Walsh,
J:—These
three
cases
were
heard
together
on
common
evidence
and
relate
to
plaintiff’s
taxation
years
ending
December
31,
1965,
December
31,
1966
and
December
31,
1967
respectively.
As
a
result
of
various
reassessments,
the
last
one
having
been
made
on
July
23,
1973,
only
three
matters
now
remain
in
dispute
between
the
parties.
Plaintiff’s
taxable
income
for
the
year
ending
December
31,
1965
was
assessed
at
$56,158,093
on
which
tax
at
$26,119,368.69
was
levied
which
reflected
a
reduction
in
interest
of
$10,482.84
on
the
decrease
in
tax
previously
assessed.
For
the
year
ending
December
31,
1966
plaintiff’s
taxable
income
was
assessed
at
$87,387,215
on
which
tax
of
$40,759,391.24
was
levied
and
for
the
year
ending
December
31,
1967
plaintiff's
taxable
income
was
assessed
at
$47,473,815
on
which
tax
of
$21,965,574.08
was
levied.
The
three
areas
remaining
in
dispute
are
as
follows:
1.
Whether
plaintiff
is
entitled
to
treat
the
income
received
on
certain
income
bonds
of
the
Duluth
South
Shore
&
Atlantic
Railroad,
Minneapolis,
St
Paul
&
Sault
Ste
Marie
Railway
Company,
and
Wisconsin
Central
Railroad
Company,
which
merged
in
1960
into
the
Soo
Line
in
all
of
which
non-resident
companies
plaintiff
held
a
controlling
interest,
as
dividend
income
under
subsection
8(3)
of
the
Income
Tax
Act
in
effect
at
the
time*
and
hence
to
reduce
the
tax
paid
under
the
provisions
of
paragraph
28(1
)(d)
of
the
Act
or
whether
it
should
be
considered
as
interest
income.
The
amounts
involved
for
1965
taxation
year
were
$841,871
on
which
the
deduction
claimed
was
$404,893,
for
the
1966
taxation
year
$833,346
on
which
the
deduction
claimed
was
$388,930
and
for
the
1967
taxation
year
$828,637
on
which
the
deduction
claimed
was
$383,912.
2.
Subsidiarily
and
in
the
event
that
such
deductions
are
disallowed
then
plaintiff
claims
that
it
is
entitled
to
a
foreign
tax
credit
of
$260,866
for
the
1965
taxation
year
of
which
amount
defendant
concedes
that
to
the
extent
of
$5,641
it
would
be
entitled
to
a
foreign
tax
credit,
but
for
the
balance
of
$255,225
relating
to
receipts
of
what
is
known
as
“per
diem”
arising
out
of
the
use
of
its
rail
cars
on
lines
of
United
States
Railroads
defendant
does
not
dispute
the
figure
but
denies
that
plaintiff
is
entitled
to
this.
credit.
This
only
applies
to
the
1965
taxation
year
since
in
the
1966
and
1967
taxation
years
no
such
credit
is
claimed
as
plaintiff
did
not
pay
United
States
income
tax
on
these
receipts
in
either
of
those
years.
3.
Whether
plaintiff
is
entitled
to
capital
cost
allowances
on
certain
properties
classified
as
donations
and
grants
in
accordance
with
the
Uniform
Classification
of
Accounts
prescribed
by
the
Canadian
Transport
Commission
but
disallowed
by
the
Minister
which
amounted
to
$66,177
in
the
1965
taxation
year
which
resulted
in
a
reduction
in
income
tax
paid
in
the
amount
of
$31,827,
$63,614
in
the
1966
taxation
year
which
resulted
in
a
reduction
in
income
tax
paid
in
the
amount
of
$29,689
and
$66,507
in
the
1967
taxation
year
resulting
in
a
reduction
in
income
tax
paid
of
$30,812.
When
a
decision
is
made
in
principle
on
each
of
the
three
issues
involved,
the
parties
can
then
no
doubt
agree
on
the
final
revised
figures.
Much
of
the
evidence
was
introduced
into
the
record
b
ymeans
of
a
statement
of
agreed
facts
which
it
is
desirable
to
quote
in
extenso:
STATEMENT
OF
AGREED
FACTS
art
1
Statement
of
Agreed
Facts
on
Income
Bonds
1.
The
Taxation
years
in
question
are
the
Plaintiff
company’s
taxation
years
ending
on
December
31,
1965,
December
31,
1966
and
December
31,
1967.
Minneapolis
2.
In
years
prior
to
1944,
Plaintiff
held
the
following
securities
of,
and
had
the
following
claims
against
the
Minneapolis,
St
Paul
and
Sault
Ste
Marie
Railway
Company
(“Minneapolis
Railway’’):
Preferred
Stock,
Common
Stock,
4%
and
5%
First
Consolidated
Mortgage
Bonds,
4%
Second
Mortgage
Bonds,
5
/2%
First
Refunding
Mortgage
Bonds,
25
year
Secured
Gold
Notes,
Leased
Line
Certificates,
Reconstruction
Finance
Corporation
Notes,
Railroad
Credit
Corporation
Notes,
Cash
Advances,
Matured
Bond
Interest
and
Guaranteed
Interest.
3.
Minneapolis
Railway
was
incorporated
under
the
laws
of
the
States
of
Michigan,
Wisconsin
and
the
Territory
of
Dakota,
in
the
United
States
of
America.
4.
Prior
to
the
year
1937,
Minneapolis
Railway
encountered
financial
difficulties
and,
in
1937,
entered
bankruptcy
under
the
provisions
of
Section
77
of
the
United
Statee
Bankruptcy
Act,
by
which
its
assets
were
placed
in
the
hands
of
Trustees
approved
by
the
United
States
Court.
5.
A
“Plan
of
Reorganization”
of
the
Minneapolis
Railway
was
approved
by
the
Interstate
Commerce
Commission
of
the
United
States
(“ICC”)
in
January
1943
under
its
Finance
Docket
11897,
and
was
approved
by
the
District
Court
of
the
United
States
in
August,
1944
under
its
order
No.
100.
6.
In
1944,
a
Company
was
incorporated
under
the
name
of
Minneapolis,
St
Paul
&
Sault
Ste
Marie
Railroad
Company
(“Minneapolis
Railroad
Company”).
7.
An
Indenture
of
Mortgage
and
Deed
of
Trust
dated
as
of
January
1,
1944
created
the
General
Mortgage
4%
Series
A
Income
Bonds
of
the
Minneapolis
Railroad
Company.
8.
Pursuant
to
the
Plan
of
Reorganization,
the
Plaintiff
received
a
number
of
the
General
Mortgage
4%
Series
A
Income
Bonds
of
the
Minneapolis
Railroad
Company
along
with
capital
stock
in
the
Minneapolis
Railroad
Company
and
an
amount
of
cash
and
a
number
of
the
Wisconsin
Central
Railway
Company
First
and
Refunding
bonds
described
in
paragraph
18.
9.
Pursuant
to
the
Plan
of
Reorganization,
the
Plaintiff’s
claim
under
the
First
Consolidated
Mortgage
Bonds
of
Minneapolis
Railway,
the
bankrupt
company,
were
extinguished
and
the
Plaintiff
surrendered
the
bond
certificates.
Duluth
10.
In
years
prior
to
1949,
Plaintiff
held
the
following
securities
in,
and
had
the
following
claims
against,
the
Duluth,
South
Shore
&
Atlantic
Railway
Company
(“Duluth
Railway’)
and
the
Mineral
Range
Railroad
Company
(“Mineral
Range”).
Duluth
Railway
Preferred
Stock,
Common
Stock,
Income
Certificates,
4%
First
Consolidated
Mortgage
Bonds,
6%
Mortgage
Bonds
of
Marquette,
Houghton
and
Ontonagon
Railroad
Company
and
5%
First
Mortgage
Bonds.
Mineral
Range
4%
First
Mortgage
Bonds,
4%
Consolidated
Mortgage
Bonds,
5%
Consolidated
Mortgage
Bonds
of
Hancock
and
Calumet
Railroad
Company
and
Cash
Advances.
11.
Duluth
Railway
was
incorporated
and
organized
under
the
laws
of
the
States
of
Wisconsin
and
Michigan,
in
the
United
States
of
America.
Mineral
Range
was
a
company
incorporated
and
organized
under
the
laws
of
the
State
of
Michigan,
and
in
the
years
prior
to
1949,
Mineral
Range
was
a
wholly
owned
subsidiary
of
Duluth
Railway.
12.
Prior
to
the
year
1937,
Duluth
Railway
and
Mineral
Range
encountered
financial
difficulties
and
in
1937,
the
two
companies
entered
bankruptcy
under
Section
77
of
the
United
States
Bankruptcy
Act,
by
which
their
assets
were
placed
in
the
hands
of
trustees
approved
by
the
United
States
Court.
13.
A
“Plan
of
Reorganization”
of
Duluth
Railway
and
Mineral
Range
was
approved
by
the
ICC
in
December
1948,
under
its
Finance
Docket
Number
11484,
and
was
approved
by
the
District
Court
of
the
United
States
In
October
1949
by
its
order
No.
27.
14.
In
1949,
a
company
was
incorporated
under
the
name
of
Duluth,
South
Shore
and
Atlantic
Railroad
Company
(“Duluth
Railroad
Company”).
15.
An
Indenture
of
Mortgage
and
Deed
of
Trust
dated
as
of
January
1,
1949
created
the
First
Mortgage
4%
50
year
Income
Bonds
of
the
Duluth
Railroad
Company.
16.
Pursuant
to
the
Plan
of
Reorganization,
the
Plaintiff
received
2
number
of
the
First
Mortgage
4%
50
year
income
bonds
of
the
Duluth
Railroad
Company
along
with
capital
stock
in
the
Duluth
Railroad
Company
and
an
amount
of
cash.
17.
Pursuant
to
the
Plan
or
Reorganization,
the
Plaintiff’s
claims
under
the
First
Mortgage
Bonds
of
Duluth
Railway
and
the
Consolidated
Mortgage
bonds
of
Mineral
Range,
the
bankrupt
companies,
were
extinguished
and
the
Plaintiff
surrendered
the
bond
certificates.
Wisconsin
18.
In
years
prior
to
1954
the
Plaintiff
held
the
following
securities
in,
and
had
the
following
claims
against
the
Wisconsin
Central
Railway
Company
(“Wisconsin
Railway’’):
Preferred
Stock,
Common
Stock,
Superior
and
Duluth
Division
4%
First
Mortgage
Bonds,
First
and
Refunding
Mortgage
Bonds
4%
and
First
and
Refunding
Mortgage
Bonds
5%.
19.
Wisconsin
Railway
was
incorporated
under
the
laws
of
the
State
of
Wisconsin,
In
the
United
States
of
America.
20.
Prior
to
the
year
1932,
Wisconsin
Railway
encountered
financial
difficulties,
and
in
1932,
entered
a
federal
equity
receivership.
In
1944,
that
receivership
was
converted
into
a
bankruptcy
under
Section
77
of
the
United
States
Bankruptcy
Act,
whereby
its
assets
were
placed
in
the
hands
of
trustees
approved
by
the
United
States
Court.
21.
A
“Plan
of
Reorganization”
of
the
Wisconsin
Railway
was
approved
by
the
Interstate
Commerce
Commission
in
June
1953
under
its
Finance
Docket
Number
14720,
and
was
approved
by
the
United
District
Court
in
February
1954,
in
its
order
Number
17104.
22.
In
1954,
a
company
was
incorporated
under
the
name
of
Wiscosin
Central
Railroad
Company
(“Wisconsin
Railroad
Company”).
23.
An
Indenture
of
Mortgage
and
Deed
of
Trust
dated
as
of
January
1,
1954
created
the
General
Mortgage
4%
bonds
of
Wisconsin
Railroad
Company.
24,
Pursuant
to
the
Plan
of
Reorganization,
the
Plaintiff
received
a
number
of
the
General
Mortgage
4
/2%
bonds
of
the
Wisconsin
Railroad
Company
along
with
capital
stock
in
the
Wisconsin
Railroad
Company
and
an
amount
of
cash.
25.
Pursuant
to
the
Plan
of
Reorganization,
the
Plaintiff’s
claims
under
the
Superior
and
Duluth
Division
First
Mortgage
bonds
and
First
and
Refunding
Mortgage
bonds
of
Wisconsin
Railway,
the
bankrupt
company
were
extinguished
and
the
Plaintiff
surrendered
the
bond
certificates.
26.
In
each
of
the
three
reorganizations,
the
assets
of
the
bankrupt
companies
were
transferred
and
conveyed
to
the
companies
incorporated
pursuant
to
each
of
the
reorganizations
free
and
clear
of
all
rights,
claims,
interests,
liens
and
encumbrances
of
the
creditors
of
the
bankrupt
companies.
Soo
Line
27.
In
1960,
Duluth
Railroad
Company
changed
its
name
to
“300
Line
Railroad
Company’’.
28.
In
1960,
Minneapolis
Railroad
Company
was
merged
with
Soo
Line
Railroad
Company
and
Wisconsin
Central
Railroad
Company
to
form
a
Company
with
the
name
Soo
Line
Railroad
Company,
(“Soo
Line’’)
and
the
income
bonds
continued
in
force
as
obligations
of
Soo
Line.
29.
In
the
taxation
years
in
question,
Soo
Line
was
a
US
resident
corporation
and
was
not
resident
in
Canada
and
did
not
carry
on
business
in
Canada
and
did
not
file
income
tax
returns
under
the
Canada
Income
Tax
Act.
30.
The
payments
received
by
the
Plaintiff
in
the
years
1965,
1966
and
1967
from
Soo
Line
Railroad
Company
were
received
under
the
respective
Income
Bonds,
namely
General
Mortgage,
4%
Series
A
Income
Bonds
of
the
Minneapolis
Railroad
Company,
First
Mortgage
4%
50
year
Income
Bonds
of
the
Duluth
Railroad
Company
and
General
Mortgage
4
/2%
Income
Bonds
of
the
Wisconsin
Railroad
Company.
31.
At
all
material
times,
Plaintiff
was
the
beneficial
holder
of
the
following
bonds
which
are
income
bonds
within
the
meaning
of
paragraph
139(1)(t)
of
subsection
8(3)
of
the
Income
Tax
Act:
Duluth
South
Shore
&
Atlantic
Railroad
4%
—
1st
Mortgage
Income
Bonds
Minneapolis,
St
Paul
&
Sault
Ste
Marie
Railway
Company
4%
—
General
Mortgage
Income
Bonds
Wisconsin
Central
Railroad
Company
4
/2%
—
General
Mortgage
Income
Bonds
32.
At
all
material
times,
Soo
Line
which
was
liable
under
the
above
described
income
bonds
(herein
called
the
“payor
corporation”).
(i)
was
a
non-resident
corporation,
being
resident
in
the
United
States
of
America,
more
than
25%
of
the
issued
share
capital
of
which
(having
full
voting
rights
under
all
circumstances)
belonged
to
the
Plaintiff
within
the
meaning
of
paragraph
(d)
of
subsection
28(1)
of
the
Income
Tax
Act,
the
particulars
of
such
ownership
being
as
follows:
a)
800
Line
Railroad
Company:
56.4%
b)
Plaintiff’s
ownership
of
shares
in
corporations
prior
to
1960
merger
into
Soo
Line:
A)
Minneapolis,
St
Paul
and
Sault
Ste
Marie
Railroad:
50.26%
B)
Wisconsin
Central
Railroad:
56.79%
C)
Duluth
South
Shore
&
Atlantic
Railroad:
100%
(ii)
paid
interest
to
Plaintiff
as
described
in
the
following
amounts,
such
being
an
annual
or
other
periodic
amount
paid
by
the
payor
corporation
within
Section
8(3)
of
the
Income
Tax
Act:
1965
—
$841,871
1966
—
$833,346
1967
—
$828,637
(iii)
was
entitled
to
deduct
and
in
fact
did
deduct
the
amount
of
interest
so
paid
to
Plaintiff
on
the
income
bonds
in
computing
income
for
United
States
income
tax
purposes;
(iv)
at
all
material
times
the
payor
corporation
a)
was
other
than
personal
corporation
b)
paid
the
interest
on
the
income
bonds
which
had
been
issued
since
1930.
