The International Nickel Company of Canada Limited v. Her Majesty the Queen, [1974] CTC 116, 74 DTC 6096

Urie, J:—The plaintiff herein appeals to this Court from the reassessment for income tax by the Minister of National Revenue for the years 1967 and 1968, wherein he deducted from the plaintiff’s profits attributable to the production of prime metal from the resources operated by it, for the purpose of computing depletion allowance to which it was entitled under paragraph 11(1)(b) of the Income Tax Act and Regulation 1201(2) of the Regulations made pursuant to the said Act, the sum of $4,363,282 for the year 1967 and the sum of $5,890,205 for the year 1968. The issues in both appeals are the same and by order of the Court made August 22, 1973 the actions were tried together on common evidence.

By agreement between the parties dated August 8, 1973, the issues to be decided are as follows:

(1) with respect to each of the years 1967 and 1968: whether scientific research expenditures deductible under paragraph 72(1 )(a)* [1] of the Income Tax Act incurred by the plaintiff during the year must be deducted in determining profits for the purpose of paragraph 1201 (2)(a)t [2] of the Regulations under the Income Tax Act:

(2) that the issue regarding deductibility of scientific research expenditures in determining profits for the purpose of paragraph 1201(2)(a) of the Regulations for the years subsequent to the year 1965 is res judicata by virtue of the judgment of the Exchequer Court of Canada in the action of The International Nickel Company of Canada, Limited v MNR, [1971] Ex CR 213; [1971] CTC 604: 71 DTC 5332;

(3) that, if such expenditures for scientific research are held to be expenditures that are deductible in the determination of the plaintiff’s profit from its business under section 4* [3] of the Income Tax Act, the plaintiff is entitled to deduct the same amount in computing its income under the said section 4 pursuant to subsection 72(1) of the Act.

In his pleading and in his submissions at trial counsel for the plaintiff argued that the expenditures in respect of scientific research were of a capital nature as found by my brother Cattanach, J in the case of The International Nickel Company of Canada v MNR (supra) and as such were not deductible in computing the plaintiff’s “profits” for the purposes of Regulation 1201(2) and that the word “profits” as so used must be interpreted in accordance with its usage within the context of the Income Tax Act and in accordance with judicial principles.

Counsel for the defendant did not argue strenuously that scientific research expenditures were not capital in nature in the sense found by Cattanach, J in the previous case. However, he did argue that the evidence adduced in this case was different than that in the previous case and that it had not been argued before Cattanach, J that the word “profits” in Regulation 1201 was unrelated to the determination of income under section 4 of the Act, the only other place in which the word “profit” is used, and that the calculation of profits must be made in accordance with its ordinary meaning and generally accepted accounting principles. If this were so, profit would have to be determined by deducting from net revenues expenditures for scientific research incurred in the current fiscal year since they are partly causal of current revenues and partly of future revenues. They should also be charged with past research expenditures which resulted in profits during the current year. Since the plaintiff’s accounting practice did not account for research expenditures against particular projects, it was not possible to determine those portions thereof attributable to current revenues. For this and other cogent reasons he argued that the best accounting practice was to charge such expenditures against net revenues for the current period.

In my view, the evidence adduced before me of the nature and extent of the scientific research engaged in by the plaintiff is no different from that adduced before Cattanach, J in the earlier case. At page 229 [630, 5347] he succinctly describes the nature of that work as determined from the evidence adduced before him and I do not think that any testimony in this case changes it in any way:

The appellant in the present case because of the extent and nature of its business expends large sums on scientific research and had done so for many years. It employs highly qualified personnel whose exclusive function is to devote their entire time and outstanding ability to a constant study of existing processes used by the appellant with a view to improving and making those processes more efficient as well as projects as to the feasibility of hitherto untried processes and methods or discovery of unknown processes. If those studies prove the feasibility of such new projects it has resulted and may again result in the appellant. expending large sums to build a plant to utilize the process so discovered or an improvement on a process in use. It has been by this constant search for better ways that the appellant has kept in the forefront of its field.

This necessarily results in a continual outlay on scientific research by the appellant. It is a continuing and never ending programme.

