KERR,
J.:—These
appeals
under
Part
I
of
the
Income
Tax
Act
from
re-assessments
of
the
income
tax
of
the
appellant
(hereinafter
referred
to
as
Sherritt)
for
its
1958
and
1959
taxation
years
were
heard
together
in
Toronto.
They
relate
to
disallowances
by
the
Minister
of
National
Revenue
in
respect
of
amounts
that
it
had
paid
in
the
years
1952,1953
and
1954
as
a
"commitment
fee”?
pursuant
to
financing
agreements
with
J.
P.
Morgan
and
Co.
Incorporated
and
certain
other
companies,
whereby
Sherritt
obtained
$24,000,000
(United
States
funds)
from
sale
of
first
mortgage
bonds
and
agreed
to
pay,
in
addition
to
interest
on
the
bonds,
a
commitment
fee
at
the
rate
of
1
per
cent
per
annum
in
respect
of
Series
A
and
Series
B
bonds
and
11%
per
cent
per
annum
in
respect
of
Series
C
bonds,
on
the
daily
average
unadvanced
portion
of
the
total
amount
that
the
lenders
were
obligated
to
lend
under
the
provisions
of
the
agreements,
as
set
forth
in
paragraph
9
of
the
agreement
dated
June
13,
1952
(Exhibit
2)
and
paragraph
5
of
the
agreement
dated
April
12,
1954
(Exhibit
8).
Sherritt
acquired
a
nickel-copper-cobalt
property
at
Lynn
Lake,
Manitoba,
in
1945
and
by
the
end
of
1951
had
done
considerable
work
in
proving
the
ore
body
and
in
developing
the
mine
project,
which
eventually
included
a
power
plant
at
Laurie
River
(about
thirty-five
miles
from
the
mine)
and
a
refinery
at
Fort
Saskatchewan
near
Edmonton,
for
production
of
metal
from
ore
concentrates
from
the
mine.
The
company
planned
a
program
of
work
to
complete
the
entire
project
and
in
that
work,
in
the
years
1952,
1958
and
1954,
expended
the
proceeds
from
the
bonds
and
also
money
from
other
sources.
The
company
made
payments
of
bond
interest
and
payments
of
commitment
fee
in
those
years,
and
subsequently
attributed
and
allocated
the
amounts
of
such
payments
in
its
accounts
to
(a)
exploration
and
development
expenses
(b)
the
cost
of
depreciable
assets
acquired
and
(c)
operating
expenses.
I
will
refer
later
to
the
source
and
use
of
all
funds
and
the
allocation
of
interest
and
commitment
fee
payments.
In
computing
its
taxable
income
from
its
1958
and
1959
taxation
years
Sherritt
deducted,
as
exploration
and
development
expense,
the
portions
of
the
bond
interest
and
commitment
fee
payments
in
the
years
1952,
1953
and
1954
that
it
had
allocated
to
that
expense;
and
claimed
capital
cost
allowance
in
respect
of
the
portions
of
the
bond
interest
and
commitment
fee
payments
that
it
had
allocated
to
the
capital
cost
of
depreciable
assets:
acquired.
The
Minister
allowed
deductions
claimed
in
respect
of
the
payments
of
bond
interest
but
disallowed
the
deductions
claimed
in
respect
of
the
payments
of
commitment
fee.
In
the
Notice
confirming
the
assessment
of
income
tax
for
the
1958
and
1959
taxation
years
the
Minister
stated
:
.
.
.
that
the
amount
of
$110,491.84
paid
by
the
taxpayer
in
the
taxation
years
1952,
1953
and
1954
as
commitment
fees
is
not
an
exploration,
prospecting
or
development
expense
and
accordingly
is
not
an
allowable
deduction
under
the
provisions
of
section
838A
of
the
Act
in
determining
the
income
of
the
taxpayer
for
the
1958
and
1959
taxation
years;
that
the
amount
of
$240,567.19
paid
by
the
taxpayer
in
the
taxation
years
1952,
1953
and
1954
as
a
commitment
fee
is
not
a
part
of
the
capital
cost
of
the
depreciable
property
owned
by
the
taxpayer
in
the
1958
and
1959
taxation
years.
In
the
Reply
to
the
Notice
of
Appeal
with
respect
to
Sherritt
‘s
1958
taxation
year
the
Minister
stated
:
9.
The
Respondent
says
that
of
the
amount
of
$3,163,410.70
claimed
by
the
Appellant
in
the
taxation
year
1958
as
development
and
exploration
expenses,
a
portion
thereof
amounting
to
$110,491.84
represents
a
portion
of
an
amount
paid
as
commitment
fees
by
the
Appellant
in
the
taxation
years
1952,
1953
and
1954,
pursuant
to
the
agreement
dated
June
13th,
1952,
referred
to
in
paragraph
3
of
the
Notice
of
Appeal
and
is
not
properly
deductible
in
computing
the
Appellant’s
income
for
the
1958
taxation
year
under
section
88A
of
the
Income
Tax
Act
because
the
said
commitment
fees
are
not
exploration,
prospecting
or
development
expenses
within
the
meaning
of
section
83A
of
the
Income
Tax
Act.
10.
The
Respondent
says
that
no
part
of
the
commitment
fees
paid
by
the
Appellant
pursuant
to
the
agreement
dated
June
138th,
1952,
referred
to
in
paragraph
3
of
the
Notice
of
Appeal,
formed
part
of
the
capital
cost
to
the
Appellant
of
any
property
of
the
Appellant
described
in
any
of
the
Classes
of
Schedule
B
to
the
Regulations
made
pursuant
to
the
Income
Tax
Act.
11.
The
Respondent
says
that
if
the
commitment
fees
are
interest
on
borrowed
money,
they
were
deductible
under
the
provisions
of
paragraph
(c)
of
subsection
(1)
of
section
11
of
the
Income
Tax
Act
in
computing
the
Appellant’s
income
for
its
1952,
1953
and
1954
taxation
years,
and
hence
no
portion
was
deductible
under
subsections
(2)
and
(3)
of
section
83A
of
the
Income
Tax
Act
and
no
portion
may
be
included
in
the
capital
cost
to
the
Appellant
of
any
property
owned
by
it
in
the
1958
taxation
year.
The
Minister
took
a
similar
position
in
disallowing
capital
cost
allowance
claimed
by
Sherritt
for
its
1959
taxation
year
in
respect
of
amounts
paid
as
commitment
fee
in
1952,
1953
and
1954.
The
years
1952,
1953
and
1954
are
of
particular
significance,
for
they
were
a
period
of
construction
and
development
of
Sher-
ritt's
Lynn
Lake
project,
i.e.,
the
mine
at
Lynn
Lake,
the
power
plant
at
Laurie
River
and
the
refinery
at
Fort
Saskatchewan,
in
which
Sherritt
expended
the
proceeds
from
the
bonds,
and
it
was
payments
of
bond
interest
and
commitment
fee
"‘during
construction’
‘
in
those
years
that
Sherritt
capitalized.
It
will
be
useful,
I
think,
to
outline
the
circumstances
that
led
to
the
borrowing
of
money
by
Sherritt,
the
use
of
the
borrowed
money
together
with
other
funds
of
the
company,
the
payment
of
bond
interest
and
commitment
fee
and
the
allocation
and
treatment
of
the
interest
and
commitment
fee
by
the
company,
and
I
will
endeavour
to
give
the
substance
of
the
portions
of
the
evidence,
as
I
understand
it,
that
I
consider
to
be
the
more
important
and
useful
in
determining
the
issues
that
are
before
the
court
for
decision
in
these
appeals.