Part
2
Statement
of
Agreed
Facts
on
Foreign
Tax
Credit
1.
The
Plaintiff’s
claim
of
$260,866
for
foreign
tax
credit
for
the
taxation
year
1965
exists
only
if
the
payments
received
on
the
income
bonds
are
treated
as
interest
income
for
Canadian
tax
purposes.
2.
The
foreign
tax
credit
claim
of
$260,866
is
for
income
tax
collected
by
the
government
of
the
United
States
of
America
on
the
Plaintiff’s
US
income
of
which
$255,225
relates
to
receipts
of
“per
diem’’
from
Railways
in
the
United
States;
the
amount
of
$255,225
is
not
in
dispute
but
the
entitlement
to
that
credit
is
in
dispute.
The
Parties
are
in
agreement
that
in
respect
of
the
balance
of
$5,641.00,
the
Plaintiff
is
entitled
to
a
foreign
tax
credit.
3.
In
the
taxation
year
1965,
“per
diem”
was
a
term
used
to
describe
payments
for
the
use
of
railway
rolling
stock,
which
payments
were
made
to
the
“owner”
railway
company
by
the
“user”
railway
company.
4.
The
obligation
on
a
railway
company
using
railway
rolling
stock
to
pay
“per
diem”
for
such
use
to
the
owner
thereof
is
created
by
a
series
of
agreements
between
railway
companies:
i)
Agreements
between
and
among
railroads
under
section
5a
of
the
Interstate
Commerce
Act
dated
April
1,
1950,
February
1,
1958
and
April
1,
1965;
li)
Car
Service
and
Per
Diem
Agreement
executed
by
the
Plaintiff
on
February
11,
1938;
iii)
Code
of
Per
Diem
Rules
—
Freight.
5.
On
a
monthly
basis,
each
railway
company
that
is
a
signatory
to
the
agreements
and
Rules
described
in
4
above
makes
an
accounting
of
all
freight
cars
(owned
by
other
railways
that
are
also
signatories
to
said
agreements
and
Rules)
that
spent
any
time
on
its
tracks
during
the
preceding
month.
From
said
Code
of
Per
Diem
rules
the
appropriate
rental
rates
per
day
are
ascertained
for
each
type
of
rolling
stock
and
the
appropriate
rental
rate
is
multiplied
by
the
number
of
days
of
use.
Based
on
this
calculation
payments
of
“per
diem”
are
made
to
the
owning
road.
6.
When
the
Plaintiff
delivers
the
railway
rolling
stock
to
the
lines
of
a
US
railway
company,
there
is
no
further
business
activity
required
of
the
Plaintiff
to
collect
the
per
diem
payments,
and
the
Plaintiff
receives
no
freight
carriage
revenues
for
the
traffic
moving
on
the
US
railway.
7.
The
Plaintiff
has
a
“permanent
establishment”
in
the
States
of
Maine
and
Vermont
in
the
United
States
of
America
within
the
definition
of
“permanent
establishment”
in
Section
2(f)
of
the
Protocol
to
the
Canada-US
Tax
Convention.
8.
For
the
purposes
of
Articles
I
and
Il
of
the
Canada-US
Tax
Convention,
said
receipts
of
per
diem
are
not
“allocable”
to
Plaintiff’s
“permanent
establishment”
in
the
States
of
Maine
and
Vermont.
9.
The
per
diem
income
was
part
of
Canadian
Pacific’s
income
for
Canadian
tax
purposes
and
in
the
taxation
year
1965
Canadian
tax
was
paid
thereon
in
an
amount
at
least
equal
to
the
US
tax
paid
thereon.
10.
The
taxation
by
the
United
States
of
America
of
the
taxpayer’s
per
diem
income
from
sources
in
the
United
States
was
based
upon
a
conclusion
of
the
United
States
Department
of
the
Treasury
that
the
per
diem
income
was
rental
income
and
that
it
was
“effectively
connected
to
the
(taxpayer’s)
trade
or
business
in
the
United
States,”
as
that
opinion
is
stated
in
a
letter
produced
by
the
Plaintiff
and
dated
the
19th
of
May,
1971,
from
the
Acting
Assistant
Secretary
of
the
Department
of
the
Treasury
to
J
Edward
Day,
a
United
States
Counsel
for
the
Plaintiff.
Part
III
Statement
of
Agreed
Facts
on
Capital
Cost
Allowance
in
Respect
of
Donations
and
Grants
1.
For
the
taxation
years
in
question,
the
Minister
disallowed
the
following
amounts
of
capital
cost
allowance
claimed
by
the
Plaintiff:
1965
—
$66,177
1966
—
63,614
1967
—
66,507
2.
Said
amounts
were
the
capital
cost
allowance
claimed
in
respect
of
certain
properties
owned
by
the
Plaintiff
where
an
amount
was
paid
to
the
Plaintiff
by
another
party,
and
where
such
payment
was
recorded
as
“Donations
and
Grants”
as
that
expression
is
used
in
the
Uniform
Classification
of
Accounts
prescribed
by
the
Board
of
Transport
Commissioners
of
Canada
(now
called
“Canadian
Transport
Commission”).
3.
The
various
capital
cost
allowance
claims
in
dispute
for
the
taxation
years
in
question
arose
in
respect
of
transactions
in
the
period
1956
to
1967,
and
for
some
purposes
in
this
litigation
may
be
divided
into
three
categories.
4.
For
greater
certainty,
the
Defendant
does
not
admit
that
the
whole
amount
of
the
“outlay”
by
the
Plaintiff
is
equal
to
either
the
cost
or
the
expenditure
incurred
for
purposes
of
the
Income
Tax
Act,
and
the
expression
“outlay”
is
used
herein
to
mean
the
expenditure
in
fact
made
by
the
Plaintiff,
and
not
such
“expenditure”
in
law,
such
being
a
question
for
determination
by
this
Honourable
Court.
CATEGORY
I
5.1
This
category
includes
outlays
by
the
Plaintiff
to
perform
work
on
property
owned
by
the
Plaintiff
where
an
amount
was
paid
to
the
Plaintiff
by
another
party.
5.2
In
each
instance,
the
Plaintiff
received
a
request
by
the
other
party
that,
to
enable
the
other
party
to
carry
out
a
project
of
its
own,
the
Plaintiff
would
modify
its
railway
or
telecommunications
facilities,
and
a
commitment
was
given
by
the
other
party
to
reimburse
the
Plaintiff
for
all
or
part
of
the
outlay
by
the
Plaintiff.
5.3
Upon
construction,
the
property
was,
and
continued
to
be,
the
property
of
the
Plaintiff.
SUB-CATEGORY
la
5.4
This
sub-category
includes
outlays
by
the
Plaintiff
where
the
request
was
received
from
the
federal
government,
a
provincial
government,
a
municipal
government,
an
agency
of
the
federal
government,
an
agency
of
a
provincial
government,
or
a
public
industrial
development
authority,
each
of
which
is
a
“government,
municipality
or
other
public
authority”
within
the
meaning
of
paragraph
20(6)(h)
of
the
Income
Tax
Act
applicable
to
the
taxation
years
in
question
(which
are
herein
called
the
“authority”).
5.5
Upon
receiving
the
request,
the
Plaintiff
advised
the
authority
of
the
estimated
total
expenditure
of
materials
and
labour
to
complete
the
work
and
the
authority
made
a
commitment
to
pay
that
amount,
or
a
part
thereof,
to
the
Plaintiff,
in
one
of
the
following
ways;
either
(a)
in
instalments
on
a
progress
basis,
(b)
after
completion,
or
(c)
prior
to
construction.
5.6
The
Plaintiff
then
conducted
the
work
using
its
own
forces
or
retaining
contractors,
and
presented
invoices
to
the
authority
for
payment
or
as
a
receipt
for
pre-payment.
5.7
Category
la
items
are
contained
in
the
examination
for
discovery
exhibits
numbered
1,
2,
3,
4,
5,
10.1,
12,
13,
15,
20,
21,
21.1,
30,
34,
36,
38.
For
the
purposes
of
this
litigation
only
items
contained
in
the
examination
for
discovery
exhibits
numbered
2,
4,
10.1
and
21.1,
and
15
are
in
evidence.
0.8
The
parties
hereby
agree
that
for
purposes
of
this
litigation,
the
decision
respecting
the
items
2,
4,
10.1
and
21.1,
and
15
insofar
as
such
decision
is
uniform
and
applicable
in
principle,
will
be
applied
to
the
remaining
items,
and
they
will
be
disposed
of
accordingly.
SUB-CATEGORY
lb
6.1
This
sub-category
includes
outlays
where
the
request
was
received
from
a
corporation
or
individual
other
than
those
described
in
sub-category
la
(which
corporations
or
individuals
are
referred
to
as
“the
Industry”).
In
these
situations
again,
the
Plaintiff
received
a
request
from
the
Industry
to
perform
work
on
a
property
on
lands
of
the
Plaintiff
which
property
would
become
and
remain
the
property
of
the
Plaintiff.
The
Plaintiff.
advised
the
Industry
of
the
estimated
total
expenditure
of
materials
and
labour
to
complete
the
construction
and
the
Industry
made
a
commitment
to
reimburse
the
Plaintiff
for
that
amount
or
a
part
thereof,
either
(a)
in
instalments
on
a
progress
basis,
or
(b)
after
completion.
The
Plaintiff
then
conducted
the
work
using
its
own
forces
or
retaining
contractors,
and
requested
payment
from
the
Industry.
6.2
The
Category
lb
items
are
contained
in
Examination
for
Discovery
Exhibits
6,
7,
8,
9,
11,
14,
18,
19,
22,
23,
25,
28
and
38.1,
35,
40,
44,
45,
46,
47,
52,
54,
57,
59,
60.
For
the
purposes
of
this
litigation
only
items
9,
28
and
38.1,
and
44
are
in
evidence,
6.3
The
parties
hereby
agree
that
for
the
purpose
of
this
litigation
the
decision
respecting
the
items
9,
28
and
38.1
and
44,
insofar
as
such
decision
is
uniform
and
applicable
in
principle,
will
be
applied
to
the
remaining
items
in
sub-category
lb
and
they
will
be
disposed
of
accordingly.
7.1
For
the
purposes
of
both
sub-categories,
in
the
event
the
findings
are
not
uniform
within
each
category,
the
parties
agree
to
apply
the
principals
to
the
remaining
items,
and
in
the
event
of
disagreement
each
reserves
the
right
to
have
such
particlar
item
determined
by
this
Honourable
Court
on
notice
of
motion.
CATEGORY
2
8.1
This
Category
includes
amounts
added
by
the
Plaintiff
to
its
capital
cost
allowance
base
with
concurrent
credit
to
“Donations
and
Grants”
upon
the
surrender
to
the
Plaintiff
of
the
perishable
components
of
a
private
railway
siding
by
a
party
to
a
private
railway
siding
agreement.
Category
2
items
are
contained
in
Examination
for
Discovery
exhibits
10,
16,
26,
29,
39,
41,
42,
43,
48,
49,
50,
51,
53,
56.
In
each
of
these
situations
the
person
(or
industry)
first
requested
the
construction
of
a
private
siding
and
agreed
to
reimburse
the
Plaintiff
for
the
actual
costs
relating
to
perishable
materials
and
labour
in
its
construction.
A
private
siding
agreement
was
executed
between
that
person
and
the
Plaintiff
by
which
the
person
authorized
the
construction,
undertook
this
reimbursement
and
rented
the
rail
and
track
materials,
for
which
no
reimbursement
of
cost
was
made.
At
the
time
that
the
person
no
longer
required
the
private
siding,
he
surrendered
it
to
the
Plaintiff
for
the
Plaintiff's
exclusive
use.
It
was
only
at
the
time
of
such
surrender
that
the
Plaintiff
recorded
a
“donation
and
grant”
under
the
provisions
of
the
Uniform
Classification
of
Accounts.
The
actual
original
cost
of
the
perishable
materials
and
the
installation
labour
for
the
private
siding
was
debited
to
the
Plaintiff’s
property
investment
accounts
to
include
this
siding
material
as
part
of
the
railway
system
of
the
Plaintiff.
It
was
only
at
the
time
that
the
property
became
the
exclusive
property
of
the
Plaintiff
under
the
siding
agreement
that
its
cost
was
included
in
the
capital
cost
base
under
capital
cost
allowance
regulations.
Te
Defendant
does
not
admit
that
the
property
surrendered
is
the
property
of
Plaintiff.
8.2
For
the
purpose
of
this
litigation,
only
item
is
in
evidence.
The
treatment
of
all
items
in
this
Category
2
will
abide
the
decision
on
that
item.
CATEGORY
3
9.1
This
Category
includes
amounts
previously
carried
in
the
capita!
cost
base
of
the
Plaintiff
and
categorized
as
Plaintiff’s
improvements
to
property
leased
by
the
Plaintiff
which
were
transferred
by
the
Plaintiff
to
the
category
of
Plaintiff's
owned
property
with
a
concurrent
transfer
from
“donations
and
grants
—
leased
lines”
to
“donations
and
grants
—
owned
lines”
in
the
year
1956,
by
virtue
of
the
fact
that
certain
properties,
which
had
previously
been
leased
by
the
Plaintiff
from
“leased
line
railway
companies”,
had
become
vested
in
the
Plaintiff
by
various
Acts
of
Parliament.
Category
3
items
are
contained
in
Examination
for
Discovery
exhibit
65.
10.1
The
Uniform
Classification
of
Accounts
provides
in
part
that
Additions,
Replacements
and
Major
Renewals
to
Railway
or
Telecommunications
property
shall
be
accounted
for
in
the
following
manner.
“7(B)
Contributions.
Where
a
portion
of
the
funds
expended
by
or
for
the
carrier
has
been
obtained
by
appropriations
from
government
funds,
or
by
contributions
from
individuals
or
others,
unless
specific
approval
has
been
given
by
the
Board
to
some
alternative
procedure,
the
accounting
shall
be
as
follows:
(i)
Exclusive
property.
The
cost
of
transportation
[sic]
property
to
which
the
carrier
acquires
exclusive
title
and
exclusive
right
of
use
shall
be
included
in
these
accounts
without
deduction
on
account
of
contributions
received
from
others.
Contributions
for
the
construction
of
transportation
property
shall
be
credited
to
account
No.
799,
‘Donations
and
grants
—
railway
property’,
or
No.
799
NR,
‘Donations
and
grants
—
railway
property
—
United
States.
lines.’
Contributions
for
projects
such
as
the
reconstruction
and
relocation
of
tracks
and
appurtenant
facilities
shall
be
applied
first
to
reduce,
or
cancel,
the
amounts
which
would
otherwise
be
charged
to
the
accrued
depreciation
account,
and
the
remainder,
if
any,
shall
be
credited
to
account
No.
799,
‘Donations
and
grants
—
railway
property’,
or
No.
799
NR,
‘Donations
and
grants
—
railway
property
—
United
States
lines.’
11.1
No
specific
approval
was
given
by
the
Board
to
adopt
any
procedure
as
an
alternative
to
that
set
out
in
Clause
7(B)(i).