At page 231 [631, 5348] he pointed out that the plaintiff carefully segregated the expenditures on scientific research between those directed to creating new processes or improving existing processes from those directed to maintaining and operating existing processes, the information for such segregation being supplied from records kept by the many research departments of the plaintiff. The evidence before me showed conclusively that such segregation was still being maintained in the years 1967 and 1968. These expenditures were properly deducted in computing the depletion base for the purposes of Regulation 1201 because they were “reasonably attributable to the production of prime metal”. It is argued that in addition to such costs there should also have been deducted in the years 1967 and 1968 those directed to creating new processes or improving existing processes. In my opinion there was no evidence adduced before me that the latter costs incurred in 1967 and 1968 were “reasonably attributable to the production of prime metal” in either of those years. As Cattanach, J pointed out at page 232 [631-2, 5348-9]:

For the appellant’s own commercial purposes all such expenditures on scientific research were included in operating costs and not as capital costs. The segregation was made for the purpose of preparing income tax returns.

I do not attach great significance to this bookkeeping or accounting practice. The outlay on scientific research is not easily classifiable and I can readily understand why for commercial purposes the appellant would regard these expenditures as affecting its net profit or loss. But different considerations apply for income tax purposes.

It is quite understandable that a commercial enterprise in its books of account for Its own purposes will treat certain classes of expenditures as revenue expenditures which are, in reality, for income tax purposes capital expenditures and conversely many items treated in the accounts of business as capital receipts are for income tax purposes taxable as income.

How an item is treated in the books of account is not the true or adequate test of the nature of the expenditure.

As I understand the essence of Lord Cave’s declaration it is that an expenditure is of a capital nature when It is made with a view to securing an asset or advantage for the enduring benefit of the trade.

The intention of the appellant in embarking upon and continuing its programme of scientific research was to acquire for itself a fund of scientific “know how” upon which it could draw when necessity might arise. Some projects were abandoned. Some proved fruitless. Some continued over many years. Many projects were undertaken which accounts for the continuing nature of the expenditure as does the fact that some projects take many years for their culmination. It is immaterial that some of the projects failed if the intention is such that had the object been realized an asset or advantage would have been obtained. If the ultimate object was an asset or advantage of a capital nature then the expenditures antecedent thereto, are also of a capital nature.

After having considered all of the facts which, as above stated, I find were substantially the same as those adduced before me, Cat- tanach, J concluded that the appellant’s expenditures for scientific research which it claimed as deductions under sections 72, 72A and by virtue of paragraph 11(1)(j) in computing its taxable income for the year were expenditures of a capital nature as a consequence of which those expenditures were not deductible in determining the base for the calculation of the depletion allowance for the purposes of Regulation 1201. For the reasons given, I wholly agree with his conclusion and, subject to my disposition of the defendant’s arguments with which I shall hereinafter deal, I find that in 1967 and 1968 the plaintiff’s expenditures on scientific research, other than those directed to maintaining and operating existing processes, were capital in nature.

Having so found, as I see it, the narrow issue for determination in this appeal is whether that finding is affected by the defendant’s argument that “profits” in the context of Regulation 1201 must be “profits” determined in accordance with generally accepted accounting principles. The gist of the defendant’s argument, as I understand it, is that generally accepted accounting practice requires that costs be associated with related revenue to measure periodic net income. There are three types of costs, the first called period costs which are not directly related to production activity. They are treated as expenses chargeable against revenue in the period in which they are incurred while costs related more directly to production activities, called product costs (eg materials, overhead, production wages, etc), are included in the cost of goods and are not recovered until the goods are sold. A third type of costs are business preserving costs which are incurred by a company to retain its competitive position in the future. The two basic principles in the handling of any of these costs are:

(a) that they be matched with revenue at some time, and

(b) that their treatment in the company’s accounting records be consistent from accounting period to accounting period to present fairly the result of the company’s operations, without distortions that would occur if changes were made in their treatment, unless notes of any such changes are carefully appended to the statements in which the changes are reflected.

Costs of scientific research have been treated by the plaintiff consistently over the years as period costs and charged against current earnings. In theory, as was explained by the expert witnesses called by the parties, perhaps they should be deferred and amortized over the future periods that they are intended to benefit. However, as those witnesses conceded, the predominant practice at present is that research costs of a continuing nature are recognized as period costs and business preserving costs and are expensed in the accounting period in which they are incurred. As noted this is, in fact, the practice of the plaintiff and is reflected in its audited financial statements presented to the public and to its shareholders.

However, it was also conceded that different considerations prevail for income tax purposes and only those expenditures permitted by the Act are deductible in determining the taxable income of the company.

