Windsor Raceway Holdings Limited v. Minister of National Revenue, [1973] CTC 2137, 73 DTC 96

The Chairman (orally):—Gentlemen, this is a. very difficult and very interesting case. I appreciate the reports you have given me, the witnesses you have called, and the argument which has been presented.

This is an appeal by Windsor Raceway Holdings Limited against a reassessment by the Minister of National Revenue for the taxation years 1966, 1967 and 1968. At the opening of the hearing counsel for the Minister brought to my attention the fact that a Motion had been filed on behalf of the Minister asking that the appeal with respect. to the 1966 taxation year be dismissed by virtue of the fact that no Notice of Objection was filed within the prescribed period of time under the section of the Income Tax Act then in force. The Motion is supported by the affidavit of William C Hunter, an officer of the Department of National Revenue, which, in fact, confirms the allegations contained in the Notice of Motion. No reply has been made to this allegation by the Appellant and, therefore, I allow the Motion and dismiss the appeal for the taxation year 1966.,., . ....

The issue under appeal is whether or not capital cost allowance is available to the appellant under Class 1 or under Class 8, Schedule B, section 1100 of the Income Tax Regulations. This is a novel point. I suspect it is the first time the matter has come before this Board, its predecessor or the courts, and so I think the result is important, not only for this appellant, but for other taxpayers who might use the type of surface that is in issue in this appeal. For this reason, I propose to outline the facts in the interests of precision and clarity so that any future tribunal will readily grasp the basis of my decision.

The appellant has been. operating a harness racing track in the vicinity of Windsor since about 1965. The owners of the appellant company, in order to provide year-round racing, decided to use a surface known as “Tartan Turf”, a trade name familiar to modern-day sport enthusiasts as an artificial football turf. This particular trade name is the property of 3M Corporation and this installation marked its initial use for a raceway in Canada. The evidence of Mr Lachine, comptroller of the appellant company, is that such a surface has been used, and is presently in use, at Laurel, Maryland, and Meadows, Pennsylvania. The Meadows installation was the earlier and carried a warranty of three years. The evidence of Dr Penny, the technical manager of this branch of the 3M Corporation operation, is that the novel nature of the Meadows installation militated against any warranty in excess of that term. However, its success prompted an extension of similar terms of warranty for the Laurel and Windsor tracks to five years.

I do not propose to explain in detail the construction or the components of the chemical composition of “Tartan Turf” other than to give a brief summary, nor do I wish to infer that I understand or comprehend completely the chemical reactions necessary to produce the finished product. I think it suffices to say that before “Tartan Turf” can be installed it requires the construction of a concrete base that would be comparable to a roadway, and Respondent’s Exhibit No. 1 is a photograph of a cross-section of this base. It shows a yellow sand base, on top of which is a 10-inch granular base of class “A” crushed gravel with 1 /2 inches of asphalt of a particular mixture described as HL6 binding course, topped again with 1-inch asphalt described in the exhibit as HL3. This is unquestionably a type of construction envisaged by Class 1 of Schedule B to Regulation 1100, and no dispute arises in this appeal as to that classification. It should be pointed out at this time that the construction of the base was not undertaken by the 3M Company—and I refer to them throughout as the 3M, although I know the official name to be similar to, if not exactly the same as, Minnesota Mining and Manufacturing of Canada Limited. The base installation was constructed by Woodall Construction Company of Windsor. The construction, of course, had to meet the specifications of the 3M Company and the evidence is that it did. What then takes place is that in this particular type of installation the formula is prepared and poured on the base and spread in such a way as to give drainage to the inside. I believe it was, in this instance, and ranging in thickness from, in the initial installation, one inch or more as shown in red in appellant’s Exhibit A-3, three-quarters of an inch or more as shown in yellow on the same exhibit, and half an inch or more as shown in blue. The evidence of Dr Penny was technical in its nature as to the reason for the various thicknesses, the shock index in its application to this particular use, and the fact that once the surface gets below a given thickness (I think five-eighths of an inch was the figure he used) it is no longer satisfactory for the safety of the animals or the proper carrying out of the racing operation. All these technical bits of evidence were most enlightening, and established beyond a doubt the fact that we all accept that this type of surface is very new and revolutionary in the athletic field.

