Lane’s Bakeries LTD v. Minister of National Revenue, [1973] CTC 2179, 73 DTC 198

The Assistant Chairman:—This is the appeal of Lane’s Bakeries Ltd from an assessment of the appellant’s 1968 taxation year heard at Ottawa on May 22, 1973.

The principal issue in this appeal is to determine whether expenditure in the amount ot $20,059 for the purchase of trays known as “Del-tra’s” or “Drater Trays” (hereinafter referred to as “trays”) in 1968 was a capital expenditure and the trays a capital asset used in the appellant's business or whether the amount of money expended for the purchase of trays was a revenue expenditure necessary for carrying on the appellant’s business.

A subsidiary issue arises if the amount of $20,059 for the purchase of trays in 1968 is found to be a capital expenditure. For purposes of determining the permissible deductions of the capital cost of the trays as allowed by the Regulations, it must be decided whether the trays are property coming within Class 8 and Class 19 or whether we are dealing with items coming within the meaning of Class 12 of Schedule B to Part XI of the Income Tax Regulations.

The facts in this appeal are as follows: Prior to 1966 Lane’s Bakeries Ltd used cardboard boxes purchased at 450. to 500 each to transport their products to retailers. Because of the short life. and heavy losses of these containers and the fact that a substantial amount of products were lost by being crushed, the company sought other means of transporting their product. In 1966 at a cost of $40,374 the appellant company purchased 7,600 trays. These trays are roughly 3 feet square, made of heavy steel wire, the bottom of which contains a polyethylene sheet and they have on opposing sides two collapsible sides approximately the height of a loaf of bread. The sides, when raised, prevent the products from being crushed and when collapsed, after delivery of the product, the trays can be more easily stacked. The cost of each tray is between $5 and $7.

In 1967 the appellant company purchased 10,500 trays at a cost of $56,981 and in 1968 it purchased 3,500 trays at a cost of $20,059. Although the trays are considerably sturdier than cardboard containers, evidence given at the hearing would indicate that damage to the trays and losses are still causing ‘a problem to the appellant. Considerable damage to trays in their handling from step-trucks is claimed by the appellant as well as damage and loss of the trays because of clients’ use and/or abuse of the trays which sometimes end up with another bakery, if not in the dump. However, in spite of considerable effort to obtain it, no evidence was given which might be helpful in establishing the useful duration of a tray. During the hearing the Board heard the testimony of Mr Gibbons, General Manager of Lane’s Bakeries Ltd, that of Mr Johnson, General Manager of Weston Bakeries of which Lane’s Bakeries Ltd is a subsidiary, that of Mr Gedge of General Bakeries, and Mr Stoddard of Ben’s Bakeries Ltd—the last two mentioned companies are not in any way related to Lane’s Bakeries Ltd. The reason for hearing these witnesses who represented plants using Del-tra’s or comparable trays was an unsuccessful attempt to establish the life span of the trays. The witnesses heard, who either had not or who had only recently commenced taking inventory of the trays in their respective plants, were in agreement on the difficulty of maintaining ‘an inventory once the trays left the plant and were reluctant to harass their clients for the prompt return of the trays. However, Exhibit R-1 shows an inventory count of trays in Lane’s Bakeries Ltd as at October 14, 1969, and of a total of 20,716 trays to be accounted for 518 were missing and 10 were damaged beyond repair. Nonetheless the durability of the trays was not firmly established. It has also brought out ‘in evidence that the appellant company treated the said trays as it did its baking pans as capital assets written off in five years. Weston Bakeries did likewise, but the representatives of General Bakeries and Ben’s Bakeries claimed that the trays in their respective companies were charged to expenses.

In attempting to determine whether the amount of $20,059 paid by the appellant for trays in 1968 was a capital or recurring expenditure, the Board, under the circumstances, was not unduly influenced by the accounting practices that were employed in the above-mentioned plants in respect to the trays. There is a good deal of practical wisdom in the view expressed by Lord Pearce in the case of BP Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia, [1966] AC 224, in referring to the matter of determining whether an expenditure was of a capital or an income nature. He said at page 264:

The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances, some of which may. point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications In the contrary direction. It is a common-sense appreciation of all the guiding features which must provide the ultimate answer.