In the defendant’s view the “profits” referred to in Regulation 1201 are not related to “income” as defined and determined under Part I of the Income Tax Act. Rather it is the profit or net earnings of a company determined under generally accepted accounting principles which, according to the defendant’s counsel, is the meaning of “profits” in regulation 1201. Since in the determination of profits utilizing such principles scientific research expenses are generally not deferred to other years but in most cases (and in particular in the case of the plaintiff) are charged against revenues in the year in which they are incurred, then all should be deducted in the determination of the base for the purpose of calculating the plaintiff’s depletion allowance, which I shall hereinafter refer to as “depletion base”.

If I were to hold that this argument cannot be substantiated, then the defendant alternatively argues that since costs must at some time be matched to revenue under current accounting practice, a charge must be made annually against net revenues for that year for deferred charges for scientific research in respect of developments pursuant thereto which produced revenue in the accounting period in question and for research projects terminated in that year. If this were not done, then he submits that these charges would remain “in limbo” never to be charged against any earned revenue as required by good accounting practice. Since the costs associated with any particular development cannot be determined because the plaintiff does not maintain its books in such a way as to know what they are for any given project, all costs of research incurred in any year must be charged against net revenue for the purpose of calculating its depletion base and the plaintiff’s claim should therefore be dismissed.

The defendant called as an expert witness, P H Lyons, an experienced chartered accountant who testified that ‘‘an enterprise should deduct from current revenues the cost of preserving its capacity to operate competitively in an ever-changing economic environment... such discretionary costs including research and development usually are deducted currently and not deferred”. While expressed differently this evidence corroborated that of the plaintiff’s experts. For example, J A Milburn, a highly qualified chartered accountant, puts the proposition in this way in paragraph 3(b) of his affidavit read into the record pursuant to the Rules of this Court:

3(b) In my opinion, scientific research expenditures, even where deducted currently, are of a different nature than expenditures such as wages, supplies and raw materials directly consumed in the course of production. The latter amounts benefit production of the period in which they are incurred, and accordingly a matching of expenses against revenues is achieved by charging these expenditures to expense at the time the products are sold. Scientific research expenditures on the other hand cannot be regarded as primarily for the benefit of the production of the period in which they are incurred. The benefit, if any, of such expenditures may not be realized until future accounting periods. Primarily because it is difficult to identify the future period or periods that may be benefitted and to determine the extent to which future periods may be benefitted, it is acceptable accounting practice to deduct such expenditures in the period In which they are incurred.

For this reason I accept the evidence of each of the experts to this extent. However, when Mr Lyons states in his affidavit that “if the company while following the non-deferral method in their books, adopted the system of deferral for some other purpose they would have to maintain parallel accounting records to apply the deferral principle properly”, I cannot agree, that to compute the depletion base for a resource company this principle, if true, should apply.

It is untenable because it ignores two things, namely (a) that all expenses are charged by the plaintiff against its periodic earnings in accordance with its consistent practice over the years for its own commercial purposes and therefore such expenses are not indefinitely deferred or held “in limbo” as alleged, and (b) that the plaintiff does not keep two sets of “parallel books” but only one. What it does do, as it is required to do by Regulation 1201(2), is to make a calculation for the purposes of computing its depletion base. In doing so it has not excluded from its computation of profits (meaning net earnings) its costs of scientific research which it did exclude in its computation of net earnings in its audited financial statements as required by good accounting practice. It is computed from the plaintiff’s one and only set of accounts. The quantum of the plaintiff’s expenditures for scientific research for the years in question is not in issue. Therefore, in my opinion, the defendant’s alternative submission fails and the only question which must be resolved is the main argument of the Minister and that is whether or not the plaintiff was correct in law in not deducting scientific research costs in its calculation of its depletion base.

In my view the words “profits” for such computation must be read in the context of the Act pursuant to which the Regulation in which it appears was promulgated and in accordance with judicial principles.