Sherritt
was
incorporated
in
1927
and
from
that
time
until
1951
was
a
relatively
small
mining
company.
It
operated
a
copper
and
zine
mine
at
Sherridon,
Manitoba,
but
suspended
operation
of
that
mine
in
September
1951,
following
exhaustion
of
the
ore
body.
In
the
years
1952,
1953
and
1954
the
company’s
only
business,
other
than
shutting
down
the
Sherridon
mine
and
doing
a
minor
amount
of
exploration,
was
its
Lynn
Lake
project.
In
1951
the
company
prepared
a
study
and
a
booklet
setting
forth
plans
for
its
Lynn
Lake
project,
the
estimated
costs
and
the
total
capital
expenditures
involved.
The
estimated
total
costs
were
$42,810,000.
Of
that
total
the
amount
to
be
expended
after
June
30,
1951,
was
$32,812,000.
The
company
planned
at
that
time
to
raise
$19,760,000
through
sale
of
first
mortgage
bonds.
This
study
and
booklet
formed
the
basis
of
discussions
between
Sherritt
and
J.
P.
Morgan
and
Co.
and
other
lending
companies,
and
led
to
the
subsequent
financing
agreements
and
sale
of
bonds.
The
companies
with
which
Sherritt
entered
into
the
financing
arrangements
were
the
Morgan
Co.,
Bankers
Trust
Company,
Newmont
Mining
Corporation,
Metropolitan
Life
Insurance
Company
and
other
companies.
Mr.
David
D.
Thomas,
President
of
Sherritt,
testified
that
the
financing
arrangements
started
in
the
fall
of
1951
and
that
an
oral
agreement
was
reached
that
the
lenders
were
committed
to
lend
the
agreed
amount
of
money
at
4
per
cent
per
annum
on
Series
A
bonds
and
at
434
per
cent
on
Series
B
bonds
as
of
January
1,
1952,
although
the
first
written
agreement
(Exhibit
2)
was
not
signed
until
June
13,
1952;
also
that
payment
of
a
commitment
fee
was
a
matter
of
discussion
from
the
first
time
the
parties
talked
and
there
was
oral
agreement
that
the
commitment
fee
would
commence
on
January
1,
1952.
The
agreement
(Exhibit
2)
provided
for
payment
of
the
commitment
fee
to
commence
from
that
date.
Mr.
Thomas
also
stated
that
other
possible
sources
of
funds
have
been
investigated
and
the
company
felt
that
they
were
less
attractive
to
the
shareholders
than
the
arrangements
made
with
Morgan
and
Co.
and
that
the
only
way
Sherritt
could
obtain
money
from
the
lenders
was
on
the
basis
of
the
conditions
set
forth
in
the
Mortgage
Indenture
that
was
entered
into
by
the
parties.
The
first
agreement
provided
for
the
authorization
by
Sherritt
of
$4,400,000
of
first
mortgage
bonds
Series
A,
and
an
issue
of
$17,600,000
of
first
mortgage
bonds
Series
B,
to
be
secured
by
a
mortgage.
The
Mortgage
Indenture,
dated
as
of
November
1,
1952,
provides
for
payments
to
Sherritt
by
Morgan
and
Co.,
as
trustee
for
the
bond
holders,
from
the
money
proceeds
of
the
bonds
upon
certain
conditions,
one
of
which
was
that
the
money
would
be
advanced
against
"‘bondable
expenditures’’
certified
by
Sherritt
as
having
been
spent
on
property,
plant
and
equipment
and
on
deferred
development
of
the
Lynn
Lake
project.
The
definition
of
‘‘bondable
expenditures’’
on
page
5
of
the
Mortgage
Indenture
(Exhibit
3)
is
in
part
as
follows:
The
term
“Bondable
Expenditures”
shall
mean
expenditures
charged
or
properly
chargeable
to
the
capital
accounts
of
the
Company
entitled
“Property,
Plant
and
Equipment”
and
“Deferred
Development
Expenditures—Lynn
Lake
Project”
or
similar
titles,
in
accordance
with
the
accounting
practices
followed
by
the
Company
in
the
preparation
of
its
balance
sheet
dated
December
31,
1951,
or
charged
or
properly
chargeable
to
other
capital
accounts
of
the
Company
in
accordance
with
generally
accepted
accounting
principles,
made
in
connection
with
the
acquisition
or
construction
by
the
Company
or
by
Laurie
of
property
as
part
of
the
Company’s
Program
.
.
.
Supplemental
Indentures
reduced
the
aggregate
amount
of
the
Series
A
and
B
bonds
to
$21,000,000
and
added
$6,000,000
Series
C
bonds.
The
procedure
for
taking
down
money
upon
proof
of
bondable
expenditures
was
the
same
for
the
Series
C
bonds
as
for
the
A
and
B
bonds.
The
commitment
fee
in
respect
of
Series
C
bonds
was
114
per
cent
per
annum
as
from
March
15,
1954.
Mr.
W.
A.
Johnson,
an
Underwriter
with
A.
E.
Ames
and
Company
Limited,
with
responsibilities
to
advise
and
aid
companies
in
securing
financing,
testified
as
an
expert
witness.
that
it
is
general
practice
for
institutional
lenders
to
ask
for
a
commitment
fee
on
mortgage
financing
for
a
natural
resource
development
and
large
construction
purposes;
that
the
majority
of
lenders
look
upon
the
commitment
fee
as
additional
yield
on
the
loan,
that
it
is
paid
on
an
amount
that
has
not
been
advanced
and
is
payable
to
the
lender
for
the
period
from
the
time
the
lender
commits
to
make
the
loan
until
the
loan
is
actually
made
;
and
that
the
commitment
fee
accrues
over
equal
periods
of
time
like
interest.
The
issuance
of
bonds
and
the
amounts
received
therefrom
by
Sherritt
are
shown
in
Exhibit
6
set
forth
next.
The contents of this table are not yet imported to Tax Interpretations.
The contents of this table are not yet imported to Tax Interpretations.
The
money
spent
by
Sherritt
in
its
Lynn
Lake
project
came
partly
from
the
proceeds
from
the
bonds
and
partly
from
other
sources.
Exhibit
7,
set
forth
next,
is
a
statement
of
the
source
and
use
of
funds
for
the
period
January
1,
1952,
to
December
31,
1954:
The contents of this table are not yet imported to Tax Interpretations.
The contents of this table are not yet imported to Tax Interpretations.
Exhibit
7
shows
funds
from
all
sources
in
the
years
1952,
1953
and
1954,
total
capital
expenditures
in
those
years
on
the
Lynn
Lake
mine
plant,
Laurie
River
power
plant
and
Fort
Saskatchewan
refinery,
and
deferred
development
expenditures
on
the
project.
(There
also
were
expenditures
prior
to
1952
but
they
are
not
included
in
the
exhibit.)
These
deferred
development
expenditures
were
said
by
Mr.
Thomas
to
be
the
pre-production
expenses
involved
in
bringing
the
mining
facility
into
production
and
included
the
sinking
of
the
mine
shafts,
underground
exploration,
test
milling
programs
to
find
out
whether
the
ore
could
be
put
into
the
form
of
a
concentrate,
metallurgical
research
work
done
in
developing
a
refining
process,
housing
loans
advanced
to
employees,
and
general
administration
expenses.