12.1
The
Uniform
Classification
of
Accounts
for
Class
1
common
carriers
by
railway
which
is
produced
in
Examination
for
Discovery
as
exhibit
64
and
bears
the
certificate
of
the
Canadian
Transport
Commission
was
validly
adopted
and
made
effective
by
the
Board
of
Transport
Commissioners
for
Canada
pursuant
to
the
powers
conferred
upon
the
Board
by
the
Railway
Act
and
governed
the
accounting
procedure
of
the
Plaintiff
during
the
taxation
years
in
question.
13.1
The
Uniform
Classification
of
Accounts
produced
in
Examination
for
Discovery
as
exhibit
64
is
the
“Uniform
Classification”
referred
to
in
subsection
84A(3)
of
the
Income
Tax
Act.
14.1
Each
property
referred
to
in
Categories
1,
2
and
3
was
“property”
within
the
meaning
assigned
by
sections
139
and
11(1)(a)
of
the
applicable
Income
Tax
Act.
15.1
In
each
of
the
instances
in
categories
1,
2
and
3,
the
amount
received
by
the
Plaintiff
did
not
exceed
the
amount
actually
laid
out
by
the
Plaintiff
to
perform
the
work
on
the
property
and
there
was
no
net
revenue
or
profit
realized
by
the
Plaintiff
from
the
transaction.
The
sections
of
the
Income
Tax
Act
which
have
or
may
have
some
bearing
on
the
determination
of
the
issues
are
as
follows:
8.
(3)
An
annual
or
other
periodic
amount
paid
by
a
corporation
to
a
taxpayer
in
respect
of
an
income
bond
or
income
debenture
shall
be
deemed
to
have
been
received
by
the
taxpayer
as
a
dividend
unless
the
corporation
is
entitled
to
deduct
the
amount
so
paid
in
computing
its
income.
(4)
This
section
is
applicable
in
computing
the
income
of
a
shareholder
for
the
purposes
of
this
Part
whether
or
not
the
corporation
was
resident
or
carried
on
business
in
Canada.
17.
(1)
Notwithstanding
paragraphs
(a),
(b)
and
(h)
of
subsection
(1)
of
section
12,
the
following
amounts
may
be
deducted
in
computing
the
income
of
a
taxpayer
for
a
taxation
year:
(a)
such
part
of
the
capital
cost
to
the
taxpayer
of
property,
or
such
amount
in
respect
of
the
capital
cost
to
the
taxpayer
of
property,
if
any,
as
is
allowed
by
regulation;
28.
(1)
Where
a
corporation
in
a
taxation
year
received
a
dividend
from
a
corporation
that
(d)
was
a
non-resident
corporation
more
than
25%
of
the
issued
share
capital
of
which
(having
full
voting
rights
under
all
circumstances)
belonged
to
the
receiving
corporation,
an
amount
equal
to
the
dividend
minus
any
amount
deducted
under
subsection
(2)
of
section
11
in
computing
the
receiving
corporation’s
income
may
be
deducted
from
the
income
of
that
corporation
for
the
year
for
the
purpose
of
determining
its
taxable
income.
12.
(1)
In
computing
income,
no
deduction
shall
be
made
in
respect
of
(f)
an
amount
paid
by
a
corporation
other
than
a
personal
corporation
as
interest
or
otherwise
to
holders
of
its
income
bonds
or
income
debentures
unless
the
bonds
or
debentures
have
been
issued
or
the
income
provisions
thereof
have
been
adopted
since
1930
(i)
to
afford
relief
to
the
debtor
from
financial
difficulties,
and
(ii)
in
place
of
or
as
an
amendment
to
bonds
or
debentures
that
at
the
end
of
1930
provided
unconditionally
for
a
fixed
rate
of
interest,
139.
(1)
In
this
Act,
(t)
“income
bond”
or
“income
debenture”
means
a
bond
or
debenture
in
respect
of
which
interest
or
dividends
are
payable
only
when
the
debtor
company
has
made
a
profit
before
taking
into
account
the
interest
or
dividend
obligation;
84A.
(3)
Where
any
amount
in
respect
of
an
expenditure
incurred
by
a
taxpayer
on
or
in
respect
of
the
repair,
replacement,
alteration
or
renovation
of
depreciable
property
of
the
taxpayer
of
a
class
prescribed
by
regulations
of
the
Governor
in
Council
made
for
the
purposes
of
this
section
is,
under
any
uniform
classification
and
system
of
accounts
and
returns
prescribed
by
the
Canadian
Transport
Commission
pursuant
to
the
Railway
Act,
required
to
be
entered
in
the
books
of
the
taxpayer
otherwise
than
as
an
expense,
(a)
no
deduction
may
be
made
in
respect
of
that
expenditure
in
computing
the
income
of
the
taxpayer
for
a
taxation
year;
and
(b)
for
the
purposes
of
section
20
and
regulations
made
under
paragraph
(a)
of
subsection
(1)
of
section
11,
the
taxpayer
shall
be
deemed
to
have
acquired,
at
the
time
the
expenditure
was
incurred,
depreciable
property
of
that
class
at
a
capital
cost
equal
to
that
amount.
Certain
portions
of
the
Canada-US
Tax
Convention
and
Protocol
dated
March
4,
1942
are
also
applicable
as
follows:
CONVENTION
Article
I
An
enterprise
of
one
of
the
contracting
States
is
not
subject
to
taxation
by
the
other
contracting
State
in
respect
of
is
industrial
and
commercial
profits
except
in
respect
of
such
profits
allocable
in
accordance
with
the
Articles
of
this
Convention
to
its
permanent
establishment
in
the
latter
State.
Article
ll
For
the
purposes
of
this
Convention,
the
term
“industrial
and
commercial
profits”
shall
not
include
income
in
the
form
of
rentals
and
royalties,
interest,
dividends,
management
charges,
or
gains
derived
from
the
sale
or
exchange
of
capital
assets.
Subject
to
the
provisions
of
this
Convention
such
items
of
income
shall
be
taxed
separately
or
together
with
industrial
and
commercial
profits
in
accordance
with
the
laws
of
the
contracting
States.
Article
XV
1.
As
far
as
may
be
in
accordance
with
the
provisions
of
the
Income
Tax
Act,
Canada
agrees
to
allow
as
a
deduction
from
the
Dominion
income
and
excess
profits
taxes
on
any
income
which
was
derived
from
sources
within
the
United
States
of
America
and
was
there
taxed,
the
appropriate
amount
of
such
taxes
paid
to
the
United
States
of
America.
PROTOCOL
3.
As
used
in
this
Convention:
(f)
the
term
“permanent
establishment”
includes
branches,
mines
and
oil
wells,
farms,
timber
lands,
plantations,
factories,
workshops,
warehouses,
offices,
agencies
and
other
fixed
places
of
business
of
an
enterprise,
but
does
not
include
a
subsidiary
corporation.
The
use
of
substantial
equipment
or
machinery
within
one
of
the
contracting
States
at
any
time
in
any
taxable
year
by
an
enterprise
of
the
other
contracting
State
shall
constitute
a
permanent
establishment
of
such
enterprise
in
the
former
State
for
such
taxable
year.
6.
(a)
The
term
“rental
and
royalties”
referred
to
in
Article
ll
of
this
Convention
shall
include
rentals
or
royalties
arising
from
leasing
real
or
immovable,
or
personal
or
movable
property
or
from
any
interest
in
such
property,
including
rentals
or
royalties
for
the
use
of,
or
for
the
privilege
of
using,
patents,
copyrights,
secret
processes
and
formulae,
goodwill,
trade
marks,
trade
brands,
franchises
and
other
like
property.
At
the
opening
of
the
hearing
paragraph
25A
was
added
to
the
agreed
statement
of
facts
stating,
“The
bonds
of
the
corporations
as
listed
in
Paragraphs
2,
10
and
18,
were
all
bonds
that
at
the
end
of
1930
provided
unconditionally
for
a
fixed
rate
of
interest.”
An
amendment
was
made
to
paragraph
5.7
in
Part
III
so
as
to
remove
Nos
10.1,
21.1
and
34
from
sub-category
la
and
put
them
in
paragraph
6.2
in
sub-category
lb,
and
also
to
add
item
No
61
to
paragraph
5.7.
Revenue
from
Income
Bonds
Two
experts
on
foreign
law
were
called
to
deal
with
an
alternate
argument
on
the
treatment
of
interest
from
the
income
bonds,
arising
out
of
the
application
to
it
of
paragraph
12(1)(f).
Robert
T
Beam,
a
lawyer
from
Chicago
was
called
on
behalf
of
plaintiff,
his
affidavit
being
taken
as
if
read.
He
had
acted
as
counsel
in
the
corporate
reorganization
of
the
Soo
Line
Railroad
Company
and
its
constituent
railroads
and
is
familiar
with
their
corporate
history
as
well
as
with
the
laws
of
the
United
States
respecting
railroad
reorganizations
and
in
particular
section
77
of
the
United
States
Bankruptcy
Law.
He
explained
that
by
virtue
of
this
an
insolvent
inter-state
railroad
may
request
a
reorganization.
A
trustee
is
appointed
and
a
plan
of
reorganization
is
filed
before
the
Interstate
Commerce
Commission
for
approval
or
for
substitution
of
its
own
plan.
Following
this,
the
scheme
is
ratified
by
the
court
if
it
approves
it
and
a
reorganization
manager
is
appointed.
The
reorganization
can
be
done
in
one
of
two
ways,
either
by
forming
a
new
corporation
resulting
from
a
merger
of
the
old
corporations
or
by
a
continuation
of
the
old
corporations
subject
to
the
terms
of
the
reorganization
scheme.
In
the
present
case
the
court
allowed
either
option
but
the
reorganization
manager
chose
to
form
a
new
corporation
as
being
a
simpler
method
of
proceeding
avoiding
less
confusion
with
securities
of
the
old
corporations,
the
old
names,
different
by-laws,
and
so
forth.
In
the
case
of
the
Minneapolis,
St
Paul
and
Sault
Ste
Marie
Railway
Company,
a
new
company
was
formed
in
1944,
although
the
old
company,
which
had
been
incorporated
under
the
laws
of
several
States
including
Minnesota,
Wisconsin,
Illinois
and
what
was
at
the
time
of
the
original
incorporation
the
Territory
of
Dakota,
was
not
dissolved
but
by
deed
of
conveyance
and
release
the
properties
of
the
old
company
were
conveyed
by
the
trustees
to
the
new
company.
The
new
company
did
not
become
liable
for
the
bonds
of
the
old
company
but
assumed
certain
obligations
such
as
taxes,
tort
claims
and
outstanding
cheques.
In
the
witness’s
opinion
the
bonds
of
the
new
company
were
not
issued
to
replace
the
bonds
of
the
old
company
but
constituted
a
new
capital
structure
approved
by
the
Interstate
Commerce
Commission
which
took
into
consideration,
for
example,
that
the
new
company
would
be
benefiting
by
the
transfer
of
a
traffic
agreement
with
the
Canadian
Pacific
without
which
the
reorganization
would
not
have
been
approved.
In
other
words
the
value
of
ali
the
rights
of
the
old
bond
holders
was
taken
into
consideration
in
their
entirety
and
the
reorganization
did
not
constitute
a
one
for
one
exchange
of
bonds.
Holders
of
the
old
bonds
received
income
bonds
of
the
new
company,
cash,
and
common
stock
options.
In
the
case
of
the
reorganization
of
the
Wisconsin
Central
Railroad
Company
which
took
place
in
1954,
the
same
procedure
was
followed,
a
new
company
being
formed
and
although
the
old
company
was
not
dissolved
its
assets
were
all
conveyed
to
the
new
company.
Holders
of
bonds
of
the
old
company
received
contingent
interest
first
mortgage
bonds,
contingent
interest
general
mortgage
bonds
and
common
shares
in
the
new
company.
In
the
case
of
the
reorganization
of
the
Duluth
South
Shore
and
Atlantic
Railroad
Company
in
1949
which
took
place
in
Minnesota,
the
same
procedure
was
again
followed
but
in
this
case
there
were
two
old
companies,
the
other
being
Mineral
Railroad
Company
wholly
owned
by
the
Duluth.
The
old
Duluth
company
was
not
dissolved
and
again
a
conveyance
of
the
assets
of
the
two
old
companies
was
made
to
the
new
company
and
the
bond
holders
of
the
old
companies
received
cash,
income
bonds
and
common
stock.
Again
it
was
made
clear
that
the
reorganization
provided
a
settlement
of
all
claims
by
the
distribution
of
a
new
package
of
securities.
In
cross-examination
he
admitted
that
the
main
purpose
of
section
77
of
the
United
States
Bankruptcy
Law
is
the
rehabilitation
of
the
debtor
by
the
reorganization
of
the
company.
It
is
not
a
liquidation
but
a
reorganization
to
preserve
an
ongoing
railroad
in
the
public
interest.
The
new
company
was
formed,
since
this
method
was
chosen,
to
relieve
the
bankrupt
corporations
from
the
difficulties
they
had
got
into
as
a
result
of
fixed
interest
bonds
when
their
earnings
did
not
generate
enough
income
to
cover
these
obligations,
by
permitting
instead
the
use
of
income
bonds
in
which
the
interest
would
not
accumulate
in
periods
when
the
revenues
were
insufficient
to
cover
the
interest
payments.
The
end
accomplished
was
to
relieve
the
bankrupt
corporations
and
certainly
not
to
relieve
the
new
corporations
so
formed.
It
was
only
in
the
Duluth
South
Shore
and
Atlantic
Railroad
reorganization
that
there
was
also
included
a
compromise
of
certain
claims
against
the
Canadian
Pacific.
Mr
Robert
Ginnane,
an
attorney,
was
called
as
an
expert
in
this
aspect
of
the
case
by
defendant,
his
letter
of
opinion
as
an
expert,
with
accompanying
certificate
of
defendant’s
counsel
being
taken
into
the
record
as
if
read.
He
is
counsel
to
a
Washington,
DC
law
firm,
a
member
of
the
United
States
Supreme
Court
bar,
and
served
as
general
counse!
to
the
Interstate
Commerce
Commission
in
that
country
from
1955
to
1970,
so
is
thoroughly
familiar
with
the
railroad
reorganizations.
He
testified
that
Canadian
Pacific
owned
fixed
interest
bonds
in
the
three
above
railroad
corporations
prior
to
1930
and
as
a
result
of
the
reorganization
the
holders
of
the
fixed
interest
bonds
received
income
bonds
and/or
cash
and/or
shares
in
lieu
of
same.
For
authority
for
this
he
referred
to
the
case
of
Van
Schaick
v
McCarthy,
116
F
2d
987
at
922,
where
it
is
stated
as
follows:
Sec
77
has
for
its
main
purpose
the
rehabilitation
of
the
debtor
by
a
readjustment
of
its
financial
structure
in
the
interest
of
the
debtor
and
its
creditors
and
security
holders,
under
a
fair
and
equitable
plan
or
reorganization
which
shall
so
modify
or
alter
the
rights
of
both
secured
and
unsecured
creditors
that
the
fixed
charges
shall
be
brought
within
the
probable
future
earnings
available
for
the
payment
thereof.
He
also
referred
to
the
case
of
George
P
Baker
et
al
v
Gold
Seal
Liquors,
Inc,
[1944]
S
Ct
2504,
which
stated
at
pages
2506-7:
The
problem
of
the
bankruptcy
Reorganization
Court
is
somewhat
different.
Liquidation
is
not
the
objective.
Rather
the
aim
is
by
financial
restructuring
to
put
back
into
operation
a
going
concern.
That
entails
two
basic
considerations:
First
is
the
collection
of
amounts
owed
the
bankrupt
to
keep
its
cash
inflow
sufficient
for
operating
purposes,
at
least
at
the
survival
levels.
