Boreal Express Ltée v. Minister of National Revenue, [1979] CTC 2985, 79 DTC 790

Delmer E Taylor [TRANSLATION]:—These appeals were heard at Montreal, Quebec on April 11, 1979 and were brought as a consequence of income tax assessments in which the Minister of National Revenue included the following amounts in the appellant’s income as “additional income’’ for the years in question:

The respondent relied, inter alia, on section 3, subsection 9(1), paragraph 56(1)(o) and section 248 of the Income Tax Act (SC 1970-71-72, c 63, as amended).

Facts

The appellant is a legally constituted corporation having its head office at 539 Blvd Lebeau, Ville St-Laurent, Quebec.

Arguments

At the start of the hearing, counsel for the respondent noted that since the appeal for 1972 was based on a “nil’’ assessment, the Board lacked jurisdiction to hear this appeal. Further, counsel agreed that if the appellant succeeded in its appeals for the other years in question, appropriate adjustments would be made with respect to the financial loss applicable for 1972. The Board agrees with counsel for the respondent that the appeal relating to 1972 should be dismissed, and the hearing will concern itself only with appeals for the years 1973, 1974 and 1975. Although the amounts vary for these three years, the basis of the appeals brought by the taxpayer and the respondent’s position with regard to these assessments are identical.

For the appellant:

We believe that these subsidies did not have to be included in computing the income of this business, since they were not determined in relation to a shortfall of income or specific expenses of the taxpayer and were intended for the production of works which, without them, would have not been produced.

The purpose of these subsidies were to further the public interest and to promote objectives sought by the government, and not the interest of the taxpayer’s business.

For the respondent:

Boréal Express Ltée is a company having the objectives of editing, publication and sale of a journal, as well as publishing in general.

During the taxation years in question, the appellant company received a total amount of $—- in subsidies from the Department of Cultural Affairs and the Canada Council.

The amount $—-, received by the appellant in the form of subsidies, constitutes income within the meaning of ss 9 and 248 of the new Act.

Alternatively, the amount of $-— was paid to the company in the form of research subsidies, pursuant to paragraph 56(1)(o) of the new Act.

Dispositions

The following comments are based on certain documents submitted to the Board:

Exhibit A-2—this is the ordinary form required for requesting a subsidy from the Department of Cultural Affairs of the province of Quebec, and it should be noted that this form is titled “Application for aid to publication" (italics are mine).

Exhibit A-5—Although this letter from the Canada Council is dated April 21, 1978, it was agreed that it illustrated correspondence applicable to the taxation years in question:

Further to my letter of March 31, I am pleased to send you herewith a cheque in the amount of $20,000 as a block grant for fiscal year 1978.

As in the past, the amount of the grant is calculated in accordance with the number of books published by you in 1977 which meet our eligibility standards. As you know, last year a surplus of funds enabled the Council to substantially and exceptionally increase the level of block grants paid. As our funds are much more limited this year, our participation is accordingly also more limited.

Despite these constraints, we have been able nevertheless to add a modest amount to our regular funds in order to make certain premium payments to publishing houses which have demonstrated special initiative in the fields of literature for youth and literary creativity.

Exhibit 1-3—An information pamphlet published by the literary and book division of the Department of Cultural Affairs of the province of Quebec:

Subsidies to publishing houses are paid for the publication of a manuscript on which the cost of printing or the limited market are such that the cost price—and the retail price—would be prohibitive, so that a publisher may reasonably refuse to publish it.

Subsidies to agencies are made either for research work in the literary field or for activities having the written word and its promotion as their objective.

Exhibit 1-4—An information pamphlet published by the Canada Council. At page one of this pamphlet it reads:

Writing and publication section

The writing and publication section is one of five sections in the Council’s Art Division. In collaboration with the Arts Award Service, it administers a number of programs of individual assistance for poets, playwrights and fiction writers, as well as programs of support for translation and publication of Canadian books and periodicals. In recent years increased funds have permitted expansion of existing programs and the establishment of several new ones, such as the programs of support for new initiatives in the promotion and distribution of Canadian books and periodicals.

About four or five books were published annually, and the inventory of books available for sale ordinarily amounted to several thousand volumes. In certain cases, a connection can be made between specific subsidies and specific books, but there were also grants for the appellant company’s general operations.

Pleading

Essentially, the position of counsel for the appellant is that the books which were published originated at the request of the governments of Canada and of Quebec, because of their public interest. In support of its position, it relied in large part on St John Dry Dock and Shipbuilding Company Limited v MNR, [1944] CTC 106; 2 DTC 663, which contains the following quotation at pp 114 and 666 respectively:

The fact that an amount is described as a Government subsidy does not of itself determine its character in the hands of the recipient for taxation purposes. In each case the true character of the subsidy must be ascertained and in so doing the purpose for which it was granted may properly be considered.

The position of the respondent is simply that the subsidies were regarded as income for a company for the purpose of publishing certain books the selling price of which could not completely cover the cost price. Alterna- tively (although the question of research was not vigorously pressed by the appellant), if the subsidies were for research work, the appellant had to show that they were used solely for carrying on “research or any similar work”.

Conclusions

The Board agrees with the respondent that whatever the extent of research in the appellant’s activities, it was not shown at the hearing that the subsidies were applied for or received for research purposes or that they were primarily used for this purpose. The appellant’s case rests on its contention that the books were published in the national interest, and its counsel described this interest as being the public interest. I am prepared to agree that the books have a certain cultural and national value to the public, but this differs from their publication being in the national interest. In my opinion, the designation ‘‘national interest” can only be made by the government, and there is no proof that the federal or provincial governments made any decision concerning publication of these books, or subsequently proceeded to make the necessary arrangements for their publication.

No valid comparison can be made between the appeals at bar and the decision in St John Dry Dock (cited above), where the government had adopted a special law requiring a dry dock to be built, which in itself represented a capital item, quite different from an inventory of books for sale. A quotation from this judgment, to be found at pp 126 and 672 respectively, in my view clearly illustrates the difference and shows that the funds in question in the case at bar should be considered as income:

That purpose was a special one, in the public interest, quite apart from the trade and business operations of the appellant and had nothing whatsoever to do with its trade or business profits or gains. Since the subsidy was paid and received for such special purpose, in the national interest, it cannot be said to be a trade or business receipt or revenue in the hands of the appellant or an item of trade or business profit or gain to it. It was paid and received for the purpose which the Act was designed to achieve and, in my opinion, that statutory purpose stamps the subsidy as an amount that should not be regarded as an item of annual net profit or gain or gratuity to the appellant or taken into computation for income tax purposes.

Publication of these books was part of the appellant company’s normal business operations, and there is no reason to conclude that the publication costs of the books in question should be included in expenses, but the receipts (subsidies or otherwise) relating thereto should be excluded from income in arriving at profit or loss.

Decision

The appeals relating to the 1972, 1973, 1974 and 1975 taxation years are dismissed.

Appeal dismissed.