Mr.
Thomas
said
that
all
the
money
received
from
the
bonds
was
used
in
the
development
of
the
Lynn
Lake
project
and
was
applicable
to
the
property,
plant
and
equipment
account
and
to
deferred
development
expenditures.
Sherritt’s
accounts
were
kept
on
an
accrual
basis
of
accounting
which
showed
the
total
cumulative
monthly
investments
in
the
property
accounts,
the
fixed
assets
of
the
Lynn
Lake
project
at
its
three
locations,
plus
deferred
development
expenditures,
spent
or
accrued
from
January
1,
1952,
through
to
December
31,
1954,
regardless
of
the
source
of
the
funds
used.
Exhibit
10,
next,
is
a
statement
of
net
interest
and
commitfee
expenditures
in
the
years
1952,
1953
and
1954.
The contents of this table are not yet imported to Tax Interpretations.
Exhibit.
11,
set
forth
next,
shows
the
distribution
of
interest
and
commitment.
fee
made
by
Sherritt
in
January
1955,
and
the
interest
as
distributed
by
type.
(Note:
This
is
the
left
half
of
Exhibit
11)
The contents of this table are not yet imported to Tax Interpretations.
The
top
half
of
the
exhibit
shows
the
total
interest,
including
commitment
fee,
and
its
distribution
by
year
to
property,
plant
and
equipment,
deferred
development
and
operating
expense.
Mr.
Thomas
explained
that
in
the
case
of
the
Laurie
River
power
plant,
for
example,
it
was
completed
in
September
1952,
and
the
net
interest,
including
commitment
fee,
was
attributed
to
the
cumulative
monthly
investment,
i.e.,
to
the
capital
cost
of
the
plant
to
that
date,
but
that
from
the
end
of
September
1952,
to
the
end
of
1953
the
plant
was
used
to
supply
operating
or
development
power
to
the
mine
and
therefore
the
interest
attributable
to
the
power
plant
was
charged
against
deferred
development
expense
at
the
mine
as
a
cost
of
development
power,
and
when
at
the
end
of
1953
the
mine
began
to
produce
concentrate
the
interest
was
thereafter
charged
to
operating
account.
In
the
case
of
the
mine,
all
the
interest,
including
commitment
fee,
attributable
to
it
was
capitalized
and
until
the
end
of
1953
was
charged
against
property,
plant
and
equipment
or
to
deferred
development
expense,
but
at
the
end
of
1953
the
mine
was
operating
and
thereafter
the
interest
attributable
to
that
asset
was
charged
against
operating.
In
the
case
of
the
refinery,
interest
was
charged
against
it
until
it
was
completed
and
ready
for
operation
at
the
end
of
July
1954,
and
thereafter
was
charged
against
the
operations
of
the
company.
The
refinery
was
ready
for
operation,
as
stated,
at
the
end
of
July
1954,
and
after
that
date
all
the
interest
was
charged
against
the
operations
of
the
company.
The
bottom
half
of
Exhibit
11
shows
the
interest
and
commitment
fee
distribution
by
type.
This
analysis
was
not
made
until
1958,
following
a
communication
from
the
Department
of
National
Revenue
that
payments
of
commitment
fee
would
not
be
allowed
as
a
taxable
expense
for
income
tax
purposes.
At
that
time
the
company
broke
down
the
interest
expense
in
the
years
1952,
1958
and
1954
into
commitment
fee,
bond
interest,
interest
on
G.S.A.
advances
and
interest
earned,
and
separated
them
between
its
Lynn
Lake
plant,
Laurie
River
plant,
Fort
Saskatchewan
plant,
deferred
development
expense
and
operating
expense.
The
result
was
an
attribution
of
commitment
fee
as
follows:
$240,567.19
to
property,
plant
and
equipment
at
the
three
locations;
$110,491.84
to
deferred
development
expenditures;
and
$31,517.03
to
operating
expense.
(It
was
the
deductions
claimed
by
Sherritt
in
respect
of
the
first
two
amounts
that
the
Minister
disallowed.
)
Mr.
Thomas
gave
evidence
to
the
effect
that
Sherritt’s
funds
from
all
sources
were
co-mingled
in
the
company’s
bank
account
or
accounts
and
no
record
was
kept
as
the
money
was
being
spent
as
to
the
particular
source
of
the
money;
when
a
payment
of
interest
or
commitment
fee
was
made
it
was
not
at
that
time
allocated
to
or
identified
with
any
particular
project
or
particular
asset;
the
company
decided
to
charge
all
interest
and
commitment
fee
to
deferred
development
as
a
suspense
account
until
the
construction
period
was
completed
and
would
then
make
an
allocation
project
by
project
or
asset
by
asset;
the
allocation
made
in
January
1955,
was
for
accounting
purposes,
but
later
there
was
a
greater
breakdown
by
classes
of
assets;
the
allocation
was
not
made
on
the
basis
of
tracing
a
particular
asset
expenditure
to
a
particular
source
of
money,
and
in
allocating
the
bond
interest
and
commitment
fee
no
differentiation
was
made
between
them.
Exhibit
15
shows
the
company’s
allocation
to
capital
cost
classes
for
income
tax
purposes
of
the
net
interest
expense
that
was
capitalized
in
the
years
1952,
1953
and
1954.
In
the
case
of
Lynn
Lake
and
Laurie
River
the
expense
was
totally
allocated
to
Class
10,
the
only
tax
class;
at
Fort
Saskatchewan
it
was
allocated
to
the
appropriate
tax
class
on
the
basis
of
the
final
construction
value
at
the
end
of
1954.
The
commitment
fee
was
allocated
in
the
same
proportion
as
the
interest,
and
the
allocation
was
based
upon
the
total
money
invested
from
the
funds
of
the
company
from
all
sources.
Mr.
Thomas
also
indicated
that
although
the
attribution
of
interest
to
property
and
to
deferred
development
expense
was
made
in
January
1955,
an
issue
with
the
Department
of
National
Revenue
did
not
arise
in
respect
of
it
until
1958,
because
in
the
years
1952
to
1957,
inclusive,
Sherritt
had
nil
income
tax
assessments,
and
it
was
not
until
1958
that
the
company
had
an
assessment
from
which
it
could
make
an
appeal.
Two
chartered
accountants,
Mr.
John
R.
Barker
and
Mr.
Stephen
Elliott,
were
called
by
counsel
for
Sherritt
as
experts
in
accounting.
Mr.
Barker
expressed
his
opinion
that
Sherritt’s
treatment
of
payments
of
commitment
fee
and
the
company’s
capitalization
and
allocation
of
the
payments
of
interest
and
commitment
fee
between
depreciable
assets
and
development
expense
was
in
accordance
with
generally
accepted
accounting
principles
and
practice.
He
said
that
it
is
generally
accepted
accounting
practice
to
add
commitment
fee
and
interest
expended
during
a
construction
period
to
the
cost
of
the
construction,
and
that
in
a
mining
enterprise
a
similar
treatment
would
be
appropriate
in
the
case
of
development
expenses.