Dispute arises, as I have said, as to which class the tartan surface should fall into for an allowance of capital cost. Section 12 of the Income Tax Act prohibits the deduction of an outlay, loss or replacement of capital, payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as otherwise permitted. The broad prohibition is, therefore, against the deduction of capital outlays in general. The exception, or area of permissible deduction, is the area of capital cost allowance provided by paragraph 11(1)(a) and other subsections of the Act and of the regulation I have referred to (Regulation 1100). We must look at and consider the purpose of capital cost allowance because, as I said in the general statement, outlays on account of capital are not as a general rule compensated. The capital cost allowance system is designed to restore to a taxpayer the full amount of capital cost of the assets used to produce income. Since it is not necessarily dependent on “wear and tear”, that is, depreciation in its strict sense, it is referred to in tax law as capital cost allowance and, under paragraph 11(1)(a) of the Act, the taxpayer has a right to an allowance in respect of the capital cost to him of income-producing assets.

No longer is this allowance computed under the old system of Straight-line depreciation as is shown quite commonly by accountants in producing financial statements for corporations, but is computed on what is known as the “diminishing balance” system. In other words, Schedule B of Regulation 1100 places certain capital assets in classes and allows a fixed percentage to be deducted annually on the diminishing balance. This is the maximum allowance which may be taken, but none of it need be taken nor need all of it be taken by the taxpayer in a given year except in certain specific instances.

So paragraph 11 (1)(a) is the statutory authority for capital allowance and provides that the determination of that part of the capital cost of the property which is deductible, or the amount of the allowance, if any, that is deductible, is to be prescribed by regulation. Class 8 of Schedule B to the Regulations is what is commonly referred to in the jargon of the trade as “the catch-all section”. It simply says: “property that is a tangible capital asset that is not included in another class in this Schedule except land or any part thereof” and then it goes on to list certain other exceptions.

Since this “Tartan Turf” is so new, and since these classes were established, ! think, some twenty-one or twenty-two years ago, it is not surprising that it does not appear in any special class, but it would have been, perhaps, impossible for it to be included in any of the classes until very recently. The Department has looked at the situation and has considered certain factors. Before dealing with them I should say that many difficulties developed with “Tartan Turf” over the period of the first five years. Appellant’s Exhibit A-1 is the agreement between the 3M Corporation and the appellant company, and it sets out the terms under which the “Tartan Turf” was to be installed. lt contains a warranty provision with certain specific restrictions which, if not abided by, would cancel out the warranty. The evidence of Dr Penny proved that the company fulfilled its obligations under the agreement as borne out by the fact that in 1970, some five years after the installation and within the warranty period, a considerable amount of money was expended by the 3M company to repair the portion which was declared unsuitable’ for racing or training. One can look at appellant’s Exhibit No 5, which is a sketch of the raceway in 1972, and the parts coloured red and blue indicate areas unacceptable for racing or training. It follows, of course, that what is unacceptable for training is unacceptable for racing, and what made it unacceptable, as I understand it from the evidence, is that the turf had become too thin and the shock index too high to allow safe racing to be conducted thereon, or portions of the track had been worn away by abrasion or other causes such as can be seen in the photograph filed as an exhibit in this case, in which it can be seen that a section of the turf is missing. Appellant’s Exhibit 5 again shows that the area not coloured, for instance in the vicinity of the starting line, is the area that was repaired under warranty in 1970 and appears to be still in good condition or acceptable for racing. But the evidence by Mr Lachine is that he, in applying sound accounting principles and practice, established in his own mind that seven years was an acceptable period in which the appellant could expect to have a useful asset in this track. It is brought out in evidence and cross-examination that by the expenditure of some 340-odd thousand dollars, I think it was, the life could be extended to 14 years, which, if we delve into mathematical calculations, would present a cost compared to the initial outlay of $900,000 for the “Tartan Turf”, of about 3 per cent per year. This really, I: think, is the basis, upon which the Department arrived at its decision to include the entire raceway, including the asphalt base and the tartan surface, in Class 1. I am borne out in this belief by the evidence of Mr Clark, an auditor with the Department of National Revenue, an Appeals Officer who. worked out the cost of repairs on a square-footage basis and on a cubic-foot basis. He worked it out with respect to total repairs and total cost and came up with a percentage that would justify an average, over five years, of some 2 /2 per cent per year for repairs on the total cost of the operation.

