portion of land on which the appellant built up its parking space. The appellant could have later declined to proceed with the proposed expansion worth $6 million and, yet, the exchange of titles was effected, completed and irrevocable.

In the same vein, the appellant could have refused to pay for the adjusted cost of the relocation of the new Pierre Corneille Street and could have been sued for such default. But the exchange of lands and titles would have remained unaffected.

Finally, pursuant to the agreement, the City of Montreal had undertaken to modify its zoning by-law from residential to commercial zoning in order to allow for the relocation of Pierre Corneille Street. Again, the exchange of lands between the parties was irremediably completed irrespective of the modification to the zoning by-law.

In conclusion, the agreement indicates that the appellant undertook to make three distinct and severable expenditures. The question then is: What was the expenditure in issue incurred for?

The nature of the advantage to be gained by the expenditure

According to the preamble of the agreement, the appellant wanted to modernize and expand Place Versailles in order to remain competitive with another booming shopping centre which was located at less than a mile from Place Versailles.

To this end, the appellant and the City of Montreal exchanged lands which allowed the appellant to improve its parking facilities. This was the advantage sought and obtained by the appellant through the first element of the transaction. The learned Tax Court judge qualified this advantage as an “acquisition of land” and an asset of an enduring nature.

I am not sure one could describe the process that took place as a process leading to an acquisition of land. This is not a case where the owner of a shopping centre acquires a portion of land to increase its acreage. This is a case where the owner already possesses the desired acreage, but makes an exchange of portions of adjacent lands to improve its operativeness and, thereby, enhance the competitiveness and profitability of its business. Indeed, as a result of the current exchange, the appellant did not, properly speaking, acquire land; it lost land as it gave more than it received in return.

In any event, the expenditure in issue here, i.e., $480,900, was not paid for what the Tax Court judge called “acquisition of land”. As the agreement reveals, it was paid for the cost of relocating Pierre Corneille Street. What was, then, the nature of the advantage to be gained by the appellant in incurring such expenditure?

Obviously, the appellant wanted to maintain an access to the north of Place Versailles in order to make it easier for tenants’ customers to access and egress from the shopping centre. It needed such kind of easy access in order to maintain and enhance its popularity and its competitiveness with a rival shopping centre. The money was not paid for changes or additions to the appellant’s premises although I suspect it may have been necessary for the appellant to make some capital outlays on its newly defined premises. As Thurlow A.C.J. put it in the Oxford case [20] :

Rather, it was paid to induce the City to make changes on City property that could be beneficial to the plaintiff in achieving its object of promoting its business by enhancing the popularity of its shopping centre.

The respondent submitted that the Oxford case is distinguishable because, in that case, the City of Calgary wanted to solve a problem of traffic resulting from the operations of the shopping centre. With respect, to put much emphasis on this feature is to put the focus on the wrong issue.

Indeed, there is no requirement that the work which ultimately led to the expenditure incurred by the appellant be done at the initiative or request of the City of Montreal. Nor is there a requirement that there be a corresponding advantage of equal or greater value to the City of Montreal in order that the expenditure incurred by the appellant be one on revenue account. What has to be looked at is the advantage sought and obtained by the appellant. In the present instance, what the appellant wanted to obtain, and paid for, is the maintenance of an access to the north of its shopping centre by the relocation of Pierre Corneille Street.

It is common ground that an identical expenditure, made by the appellant in 1969 in identical circumstances, resulted in a local improvement tax imposed upon the appellant by the City of Montreal for the cost of relocating the same Pierre Corneille Street. It is undisputed that such tax was properly deducted as a business expense.

In the present instance, the expenditure was, from the appellant’s perspective, in the nature of a tax because it was incurred and paid, as in 1969, for the same kind of improvements to a city street to maintain the competitiveness of its business. Yet, it cannot formally be described as a tax be- cause the City of Montreal, for personal reasons over which the appellant had no control, decided to collect the amount of the expenditure as compensation in lieu of local or street improvement taxes and rates. In my view, the fact that the City of Montreal elected to proceed in such fashion cannot alter the nature and character of the expenditure in the hands of the appellant and the nature of the advantage it gained as a result of making such expenditure. I cannot improve on the following excerpt from Thurlow A.C.J. in the Oxford case which, in my view, properly describes the expenditure incurred by the appellant in the present instance [21] :

For if, as I think, the expenditure can and should be regarded as having been laid out as a means of maintaining, and perhaps enhancing, the popularity of the shopping centre with the tenants’ customers as a place to shop and of enabling the shopping centre to meet the competition of other shopping centres, while at the same time avoiding the imposition of taxes for street improvements, the expenditure can, as it seems to me, be regarded as a revenue expense notwithstanding the once and for all nature of the payment on the more or less long term character of the advantage to be gained by making it.

Before closing, I want to underline the quality of the submissions made by both counsel at the hearing.

For these reasons, I would allow the appeal, set aside the judgment of the Tax Court and refer the matter back to the Minister for reconsideration and reassessment on the basis that the expenditure ($63,479) claimed by the appellant for local improvements was a revenue expense deductible from ihe appellant’s taxable income.

As requested, I would allow one set of costs here and in the Tax Court of Canada for all six related appeals.

Appeal dismissed.