He
also
said
that
to
undertake
a
capital
construction
of
the
magnitude
that
Sherritt
did,
requires
the
bringing
together
of
three
factors,
labour,
materials
and
capital;
capital
had
to
be
raised
to
complete
the
construction,
and
the
interest
and
commitment
fee
incurred
during
the
construction
period
is
just
as
real
a
cost
of
that
construction
as
the
bricks
and
mortar;
and
capitalizing
or
adding
the
interest
and
commitment
fee
to
the
cost
of
construction
establishes
a
base
for
depreciation
in
which
the
total
capital
cost
is
charged
to
the
operations
of
the
company
over
the
useful
life
of
the
plant,
thereby
bringing
about
a
proper
matching
of
expenses
with
revenues
during
the
operating
life
of
the
company;
also
that
if
interest
during
construction
is
not
capitalized
it
must
be
charged
to
operations
and
thereby
create
a
loss
during
construction,
with
the
result
that
the
company
is
operating
at
a
loss
before
it
has
begun
active
operation,
which
not
only
does
not
represent
proper
matching
of
the
total
cost
of
the
project
over
its,
useful
life,
i.e.,
the
adequate
matching
of
costs
with
revenues,
because
the
period
during
which
the
money
is
expended
does
not
coincide
with
the
periods
during
which
the
benefit
of
that
expense
is
going
to
be
realized,
but
is
also
unfair
to
present
shareholders
in
that
for
them
there
would
be
an
expense
and
a
loss
whereas
for
future
shareholders
there
would
be
a
benefit
because
they
would
not
have
to
bear
that
expense.
Mr.
Barker
also
agreed
that
there
are
a
number
of
factors
and
variable
to
be
considered
in
deciding
whether
or
not
to
capitalize
interest
during
construction
and
these
factors
include
income
from
other
operations
of
a
company,
the
significance
and
size
of
the
interest
expense,
the
co-mingling
of
funds
and
their
segregation,
the
source
of
the
funds
and
the
purpose
for
which
they
are
used,
and
the
length
of
the
period
of
construction.
He
agreed
also
that
there
is
some
difference
of
opinion
as
to
whether
interest
during
construction
should
be
capitalized
and
there
is
also
a
view
held
that
interest
is
a
money
cost
or
a
financing
cost
and
should
either
not
be
capitalized
at
all
or,
if
capitalized,
should
not
be
charged
to
a
particular
asset
but
to
an
intangible
account
and
written
off
over
a
period
of
time;
also
that
it
is
difficult
to
find
anything
specific
on
commitment
fee
as
such,
and
his
opinion
in
respect
of
such
fee
expense
is
related
to
his
experience
with
interest
and
other
types
of
expense
incidental
to
a
particular
project
construction.
In
Mr.
Barker’s
opinion
it
would
have
been
improper
for
Sherritt
to
isolate
the
interest
during
construction,
take
it
out
of
development
expenses
and
charge
it
as
an
operating
loss.
Mr.
Elliott
gave
his
opinion
that
interest
paid
during
the
construction
period
with
respect
to
funds
borrowed
for
construction,
and
commitment
fees
paid
for
the
availability
of
those
funds,
are
properly
capitalizable
as
part
of
the
cost
of
the
particular
project
for
which
the
funds
were
expended;
that
it
is
accepted
and
proper
accounting
to
attribute
this
expense
to
the
cost
of
physical
assets
constructed;
and
that
the
commitment
fee
is
paid
only
so
long
as
the
funds
are
not
borrowed,
only
so
long
as
the
project
is
incomplete,
and
it
is
inherently
a
part
of
the
cost
of
construction.
He
said
that
the
generally
accepted
accounting
principle,
described
as
matching
costs
with
revenue,
is
that
in
order
to
measure
the
income
of
a
period
the
revenue
of
the
period
should
be
charged
with
the
costs
applicable
to
that
period
;
if
the
cost
of
a
service
that
will
be
derived
from
a
capital
asset
in
the
future
is
charged
off
against
income
during
a
current
period
the
income
of
the
current
period
would
be
under-stated
and,
conversely,
the
income
of
the
future
period
would
be
overstated
by
reason
of
the
fact
that
there
would
be
no
charge
against
the
revenue
of
the
future
period
for
the
costs
of
the
service
rendered
by
that
capital
asset
in
that
future
period;
and
that
a
determinative
factor
in
deciding
at
what
time
the
capitalization
of
interest
should
cease
is
that
the
property
be
in
a
condition
to
be
utilized
to
earn
revenue.
Mr.
Elliott
also
gave
his
opinion
that
in
Sherritt’s
case
the
funds
were
borrowed
for
the
Lynn
Lake
project
and
the
interest
and
commitment
fee
paid
during
the
construction
period
were
properly
attributable
to
that
project
and
were
part
of
the
cost
or
expense
of
the
development
work
or
the
depreciable
assets
and
should
be
attributed
to
these
accounts;
the
commitment
fee
should
as
a
matter
of
principle
be
allocated
along
with
the
interest
and
proportionately
thereto
and
that
it
is
fair
and
reasonable
to
allocate
the
interest
and
commitment
fee
to
the
investment
in
the
particular
projects
for
which
the
funds
were
borrowed.
Mr.
Elliott
also
said
that
the
practice
of
capitalizing
interest
during
construction
started
with
utilities
but
has
carried
over
into
other
types
of
companies
and
is
accepted
and
preferred
accounting
practice
in
industrial
companies
as
well
as
in
utilities.
Professor
W.
B.
Coutts,
a
chartered
accountant
and
Professor
of
Accounting
at
the
School
of
Business
in
the
University
of
Toronto,
was
called
as
an
expert
by
counsel
for
the
Minister.
His
opinion
was
that
capitalization
of
interest
during
construction
as
part.
of
the
cost
of
the
assets
acquired
is
not
preferable
treatment,
because
it
involves
too
great
a
departure
from
the
usual
accounting
basis
of
valuing
or
attaching
a
dollar
figure
to
fixed
assets
in
the
accounts,
which
normally
is
restricted
to
costs
directly
related
to
the
assets,
interest
is
usually
regarded
as
a
financing
cost,
part
of
the
cost
of
capital
treated
as
a
cost
in
the
period
in
which
it
is
incurred;
the
capitalization
of
interest
during
construction
leads
to
inconsistencies
within
and
between
companies,
such
as
the
fact
that
an
asset
acquired
by
borrowing
will
show
a
different
cost
from
the
cost
of
an
asset
acquired
out
of
equity
funds,
and
the
fact
that
an
asset
acquired
at
a
time
when
the
company
is
not
engaged
in
other
activities
might
be
capitalized
more
readily
than
in
the
case
of
a
company
engaged
in
other
activities;
and
when
interest
is
capitalized
it
produces
a
cost
figure
that
is
not
really
consistent
or
in
conformity
with
the
usual
way
of
valuing
fixed
assets.
As
to
commitment
fees,
his
Opinion
was
that
they
are
even
less.
justifiably
included
in
the
capital
asset
costs
than
interest
is—such
fees
seem
to
be
a
cost
of
not
using
capital
in
the
asset
and
it
is
difficult
to
find
any
logical
relationship
between
the
amount
of
the
commitment
fee
and
the
amount
of
any
subsequent
investment
in
fixed
assets.
As
to
the
allocation
of
commitment
fee
expenses
to
particular
assets,
he
could
see
no
direct
relationship
between
the
fee
and
the
amount
invested
in
the
asset
at
a
particular
time.