lt has often been said by me and by others, and I think there is no doubt whatsoever, that there is little, if any, room for the exercise of judicial discretion with respect to matters under the Income Tax Act. The Act must be interpreted strictly in accordance with the letter of the law in so far as is possible. In this particular situation, we have one of those rare instances where Parliament, in its wisdom, has created a class under. Schedule B of the Regulations that is, as I have said, “a catch-all section”.

Evidence has been adduced that difficulties arose with the Meadows track after a three-year period, and with the Laurel track—both of which ran considerably fewer programs over the five-year period than did the appellant in this case. The appellant ran 770 programs, as I recall, over a five-year period, as compared to about 311 for Meadows and about 190 for Laurel. The cost to the appellant company was about $106,000, perhaps close to $107,000, for repairs during that five- year period.

I suppose "I should add at this point that it really goes without saying that there is no dispute or question whatsoever that this. capital outlay was made for the purpose of earning income and for the purpose, as the number of programs run. would indicate, of getting the maximum possible use out of the track under the climatic conditions which exist in this country. - , ...

Since this is a novel point, I think I must point out the obvious, and say that in this country we have situations that require the foresight and venturesome action of individuals in order to be able to produce entertainment, revenue and pleasure for a population with an ever- increasing amount of leisure time. Such a revolutionary product as the tartan surface, as applied not only to the activities of this appellant but to its many uses in Canada for other athletic contests, must not, in my view, be hampered in its possible expanded use by tunnel vision on the part of those of us who have to make decisions in the first instance. Many cases have been cited to me to show that this particular tartan surface should fall under Class 1 by virtue of its construction as part of the over-all track. The case of Thibodeau Express Limited v MNR, 40 Tax ABC 419; 66 DTC 260 has been cited by the appellant as supporting its contention and has been attacked and an attempt made to distinguish it by learned counsel for the respondent. I think what my learned colleague did in that case was, by the process of elimination and by direct consideration of the specified objects in Class 1, to come to the conclusion that the property that he was concerned with in that case did not fit any of the designations in Class 1 and, therefore, by elimination, fell into the ‘‘catch all” section of Class 8.

In this situation before me to-day, I come to the same conclusion. This, in my view, was a surface that cannot, by any stretch of the imagination or by interpretation of the strict wording of Class 1 of Schedule B to the Regulations, be deemed to be a property, a structure or a construction that was intended or expected to have a lifetime of years comparable to what would be expected from a bridge, a canal, a culvert, a dam, or other specified object. We know that bridges last for hundreds of years, in some instances, when kept in repair; canals likewise. Counsel for the respondent has very persuasively tried to include this tartan surface in Class 1, paragraph (g), by showing, or attempting to show, that it was really part of the construction of the underlay track, which unquestionably should last for many years. I think the evidence is clear that the only way this particular tartan surface could have been maintained beyond a useful expectation of seven years was by continued expenditure of large sums of money, and it cannot therefore be said to be a structure that would be by analogy in the contents of Class 1.

On all the evidence, the diagrams, the photographs, the technical data and the arguments submitted, I am satisfied that this type of surface in this country must and should be included in Class 8 and be subject to 20 per cent capital cost allowance, and the appeal will, therefore, be allowed and referred back to the Minister for reassessment accordingly.

I think, in the result, the correct terminology is, the appeal is allowed in part, being dismissed with respect to 1966, for which taxation year no Notice of Objection was filed. In all other respects the appeal is allowed.

Appeal allowed in part.