In MNR v Anaconda American Brass Limited, [1956] AC 85; [1955] CTC 311; 55 DTC 1220, a case in which the question at issue was whether or not the LIFO method of inventory revaluation was properly used in the determination of the respondent’s excess profits under the Excess Profits Tax Act, it was argued that annual income for income tax purposes is determined by accepted accountancy practice unless the Act otherwise provides. This contention was rejected by the Privy Council. At page 100 [319, 1224] Viscount Simonds quoting Lord Clyde in Whimster and Co v Inland Revenue Commissioners, 12 TC 813, stated as follows:

“In the first place, the profits of any particular year or accounting period must be taken to consist of the difference between the receipts from the trade or business during such year or accounting period and the expenditure laid out to earn those receipts. In the second place the account of profit and loss to be made up for the purpose of ascertaining that difference must be framed consistently with the ordinary principles of commercial accounting, so far as applicable, and in conformity with the rules of the Income Tax Act, or of that Act as modified by the provisions and schedules of the Acts regulating Excess Profits Duty, as the case may be. For example, the ordinary principles of commercial accounting require that in the profit and loss account of a merchant’s or manufacturer’s business the values of the stock-in-trade at the beginning and at the end of the period covered by the account should be entered at cost or market price, whichever is the lower although there is nothing about this in the taxing statutes.”

Italics mine.

This statement was cited with approval by Abbott, J in MNR v Irwin, [1964] SCR 662; [1964] CTC 362; 64 DTC 5227.

At page 102 [321,1225] Viscount Simonds further stated:

It is the same consideration which makes it clear that the evidence of expert witnesses, that the LIFO method is a generally acceptable and in this case the most appropriate, method of accountancy, is not conclusive of the question the court has to decide. That may be found as a fact by the Exchequer Court and affirmed by the Supreme Court. The question remains whether it conforms to the prescription of the Income Tax Act. As already indicated, in their Lordship’s opinion it does not.

(Italics mine.)

The approach necessary to determine the answer to this problem in any given case is concisely set forth in Associated Investors of Canada Limited v MNR, [1967] 2 Ex CR 96; [1967] CTC 138: 67 DTC 5096, wherein Jackett, P, as he then was, stated at pages 101 and 102 [143-4, 5098-9] as follows:

Under the Income Tax Act, in determining the income tax payable by the appellant for a year, the first step is to determine the “income” from the appellant’s business for the year (section 3). Subject to any special provision that may be applicable, the “income” from a “business” for a year is the “profit” therefrom for the year (section 4).

Profit from a business subject to any special directions in the statute, must be determined in accordance with ordinary commercial principles. [Canadian General Electric Co Ltd v MNR, [1962] SCR 3, per Martland, J at p. 12; . . .] The question is ultimately “one of law for the court”. It must be answered having regard to the facts of the particular case and the weight which must be given to a particular circumstance must depend upon practical considerations. As it is a question of law, the evidence of experts is not conclusive. [See Oxford Motors Ltd v MNR, [1959] SCR 548, per Abbott, J at p. 553; [1959] CTC 195 at 202; and Strick v Regent Oil Co Ltd, [1965] 3 WLR 636 per Reid, J, at pp 645-6. See also MNR v Anaconda American Brass Ltd, [1956] AC 85 at p 102; [1955] CTC 311 at 319.]

My first task is therefore to determine the proper treatment of the amounts in question in accordance with ordinary commercial principles. Having ascertained that, I must consider whether any different treatment is dictated by any special provision of the statute.

Ordinary commercial principles dictate, according to the decisions, that the annual profit from a business must be ascertained by setting against the revenues from the business for the year, the expenses incurred in earning such revenues.

In considering whether the results of any transaction can be considered in computing the profit of a business for a particular year, the first question is whether it was entered into for the purpose of gaining or producing income from the business. [Compare Section 12(1)(a).] If it was not, such results cannot be taken into account in computing such profits. Even if the transaction was entered into for the purpose of the business, if it was a Capital transaction, its results must also be omitted from the calculation of the profits from the business for any particular year [Compare Section 12(1)(b). See BC Electric Railway Co Ltd v MNR, [1958] SCR 133, per Abbott, J at p 137; [1958] CTC 21 at 25.]

(Italics mine.)

Therefore, since, for the reasons given by Cattanach, J in the 1971 International Nickel Company of Canada appeal (supra) the expenses for scientific research for the years 1967 and 1968 were not attributable to the production of prime metals in those years and that such expenses were capital in nature, they are not deducted, therefore, from revenue in determining the annual profits of the business in the context of the Income Tax Act, although they are excluded therefrom for the determination of the plaintiff’s taxable income by virtue of sections 72, 72A and paragraph 11(1)(j)* [4] of the Act.