Counsel
for
Sherritt
showed
Professor
Coutts
excerpts
from
balance
sheets
of
a
number
of
companies
(Exhibit
15)
which
indicate
that
interest
during
construction
has
been
capitalized.
Professor
Coutts
agreed
that
the
practice
is
more
prevalent
now
that
it
was
ten
years
ago
and
also
that
since
1956
his
work
has
been
in
the
academic
world
and
since
that
year
he
has
not
had
any
close
connection
with
actual
practice.
The
three
accounting
experts
were
questioned
at
some
length
in
exploration
of
their
opinion
and
Professor
Coutts
commented
on
extracts
from
books
on
accounting
to
which
his
attention
was
drawn
by
counsel
for
Sherritt.
The
evidence
satisfies
me
that
Sherritt
found
it
necessary
to
borrow,
and
did
borrow,
through
the
bond
financing
described
in
the
evidence,
money
that
it
needed
to
complete
its
Lynn
Lake
project,
which
consisted
of
its
Lynn
Lake
mine,
Laurie
River
power
plant,
Fort
Saskatchewan
refinery
and
related
facilities,
all
of
which
were
interrelated
with
the
objective
of
mining
ore
from
the
mine
and.
converting
it
into
concentrates
from
which
saleable
metals
would
be
produced;
that
the
money
was
borrowed
exclusively
for
that
project
and
was
expended
on
it
in
the
years
1952,
1953
and
1954;
that
payment
of
the
commitment
fee,
in
addition
to
interest
on
the
bonds,
was
a
requirement
of
the
borrowing
and
a
condition
upon
which
the
money
was
lent;
and
that
the
payments
of
bond
interest
and
commitment
fee
were
made
and
allocated
as
reported
by
Sherritt.
In
the
Notice
of
Appeal
Sherritt
suggested
that
the
commitment
fee
is
interest
on
borrowed
money
within
the
meaning
of
Section
11(1)
(c)
of
the
Income
Tax
Act.
That
suggestion
was
not
made
at
the
hearing
by
counsel
for
Sherritt,
who
put
Sherritt
‘s
case
on
other
grounds.
My
conclusion
is
that
the
commitment
fee
is
not
interest.
The
submission
of
counsel
for
Sherritt
was
substantially
as
follows
:
1.
In
the
absence
of
definition
in
the
Income
Tax
Act
of
"‘ex-
pense’’
or
"‘cost’’,
these
words
are
to
be
construed
in
their
normal
and
ordinary
meaning
in
accordance
with
accepted
commercial
principles
and
practice.
2.
It
is
a
fundamental
principle
of
income
tax
law
that
expenditures
are
required
to
be
attributed
to
an
appropriate
period
in
order
to
compute
accurately
the
income
of
each
period.
3.
So-called
financial
costs,
including
interest
and
commitment
fee,
expended
in
a
construction
period
are,
in
accordance
with
generally
accepted
accounting
principles
and
practice,
properly
attributed
to
the
capital
cost
of
the
fixed
assets
constructed,
where
the
borrowing
was
done
for
the
purpose
of
the
construction
;
this
treatment
is
based
on
the
necessity
to
defer
such
costs
over
the
useful
life
of
the
assets
in
order
to
give
a
fair
and
accurate
statement
of
the
income
of
the
taxpayer
in
each
of
the
periods
in
which
the
assets
are
used
to
produce
revenue.
4.
The
amounts
of
commitment
fee
attributed
and
allocated
by
Sherritt
in
respect
of
the
construction
period
to
the
capital
cost
of
depreciable
assets
are
part
of
the
capital
cost
of
those
assets
within
the
meaning
of
Section
11(1)
(a)
of
the
Act
and
Regulations.
5.
The
amounts
of
commitment
fee
attributed
and
allocated
by
Sherritt
to
exploration
and
development
expenses
are
prospecting,
exploration
and
development
expenses
incurred
by
Sherritt
in
searching
for
minerals
in
Canada
in
the
years
1952,
1953
and
1954
within
the
meaning
of
Section
83A(2)
and
(3)
of
the
Act,
6.
The
payment
of
commitment
fee
is,
from
the
point
of
view
of
problems
raised
by
this
case,
of
the
same
character
as
a
payment
of
interest
and
there
is
no
ground
for
treating
commitment
fee
expense
differently
from
interest
expense
during
the
construction
period.
1.
The
method
of
allocation
of
the
commitment
fee
followed
by
Sherritt
on
the
basis
of
the
pro
rata
amount
of
capital
investment
in
the
assets
is
approved
by
accounting
practice
and
is
fair
and
reasonable.
8.
Sections
11(1)
(a)
and
83A
and
Section
1100
of
the
Regulations
permit
the
deductions
claimed
by
Sherritt.
The
main
points
of
argument
submitted
by
counsel
for
the
Minister
were
as
follows:
1.
Sherritt
has
not
established
as
a
fact
that
the
commitment
fees
are
part
of
the
capital
cost
to
it
of
the
assets
to
which
it
seeks
to
attribute
them
or
that
they
are
prospecting,
exploration
and
development
expenses
in
searching
for
minerals
within
the
meaning
of
Section
83A
of
the
Act.
2.
Neither
interest
nor
commitment
fees
may,
as
a
matter
of
law,
be
treated
under
the
Act
as
part
of
the
capital
cost
of
assets
or
prospecting,
exploration
and
development
expenses
within
the
meaning
of
Section
83A.
3.
Interest
and
commitment
fees
are
costs
related
to
the
raising
of
capital
but
not
a
cost
of
the
assets
acquired.
Commitment
fees
may
perhaps
now
be
deducted,
in
the
year
in
which
they
are
incurred,
under
Section
11(1)
(cb)
which
covers
general
expenses
in
connection
with
raising
capital,
but
that
section
was
not
enacted
until
1955
and
was
not
in
force
or
applicable
to
the
years
1952,
1953
and
1954
in
which
the
fees
were
paid.
The
deduction
in
those
years
of
commitment
fees
was
prohibited
by
Section
12(1)
(b)
and
they
cannot
be
deducted
through
the
indirect
route
of
Sections
11(1)
(a)
and
83A.
If
interest
and
commitment
fees
can
be
capitalized
as
part
of
the
capital
cost
of
assets
and
deducted
under
Section
11(1)
(a),
then
Sections
11(1)
(e)
and
11(1)
(cb)
are
superfluous.
4.
The
legally
incorrect
result
of
capitalizing
interest
on
borrowed
capital
is
that
it
is
deducted
indirectly
through
the
capital
cost
allowance
route
of
Section
11(1)
(a)
or
the
route
of
Section
83A;
there
is
only
one
way
of
deducting
interest
and
that
is
under
Section
11(1)
(c)
in
the
year
in
which
it
is
paid
or
incurred.
5.
Capital
cost
to
a
taxpayer
of
depreciable
property
is
the
price
he
pays
for
it,
not
the
price
he
pays
to
obtain
the
funds;
it
is
plain
from
an
examination
of
Section
20
of
the
Act
that
the
Act
does
not
contemplate
inclusion
of
interest
in
the
capital
cost
to
the
taxpayer.
6.
Capitalizing
interest
during
construction
is
not
consistent
with
the
scheme
of
Part
XI
of
the
Regulations,
which
sets
out
generally
rules
for
deducting
capital
cost
allowance.
7.