The
second
is
to
design
a
plan
which
creditors
and
other
claimants
will
approve,
which
will
pass
scrutiny
of
the
Interstate
Commerce
Commission,
which
will
meet
the
fair
and
equitable
standards
required
by
the
Act
for
Court
approval,
and
which
will
preserve
an
ongoing
railroad
in
the
public
interest.
He
stated
that
this
is
what
the
reorganization
plans
accomplished
in
this
case
and
that
it
was
the
holders
of
fixed
interest
bonds
of
the
old
company
which
received
the
new
income
bonds
as
part
of
the
plan
and
not
as
a
matter
of
choice,
the
new
corporation
being
merely
a
vehicle
to
accomplish
this
end.
Expressing
his
opinion
as
to
the
application
of
subparagraph
12(1)(f)(ii)
of
the
Income
Tax
Act,
although
he
concedes
that
this
is
a
matter
for
the
Canadian
court
to
interpret,
he
was
less
certain
of
its
applicability
in
the
case
of
the
Duluth
South
Shore
Atlantic
Railroad
income
bonds
stating
in
the
last
paragraph
of
his
opinion:
As
to
quoted
clause
(ii)
of
Section
12(1)(f),
it
seems
clear
that
the
income
bonds
of
Minneapolis
and
Wisconsin
were
issued
“in
place”
of
bonds
“that
at
the
end
of
1930
provided
unconditionally
for
a
fixed
rate
of
itnerest.”
In
the
case
of
Duluth,
the
facts
presently
available
to
me
are
not
sufficient
to
permit
me
to
express
an
opinion
as
to
whether
Duluth’s
income
bonds
satisfy
the
condition
of
clause
(ii).
it
is
defendant’s
contention
that
subsection
8(3)
stands
by
itself
and
that
it
is
not
necessary
to
consider
the
effect
of
paragraph
12(1)(f)
but
in
the
event
that
the
Court
does
not
so
conclude
then
as
an
alternative
argument
defendant
contends
that
the
Soo
corporation
could
have
deducted
the
amounts
paid
to
Canadian
Pacific
as
holders
of
its
income
bonds
and
hence
Canadian
Pacific
could
not
within
the
provisions
of
subsection
8(3)
be
deemed
to
have
received
these
payments
as
a
dividend.
Since
the
evidence
of
the
expert
witnesses
was
devoted
to
this
alternative
argument
it
would
be
appropriate
to
deal
with
it
at
this
time.
If
the
Soo
corporation
although
non-resident
is
a
corporation
within
the
meaning
of
paragraph
12(1)(f)
(and
this
argument
will
be
dealt
with
later)
then,
since
it
is
not
a
personal
corporation,
the
section
applies,
so
that
it
could
not
deduct
the
payments
made
to
Canadian
Pacific
as
holders
of
the
income
bonds
of
the
three
companies
who
merged
to
form
it
in
1960
“unless
the
bonds
or
debentures
have
been
issued
or
the
income
provisions
thereof
have
been
adoptd
since
1930”
(which
is
the
case)
(i)
to
afford
relief
to
the
debtor
from
financial
difficulties,
and
(ii)
in
place
of
or
as
an
amendment
to
bonds
or
debentures
that
at
the
end
of
1930
provided
unconditionally
for
a
fixed
rate
of
interest.
Applying
the
provisions
of
these
two
conditions
to
the
proof
which
has
been
submitted
defendant’s
argument
would
extend
the
meaning
of
the
word
“debtor”
in
subparagraph
(i)
to
include
the
predecessor
companies
of
the
Duluth
South
Shore
and
Atlantic
Railroad,
Minneapolis,
St
Paul
and
Sault
Ste
Marie
Railway
Company
and
Wisconsin
Central
Railroad
Company
which
were
relieved
from
their
financial
difficulties
by
the
issue
of
these
bonds.
While
this
was
undoubtedly
the
purpose
of
the
reorganizations,
which
could
have
been
accomplished
without
the
formation
of
new
companies
I
cannot
conclude
that
we
can
so
extend
the
meaning
of
the
word
“debtor”
in
subparagraph
(i)
to
include
the
old
companies
without
completely
ignoring
fundamental
principles
of
company
law
relating
to
the
separate
corporate
existence
of
the
newly
formed
corporations.
It
is
not
the
newly
formed
corporations
which
were
in
financial
dffiiculties
but
their
predecessors
and
the
word
“debtor”
in
subparagraph
(i)
must
refer
back
to
the
corporation
paying
the
interest
on
the
income
bonds,
that
is
to
say
the
new
corporation.
While
the
old
corporations
remained
in
existence
in
the
sense
that
they
did
not
surrender
their
charters
it
was
not
they
who
were
paying
the
interest
on
these
bonds
to
Canadian
Pacific
in
1965,
1966
and
1967.
Moreover,
I
do
not
find
that
the
new
income
bonds
were
issued
“in
place
of”
the
fixed
interest
bonds
of
the
old
corporations
within
the
meaning
of
subparagraph
(ii)
of
paragraph
12(1)(f).
They
were
issued
together
with
certain
sums
of
cash
and
certain
shares
in
exchange
for
the
old
bonds
and
certain
other
considerations
including
in
the
case
of
the
Minneapolis,
St
Paul
and
Sault
Ste
Marie
Railway
contracts
with
Canadian
Pacific,
and
in
the
case
of
Duluth
South
Shore
and
Atlantic
Railroad
release
of
certain
claims
against
Canadian
Pacific.
While
apparently
the
reorganization
plan
approved
by
the
Interstate
Commerce
Commission
in
each
case
and
ratified
by
the
courts
considered
that
this
was
an
equivalent
consideration
to
protect
as
far
as
possible
the
creditors
of
the
old
companies
which
had
encountered
financial
difficulties
it
would
be
an
oversimplification
to
say
that
the
new
income
bonds
were
simply
issued
“in
place
of’
the
old
fixed
interest
bonds.
It
follows
therefore
that
the
paying
corporation
which
is
the
corporation
referred
to
in
paragraph
12(1)(f)
would
not
qualify
under
that
section
to
make
deduction
for
these
payments
in
computing
its
income
if
it
were
a
taxpayer
in
Canada
and
that
Canadian
Pacific
as
the
receiving
taxpayer
is
not
as
a
result
of
the
concluding
clause
of
subsection
8(3)
prevented
from
applying
the
said
section
and
claiming
that
these
sums
were
received
as
dividend
income.
While
this
disposes
of
this
alternative
argument
in
favour
of
plaintiff
it
does
not
by
any
means
dispose
of
the
principal
argument
relating
to
treatment
by
Plaintiff
of
this
income
as
dividend
income
under
the
provisions
of
subsection
8(3).
Defendant
argues
as
another
alternative
argument
that
if
the
word
“corporation”
as
used
in
subsection
8(3)
is
limited
to
corporations
subject
to
the
Income
Tax
Act
of
Canada
(with
which
contention
defendant
does
not
agree)
then
since
the
interest
received
by
Canadian
Pacific
on
these
income
bonds
was
from
a
US
corporation
not
doing
business
in
Canada
and
not
resident
in
Canada
it
therefore
cannot
be
deemed
to
be
a
dividend
governed
by
subsection
8(3)
in
the
first
place.
Defendant
has
contended
in
its
principal
argument
relating
to
income
bonds,
however,
that
the
word
“corporation”
in
subsection
8(3)
is
not
limited
to
a
corporation
resident
in
Canada
and
if
this
contention
is
sustained
the
second
alternative
argument
fails.
In
support
of
this
contention
reference
is
made
to
subsection
8(4)
(supra)
which
applies
section
8
in
computing
the
income
of
a
shareholder
“whether
or
not
the
corporation
was
resident
or
carried
on
business
in
Canada”.
Section
8
has
a
heading
“Appropriation
of
Property
to
Shareholders”
and
the
word
“shareholder”
in
subsection
8(4)
is
certainly
not
limited
to
a
corporate
shareholder.
The
word
"corporation”
is
subsection
8(4)
read
in
conjunction
with
subsection
8(3)
must
mean
the
paying
corporation,
which
I
have
found
is
not
entitled
to
deduct
the
amounts
so
paid
in
computing
its
income.
For
purposes
of
Canadian
income
tax
this
would
appear
to
be
the
case
whether
or
not
it
was
resident
or
carried
on
business
in
Canada.
The
fact
that,
as
admitted
in
the
agreed
statement
of
facts,
the
Soo
Line
as
paying
corporation
was
entitled
to
deduct
and
in
fact
did
deduct
the
amount
of
interest
so
paid
to
plaintiff
on
the
income
bonds
in
computing
its
income
for
United
States
income
tax
purposes
cannot
affect
this.
Further
support
for
the
conclusion
that
the
word
“corporation”
used
in
subsection
8(3)
includes
a
non-resident
corporation
results
from
the
fact
that
paragraph
139(1)(h)
of
the
Act
defining
“corporation”
states
that
it
“includes
an
incorporated
company”
and
goes
on
to
define
‘‘corporation
incorporated
in
Canada”.
If
it
had
been
the
intent
to
limit
the
application
of
subsection
8(3)
to
“a
corporation
incorporated
in
Canada”
this
would
have
been
the
proper
phrase
to
use
instead
of
merely
“a
corporation”.
Moreover,
paragraph
28(1)(d)
by
virtue
of
which
Canadian
Pacific
will
benefit
by
including
the
interest
received
on
the
income
bonds
as
a
dividend
under
subsection
8(3)
provides
for
a
dividend
having
been
received
from
“a
non-resident
corporation”
more
than
25%
of
the
issued
share
capital
of
which
(having
full
voting
rights
under
all
circumstances)
belonged
to
the
receiving
“corporation”,
as
was
the
case
here.
The
fact
that
I
have
concluded
that
the
word
“corporation”
as
used
in
subsection
8(3)
applies
to
a
non-resident
as
well
as
to
a
Canadian
corporation
does
not
necessarily
lead
to
a
decision
of
the
issue
respecting
the
treatment
by
Canadian
Pacific
of
the
interest
received
on
the
income
bonds
as
dividend
income.
Defendant
contends
that
it
could
not
do
so
because
the
paying
corporation,
the
Soo
Line,
was
entitled
to
deduct
the
amount
so
paid
in
computing
its
income
in
the
United
States,
and
it
is
with
respect
to
this
issue
that
the
parties
disagree,
plaintiff
contending
that
this
is
irrelevant
and
that
unless
the
paying
corporation
was
entitled
to
deduct
the
amount
so
paid
in
computing
its
income
in
Canada,
which
was
not
the
case,
the
exception
has
no
application.
I
have
already
found
(supra)
that
on
a
strict
interpretation
of
paragraph
12(1)(f)
it
would
not
have
been
entitled
to
make
the
deduction
even
if
it
had
been
a
taxpayer
in
Canada,
because
of
the
bonds
having
been
issued
by
the
new
companies
and
not
in
place
of
the
original
fixed
interest
bonds,
but
since
defendant
contends
that
subsection
8(3)
should
be
interpreted
by
itself
without
reference
to
paragraph
12(1)(f)
it
is
now
necessary
to
deal
with
this
principal
argument
of
defendant.
Defendant
contends
that
the
words
“entitled
to”
and
the
words
“in
computing
its
income”
in
subsection
8(3)
have
no
limiting
significance
implying
that
they
have
reference
to
income
taxable
in
Canada
but
are
equally
applicable
to
a
non-resident
corporation.
Plaintiff
refers
to
the
case
of
Lea-Don
Canada
Limited
v
MNR,
[1970]
CTC
346;
70
DTC
6271,
which
dealt
with
an
entirely
different
section
to
the
Act
but
in
which
Hall,
J
rendering
the
unanimous
judgment
of
the
Supreme
Court
stated
at
page
349
[6273-4]:
The
argument
that
the
provisions
of
the
Income
Tax
Act
authorizing
a
deduction
on
account
of
the
capital
cost
of
depreciable
property
are
applicable
to
non-residents
who
are
not
subject
to
assessment
for
income
tax
under
Part
I
of
the
Act
because
such
deduction
is
from
income
is
wholly
untenable.
It
is
clear
that
Section
20(4)
is
concerned
with
taxpayers
entitled
to
a
deduction,
not
with
persons
who
are
not
subject
to
assessment
under
Part
I.
A
non-resident
not
carrying
on
business
in
Canada
is
not
a
person
entitled
to
such
a
deduction
and
therefore
Section
20(4)
cannot
properly
be
said
to
be
“applicable”
to
him.
it
is
unfortunately
true
that
the
result
of
this
interpretation
does
some
injury
to
the
scheme
of
taxation
as
provided
in
the
Act
taken
as
a
whole.
As
counsel
for
defendant
said
in
his
written
notes
with
which
I
am
in
agreement
on
this
point:
“the
purpose
of
Section
8(3)
is
to
provide
equal
tax
treatment
on
inter-corporate
capital
transfers
in
the
nature
of
dividends,
deemed
or
actual.
It
is
not
intended
that
the
payer
corporation
should
have
a
deduction
of
the
amount
of
interest
paid
and
also
the
receiving
corporation
obtain
the
interest
tax
free.”
While
this
is
quite
true
when
one
is
dealing
with
two
Canadian
corporations
subject
to
income
tax
in
Canada,
the
fact
that
in
this
case
the
paying
corporation
was
not
subject
to
such
tax
but
nevertheless
gained
the
taxation
benefit
in
the
United
States
resulting
from
deducting
the
interest
so
paid
on
the
income
bends,
in
computing
its
income
for
United
States
income
tax
purposes
and
that
Canadian
Pacific
as
owners
of
the
majority
interest
in
the
paying
corporation
benefits
indirectly
from
this,
is
not
in
my
view
sufficient
to
prevent
it
from
treating
the
amounts
so
received
as
dividend
income
within
the
clear
provisions
of
subsection
8(3)
of
the
Act,
and
as
a
consequence
obtaining
the
taxation
benefits
in
Canada
resulting
from
the
application
of
paragraph
28(1)(d).
Plaintiff
made
some
subsidiary
arguments
in
support
of
its
interpretation
of
subsection
8(3),
which
arguments,
although
they
cannot
be
sustained,
are
of
some
passing
interest.
In
the
first
place
it
was
pointed
out
that
for
a
number
of
years
prior
to
the
1965
taxation
year
the
income
from
these
bonds
had
always
been
declared
by
it
as
a
dividend
under
subsection
8(3)
without
any
objection
by
defendant.
The
principle
that
taxation
authorities
need
not
be
consistent
in
their
treatment
of
a
taxpayer’s
return
from
year
to
year
is
so
well
established
that
it
is
unnecessary
to
cite
authorities
for
it.
If
defendant
made
an
error
in
its
assessment
of
plaintiff
on
this
issue
in
prior
years,
as
defendant
would
contend
was
the
case,
this
does
not
prevent
the
taxation
of
such
income
in
the
manner
now
considered
proper
for
the
taxation
years
in
question.
The
second
issue
is
somewhat
similar.
Interpretation
Bulletin
IT-10,
dated
May
19,
1971,
reads
in
part:
An
amount
received
by
a
taxpayer
in
respect
of
an
income
bond
or
debenture
owned
by
him
normally
is
deemed
to
have
been
received
by
him
as
a
dividend.
The
exception
to
this
is
where
the
corporation
making
the
payment
is
entitled
to
deduct
the
amount
so
paid
in
computing
its
income.
Section
12(1)(f)
sets
out
the
circumstances
in
which
a
corporation
is
entitled
to
such
a
deduction.
The
fact
that
the
interest
is
deductible
under
the
law
of
a
foreign
jurisdection
in
computing
income
subject
to
tax
in
that
jurisdiction
will
not
affect
the
application
of
Section
8(3).
