Reliance Products LTD v. Minister of National Revenue, [1974] CTC 2214, 74 DTC 1157

A W Prociuk:—The appellant appeals from the respondent’s reassessment of the 1971 taxation year wherein the inclusion by the appellant of the sum of $76,880 to capital cost for capital cost allowance purposes was disallowed. The said sum was a major portion of a grant received by the appellant under the provisions of the Regional Development Incentives Act (SC 1968-69, c 56) and amendments thereto.

At the commencement of the hearing of this appeal, counsel filed an agreed statement of facts which is as follows:

1. The Appellant is a corporation incorporated under the laws of the Province of Manitoba and carries on business as a manufacturer of plastic products of various kinds and being industrial and recreational products.

2. The Appellant operates factories or branch operations at the cities of Winnipeg, Calgary and Toronto.

3. The Appellant has been engaged in the aforesaid business for approximately 15 years.

4. The Appellant, before applying or receiving the grant hereinafter referred to, employed personnel as follows:

Winnipeg	—	approximately 80 employees
Toronto	—	approximately 10 employees
Calgary	—	approximately 6 employees

5. The Appellant, pursuant to the provisions of the Regional Development Incentives Act, (SC 1968-69 Cap 56 as amended) applied for a development incentive in order to expand production of existing products and to produce new products. That is, the Appellant would acquire machinery in respect of the production of plastic pails, water paks, porta sinks, battery cases, cover and lids, including moulds to produce same, together with auxiliary equipment such as scrap grinders and chiller machines.

6. Pursuant to the provisions of the Regional Development Incentives Act, the development incentive consisted of an amount based upon a percentage of approved capital costs and based upon the number of jobs to be created directly in the operation.

7. Pursuant to the provisions of the Regional Development Incentives Act and pursuant to paragraph 6 hereof, the Appellant was entitled to receive an amount calculated as follows:

(a) in respect of approved capital costs of $346,277, 16% thereof or the sum of $55,404.32;

(b) in respect of the expected creation of 31 jobs at $3,100 per job, the sum of $96,100.

The aggregate of $55,404.32 and $96,100.00 amounted to $151,501.32.

8. Pursuant to the entitlement of $151,501.32 referred to in paragraph 7 hereof, the appellant received during its 1971 taxation year the following amounts calculated as follows:

(a) in respect of approved capital costs	—	$18,114.00
(b) in respect of 31 jobs, 80% of the
approved amount		76,880.00
		$94,994.00

9. The balance of the entitlement in respect of approved capital costs was to be provided as the new machinery was acquired and installed, and the balance (or 20%) of the entitlement in respect of 31 jobs was to be provided subsequent to inspection and satisfaction that the said jobs had been so created or provided.

10. Pursuant to the provisions of the Income Tax Act (S 20-6(h)), it is provided that amounts received by way of grants or subsidy in respect of the acquisition of depreciable property, shall be deducted from the capital cost of such depreciable property for the purposes of determining capital cost allowance.

11. Pursuant to paragraph 10 hereof, the accountants of the Appellant did deduct the sum of $22,642.00 which sum was intended to be $18,114.00 as per para 8 hereof.

12. Pursuant to para 10 hereof, the Respondent did by way of assessment adjust the capital cost claimed by the Appellant by the amount of $76,880.00 referred to in para 8(b) hereof.

13. By virtue of the adjustment to capital cost pursuant to paragraph 12 hereof, the capital cost allowance claimed as a deduction by the Appellant has been reduced for the taxation year 1971 by the sum of $14,471.00.

The Issue—The question to be decided, is having regard to the provisions of the Regional Development Incentives Act and S 20-6(h) of the Income Tax Act, what amount, if any, should be deducted in calculating capital cost and therefore capital cost allowance for the purposes of the Income Tax Act.

Paragraph 20(6)(h) of the Income Tax Act as it was then in force states as follows:

20. (6) Special cases.—For the purpose 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;

Learned counsel for the appellant argued that section 12 of the Regional Development Incentives Act overrides paragraph 20(6)(h), otherwise section 12 is meaningless.

Section 12 of the Regional Development Incentives Act states as follows:

12. An amount payable to an applicant on account of a development incentive under this Act is exempt from income tax.

I cannot see any conflict between the two sections quoted above. It seems to me logical that while a taxpayer is not to be taxed on the amount of the incentive grant received, he ought not to include the amount so received in his capital cost for capital cost allowance purposes.

In 1971 the appellant received a total of $94,994. Paragraph 20(6)(h) is clear and unambiguous and the respondent properly disallowed the entire amount received for capital cost allowance purposes.

The appeal accordingly is dismissed.

Appeal dismissed.