The
scheme
of
Section
838A
is
inconsistent
with
the
theory
that
costs.
related
to
the
raising
of
capital
should
be
treated
as
exploration
and
development
expense.
8.
The
capitalization
of
interest
paid
or
accrued
during
a
construction
period
depends
on
a
large
number
of
variables,
is
illogical
and
inconsistent,
results
in
unfairness
as
between
taxpayers,
and
should
be
rejected
as
a
sound
basis
for
determining
capital
cost
or
exploration
and
development
expenses.
There
is
no
legal
or
logical
basis
for
treating
interest
incurred
during
a
construction
period
as
part
of
the
capital
cost
of
assets,
and
treating
interest
subsequent
to
the
construction
period
as
a
current
deduction.
9.
Sherritt’s
monies
from
all
sources
went
into
a
co-mingled
fund
and
were
paid
out
without
identification
as
to
source.
10.
The
unadvanced
amounts
in
respect
of
which
the
commitment
fee
was
paid
were
not
earmarked
or
segregated
for
any
particular
purpose.
11.
When
a
payment
of
commitment
fee
was
made,
it
was
not
identified
with
any
particular
asset
or
activity.
12.
The
percentage
allocation
made
by
Sherritt
was
notional,
retroactive
and
hypothetical
and
based
on
total
cumulative
monthly
investment
from
all
sources
and
not
on
any
particular
attribution
to
source.
13.
The
allocation
of
commitment
fee
follows
the
allocation
of
interest,
i.e.,
it
is
in
the
same
proportion,
and
does
not
take
into
account
the
difference
between
interest
and
commitment
fee,
the
former
being
based
on
the
amount
of
capital
borrowed
and
the
latter
on
the
amount
that
had
not
been
borrowed.
Counsel
for
Sherritt
referred
to
the
following
cases
in
support
of
his
argument
:
Whimster
&
Co.
v.
C.I.R.,
12
T.C.
813
;
Russell
v.
Town
and
Country
Bank,
Limited,
13
App.
Cas.
418;
Hinds
v.
Buenos
Ayres
Grand
National
Tramways
Company,
Limited,
[1906]
2
Ch.
654:
Chancery
Lane
Safe
Deposit
and
Office
Co.
Lid.
v.
C.I.R.,
43
?
T.C.
83;
Bardwell
v.
Sheffield
Waterworks
Company,
L.R.
14
Eq.
517;
Lions
Equipment
Limited
v.
M.N.R.,
34
Tax
A.B.C.
221
;
Dominion
Taxicab
Association
v.
M.N.R.,
[1954]
8.C.R.
82;
[1954]
C.T.C.
34;
Robert
Addie
&
Sons
Collieries
Limited
v.
C.I.R.,
8
T.C.
671.
Counsel
for
the
Minister
referred
to
the
following
cases
in
support
of
his
argument:
Gunnar
Mining
Limited
v.
M.N.R.,
[1965]
C.T.C.
387
:
(affirmed)
[1968]
C.T.C.
22;
Imperial
Oil
Limited
v.
M.N.R.,
[1947]
C.T.C.
353;
Trapp
v.
M.N.R.,
[1946]
C.T.C.
30;
M.N.R.
v.
Anaconda
American
Brass
Ltd.,
[1956]
A.C.
85;
Montreal
Coke
&
Manufacturing
Company
v.
M.N.R.,
[1942]
C.T.C.
1
(S.C.C.)
:
(affirmed)
[1944]
C.T.C.
94
(P.C.)
;
Madden
v.
Nelson
and
Fort
Sheppard
Railway
Company,
[1899]
A.C.
626;
Re
Farm
Security
Act,
[1947]
S.C.R.
394;
Riches
v.
Westminster
Bank
Limited,
[1947]
A.C.
390;
Halsbury’s
Laws
of
England,
3rd
ed.,
Vol.
27,
p.
7
;
The
Attorney-General
for
Ontario
v.
Barfried
Enterprises
Ltd.,
[1963]
8.C.R.
570;
42
D.L.R.
(2d)
137;
Canada
Safeway
Limited
v.
M.N.R.,
[1957]
C.T.C.
335;
Cree
Enterprises
Ltd.
v.
M.N.R.,
[1966]
C.T.C.
166;
Corporation
of
Birmingham
v.
Barnes,
[1935]
A.C.
292;
Fraser
v.
Commissioner
of
Internal
Revenue
(Circuit
Court
of
Appeals,
Second
Circuit),
25
F.
(2d)
653;
Hays
v.
Gauley
Mountain
Coal
Company,
247
U.S.
189
;
Georgia
Cypress
Co.
v.
South
Carolina
Tax
Commission,
22
S.E.
2d
419.
The
question
of
deductions
claimed
by
Sherritt
and
allowed
by
the
Minister
in
respect
of
bond
interest
payments
during
the
construction
period
is
not
directly
in
issue
for
determination
in
these
appeals,
but
Sherritt’s
claim
for
deduction
of
commitment
fee
payments
during
the
construction
period
is
based
on
the
theory
that
inclusion
of
payments
of
interest
during
construction
as
part
of
the
cost
of
the
property
acquired
with
the
borrowed
money
is
in
accordance
with
generally
accepted
business
and
commercial
principles
and
that
such
interest
in
Sherritt’s
case
may
be
deducted
under
Section
11(1)
(a)
as
part
of
the
capital
eost
to
the
taxpayer
of
depreciable
property
and
under
Section
83A(2)
and
(3)
as
exploration
and
development
expenses
incurred
by
the
taxpayer
in
searching
for
minerals
in
Canada.
Consequently
that
theory
must
be
considered.
However,
even
if
it
is
found
as
a
fact,
as
counsel
for
Sherritt
submits
it
should
be,
that
Sherritt’s
treatment
of
payments
of
bond
interest
and
commitment
fee
during
construction
was
in
accordance
with
generally
accepted
accountancy
principles
and
that
the
method
followed
was
an
appropriate
method
of
accounting
for
Sherritt,
that
is
not
conclusive
of
the
question
the
court
has
to
decide,
for
the
prescriptions
of
the
Income
Tax
Act
prevail.
The
deductions
that
are
permitted
or
prohibited,
as
the
case
may
be,
in
Sections
11,
12
and
83A
are
certain
deductions
made
in
computing
income.
The
word
income
is
defined
in
Section
4
of
the
Act
as
follows:
4.
Subject
to
the
other
provisions
of
this
Part,
income
for
a
taxation
year
from
a
business
or
property
is
the
profit
therefrom
for
the
year.
This
leads
to
consideration
of
what
is
meant
by
profit
for
the
year.
In
M.N.R.
v.
Anaconda
American
Brass
Ltd.,
[1956]
A.C.
85;
[1955]
C.T.C.
811
the
Privy
Council
said
at
pp.
100,
101
[319]
:
.
.
.
The
income
tax
law
of
Canada,
as
of
the
United
Kingdom,
is
built
upon
the
foundations
described
by
Lord
Clyde
in
Whimster
&
Co.
v.:
C.I.R.
(1925),
12
T.C.
813,
823,
in
a
passage
cited
by
the
Chief
Justice
which
may
be
here
repeated.
“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.”
.
.
.
In
Canadian
General
Electric
Company
v.
M.N.R.,
[1962]
S.C.R,
3;
[1961]
C.T.C.
512
Martland,
J.
said
at
p.