Accordingly,
where
a
Canadian
corporation
receives
interest
on
an
income
bond
from
a
United
States
corporation
which
is
not
subject
to
tax
in
Canada,
Section
8(3)
will
deem
that
interest
to
be
a
dividend
regardless
of
whether
the
US
corporation
may
deduct
the
amount
paid
by
it
in
computing
its
income
subject
to
tax
In
the
United
States.
This
Bulletin
was
prior
to
the
final
notice
of
reassessment
dated
July
23,
1973.
The
new
Income
Tax
Act
which
went
into
effect
on
January
1,
1972
has
a
section
substantially
similar
to
subsection
8(3),
namely
subsection
15(3)
which
reads
as
follows:
15.
(3)
An
annual
or
other
periodic
amount
paid
by
a
corporation
resident
in
Canada
to
a
taxpayer
in
respect
of
an
income
bond
or
income
debenture
shall
be
deemed
to
have
been
paid
by
the
corporation
and
received
by
the
taxpayer
as
a
dividend
on
a
share
of
the
capital
stock
of
the
corporation,
unless
the
corporation
is
entitled
to
deduct
the
amount
so
paid
in
computing
its
income,
Subsection
15(4)
reads:
(4)
An
annual
or
other
periodic
amount
paid
by
a
corporation
not
resident
in
Canada
to
a
taxpayer
in
respect
of
an
income
bond
or
income
debenture
shall
be
deemed
to
have
been
received
by
the
taxpayer
as
a
dividend
unless
the
amount
so
paid
was,
under
the
laws
of
the
country
in
which
the
corporation
was
resident,
deductible
in
computing
the
amount
for
the
year
on
which
the
corporation
was
liable
to
pay
income
or
profits
tax
imposed
by
the
government
of
that
country.
It
is
to
be
noted
that
by
virtue
of
these
amendments
Canadian
Pacific
can
no
longer
claim
the
interest
received
on
these
income
bonds
as
a
dividend.
Subsequent
to
this
a
new
Interpretation
Bulletin
was
issued,
Bulletin
IT-52
on
June
16,
1972,
replacing
Bulletin
IT-10,
which
reads
in
part:
Under
the
pre-1972
Act,
whether
such
an
amount
was
deemed
to
be
a
dividend
did
not
depend
on
whether
it
was
deductible
in
computing
income
in
the
foregn
country.
Instead,
the
test
was
whether
it
would
have
qualified
for
a
deduction
under
old
paragraph
12(1)(f)
if
the
non-resident
corporation
had
been
subject
to
tax
in
Canada.
Unless
the
amount
paid
would
have
been
deductible
in
those
circumstances,
it
was
deemed
to
be
a
dividend
to
the
recipient.
In
discussing
the
significance
of
Interpretation
Bulletins,
my
brother
Cattanach,
J
stated
in
the
case
of
Ernest
G
Stickel
v
MNR,
[1972]
FC
672
at
684;
[1972]
CTC
210
at
218;
72
DTC
6178
at
6185:
First
Information
Bulletin
41
is
precisely
what
it
is
stated
to
be,
and
that
is
an
information
bulletin
issued
by
the
Deputy
Minister
of
the
Department
of
National
Revenue.
The
Deputy
Minister
does
not
have
the
power
to
legislate
on
this
subject-matter
delegated
to
him.
In
reality,
this
information
bulletin
is
nothing
more
than
the
Department’s
interpretation
of
Article
VIIIA
of
the
Treaty
for
departmental
purposes.
In
answer
to
the
argument
based
on
the
Interpretation
Bulletins
defendant’s
counsel
could
only
state
that
he
does
not
agree
with
them
and
considers
them
to
be
wrong.
Certainly
the
Act
has
to
be
interpreted
by
the
Court
and
not
by
rulings
of
departmental
officers
so
defendant
is
not
estopped
in
the
present
proceedings
from
refusing
to
apply
these
Interpretation
Bulletins.
Plaintiff
also
argues
that
the
fact
that
the
law
had
to
be
amended
so
as
to
prevent
the
treatment
of
such
payments
as
dividends
when
paid
by
a
non-resident
corporation
which
has
deducted
same
in
paying
its
taxes
in
the
United
States
indicates
that
before
these
amendments
the
law
could
not
be
so
interpreted.
In
answer
to
this
argument
counsel
for
defendant
invokes
the
Interpretation
Act,
RSC
1970,
c
1-23,
subsections
37(2),
(3)
and
(4)
which
read
as
follows:
37.
(2)
The
amendment
of
an
enactment
shall
not
be
deemed
to
be
or
to
involve
a
declaration
that
the
law
under
such
enactment
was
or
was
considered
by
Parliament
or
other
body
or
person
by
whom
the
enactment
was
enacted
to
have
been
different
from
the
law
as
it
is
under
the
enactment
as
amended.
(3)
The
repeal
or
amendment
of
an
enactment
in
whole
or
in
part
shall
not
be
deemed
to
be
or
to
involve
any
declaration
as
to
the
previous
state
of
the
law.
(4)
A
re-enactment,
revision,
consolidation
or
amendment
of
an
enactment
shall
not
be
deemed
to
be
or
to
involve
an
adoption
of
the
construction
that
has
by
judicial
decision
or
otherwise
been
placed
upon
the
language.
used
in
the
enactment
or
upon
similar
language.
In
other
words
it
is
not
permissible
to
construe
an
Act
to
which
the
Interpretation
Act
applies
by
reference
to
a
subsequent
Act
unless
such
subsequent
Act
directs
how
the
prior
Act
is
to
be
interpreted
(see
Home
Oil
Company
Limited
v
MNR,
[1954]
Ex
CR
622
at
627;
[1954]
CTC
301
at
306;
54
DTC
1153
at
1155-6).
Although
the
Minister
is
in
no
way
bound
therefore
by
the
manner
in
which
he
has
permitted
the
amounts
received
by
plaintiff
as
interest
in
these
income
bonds
to
be
dealt
with
under
subsection
8(3)
in
preceding
taxation
years,
nor
by
the
departmental
Interpretation
Bulletins
which
confirm
that
this
was
the
proper
way
to
deal
with
these
receipts,
and
although
no
inference
can
be
drawn
from
the
amendments
in
the
new
Income
Tax
Act
changing
the
wording
of
subsections
8(3)
and
8(4)
so
as
to
close
the
loophole
by
virtue
of
which
the
Soo
Line,
not
a
taxpayer
in
Canada,
was
able
to
deduct
the
interest
payments
in
computing
its
taxable
income
in
the
United
States
while
at
the
same
time
Canadian
Pacific
could
by
virtue
of
subsection
8{3)
and
paragraph
28(1)(d)
deduct
these
receipts
from
its
own
taxable
income,
all
these
arguments
lend
some
support
to
the
conclusion
already
reached
that
plaintiff
is
entitled
to
make
these
deductions
notwithstanding
the
consequences
which
may
seem
contrary
to
the
scheme
of
the
Act.
See
in
this
connection
His
Majesty
the
King
v
Consolidated
Lithographing
Manufacturing
Company
Limited,
[1934]
SCR
298
at
302;
[1928-34]
CTC
235
at
238;
1
DTC
261,
where
Hughes,
J
refers
with
approval
to
the
statement
of
Lord
Cairns
in
Partington
v
Attorney
General
(1869),
LR
4
HL
100
at
122
in
which
he
said:
I
am
not
at
all
sure
that,
in
a
case
of
this
kind—a
fiscal
case—form
{s
not
amply
sufficient;
because,
as
1
understand
the
principle
of
all
fiscal
legislation,
it
is
this:
if
the
person
sought
to
be
taxed
comes
within
the
letter
of
the
law
he
must
be
taxed,
however
great
the
hardship
may
appear
to
the
Judicial
mind
to
be.
On
the
other
hand,
if
the
Crown,
seeking
to
recover
the
tax,
cannot
bring
the
subject
within
the
letter
of
the
law,
the
subject
is
free,
however
apparently
within
the
spirit
of
the
law
the
case
might
otherwise
appear
to
be.
Foreign
Tax
Credit
In
view
of
the
conclusion
which
I
have
reached
respecting
the
treatment
by
plaintiff
as
dividends
of
the
payments
received
as
interest
on
the
income
bonds
it
is
perhaps
not
necessary
to
deal
with
this
second
argument
of
plaintiff
which
only
applies,
in
any
event,
to
the
1965
taxation
year,
but
as
it
was
fully
argued
by
both
parties,
and
since
there
is
a
possibility
that
my
conclusions
on
the
first
issue
might
not
be
sustained
in
appeal
it
is
desirable
to
deal
with
this
argument.
The
witness
John
Clough,
Controller
of
Canadian
Pacific,
testified
as
to
the
meaning
of
“per
diem”
receipts
saying
that
they
are
rentals
paid
by
one
railroad
to
another
for
the
use
of
its
equipment,
especially
freight
cars
on
foreign
lines.
These
agreements
are
made
under
the
supervision
of
the
Interstate
Commerce
Commission.
Canadian
Pacific
has
some
of
its
own
lines
in
Maine
and
Vermont
so
there
would
be
no
question
of
“per
diem”
rentals
while
its
cars
are
on
those
lines.
However,
while
goods
are
going
from
Canada
to
the
United
States,
for
example,
the
tariff
charges
are
divided
between
the
various
railroads
on
whose
tracks
the
cars
travel,
on
a
mileage
basis.
Canadian
Pacific
would
receive
no
freight
revenue
for
any
movement
of
its
cars
on
foreign
lines.
It
does
receive
a
per
diem
amount
based
on
the
age
and
type
of
the
cars
and
other
factors
and
especially
on
the
length
of
time
during
which
the
cars
remain
on
each
of
these
other
lines.
In
North
America
there
is,
of
course,
a
very
extensive
interchange
of
cars
from
one
railroad
line
to
another
and
reports
of
movements
are
eveniually
assembled
and
the
adjustments
made.
Canadian
Pacific
also
has
some
freight
sales
offices
in
the
United
States
to
induce
the
use
of
Canadian
Pacific
routes
in
Canada
as
well
as
operating
the
lines
it
owns
in
Maine
and
Vermont
and
therefore
has
an
establishment
in
the
United
States
on
which
United
States
taxation
is
paid,
but
the
witness
stated
that
this
has
nothing
to
do
with
the
“per
diem”
charges
which
are
paid
directly
to
the
company
in
Canada
by
the
various
railroads
which
owe
them.
Per
diem
rates
are
supposed
to
he
equivalent
to
the
owner’s
expenses
for
maintaining
the
cars.
They
are
not
intended
to
yield
a
profit.
The
receipts
are
credited
to
the
equipment
rentals
account.
The
aggregate
of
the
“per
diem”
receipts
are
credited
to
the
income
account
and
the
aggregate
of
expenses
for
maintenance
of
the
cars
are
debited
there,
the
intention
being
that
they
should
balance.
As
a
result
of
Interstate
Commerce
Commission
studies.
however,
the
railroads
are
deemed
to
profit
to
the
extent
of
4%
of
the
gross
per
diem
receipts,
which
amount
is
taxable
as
income.
In
1966
and
1967
Canadian
Pacific’s
loss
on
its
Maine
and
Vermont
operations
amounted
to
more
than
this
income
from
“per
diem”
receipts.
This
was
not
the
case
in
1965,
when
United
States
income
tax
was
paid
in
the
amount
of
$260,866,
of
which
$255,225
related
to
“per
diem”
receipts.
On
May
19,
1971
the
Department
of
the
Treasury
in
Washington
advised
counsel
for
Canadian
Pacific
that
The
Internal
Revenue
Service
has
now
advised
us
of
its
conclusion
that
the
“per
diem”
payments
at
issue
in
the
case
(payments
from
the
United
States
carriers
for
the
use
of
railroad
cars
in
the
United
States)
constitute
rental
income
to
Canadian
Pacific
as
defined
in
Para
6(a)
of
the
Protocol
to
the
Income
Tax
Convention
between
the
United
States
and
Canada
and
are
not
io
be
treated
as
industrial
and
commercial
profits
within
the
meaning
of
Article
Il
to
the
Convention.
The
Service
has
further
concluded,
however,
that
such
income
is
effectively
connected
with
the
conduct
by
Canadian
Pacific
of
its
trade
or
business
within
the
United
States.
We
see
no
basis
for
Treasury
disagreeing
with
these
conclusions.
The
result
is
that
while
the
payments
will
be
taxed
by
the
United
States,
the
tax
will
be
on
the
net
rather
than
the
gross
basis.
The
company
did
not
appeal
this
“effectively
connected”
ruling
and
as
a
result
of
not
doing
so
it
was
able
to
avoid
tax
liability
in
the
United
States
in
the
1966
and
1967
tax
years.
Plaintiff
contends
that
the
United
States
Treasury
Department’s
interpretation
of
the
nature
of
these
receipts
is
correct,
and
that
the
per
diem
receipts
are
in
the
nature
of
rental
for
use
of
their
freight
cars
.
It
would
appear
that
the
term
‘rental
and
royalties”
as
defined
in
paragraph
6(a)
of
the
Protocol
to
the
Convention
can
be
given
a
broad
interpretation.
Some
problem
in
interpretation
arises
from
the
fact
that
the
net
revenue
derived
from
rentals
would
normally
be
considered
to
constitute
“industrial
and
commercial
profits’,
but
by
virtue
of
Article
II
(supra)
rentals
are
excluded
from
this
classification.
Plaintiff
contends
that
since
it
is
not
in
the
business
of
leasing
its
freight
cars,
rental
income
could
not
be
considered
as
commercial
income
even
in
the
ordinary
business
sense.
The
said
Article
Il
provides
that
such
items
of
income
(ie
rentals)
“shall
be
taxed
separately
or
together
with
industrial
and
commercial
profits”.
According
to
the
Department
of
Treasury
ruling
they
were
found
to
constitute
rental
income,
and
they
were
taxed
together
with
industrial
and
commercial
profits
of
the
Canadian
Pacific
resulting
from
the
operation
of
its
lines
in
Maine
and
Vermont.
Considerable
discussion
took
place
respecting
the
meaning
of
the
word
“rental”
as
used
in
paragraph
6(a)
of
the
Protocol
to
the
Convention
(supra).
It
is
true
that
the
regulations
respecting
payment
by
railway
companies
for
the
use
of
cars
of
other
railways
while
on
their
tracks
lack
some
of
the
elements
found
in
normal
renta!
agreements
in
that
no
term
is
fixed
for
the
duration
of
the
lease,
and
it
cannot
be
terminated
at
will
by
the
company
which
owns
the
cars,
as
long
as
the
railway
which
is
using
them
is
not
in
default
in
its
payments
which
are
based
on
an
ascertainable
daily
rate,
or
is
not
otherwise
in
default
in
respect
of
the
length
of
time
it
is
retaining
them
or
the
use
it
is
making
of
them
in
accordance
with
regulations
the
details
of
which
do
not
concern
us
here.
The
payments
constitute
a
charge
for
use
of
the
cars
and
the
duration
of
the
use
is
primarily
in
the
control
of
the
user.
The
fact
that
the
rates
fixed
are
not
intended
to
yield
a
profit
does
not
prevent
the
amounts
received
from
being
considered
as
rental
as
profit
is
not
an
essential
ingredient
of
a
rental
contract.
Subparagraph
106(1)(d)(vii)
of
the
Income
Tax
Act
excludes
from
the
15%
withholding
tax
levied
in
Canada
on
payments
to
non-residents
of
“rent,
royalty
or
similar
payment”
a
payment
in
respect
of
the
use
by
a
railway
company
of
railway
rolling
stock
as
defined
in
paragraph
(25)
of
section
2
of
the
Railway
Act,
This
relates
to
payments
to
American
railways
of
per
diem
income
due
to
them
from
use
of
their
cars
in
Canada.