Support for this view is derived from another Exchequer Court decision also made in 1967 in the case of Quemont Mining Corporation, Limited et al v MNR, [1967] 2 Ex CR 169; [1966] CTC 570; 66 DTC 5376. There the Minister raised what appears to be practically the same issue as the one with which I am dealing in this case. The question in the Quemont case was whether or not in computing the appellant’s profits from its mining operations for the purpose of calculating its depletion base, duties paid under the Quebec Mining Act had to be deducted, just as in this case the issue is whether or not scientific research expenditures must be deducted in computing the depletion base of the Plaintiff herein. At page 200 [602, 5394] Cattanach, J observed:

Counsel for the Minister, as I understood his argument, readily concedes that the taxes paid to the Province of Quebec were not laid out for the purpose of gaining the income and accordingly those taxes so paid are not a proper deduction from income under Section 12(1)(a) of the Income Tax Act. However, he does not accept the premise of Counsel for Quemont that the word “profits” used in Section 1201 (2)(a) of the Regulations is synonymous with the word “Income” or that it means the difference between receipts and expenditures laid out to earn those receipts. On the contrary he contends that the word “profits” is used in Section 1201 (2)(a) in its popular and ordinary commercial sense and means net profits, or receipts which are left to the taxpayer after all accounts are paid.

After referring to the Anaconda and Irwin cases (supra) at page 202 [604, 5395] he cited MNR v Imperial Oil Limited, [1960] SCR 753; [1960! CTC 275; 60 DTC 1219, as follows:

In MNR v Imperial Oil Limited, [1960] SCR 753; [1960] CTC 275, the Supreme Court considered Section 1201 of the Regulations in its earlier form. Judson, J delivered a judgment for three of the four members of the Court which constituted the majority. At pp 744 and 745 [p 285] he said:

. .I think that Regulation 1201 now requires the following procedure in determining the base for the allowance to be granted to a taxpayer who operates more than one oil or gas well:

(1) Determine the profits or losses of each producing well in the normal manner by ascertaining the difference between the receipts reasonably attributable to the production of oil or gas from the well and the expenses of earning those receipts.’’* [5]

lt seems to me to be the clear inference from the language quoted above, Judson J interpreted the word “profits” as it appeared in Section 1201 in its prior form as having the same meaning as that attributed to it by the Privy Council in the Anaconda case (supra) in the Excess Profits Tax Act and by the Supreme Court in the Irwin case (supra) as applied to the Income Tax Act, that is to say the difference between the receipts from a business for the year and the expenses laid out to earn those receipts.

The subsequent amendments to Section 1201 do not appear to me to affect the meaning attributed to the word “profits” by Judson, J in the Imperial Oil case (supra).

At page 203 [605, 5396] his finding was as follows:

I can see no justifiable reason for construing the word “profits” as used in the Regulation in any sense different from the meaning attributed by authorities to that same word as used in the Income Tax Act.

Counsel for the defendant sought to distinguish this case on the basis that the Quemont case (supra), in his view, turned on whether or not the Quebec mining duties were paid for the “purpose of earning income’’. With great respect I find it impossible to say that there is any appreciable difference between an expense made for the purpose of earning income and one reasonably attributable to the production of prime metal from which the earned income of a mining company is derived.

In Home Oil Company Limited v MNR, [1955] SCR 733; [1955] CTC 192; 55 DTC 1148, Rand, J at page 736 [196, 1150] held that the words “reasonably attributable” mean “specially or directly related” and this being so when subsection (4) of Regulation 1201 says “There shall be deducted from the aggregate profits of a taxpayer for a taxation year expenses reasonably attributable to the production of . . . prime metal . . . from all of the resources operated by him” it means that the outlays charged against the profits must themselves be specially or directly related to them. They were made for the purpose of earning income from production. Therefore, I rely on the Quemont case as supporting the position which I take, namely that the word “profit” must be used in the sense that it was found proper by Judson, J in the Imperial Oil case (supra), and Jackett, P in the Associated Investors case (supra).

Counsel for the defendant also relied heavily on the recent English Court of Appeal decision in Heather v PE Consulting Group Limited (1973), 48 TC 297, as enabling me to hold that the 1970 International Nickel Company judgment was not binding upon me. In that case the taxpayer paid certain sums of money to trustees to enable the trustees to purchase shares of the appellant company to provide key employees with control of the appellant company. The trustees were to hold the shares for the benefit of the employees and lump sums were paid to the trustees for several years which the taxpayer company contended were revenue expenditures and were proper deductions to be made in computing the company’s tax. The Crown contended that they were instalments of capital and could not be deducted.