12
[520]
:
In
considering
the
validity
of
this
conclusion,
reference
may
first
be
made
to
some
general
principles
which
have
been
stated
regarding
the
meaning
of
the
word
“profit”
and
the
method
of
its
determination.
Viscount
Maugham,
in
Lowry
(Inspector
of
Taxes)
v.
Consolidated
African
Selection
Trust,
Ltd.,
[1940]
A.C.
648
at
661;
2
All
j.:
E.R.
545,
said:
“It
is
well
settled
that
profits
and
gains
must
be
ascertained
on
ordinary
commercial
principles,
and
this
fact
must
not
be
forgotten.”
In
this
Court,
in
Dominion
Taxicab
Association
v.
M.N.R.,
[1954]
S.C.R.
82
at
85;
[1954]
C.T.C.
34
at
37,
Cartwright,
J.
said:
“The
expression
‘profit’
is
not
defined
in
the
Act.
It
has
not
a
technical
meaning
and
whether
or
not
the
sum
in
question
constitutes
profit
must
be
determined
on
ordinary
commercial
principles
unless
the
provisions
of
the
Income
Tax
Act
require
a
departure
from
such
principles.”
In
British
Columbia
Electric
Railway
Company
Limited
:
V.
M.N.R.,
[1958]
S.C.R.
133;
[1958]
C.T.C.
21
Abbott,
J.
said
at
p.
137
[31]
:
Since
the
main
purpose
of
every
business
undertaking
is
presumably
to
make
a
profit,
any
expenditure
made
“for
the
purpose
of
gaining
or
producing
income”
comes
within
the
terms
of
Section
12(1)
(a)
whether
it
be
classified
as
an
income
expense
or
as
a
capital
outlay.
Once
it
is
determined
that
a
particular
expenditure
is
one
made
for
the
purpose
of
gaining
or
producing
income,
in
order
to
compute
income
tax
liability
it
must
next
be
ascertained
whether
such
disbursement
is
an
income
expense
or
a
capital
outlay.
The
principle
underlying
such
a
distinction
is,
of
course,
that
since
for
tax
purposes
income
is
determined
on
an
annual
basis,
an
income
expense
is
one
incurred
to
earn
the
income
of
the
particular
year
in
which
it
is
made
and
should
be
allowed
as
a
deduction
from
gross
income
in
that
year.
Most
capital
outlays
on
the
other
hand
may
be
amortized
or
written
off
over
a
period
of
years
depending
upon
whether
or
not
the
asset
in
respect
of
which
the
outlay
is
made
is
one
coming
within
the
capital
cost
allowance
regulations
made
under
Section
11(1)
(a)
of
the
Income
Tax
Act.
I
am
satisfied
that
at
least
where
the
amount
is
significant
in
relation
to
the
business
of
a
company,
it
is
in
accordance
with
generally
accepted
business
and
commercial
principles
to
charge,
as
a
cost
of
construction,
payments
of
interest
in
respect:
of
the
construction
period
on
borrowed
money
expended
by
the
company
for
such
construction
and
to
write
such
payments
off
over
a
period
of
years.
The
practice
of
doing
so
is
not
as
common
outside
the
public
utility
field
as
within
that
field
but
it
has
extended
to
companies
outside
that
field.
Having
reached
this
conclusion,
it
is
necessary
to
ask
whether
interest
expense
of
this
character
may
be
deducted
for
income
tax
purposes
in
those
years
in
which
it
is
written
off.
I
think
there
is
no
doubt
that
the
interest
is
a
capital
outlay,
the
deduction
of
which
in
computing
income
for
a
taxation
year,
is
prohibited
by
Section
12(1)
(b)
unless
its
deduction
is
expressly
permitted
by
some
other
provision
of
the
Act.
Sherritt’s
case
is
put
on
the
basis
that
Sections
11(1)
(a)
and
83A(2)
and
(3)
permit
deductions
of
amounts
in
the
computation
of
which
interest
is
a
factor.
This
leads
to
consideration,
firstly,
whether
such
interest
is
part
of
the
cost
of
the
assets
acquired
by
the
taxpayer
with
borrowed
capital
and,
secondly,
whether
it
is
part
of
a
capital
cost
within
Section
11(1)
(a).
Counsel
for
Sherritt
cited
a
decision
of
the
House
of
Lords
in
1965,
Chancery
Lane
Safe
Deposit
and
Offices
Co.
Ltd.
v.
Commissioners
of
Inland
Revenue,
43
T.C.
83,
from
which
the
following
extracts
are
quoted:
Lord
Pearson,
pp.
128
and
129
:
My
Lords,
the
Appellant
Company
carries
on
in
the
basement
of
its
buildings
in
Chancery
Lane
a
safe
deposit
business,
and
lets
the
upper
parts
of
the
building
to
tenants.
Most
of
the
upper
parts
were
destroyed
by
enemy
action
in
the
years
1940
and
1941.
Building
operations
for
rebuilding
the
upper
parts
and
effecting
some
new
construction
were
carried
out
in
the
period
from
1949
to
1958.
For
the
purpose
of
financing
the
building
operations
the
Company
borrowed
large
sums
on
mortgage
in
the
years
1954
to
1956
and
repayment
was
made
in
the
years
1958
to
1961.
In
the
meantime
interest
was
paid
on
the
sums
outstanding
and
secured
by
the
mortgages.
The
Company
consulted
its
auditors
as
to
the
proper
treatment
of
the
mortgage
interest
in
its
accounts.
The
auditors
advised
the
Company
that,
in
order
to
give
a
true
and
fair
view
of
the
Company’s
affairs
and
in
particular
to
bring
out
the
cost
of
the
building
operations,
and
in
accordance
with
general
accountancy
practice,
it
was
proper
to
charge
to
capital
the
cost
of
finance
during
the
period
of
construction
in
cases
where
the
outlay
was
substantial
in
relation
to
the
size
of
the
Company.
This
was
found
by
the
Special
Commissioners
to
be
a
proper
method
for
accounting
purposes,
and
it
was
adopted
by
the
Company.
A
calculation
was
made
for
each
of
the
relevant
years
in
order
to
arrive
at
the
correct
proportion
of
the
mortgage
interest
to
be
charged
to
capital
in
the
Company’s
accounts
in
that
year.
Lord
Morris,
p.
III
:
In
the
year
1954-55
the
Company
paid
£3,260
in
mortgage
interest;
in
the
year
1955-56
the
amount
they
paid
was
£11,324;
in
the
year
1956-57
it
was
£26,536;
in
the
year
1957-58
it
was
£29,149;
in
the
year
1958-59
it
was
£28,879.
In
the
years
to
which
I
have
referred
the
Company
decided
to
charge
part
of
those
sums
to
capital.
Their
decision
was
deliberate
and
calculated.
It
was
supported
by
the
reasoning,
the
soundness
of
which
has
not
been
challenged,
that
during
the
period
of
construction,
when
the
money
being
spent
was
substantial
in
relation
to
the
size
of
the
Company,
it
was
proper
to
make
the
cost
of
finance
a
charge
to
capital.
The
proportion
of
the
mortgage
interest
was
so
to
be
charged
to
capital
was
carefully
calculated
on
the
basis
of
the
proportion
which
actual
rents
received
bore
to
the
estimated
amount
of
the
rents
that
might
be
obtained
when
the
buildings
were
completed.