I
do
not
believe
however
that
this
section
is
authority
for
the
interpretation
of
the
words
‘rental
and
royalties”
in
paragraph
6(a)
of
the
Protocol
to
the
Tax
Convention.
Moreover,
the
assessment
of
Canadian
Pacific’s
per
diem
income
in
the
United
States
was
not
based
on
a
flat
15%
withholding
tax
on
the
per
diem
rental
receipts
but
was
based
on
the
deemed
profit
on
them
calculated
at
4%,
which
was
held
to
be
income
“effectively
connected
with”
the
conduct
of
Canadian
Pacific’s
business
in
the
United
States.
In
interpreting
paragraph
106(1)(d)
in
a
case
not
dealing
with
per
diem
rentals
for
railroad
cars
Justice
Thurlow,
as
he
then
was,
stated
in
United
Geophysical
Company
of
Canada
v
MNR,
[1961]
CTC
134
at
145;
61
DTC
1099
at
1105:
It
seems
to
me,
therefore,
that
Section
106(1)(d)
includes
any
payment
which
is
similar
to
rent
but
which
is
payable
in
respect
of
personal
property.
Moreover,
in
its
ordinary
usage,
as
opposed
to
its
technical
lega!
meaning,
the
word
“rent”,
besides
referring
to
returns
of
that
nature
from
real
property,
is
broad
enough
to
include
a
payment
for
the
hire
of
personal
property.
Thus
the
Shorter
Oxford
Dictionary
gives
as
one
of
the
meanings
of
the
word,
“The
sum
paid
for
the
use
of
machinery,
etc.
for
a
certain
time.”
In
this
definition,
there
are
but
two
characteristics
of
the
sum,
namely
it
is
for
the
use
of
machinery,
etc.,
and
it
is
paid
for
that
use
for
a
certain
time.
In
the
present
case
of
course
the
time
is
not
certain
but
I
do
not
consider
that
this
difference
is
sufficiently
critical
to
lead
to
a
conclusion
that
the
per
diem
revenues
cannot
be
considered
as
rental,
as
the
duration
of
use
of
each
car
can
be
and
is
calculable
so
as
to
determine
the
amount
due.
What
we
have
to
interpret
in
deciding
whether
this
tax
credit
should
be
allowed
is
the
terms
of
the
Convention
and
Protocol
itself,
and
not
of
the
income
Tax
Act.
The
parties
are
in
agreement
that
the
terms
of
a
treaty
will
override
an
Act
and
that
it
should
be
construed
more
liberally.
A
good
expression
of
this
principle
is
found
in
the
case
of
William
Vincent
Saunders
v
MNR,
11
Tax
ABC
399;
54
DTC
524,
in
which
R
S
W
Fordham,
QC
of
the
Tax
Appeal
Board
stated
at
page
402
[526]:
The
accepted
principle
appears
to
be
that
a
taxing
Act
must
be
construed
against
either
the
Crown
or
the
person
sought
to
be
charged,
with
perfect
strictness—so
far
as
the
intention
of
Parliament
is
discoverable.
Where
a
tax
convention
is
involved,
however,
the
situation
is
different
and
a
liberal
interpretation
is
usual,
in
the
interests
of
the
comity
of
nations.
Tax
conventions
are
negotiated
primarily
to
remedy
a
subject’s
tax
position
by
the
avoidance
of
double
taxation
rather
than
to
make
it
more
burdensome.
This
fact
is
indicated
in
the
preamble
to
the
Convention.
Accordingly,
it
is
undesirable
to
look
beyond
the
four
corners
of
the
Convention
and
Protocol
when
seeking
to
ascertain
the
exact
meaning
of
a
particular
phrase
or
word
therein.
In
the
present
case
Canadian
Pacific
was
required
to
pay
United
States
Income
tax
in
the
amount
of
$255,225
for
1965
on
these
per
diem
receipts
on
the
basis
that
this
was
rental
income
effectively
connected
with
its
permanent
establishment
in
the
United
States.
It
is
agreed
in
paragraph
9
of
Part
Il
of
the
agreed
statement
of
facts
that
“The
per
diem
income
was
part
of
Canadian
Pacific’s
income
for
Canadian
tax
purposes
and
in
the
taxation
year
1965
Canadian
tax
was
paid
thereon
in
an
amount
at
least
equal
to
the
US
tax
paid
thereon’’.
Unless
the
credit
is
allowed,
therefore,
there
would
be
double
taxation
on
this
amount,
contrary
to
the
intention
of
the
Tax
Convention.
Defendant’s
argument
really
amounts
to
contending
that
the
interpretation
made
by
the
United
States
taxing
authorities
was
wrong
and
that
these
receipts
should
have
been
considered
as
industrial
and
commercial
profits
within
the
meaning
of
Article
I
of
the
Convention
and
hence
not
taxable
in
the
United
States,
as
said
profits
were
not
“allocable”
to
its
permanent
establishment
there.
(See
paragraph
8
of
agreed
statement
of
facts
(supra).)
While
it
is
true
that
this
Court
has
the
right
to
interpret
the
Canada-
US
Tax
Convention
and
Protocol
itself
and
is
in
no
way
bound
by
the
interpretation
given
to
it
by
the
United
States
Treasury,
the
result
would
be
unfortunate
if
it
were
interpreted
differently
in
the
two
countries
when
this
would
lead
to
double
taxation.
Unless
therefore
it
can
be
concluded
that
the
interpretation
given
in
the
United
States
was
manifestly
erroneous
it
is
not
desirable
to
reach
a
different
conclusion,
and
I
find
no
compelling
reason
for
doing
so.
While
it
may
well
be
that
the
“per
diem”
rentals
are
not
properly
“allocable”
to
the
permanent
establishment
of
the
Canadian
Pacific
in
the
United
States,
this
was
not
the
term
used
by
the
ruling
of
the
United
States
Treasury
Department,
which
instead
uses
the
words
“effectively
connected”
as
a
basis
for
taxation,
which
words
do
not
appear
in
the
Tax
Convention.
The
defendant
in
order
to
succeed
in
its
argument
has
to
satisfy
the
Court
that
these
receipts
were
“industrial
and
commercial
profits”
within
the
meaning
of
Article
I
rather
than
rentals.
While
these
receipts
have
certain
aspects
of
both,
as
already
stated,
Canadian
Pacific
did
nothing
to
advance
or
promote
this
source
of
revenue,
which
is
the
usual
badge
of
a
commercial
or
industrial
enterprise;
on
the
contrary
it
would
like
to
get
its
cars
back
sooner
and
the
“per
diem”
charges
are
not
fixed
at
a
rate
intended
to
yield
profit
although
for
taxation
purposes
they
are
deemed
to
yield
a
net
profit
of
4%
on
the
gross
revenue
so
received.
I
conclude
therefore
that
there
is
no
compelling
reason
for
disagreeing
with
the
treatment
given
this
source
of
revenue
by
the
United
States
Treasury,
and
in
the
event
that
plaintiff
were
not
allowed
to
include
as
dividend
income
by
virtue
of
subsection
8(3)
of
the
Income
Tax
Act
the
amount
of
$841,871
received
in
1965
as
interest
on
the
income
bonds
it
should
in
the
alternative
be
allowed
to
claim
a
foreign
tax
credit
of
$260,866
which
includes
$255,225
resulting
from
per
diem
receipts
in
the
United
States
by
virtue
of
the
provisions
of
the
Canada-
US
Tax
Convention
and
Protocol
thereto.
In
view
of
this
conclusion
it
is
unnecessary
to
deal
with
the
alternative
argument
raised
by
plaintiff
resulting
from
paragraph
3(f)
of
the
Protocol
which
in
defining
“permanent
establishment’’
goes
on
to
say
“The
use
of
substantial
equipment
or
machinery
within
one
of
the
contracting
States
at
any
time
in
any
taxable
year
by
an
enterprise
of
the
other
contracting
State
shall
constitute
a
permanent
establishment
of
such
enterprise
in
the
former
State
for
such
taxable
year”.
By
virtue
of
this
plaintiff
argues
that
even
if
the
revenues
derived
from
the
per
diem
receipts
should
not
have
been
considered
to
be
“effectively
connected”
with
its
permanent
establishment
in
the
United
States
the
mere
use
of
its
freight
cars
there
is
itself
of
sufficient
importance
to
constitute
a
permanent
establishment
in
itself.
Defendant
contests
this
argument
by
stating
that
the
use
by
the
American
railroads
of
Canadian
Pacific
freight
cars
in
the
United
States
is
not
equivalent
to
the
use
of
this
equipment
by
Canadian
Pacific
itself
because
Canadian
Pacific
makes
no
use
of
this
equipment
once
it
passes
onto
the
line
of
another
railroad,
and
even
the
freight
revenue
derived
from
the
merchandise
carried
therein
is
only
allocated
to
Canadian
Pacific
in
proportion
to
the
distance
in
which
this
merchandise
is
carried
on
its
own
lines.
While
I
am
inclined
to
agree
with
defendant
on
this
point,
therefore,
and
conclude
that
the
mere
use
of
the
freight
cars
in
the
United
States
by
other
railroads
does
not
itself
constitute
a
permanent
establishment
of
Canadian
Pacific
there
within
the
meaning
of
paragraph
3(f),
this
conclusion
does
not
affect
the
principal
conclusion
already
made
respecting
the
right
of
plaintiff,
Canadian
Pacific,
to,
if
necessary,
claim
this
foreign
tax
credit
in
the
1965
taxation
year.
Capital
Cost
Allowance
Claims
The
witness
John
Clough,
Controller
of
Canadian
Pacific,
testified
at
length
respecting
the
specimen
examples
the
parties
agreed
to
use
in
the
consideration
of
the
various
categories
of
capital
cost
allowance
claims
in
accordance
with
the
agreed
statement
of
facts.
As
indicated
therein
there
are
three
categories,
the
first
being
broken
down
into
subcategories.
Category
I
deals
with
outlays
by
plaintiff
to
perform
work
on
property
owned
by
it
at
the
request
of
another
party
with
an
amount
being
paid
by
the
other
party
as
a
contribution
toward
the
cost,
the
first
subcategory
being
cases
where
the
payment
was
made
by
some
government,
municipal
or
other
public
authority,
whereas
the
second
subcategory
deals
with
cases
where
the
payment
was
made
by
another
corporation
or
individual.
Category
I!
deals
with
capital
cost
allowance
claims
upon
the
surrender
to
plaintiff
of
perishable
components
of
private
railway
sidings
when
same
are
abandoned
by
the
party
for
whom
they
were
constructed
and
who
had
paid
for
these
materials
and
labour
at
the
time
of
construction.
Category
III
deals
with
claims
for
improvements
to
property
leased
by
plaintiff
which
properties
became
vested
in
plaintiff
in
1956
by
an
Act
of
Parliament.
Category
I(a):
Dealing
first
with
subcategory
I(a),
Item
2,
witness
explained
that
this
item
arose
out
of
a
relocation
of
certain
Canadian
Pacific
telegraph
lines
in
Nova
Scotia
required
by
the
Government
in
1957
as
the
result
of
the
construction
of
the
Canso
Causeway.
These
lines
had
to
be
diverted
and
some
attached
to
poles
belonging
to
the
Canadian
National
Railways
and
the
Maritime
Telegraph
Company.
The
cost
involved
for
the
work
all
of
which
was
done
by
Canadian
Pacific
employees
was
$28,100
for
which
Canadian
Pacific
was
reimbursed.
Out
of
this
amount,
$8,690
was
applied
to
cancel
the
charge
to
the
depreciation
reserve
account
respecting
these
lines,
the
balance
of
$19,410
being
set
up
in
what
is
called
the
Donations
and
Grants
Account
as
required
by
the
Uniform
Classification
of
Accounts
of
the
Canadian
Transport
Commission,
or
the
Board
of
Transport
Commissioners
of
Canada,
as
it
was
known
at
the
time.
These
classifications
are
reviewed
by
the
internal
auditors
of
the
company
as
well
as
its
external
auditors
and
the
field
auditors
of
the
Canadian
Transport
Commission.
In
this
item
as
in
all
items
in
all
three
categories,
the
amount
received
by
the
plaintiff
did
not
exceed
the
amount
it
laid
out
to
perform
the
work
on
the
properties
so
that
there
was
no
net
revenue
or
profit
realized
by
it.
(See
15.1
of
agreed
statement
of
facts
(supra).)
The
poles
to
which
the
new
lines
were
attached
were
not
necessarily
erected
on
Canadian
Pacific
property
but
in
cases
where
the
lines
were
attached
to
CNR
poles
the
cross
bars
and
wires
would
nevertheless
belong
to
Canadian
Pacific,
and
the
same
applies
in
the
case
of
lines
attached
to
Maritime
Telegraph
poles.
The
attribution
of
the
amount
of
$8,690
to
cancel
the
charge
in
depreciation
reserve
account
for
the
lines
so
moved
is
in
accordance
with
the
third
paragraph
of
Article
7(B)
of
the
Uniform
Classification
of
Accounts
quoted
in
10.1
of
the
agreed
statement
of
facts
(supra).
Dealing
with
Item
4,
the
witness
explained
that
this
was
a
conversion
done
at
the
request
of
Ontario
Hydro
in
1958
as
a
result
of
the
change-
over
from
25
to
60-cycle
power.
The
total
cost
was
$35,500
of
which
Ontario
Hydro
agreed
to
pay
40%
of
$14,200.
This
involved
the
cost
of
a
new
rectifier
which
was
capitalized
over
a
5-year
period.
One-fifth
was
charged
in
the
1958
year
or
$7,100
with
the
Hydro
proportion
of
40%
of
this
or
$2,840
being
entered
in
the
Donations
and
Grants
Account.
The
documents
indicate
that
this
was
the
fourth
of
five
instalments
which
were
so
treated.
Apparently
no
disallowance
has
been
made
of
the
capital
cost
claim
for
the
other
four
instalments.
three
of
which
appear
to
have
been
in
preceding
years,
as
there
is
a
note
on
one
of
the
documents
filed
as
an
exhibit
that
no
details
were
required
of
the
fifth
contribution
made
in
1959.
As
in
the
case
of
all
items
in
all
three
categories,
no
disallowance
was
made
until
the
1965
taxation
year.
This
work
was
actually
for
improvements
to
the
Grand
River
Railway
which
was
leased
to
Canadian
Pacific.
Item
15
concerns
extensive
relocation
of
lines
which
was
necessary
as
a
result
of
the
construction
of
the
St
Lawrence
Seaway
involving
aggregate
expenditures
of
$2,200,000.
The
only
amount
disallowed,
however,
was
$314,852
entered
in
Donations
and
Grants
in
1961,
representing
the
value
of
certain
work
done
on
the
Ontario
and
Quebec
Railway
and
Atlantic
and
Northwest
Railway
both
operated
by
Canadian
Pacific
under
perpetual
leases.
This
work
was
paid
for
by
the
St
Lawrence
Seaway
Authority.
Here
again
the
deviations
to
the
lines
were
not
requested
by
Canadian
Pacific
which
was
satisfied
with
the
former
location
but
were
necessitated
by
the
Seaway
construction.
In
the
case
of
MNR
v
Massawippi
Valley
Railway
Company,
[1961]
Ex
CR
191;
[1961]
CTC
78;
61
DTC
1040,
Mr
Justice
Dumoulin
had
occasion
to
examine
the
leases
of
the
Ontario
and
Quebec
Railway
and
Quebec
Central
Railways
to
Canadian
Pacific
in
perpetuity
in
the
light
of
the
provisions
of
the
Quebec
Civil
Code
which
the
parties
agreed
was
applicable
with
respect
to
these
emphyteutic
leases
and
he
concluded
that
for
all
material
purposes
the
lessor
companies
were
little
more
than
mere
corporate
designations
and
in
effect
the
lessee,
the
Canadian
Pacific
took
over
all
their
obligations:.
