Souwesto Broadcasters Limited v. Minister of National Revenue, [1974] CTC 2112

The Chairman (orally: September 18, 1973):—This is an appeal by Souwesto Broadcasters Limited against a reassessment by the Minister of National Revenue with respect to the 1970 taxation year. The basis of the reassessment is the disallowance of the appellant’s claim for capital cost allowance on the ground that the Minister’s decision is that the appellant did not incur any capital cost for the depreciable items and therefore is not entitled to any allowance under the Income Tax Act and regulations made thereunder.

The facts are very brief. The evidence is short and was given by Mr John Leigh Moore, who is the president and general manager of the appellant company. Apparently, according to Exhibit A-1, a company known as Rogers Broadcasting Limited and the appellant, Souwesto Broadcasters Limited, were both broadcasting on the frequency of 680. This was apparently causing some difficulty to the Rogers programming in the late evening in the areas where the approved patterns of the two stations cross-hatched or overlapped. In 1968 Rogers approached Souwesto with a view to getting it to change its frequency from 680 to 1570. Some negotiations transpired and I think Mr Moore indicated that at one time the appellant had opposed the change.

The question is a difficult one in law, as is evidenced by the two main cases on the point, both of which were decided by Chief Justice Jackett of the Federal Court of Canada when he was President of the Exchequer Court of Canada. The first of these is Ottawa Valley Power Company v MNR, [1969] 2 Ex CR 64; [1969] CTC 242; 69 DTC 5166, and the other is The D’Auteull Lumber Co Ltd v MNR, [1970] Ex CR 414; [1970] CTC 122; 70 DTC 6096.

On the face of it, these two cases would appear to contradict each other, and unquestionably the learned Chief Justice had a very difficult time in resolving in his own mind the correct result for each of these cases. I suppose, therefore, that I can presume that a lesser mortal such as myself might be excused for failing to attain the absolute ultimate in correctness in this decision.

As I have said, the facts are very simple. The thrust of the respondent’s argument is that there is no evidence of any value to what the appellant gave up by virtue of agreeing to this change of frequency; that the $353,133 spent by Rogers on the appellant’s behalf, pursuant to the agreement filed as Exhibit A-1, was not money spent in any way related to the value of what the appellant company was giving up, and that therefore it should not be eligible to be treated, under the relevant provisions of the Income Tax Regulations, as a capital cost for capital cost allowance purposes. I think it should be said at this stage that the two parties were unquestionably acting at arm’s length. The appellant company had a coverage of some 1,500,000 potential listeners and, by the change, according to figures issued by the Dominion Bureau of Statistics, this would be reduced to some 400,000. According to Mr Moore, Souwesto had been at 680 on the dial for over 20 years and its BBM rating after the change of frequency took a considerable drop.

I think one can almost take judicial notice of the fact that radio stations spend a great deal of their time trying to inform the public, or educate the public, as to their frequency location, and this is obviously because, when the ratings are taken, it is important that anyone surveyed should know the correct frequency. So I think there is a definite advantage to Rogers and a monetary loss that the appellant suffered in this exchange, which is related to the broadcasting frequency alone. The operation itself was not, and is not, for sale, and it was purely a question of negotiations between the parties as to what would take place. In his evidence Mr Moore was quite frank and quite ready to admit that the picture was not all black, because the company could concentrate on running a smaller operation, thereby reducing its operating costs and perhaps maintaining what, to its shareholders, would be a reasonable return on their investment. But the station could not operate on a frequency of 1570 without a new transmitter site, and anyone connected with the radio field knows that this is one of the most expensive aspects, if not the most expensive aspect, of getting a station into operation.

The agreement (Exhibit A-1) sets out that the usual application must be made to the Canadian Radio and Television Commission— or to the Board of Broadcast Governors (I am not sure which it was in 1968)—and that Rogers will pay such costs. It also provides that Rogers shall be fully responsible for all of the costs of constructing the new facilities and of getting them approved, and may discharge such liability by effecting payment directly to the vendor (the appellant company)—those are my words—and/or suppliers or, at the election of Rogers, by placing Souwesto in funds to enable it to effect such payments partly in one manner and partly in the other.

To accept the argument of the Crown would be, at the very least, to completely overlook the replacement cost of the existing transmitting site that the appellant was then using. It was necessary to purchase a new site, in fact to purchase considerably more land than was actually needed, and to construct eight towers and several small buildings necessary in the tuning operations of the radio station. Their construction was undertaken, completed, and paid for by Rogers, and the depreciation thereon is the subject of this appeal.

I have stated that Chief Justice Jackett had difficulty in the two cases I have mentioned, both of which were appealed to the Supreme Court of Canada. In the Ottawa Valley Power case (supra), which has been upheld in the Supreme Court of Canada without written reasons ([1970] CTC 305; 70 DTC 6223), Jackett, CJ closes on a note that he is still not satisfied with his decision and affords the opportunity for written argument. In the D'Auteuil case (supra) he goes to great lengths, towards the end of his reasons for judgment, to explain to, or to assist, those of us who have to interpret his findings in the two judgments, by adding a reference to the Ottawa Valley Power case and saying, at page 29 [6100]:

... There, I was considering a case where the consideration given for the “plant” was “entering Into the low-priced supply contract”—a consideration very difficult to put a value on—and what I am sure that I had in mind is that, “prima facie”, the value of the consideration is equal to the value of what is received for it, so that where, as in my hypothetical case, what was received can easily be valued, and what was given is almost impossible to value, it is a fair statement that “prima facie, what he pays for the plant is the value of the plant”. Thus, in any particular case, there may arise a question as to what evidence Is admissible. Where the value of the thing given for the capital asset in question can be determined with the same kind of effort as is required to value the capital asset itself, I should have thought that the Court would not look kindly on attempts to lead evidence as to the value of the capital asset in lieu of, or in addition to, evidence as to the value of what was given for it.

In this case, it is clear to me that what was given for the right to use this frequency had a value far in excess of the plant itself, and that the parties have arrived, by their own means, at what this asset, namely, the frequency of the appellant company, is worth. Therefore I find that the value as agreed upon by the parties is the value which should be applied, and the matter should be referred back to the Minister for reassessment accordingly.

The appeal is therefore allowed.

Appeal allowed.