The set of circumstances with which we are dealing in this appeal contains indications which point in favour of considering the expenditure for trays as a capital expenditure and which is supported by cases cited by the respondent and other indications which would lead one to consider that these expenditures are recurring income expenditures which, in turn, are supported by cases cited by the appellant. The Board in this instance must therefore weigh the value of the respective indications.

1. It is on record that the appellant company purchased the trays because the cardboard containers proved to be too expensive owing to the short durability of the containers and because of the loss of products due to lack of solidity of the boxes.

2. It is also on record, Exhibit A-2, that Lane’s Bakeries Ltd expended for trays in

3. Exhibit A-3 is a history of lost or damaged trays (in dollars)

4. The known loss of trays in a seven-year period is approximately 15%. The trays are made of sturdy steel wire, and though costly, the trays are presently repaired by the appellant.

5. It is clear from evidence given that the loss of trays is largely due to the use or abuse of trays by the appellant’s clients and the appellant’s reluctance to have the clients return the trays.

6. An unknown quantity of trays purchased each year may possibly be a result of the appellant’s increased business.

7. Although the 15% missing trays may not be under the control of the appellant, a great number of them apparently are still in existence. They remain the appellant’s property and could conceivably be recuperated.

In the light of the facts of this case, even though the expenditures for trays might be considered as recurring, they cannot be, in my opinion, considered as expenses for expendable items as were the cardboard containers. Although the durability of the trays was not specifically determined, the figures for lost and damaged trays show that their durability could be estimated at about five years.

In my view, therefore, the appellant’s expenditure of $20,059 in 1968 was made in the acquisition of new assets having some durability for the purpose of improving and increasing its distribution and marketing processes which added to the appellant’s business operations and, as such, should be considered as a capital expenditure.

Having come to the conclusion that the trays are tangible capital assets, it is now necessary to determine whether these items come under Class 8 or Class 12 of Schedule B to the Regulations made pursuant to the Income Tax Act.

Class 8 of Schedule B, allowing a 20% deduction, deals with tangible capital assets that are not specifically included in any other class of Schedule B.

Class 12 of Schedule B allowing a 100% deduction refers to property not included in any other class. Counsel for the appellant alleges that the trays are tools costing less than $100, and therefore belong to Class 12(h) of Schedule B. Counsel for the respondent claims that the trays are not tools and must therefore belong to the ‘‘catch-all” provisions of Class 8, with the result that the point at issue now is whether or not the trays are tools within the meaning of Class 12(h) of Schedule B.

In interpreting the word “tool” as used in Class 12{h) of Schedule B, I agree with the respondent that the general or popular meaning of the word must be used rather than its narrow legal or technical one.

The general or popular meaning of the word “tool” may best be arrived at by referring to the general definitions of the dictionaries. In Funk and Wagnall “tool” is defined as “a simple mechanism or implement as a hammer, chisel, plane, spade or file used in working, moving or transforming material’. The Random House Dictionary defines “tool” as “an implement, especially one held in the hand, for performing or facilitating mechanical operations as a hammer, saw, file, etc.: any instrument of manual operation; anything used as a tool”.

In my opinion the trays used by the appellant company to transport its product from the plant to their clients are simple manual implements used in moving the appellant’s product, and fall within the general popular and dictionary meaning of the word “tool” and, costing less than $100, are properly included in the meaning of Class 12(h) of the Regulations.

The appeal is therefore allowed in part and referred back to the Minister for reconsideration and reassessment, taking into account that the amount of $20,059 expended by the appellant for Del-tra’s in the 1968 taxation years is a capital expenditure and that the said trays are tangible capital assets which would properly be included as property coming within Class 12(h) of the Regulations made pursuant to the Income Tax Act.

Appeal allowed in part.