Category
l(b):
Turning
to
grants
from
private
corporations,
Items
10.1
and
21.1
both
concern
grants
from
Alberta
Mining
Corporation
for
the
construction
of
a
speer
line
to
provide
service
for
an
industrial
development.
The
capital
expenditure
involved
was
about
$100,000
and
the
payments
were
actually
made
by
Athabaska
Valley
Development
Corporation
to
whom
Alberta
Mining
Corporation
transferred
its
rights
in
its
agreement
with
Canadian
Pacific.
The
amounts
disallowed
were
$24,793
in
1960
and
$15,949
in
1962.
Canadian
Pacific
owned
the
track
and
did
not
share
the
ownership
with
Alberta
Mining
Corporation
or
Athabaska
even
though
some
of
it
ran
over
Alberta
Mining
Corporation
land.
Item
9
dealt
with
rearranging,
extending
and
transposing
some
copper
wires
at
the
request
of
the
Bell
Telephone
Company
in
1959
so
as
to
provide
telephone
service
between
White
Fish
Falls
and
Little
Current.
The
cost
was
$29,000
of
which
$8,100
was
capital
cost
and
the
Bell
Telephone
Company
contributed
$4,000
as
well
as
rental
of
$1,520
a
year
for
a
minimum
of
5
years.
The
$4,000
item
entered
in
Donations
and
Grants
was
disallowed.
items
28
and
38.1
concern
the
replacement
of
a
loading
platform
in
two
new
locations,
in
1963
and
1964,
relocating
an
overhead
crane
and
rearranging
yard
trackage
at
the
request
of
United
Grain
Growers,
to
clear
an
area
for
the
construction
of
a
new
grain
elevator.
The
total
cost
was
$14,000,
of
which
$9,329
was
eventually
charged
to
Donations
and
Grants.
Item
44
concerns
a
similar
grant
from
Federal
Grain
Company
in
the
1965
taxation
year
to
cover
the
estimated
cost
of
$4,800
for
rearranging
trackage
and
extending
siding
tracks
to
accommodate
a
grain
elevator.
The
amount
of
the
contribution
charged
to
Donations
and
Grants
and
disallowed
was
$2,141.
Category
Il:
Item
50
was
chosen
as
a
typical
specimen
case
dealing
with
private
siding
agreements.
The
witness
Clough
explained
that
when
a
client
approaches
a
railway
to
build
a
siding,
the
railroad
provides
at
its
expense
all
non-perishable
materials
such
as
tracks
for
which
the
lessee
pays
rental.
In
addition
to
this
the
lessee
pays
for
what
are
considered
as
perishable
items
which
include,
ties,
grading,
gravel
as
Well
as
the
work
done
for
installation.
When
the
siding
is
no
longer
required
the
railway
company
is
then
entitled
to
rip
it
up
and
recover
whatever
they
wish,
billing
the
former
lessee
for
the
cost
of
this.
In
some
rare
cases
the
railway
prefers
to
retain
the
siding
for
its
own
use.
When
the
siding
agreement
is
cancelled
the
railroad
then
records
the
perishable
materials
as
a
capital
asset
with
a
concurrent
credit
to
the
Donations
and
Grants
Account.
In
the
example
chosen
the
amount
involved
was
$2,851
for
the
year
ending
December
31,
1966,
when
the
labour
and
perishable
materials
reverted
to
Canadian
Pacific
upon
cancellation
of
the
private
siding
agreement.
Part
of
the
track
is
of
course
on
the
land
belonging
to
the
lessee
but
the
lease
agreement
clearly
provides
that
on
termination
of
the
lease
the
railway
company
may
remove
these
materials
from
any
portion
of
the
siding
outside
its
property
or
on
the
premises
of
the
other
party.
Category
III:
Item
65
was
chosen
as
a
specimen
case
under
the
third
category
dealing
with
improvements
to
leased
properties.
By
SC
1956,
c
55,
proclaimed
to
take
effect
from
October
18,
1956,
the
assets
of
these
formerly
leased
railways
became
vested
in
Canadian
Pacific
and
an
entry
was
made
in
its
books
transferring
these
improvements
from
the
Donations
and
Grants
Leased
Lines
Accounts
to
Donations
and
Grants
Owned
Lines.
This
was
done
in
accordance
with
the
provisions
of
the
Uniform
Classification
of
Accounts
and
the
amount
shown
as
increases
between
1955
and
1956
which
was
disallowed
is
$107,639.
It
was
emphasized
by
Canadian
Pacific
that
it
is
only
claiming
for
the
improvements
made
by
it
to
the
property
which
had
formerly
been
leased
and
not
for
the
value
of
the
original
property,
on
the
basis
that
these
improvements
were
Canadian
Pacific
property
both
before
and
after
the
vesting.
I
have
set
out
the
above
facts
brought
out
in
evidence
concerning
the
specimen
examples
dealt
with
by
the
parties
in
each
of
the
three
categories
before
reaching
any
conclusions
as
to
whether
these
additions
to
plaintiff’s
capital
cost
base
should
have
been
allowed
or
disallowed
for
the
taxation
years
in
question,
in
any
given
category,
since
many
of
the
arguments
and
much
of
the
jurisprudence
submitted
by
the
parties
on
this
issue
is
applicable
to
one
or
more
of
the
categories.
During
the
course
of
this
argument
two
further
sections
of
the
Income
Tax
Act
were
referred
to
which
it
might
be
convenient
to
quote
here:
84A.
(1)
Notwithstanding
subsection
(8)
of
section
84,
where
property
of
the
following
description,
namely:
(a)
railway
track
or
railway
track
grading,
or
(b)
a
crossing
as
defined
in
subsection
(9)
of
section
265
of
the
Railway
Act,
Cl,
has,
prior
to
1956,
been
acquired
by
a
taxpayer,
that
property
shall,
for
the
purposes
of
section
20
and
regulations
made
under
paragraph
(a)
of
subsection
(1)
of
section
11,
be
deemed
to
have
been
acquired
at
a
capital
cost
equal
to
the
amount
that,
according
to
the
books
of
the
taxpayer,
was
its
value
at
the
end
of
1955.
(2)
For
the
purposes
of
this
section,
in
determining
the
amount
that,
according
to
the
books
of
the
taxpayer,
was
the
value
of
any
property
at
the
end
of
1955,
no
amount
shall
be
included
in
respect
of
property
that,
at
that
time,
was
leased
from
any
other
person.
And
paragraph
20(6)(h)
which
reads:
20.
(6)
For
the
purposes
of
this
section
and
regulations
made
under
paragraph
(a)
of
subsection
(1)
of
section
11,
the
following
rules
apply:
(h)
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;
As
counsel
for
defendant
points
out
the
fact
that
the
items
have
been
properly
recorded
in
accordance
with
the
Uniform
Classification
of
Accounts
as
required
by
section
328
of
the
Railway
Act,
RSC
1970,
c
R-2,
and
the
regulations
of
the
Canadian
Transport
Commission
does
not
bind
the
Minister
of
National
Revenue
with
respect
to
the
tax
treatment
of
same
unless
the
expenditure
on
which
capital
cost
is
claimed
can
be
brought
strictly
within
the
provisions
of
subsection
84A(3)
(supra).
Plaintiff,
however,
contends
that
even
if
these
items
cannot
be
claimed
within
subsection
84A(3)
they
can
still
be
brought
within
paragraph
11(1)(a)
dealing
with
capital
costs
allowed
to
any
taxpayer.
I
do
not
believe
that
anything
turns
on
this
distinction
in
the
present
case,
however.
Counsel
for
defendant
suggests
that
these
expenditures
were
not
all
incurred
“in
respect
of
the
repair,
replacement,
alteration,
or
renovation
of
depreciable
property
of
the
taxpayer”
in
the
words
of
the
said
section.
I
cannot
agree
with
this
argument.
Aside
from
the
fact
that
in
some
of
the
agreements
the
actual
words
“replacement”
were
used,
the
words
appear
to
me
to
be
broad
enough
to
cover
relocation
that
was
done
in
the
typical
cases
dealt
with.
There
might
be
some
slight
doubt
with
respect
to
Category
Il
which
dealt
with
the
capitalization
in
the
Donations
and
Grants
Account
of
perishable
materials,
and
labour
costs
arising
out
of
the
construction
of
private
sidings
when
these
were
surrendered
to
plaintiff
for
its
exclusive
use,
but
the
removal
of
a
siding
is
certainly
analogous
to
the
replacement
or
alteration
thereof.
With
regard
to
the
other
categories
relocation
is
certainly
equivalent
to
a
replacement
or
alteration.
Both
parties
agree
that
the
word
“deemed”
in
paragraph
84A(3)(b)
means
in
this
context
‘‘conclusively
presumed”.
Counsel
for
defendant
raised
an
alternative
argument
with
respect
to
Item
15
in
Category
I,
suggesting
that
since
not
all
of
the
work
in
connection
with
the
deviation
and
alteration
of
tracks
and
other
works
resulting
from
ine
St
Lawrence
Seaway
project
was
done
by
the
Canadian
Pacific
but
Some
of
it
was
done
by
the
St
Lawrence
Seaway
Authority
itself
for
the
Canadian
Pacific
a
distinction
should
be
made
because
not
all
of
this
work
was
“an
expenditure
incurred
by
a
taxpayer”.
Since
the
agreement
provides
that
ail
expenses
were
to
be
borne
by
the
Seaway
Authority,
in
any
event,
in
order
to
restore
railway
facilities
as
altered
so
as
to
be
substantially
equivalent
to
the
existing
facilities
and
merely
provided
that
some
of
the
work
could
be
done
by
the
railway
when
this
could
be
done
more
expeditiously
and
billed
to
the
Seaway
Authority,
while
other
work
would
be
done
by
the
Seaway
Authority
itself,
it
would
appear
to
be
ignoring
the
commercial
realties
of
the
Situation
to
make
a
distinction
based
on
the
precise
wording
of
subsection
84A(3).
In
this
connection
I
would
refer
to
a
judgment
of
Jackett,
P
as
he
then
was
in
Ottawa
Valley
Power
Company
v
MNR,
[1969]
CTC
242;
69
DTC
5166,
in
which
at
page
254
[5174]
he
stated:
The
next
question
is
whether,
assuming
that
I
am
right
in
concluding
that
the
appellant
would
have
been
entitled
to
capital
cost
allowance
if
it
had
received
the
cash
from
Hydro
and
expended
it
on
the
capital
additions
and
improvements
itself,
it
is
in
any
different
position
because
the
bargain
took
the
form
of
Hydro
undertaking
to
make
the
expenditures
in
such
a
way
that
the
additions
and
improvements
would
be
made
to
the
appellant’s
assets
and
belong
to
the
appellant.
The
transaction
that
actually
took
place
and
the
transaction
that
might
have
taken
place
(under
which
the
appellant
would
have
been
entitled
to
capital
cost)
come
to
the
same
thing
from
a
commercial
point
of
view.
The
question
is
whether
this
is
a
case
where
the
result
from
a
tax
point
of
view
depends
on
the
way
in
which
the
result
was
achieved.
I
find
it
very
difficult
to
reach
a
conclusion
on
that
question
where
one
has
the
complication
of
an
existing
supply
contract
that
is
to
continue
for
a
term
being
amended
in
consideration
of
a
transfer
of
assets
to
be
used
as
Capital
assets
in
the
supplier’s
business.
In
the
present
case
there
is
no
complication
arising
out
of
any
existing
supply
contract
between
Canadian
Pacific
and
the
St
Lawrence
Seaway
Authority.
I
would
therefore
make
no
distinction
based
on
the
question
of
who
actually
did
the
work
or
incurred
the
initial
expenditure
since
in
all
the
cases
in
question
the
reconstructed
facilities
became
the
property
of
Canadian
Pacific
with
the
cost
being
borne
by
the
Seaway
Authority.
While
the
question
was
not
argued
before
me
I
have
given
some
consideration
to
whether
the
word
“expenditure”
as
used
in
subsection
84A(3)
should
be
interpreted
so
as
to
mean
“net
expenditure”
so
as
to
deduct
fro
many
such
expenditure
sums
received
by
third
parties
as
a
contribution
thereto,
but
I
have
reached
the
conclusion
that
this
cannot
validly
be
done,
although
it
would
solve
the
problem
and
lead
to
a
more
equitable
result
from
the
point
of
view
of
the
Minister
of
National
Revenue,
since
the
strict
wording
of
subsection
84A{3)
and
the
application
of
section
7B
of
the
Uniform
Classification
of
Accounts
(supra)
results
in
the
sums
received
not
being
taken
into
income
and
taxed
accordingly,
but
(except
to
the
extent
that
they
are
applied
to
reduce
or
cancel
the
amounts
otherwise
charged
to
accrued
depreciation
account)
being
entered
in
the
Donations
and
Grants
Account
and
forming
part
of
shareholders’
equity.
There
is
no
Suggestion
in
the
proceedings
in
the
present
case
that
contributions
should
be
treated
in
any
other
manner
and
it
would
not
appear
to
be
appropriate
by
mere
interpretation
of
the
word
“expenditure”
in
subsection
84A(3)
to
deduct
them
from
the
amount
actually
expended
by
or
on
behalf
of
the
taxpayer
with
respect
to
the
repair,
replacement,
alteration
or
renovation
of
depreciable
property
which
is
to
be
added
to
its
cost
base
for
capital
cost
allowance
purposes
pursuant
to
paragraph
84A(3)(b).
Reference
was
made
to
the
judgment
of
Cameron,
J
in
the
case
of
Okalta
Oils
Limited
v
MNR,
[1955]
Ex
CR
67;
[1955]
CTC
39;
55
DTC
1029,
in
which
he
stated
at
page
72
[44-5,
1032-3]:
While
it
may
perhaps
be
said
that
from
one
point
of
view
the
appellant
“incurred”
the
costs
by
becoming
liable
and
paying
the
costs
of
labour
and
material,
it
Cannot
be
said
in
the
light
of
what
occurred
that
it
suffered
or
was
put
to
any
loss
or
that
on
the
operation
it
was
out-of-pocket.
I
find
it
impossible
to
put
upon
the
subsection
such
a
construction
as
would
enable
a
corporation
which
is
not
out-of-pocket
on
its
operation,
but
on
the
contrary
has
had
all
its
expenses
paid
for
by
another
party—in
this
case
a
Crown
corporation—to
be
repaid
for
such
expenses
out
of
taxes
which
would
otherwise
accrue
to
the
Crown.
To
do
so
would
mean
that
the
legislation
was
intended
to
confer
not
only
indemnity
for
such
losses,
but
also
an
additional
bonus
of
a
like
amount,
an
interpretation
which
I
think
Parliament
did
not
contemplate.
Plaintiff
distinguishes
this
case,
however,
on
the
basis
that
it
dealt
with
subsection
8(6)
of
the
Income
War
Tax
Act
which
was
designed
to
encourage
oil
exploration
by
enabling
a
taxpayer
who
had
incurred
costs
in
drilling
an
oil
well
which
proved
unproductive
to
recover
out-cf-pocket
expenses
by
means
of
tax
deductions
which
is
an
entirely
different
issue
from
the
present
case.
Defendant’s
counsel
further
contended
that
if
the
net
cost
argument
cannot
be
accepted
then
we
must
look
at
paragraph
20(6)(h)
at
least
with
respect
to
the
items
in
Category
I(a).
The
question
that
arises
is
whether
Canadian
Pacific
received
or
was
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
for
the
purposes
of
advancing
or
sustaining
the
technological
capability
of
a
Canadian
manufacture
or
other
industry”.