As I understand him, counsel for the defendant likens the annual instalment payments in the Heather case to those made by the plaintiff herein in that the aggregate of the annual payments was unpredictable and the company could at any time have discontinued the contributions to the trustees and bring the scheme to an end in the same way that the plaintiff here could cancel all research at any time if it so desired. He relied in particular on the passage at page 325 of a judgment of Buckley, LJ reading as follows:

The Company’s business was that of business management and industrial consultants, and the value of the services which it provided depended to a very great extent upon the quality and expertise of those whom it employed and, as I think it right to infer, upon these employees being permitted to carry out their functions as management and industrial consultants uninterfered with or uninhibited by interference by any persons who were not as well qualified to deal with the problems which had to be dealt with as they were themselves. It was therefore a case in which the independence as well as the qualifications of the staff—independence, I mean, from inhibiting superior

Supervision—were very important to the welfare of the trade of the Company and in that respect it appears to me that the second objective which the Commissioners found to obtain in this case was one directly related to the conduct of the Company's trade.

(Italics mine.)

In the view of counsel the payments for scientific research were important to the welfare of the trade of the company in the same fashion as the payments made by the taxpayer company in the Heather case, which the Court of Appeal found to be chargeable against revenues of the company. With respect, I do not agree that this case is analogous to the Heather case or that it calls upon me to reach a different conclusion from that which I have already alluded to.

The difficulty in determining whether an expenditure is of a revenue or capital nature and the course which a Court should follow in attempting to find the correct designation is put with admirable clarity by Lord Denning, 'MR at page 321 of the Heather case:

The question—revenue expenditure or capital expenditure—is a question which is being repeatedly asked by men of business, by accountants and by lawyers. In many cases the answer Is easy: but in others it is difficult. The difficulty arises because of the nature of the question. It assumes that all expenditure can be put correctly into one category or the other: but this is simply not possible. Some cases lie on the border between the two: and this border is not a line clearly marked out; it is a blurred and undefined area in which anyone can get lost. Different minds may come to different conclusions with equal propriety. It is like the border between day and night, or between red and orange. Everyone can tell the difference except in the marginal cases; and then everyone is in doubt. Each can come down either way. When these marginal cases arise, then the practitioners—be they accountants or lawyers—must of necessity put them into one category or the other. And then, by custom or by law, by practice or by precept, the border is staked out with more certainty. In this area at least, where no decision can be said to be right or wrong, the only safe rule is to go by precedent. So the thing to do is to search through the cases and see whether the instant problem has come up before. If so, go by it. If not, go by the nearest you can find.

Again at page 322 of the Heather case Lord Denning stated:

The Courts have always been assisted greatly by the evidence of accountants. Their practice should be given due weight but the Courts have never regarded themselves as being bound by it. It would be wrong to do so. The question of what is capital and what is revenue is a question of law for the courts. They are not to be deflected from their true course by the evidence of accountants, however eminent.

In these reasons I have endeavoured to review the applicable case law as a result of which 1 have reached the same conclusion as that. reached by Cattanach, J in the 1970 International Nickel case (supra) that, in law, the expenditures for scientific research are capital in nature.

I cannot dispute the evidence of the eminent accountants in this case as to the ordinary commercial application of accounting principles. However, as a matter of law, in my opinion, the meaning of the word “profits” as used in Regulation 1201 is that decided by Judson, J in the Imperial Oil case (supra) no matter how they were treated by the company in keeping its books in accordance with good accounting practice for the purposes of its audited statements. Since the expenditures for scientific research have been found to be capital in nature they are, in my view, not deductible in computing the plaintiff’s depletion base. Accordingly, the plaintiff’s appeals will be allowed.

Having so concluded, it is not necessary for me to consider whether the matter is res judicata nor is it necessary for me to consider the plaintiff’s alternative contention that if it should be held that the scientific research expenditures in question were of a revenue nature the plaintiff would then be entitled to deduct these expenditures under paragraph 12(1 )(a) as well as under section 72 in computing its taxable income for the year.

The appeals are allowed and the assessments for the years 1967 and 1968 are referred back to the Minister for appropriate action in accordance with these reasons. The plaintiff shall be entitled to its taxed costs on each appeal up to the time of hearing and to one set of costs for the hearing since the appeals were tried on common evidence.