Although
the
argument
was
not
raised
before
me
I
would
seriously
doubt
whether
the
sums
which
Canadian
Pacific
received
from
public
authorities
for
the
relocation
of
railway
tracks
or
telecommunication
lines
were
“for
the
purpose
of
advancing
or
sustaining
its
technological
capability"
since
in
each
case
the
evidence
indicated
that
it
was
satisfied
with
the
lines
as
they
were
and
merely
moved
them
to
accommodate
the
public
authority
in
question.
In
any
event,
I
do
not
find
that
these
payments
can
be
considered
as
“a
grant,
subsidy
or
other
assistance”.
This
section
has
been
dealt
with
in
a
number
of
cases.
In
the
case
of
G
T
E
Sylvania
Canada
Limited
v
Her
Majesty
the
Queen,
[1974]
CTC
408;
74
DTC
6315,
my
brother
Justice
Cattanach
states
at
page
414
[6320]:
Again
referring
to
the
dictionary
meanings
of
the
words
“grant”
and
“subsidy”
there
is
one
common
thread
throughout,
that
Is
a
gift
or
assignment
of
money
by
government
or
public
authority
out
of
public
funds
to
a
private
or
individual
or
commercial
enterprise
deemed
to
be
beneficial
to
the
public
interest.
Subject
to
minor
refinements
the
words
“grant”
and
“subsidy”
appear
from
their
dictionary
meanings
to
be
almost
synonymous.
He
goes
on
to
apply
the
ejusdem
generis
doctrine
of
construction
and
concludes
at
page
415
[6320]:
The
fact
is
that
the
general
words
“or
other
assistance”
can
hardly
avoid
being
anciliary
in
nature
to
the
words
“grant”
and
“subsidy”.
It
seems
to
me
that
where
there
are
ancillary
words
of
this
nature
it
is
a
sound
rule
not
to
give
such
a
construction
to
the
ancillary
words
as
will
wipe
out
the
significance
of
the
particular
words
which
antecede
them.
As
I
have
said
before,
the
constant
and
dominating
feature
in
the
words
“grant”
and
“subsidy”
is
that
each
contemplates
the
gift
of
money
from
a
fund
by
government
to
a
person
for
the
public
weal.
Something
concrete
and
tangible
is
to
be
bestowed.
For
the
reasons
I
have
expressed
the
general
words
“or
other
assistance”
must
be
coloured
by
the
meaning
of
those
words.
This
decision
was
upheld
in
appeal
([1974
CTC
751;
74
DTC
6673)
although
Chief
Justice
Jackett
was
careful
to
state
in
a
footnote
at
page
752
[6674]
that
he
wished
to
reserve
consideration
of
the
portion
of
the
judgment
based
on
the
application
of
the
ejusdem
generis
rule.
In
the
case
of
Ottawa
Valley
Power
Company
v
MNR
(supra)
President
Jackett,
as
he
then
was,
stated
at
pages
249-50
[5171]:
I
do
not
think
that
the
words
in
paragraph
(h)—“grant,
subsidy
or
other
assistance
from
a
.
.
.
public
authority”—have
any
application
to
an
ordinary
business
contract
negotiated
by
both
parties
to
the
contract
for
business
reasons.
If
Ontario
Hydro
were
used
by
the
legislature
to
carry
out
some
legislative
scheme
of
distributing
grants
to
encourage
those
engaged
in
business
to
embark
on
certain
classes
of
enterprise,
then
I
would
have
no
difficulty
in
applying
the
words
of
paragraph
(h)
to
grants
so
made.
Here,
however,
as
it
seems
to
me,
the
legislature
merely
authorized
Ontario
Hydro
to
do
certain
things
deemed
expedient
to
carry
out
successfully
certain
changes
in
its
method
of
carrying
on
its
business
and
the
things
that
it
was
so
authorized
to
do
were
of
the
same
character
as
those
that
any
other
person
carrying
on
such
a
business
and
faced
with
the
necessity
of
making
similar
changes
might
find
it
expedient
to
do.
I
cannot
regard
what
is
done
in
such
circumstances
as
being
“assistance”
given
by
a
public
authority
as
a
public
authority.
In
my
view
Section
20(6)(h)
has
no
application
to
the
circumstances
of
this
case.
See
also
St
John
Dry
Dock
and
Shipbuilding
Co
Ltd
v
MNR,
[1944]
CTC
106
at
114,
in
which
Thorson,
J
stated:
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.
In
the
present
case
although
the
relocation
of
the
tracks
or
telecommunication
lines
was
done
to
enable
works
to
be
undertaken
which
may
have
been
for
the
public
benefit
it
cannot
be
said
that
the
contributions
by
the
governmental
authorities
to
plaintiff
to
reimburse
it
for
the
cost
of
these
works
are
in
the
nature
of
grants
or
subsidies
to
induce
plaintiff
to
undertake
something
which
in
itself
was
for
the
public
benefit.
I
conclude
that
paragraph
20(6)(h)
does
not
apply
in
the
present
case.
some
of
the
reasoning
applied
by
Chief
Justice
Jackett
in
the
Ottawa
Valley
Power
case
is
of
interest
in
reaching
a
conclusion
on
the
issue
raised
in
the
present
case
although
it
must
be
remembered
that
that
case
did
not
deal
with
subsection
84A(3)
and
furthermore
was
complicated
by
the
fact
that
there
were
also
certain
contracts
involved
which
formed
part
of
the
consideration,
a
factor
which
is
absent
in
the
present
case.
At
page
251
[5172]
he
states:
The
respondent
says,
with
great
force,
that
an
analysis
of
the
appellant's
position
before
and
after
the
change-over
shows
that
the
additions
and
improvements
to
its
plant
that
enabled
it
to
produce
60
cycle
power
instead
of
25
cycle
power
cost
it
exactly
nothing.
The
respondent
might
have
added
that
this
view
is
reinforced
by
the
appellant’s
treatment
of
the
acquisition
on
its
own
books.
I
find
it
very
difficult
to
escape
either
the
logic
or
the
justice
of
the
respondent’s
contention.
The
appellant
did
not
have
to
make
an
expenditure
of
a
single
cent
on
capital
account
in
connection
with
the
change-over.
He
goes
on
to
consider
the
effect
the
supply
contract
might
have
had
however,
had
this
issue
been
raised,
pointing
out
that
had
Ontario
Hydro
paid
this
sum
to
the
appellant
for
the
desired
amendment
to
the
supply
contract
the
appellant,
Ottawa
Valley
Power,
would
have
then
incurred
the
capital
cost
of
the
additions
and
improvements
even
though
it
had
in
effect
been
reimbursed
by
Hydro,
and
it
would
have
been
entitled
to
capital
cost
allowance
in
respect
of
the
capital
cost
so
incurred.
In
reaching
this
conclusion
he
follows
the
case
of
Corporation
of
Birmingham
v
Barnes
(1935),
19
TO
195,
which
plaintiff
also
relies
on
in
the
present
case,
in
which
the
appellant
corporation
had
entered
into
an
agreement
with
the
company
to
lay
a
tramway
track
to
the
company’s
works
in
return
for
which
they
received
a
specified
sum
and
also
received
a
grant
from
the
Unemployment
Grants
Committee
for
sums
it
had
expended
on
the
renewal
of
its
tramway
tracks.
It
was
held
that
the
payment
by
the
company
and
the
grant
from
the
Unemployment
Grants
Committee
could
not
be
taken
into
account
in
ascertaining
the
“actual
cost”
to
the
Corporation
of
the
tramway
tracks
in
question
for
the
purpose
of
computing
the
allowance
due
for
wear
and
tear
of
such
tracks,
ie
depreciation.
At
page
217
in
his
judgment
Lord
Atkin
states:
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.
This
case
is
relevant
to
my
decision
not
to
interpret
the
word
“expenditure”
in
subsection
84A(3)
as
“net
expenditure”.
In
reaching
his
conclusion
Chief
Justice
Jackett
distinguished
in
a
footnote
the
American
case
of
Detroit
Edison
Co
v
Commissioner
of
Internal
Revenue
(1942),
319
US
98,
which
made
a
contrary
finding,
stating
that
this
decision
seems
to
have
been
based
on
the
fact
that
the
payments
received
were
not
taken
into
revenue,
and
concluding
that
“If
the
payments
had
been
taken
into
revenue,
it
would
seem
that
the
Court
might
have
reached
the
opposite
result”.
In
the
present
case,
of
course,
the
receipts
were
not
taken
into
revenue
either
as
a
result
of
the
requirements
of
the
Uniform
Classification
of
Accounts.
In
the
Detroit
Edison
case
it
was
stated
under
Paragraph
No
102:
But
we
think
the
statutory
provision
that
the
‘‘basis
of
property
shall
be
the
cost
of
such
property”
normally
means,
and
that
in
this
case
the
Commissioner
was
justified
in
applying
it
to
mean,
cost
to
the
taxpayer.
and
again
under
No
103:
But
it
does
not
follow
that
the
Company
must
be
permitted
to
recoup
through
untaxed
depreciation
accruals
an
investment
it
has
refused
to
make.
The
Commissioner
was
warranted
in
adjusting
the
depreciation
base
to
represent
the
taxpayer’s
net
investment.
This
would
be
in
line
with
the
reasoning
in
the
Okalta
case
(supra)
but
it
is
doubtful
that
it
can
be
applied
to
the
interpretation
of
subsection
84A(3)
of
the
Income
Tax
Act.
It
was
dealing
with
the
words
“cost
of
such
property”,
the
Birmingham
case
was
dealing
with
the
words
“actual
cost”
while
we
are
dealing
in
paragraph
84A(3)(b)
with
the
words
“expenditure”
and
“capital
cost”.
I
should
have
thought
that
the
words
“actual
cost”
as
used
in
the
Birmingham
case
would
have
had
a
more
limited
meaning
than
the
words
used
in
the
Income
Tax
Act
or
the
American
statute
and
would
have
provided
greater
justification
for
taking
into
consideration
in
reduction
of
such
‘‘actual
cost”
any
grants
or
payments
received,
but
despite
this
the
said
case
concluded
otherwise.
To
summarize,
therefore,
I
have
found
(1)
that
no
distinction
should
be
made
between
the
items
classified
in
Category
I(a)
and
Category
l(b),
and
(2)
that
all
these
items,
together
with
those
classified
in
Category
II
were
properly
dealt
with
by
plaintiff
in
its
tax
returns
since
capital
cost
allowance
can
be
claimed
on
the
amounts
shown
in
the
Donations
and
Grants
Account
despite
the
contribution
made
by
governmental
authorities
or
corporate
or
individual
third
persons
to
Canadian
Pacific
to
relocate
or
construct
these
facilities.
There
remains
for
consideration
Category
III
dealing
with
improvements
to
property
formerly
leased
on
long-term
emphyteutic
leases,
but
since
1956
owned
by
plaintiff.
These
improvements
made
throughout
Canada
by
Canadian
Pacific
during
the
period
when
these
lines
were
leased
by
it,
all
on
long-term
leases,
and
before
it
took
over
ownership
of
these
lines
in
1956,
were
transferred
in
that
year
from
the
account
entitled
Donations
and
Grants
Leased
Lines
to
Donations
and
Grants
Owned
Lines.
As
indicated
previously,
dealing
with
two
such
cases
in
the
Province
of
Quebec,
Mr
Justice
Dumoulin,
in
the
case
of
MNR
v
Massawappi
Valley
Railway
Company
(supra)
concluded
that
since
they
were
in
the
nature
of
emphyteutic
leases
the
obligations
of
the
lessor
were
really
those
of
the
lessee,
Canadian
Pacific,
and
although
he
was
dealing
with
interest
on
bonds,
and
not
with
improvements
made
by
Canadian
Pacific
to
such
properties,
the
same
reasoning
would
appear
to
be
applicable.
Whether
or
not
this
same
reasoning
would
apply
to
long-term
leases
of
railway
lines
elsewhere
in
Canada
was
not
argued
before
me,
and
I
do
not
believe
it
is
necessary
for
me
to
express
an
opinion
on
that
question
in
order
to
decide
this
issue.
Defendant
relies
on
the
provisions
of
subsections
84A(1)
and
(2)
which
indicate
that
notwithstanding
subsection
84A(3),
where
the
taxpayer
has
acquired
property
prior
to
1956
it
shall
be
carried
in
the
taxpayer’s
books
at
a
capital
cost
equal
to
its
value
at
the
end
of
1955
and
that
for
this
purpose
no
amount
shall
be
included
in
respect
of
property
which
was
at
that
time
leased
from
any
other
person.
Since
ownership
of
this
property
was
only
acquired
by
Canadian
Pacific
in
1956
it
cannot
be
said
to
have
been
acquired
by
it
prior
to
1956.
Subsection
84A(1)
therefore
has
no
application
but
subsection
84A(2)
must
have
reference
not
only
to
subsection
84A(1)
but
to
the
whole
of
section
84A
since
it
uses
the
words
“For
the
purposes
of
this
section”
and
not
“For
the
purposes
of
subsection
(1}”.
At
the
end
of
1955
the
property
was
leased
property
and
therefore
by
virtue
of
the
said
subsection
(2)
“no
amount
shall
be
included
in
respect
of
property
that,
at
that
time,
was
leased
from
any
other
person”.
Plaintiff
would
make
a
distinction
between
the
capital
cost
claims
arising
out
of
the
value
of
the
leased
property
so
acquired,
and
the
present
claim
which
is
limited
only
to
the
capital
cost
which
plaintiff
claims
for
improvements
made
by
it
to
the
leased
property
during
the
time
it
was
under
lease
which
it
contends
it
has
always
been
entitled
to
claim
just
as
if
these
improvements
had
been
made
to
its
own
property.
I
am
of
the
view
that
the
express
wording
of
subsection
84A(2)
must
override
the
argument
which
can
be
made
arising
out
of
the
juridical
significance
of
long-term
leases
and
their
effect
on
the
capital
cost
treatment
by
the
lessee
of
improvements
made
on
such
property.
Subsection
84A(2)
states
categorically
‘no
amount
shail
be
included”.
This
would
appear
to
be
broad
enough
not
only
to
refer
to
amounts
arising
from
the
capital
costs
of
the
property
carried
in
the
books
of
the
former
owner
but
also
to
any
amounts
relating
thereto
carried
in
the
books
of
Canadian
Pacific
for
improvements
made
by
it
to
the
said
leased
property.
Plaintiff’s
appeal
fails
on
this
issue
therefore.
To
summarize,
l
have
concluded
the
various
issues
raised
as
follows:
1.
Plaintiff
is
entitled
to
treat
the
interest
received
on
income
bonds
as
dividend
income
under
subsection
8(3)
of
the
Income
Tax
Act
and
therefore
to
the
deduction
of
$404,893
claimed
for
taxation
in
its
1965
taxation
year,
$388,930
claimed
for
its
1966
taxation
year
and
$383,912
claimed
for
its
1967
taxation
year.
2.
Alternatively,
in
the
event
that
such
deduction
is
disallowed
plaintiff
is
entitled
to
claim
foreign
tax
credit
in
the
amount
of
$260,866
for
its
1965
taxation
year.
3.
Plaintiff
is
entitled
to
capital
cost
allowance
on
amounts
posted
in
its
Donations
and
Grants
Account
and
classified
by
the
parties
to
the
proceedings
under
Categories
l(a),
l(b)
and
Il
but
is
not
entitled
to
such
allowances
on
the
amounts
classified
under
Category
III.
Plaintiff's
tax
reassessment
for
each
of
the
years
1965,
1966
and
1967
is
referred
back
to
the
Minister
for
further
reassessment
in
accordance
with
these
reasons,
with
costs
in
favour
of
plaintiff.
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