By
so
charging
to
capital
it
was
considered
that
a
true
and
fair
view
of
the
Company’s
affairs
and
of
the
capital
cost
of
the
rebuilding
and
of
the
erection
of
the
new
buildings
would
be
given.
Lord
Upjohn,
p.
119:
My
Lords,
when
the
Appellants
wanted
to
rebuild
their
safe
deposit
premises
in
Chancery
Lane,
which
had
been
damaged
in
the
war,
they
decided
to
do
so
by
financing
it
on
borrowed
money.
They
had,
of
course,
to
pay
interest
on
it,
and
they
were
advised
by
their
accountants
that
it
would
be
proper
to
treat
part
of
that
interest
as
attributable
to
capital
expenditure.
That
was
plainly
right
and
is
not
in
dispute;
the
cost
of
hiring
money
to
rebuild
a
house
is
just
as
much
a
capital
cost
as
the
cost
of
hiring
labour
to
do
the
rebuilding.
So,
in
their
company
accounts
issued
to
shareholders
for
the
relevant
years,
they
debited
part
of
the
interest
on
the
borrowed
money
against
their
profit
and
loss
account,
in
the
usual
way,
and
part
to
capital
account.
This
meant,
of
course,
that
the
profit
and
loss
account
was
not
as
diminished
as
it
would
have
been
had
the
whole
been
so
debited.
Counsel
for
Sherritt
also
cited
the
decision
of
Warrington,
J.
in
Hinds
v.
Buenos
Ayres
Grand
National
Tramways
Company,
Limited,
[1906]
2
Ch.
654
from
which
I
quote:
The
Buenos
Ayres
Grand
National
Tramways
Company,
Limited,
have
issued
certain
debentures
the
interest
on
which
is
payable
out
of
the
profits
of
each
year
and
the
profits
only.
The
question
which
the
Court
has
to
determine
is
whether
the
company
are
bound
by
law
to
charge
against
the
profits
of
the
year
interest
on
money
which
has
been
borrowed
expressly
for
the
purpose
of
what
I
may
call
construction.
It
is
not
literally
construction—it
is
the
conversion
of
their
horse
line
into
an
electrical
traction
line,
but
for
practical
purposes
it
is
the
same
thing
as
money
borrowed
for
the
purposes
of
construction.
The
directors
propose,
unless
they
are
so
bound,
to
charge
during
the
period
of
construction
as
part
of
the
expenses
of
constructing
each
mile
of
the
new
line
not
only
the
money
actually
expended
in
paying
for
that
construction,
but
the
interest—the
proportionate
part
of
the
interest—on
the
money
which
they
have
borrowed.
Is
there
anything
that
renders
it
incumbent
upon
the
company
to
charge
that
interest
to
the
revenue
account?
In
the
first
place,
it
is
not
contended
that
there
is
anything
in
any
of
the
Companies
Acts
which
in
terms
compels
the
company
so
to
charge
this
interest.
Neither
is
there
any
contractual
stipulation
to
that
effect
in
the
documents
which
regulate
the
constitution
of
this
company.
The
question
therefore
is,
“Is
there,
independently
of
statute,
or
independently
of
contractual
stipulations
affecting
this
company,
any
general
rule
of,
law
which
compels
a
company
to
charge
interest
on
money
borrowed
for
the
purposes
of
construction
against
revenue,
and
prohibits
it
from
charging
that
interest,
during
construction,
to
capital
account?”
That
really
is
the
question
which
I
have
to
decide.
In
my
opinion
there
is
no
such
principle
of
law.
I
think
the
authorities
establish
that
the
principle
which
regulates
all
these
questions
is
that
which
is
expressed
by
Lord
Macnaghten
in
the
case
of
Jamaica
Ry.
Co.
v.
Attorney-General
of
Jamaica
([1893]
A.C.
127,
186).
He
says
in
reference
to
expenditure,
which
prima
facie
in
that
particular
case
was
income
expenditure:
“Nor
is
every
item
of
expenditure
necessarily
to
be
debited
wholly
against
the
income
of
the
period
in
which
it
occurs.
It
may
be
fair
and
proper
to
spread
some
items
over
a
longer
time.”
.
.
.
.
.
.
In
considering
the
accounts
of
a
company
the
only
principle
by
which
the
Court
can
be
guided—of
course
unless
there
are
some
express
words,
express
provisions,
or
express
stipulations
on
the
subject—is
the
consideration
what
a
commercial
man,
acting
fairly
and
honestly
in
the
conduct
of
his
business,
would
consider
the
proper
thing
to
do.
Now,
I
think
that
that
is
illustrated
also
by
that
case
of
Bloxam
v.
Metropolitan
Ry.
Co.
(L.R.
3
Ch.
337).
In
that
case
the
question
which
I
have
to
determine
directly
arose.
Wood,
V.-C.
thought
that
the
interest
on
borrowed
money
ought
clearly
to
be
charged
against
revenue;
but
the
matter
came
before
the
Appeal
Court,
and
Lord
Chelmsford,
L.C.
expressed
the
gravest
doubt
without
expressly
dissenting
as
to
whether
there
was
any
such
stringent
rule
as
the
Vice-Chancellor
had
thought.
It
is
impossible
to
read
the
judgment
of
Lord
Chelmsford
without
seeing
(although
he
carefully
guarded
himself
against
expressly
dissenting)
what
his
views
were.
In
a
subsequent
case,
Bardwell
v.
Sheffield
Waterworks
Co.
(L.R.
14
Eq.
517),
Malins
,V.-C.
allowed
the
interest
on
money
borrowed
for
the
purpose
of
capital
expenditure
during
construction
to
be
added
to
the
amount
expended
and
to
be
treated
as
a
capital
charge.
That
is
how
the
authorities
stand.
Now,
what
is
it
that
the
company
are
really
proposing
to
do?
They
are
creating
a
capital
asset
by
means
of
which
they
will
hereafter
earn,
or
they
hope
to
earn,
profits
for
the
company.
They
are
not
simply
employing
contractors
to
find
the
money
and
do
the
work.
They
are
finding
the
money
themselves,
and
they
find
the
money
by
borrowing
it.
What
does
each
mile
of
line
cost
them
under
these
circumstances—what
is
it
that
they
expend
in
constructing
each
mile
of
line,
taking
the
amount
of
the
borrowed
money
expended
on
that
line
to
be
£10,000,
that
being
the
company’s
estimate?
The
money
is
borrowed
for
that
particular
purpose—the
£10,000.
They
have
no
pay
interest
on
that
£10,000
during
the
period
that
construction
is
taking
place.
In
my
opinion
that
asset
which
they
are
so
constructing
costs
them
not
only
the
£10,000,
but
the
£10,000
plus
the
amount
of
interest
during
that
period
of
construction;
and
that
is
what
they
are
out
of
pocket
during
the
construction
of
that
mile
of
line.
Now,
it
seems
to
me
that
the
company
are
entitled—I
do
not
say
that
they
are
bound
to
do
it—if
they
think
fit
to
charge
in
their
accounts
as
the
cost
of
that
mile
of
line
not
only
the
£10,000,
but
the
£10,000
and
the
interest
on
it
during
the
period
of
construction.
Counsel
for
the
Minister
cited
several
decisions
of
courts
in
the
United
States
to
the
effect
that
the
cost
of
property
is
the
price
paid
for
it
at
the
time
of
its
acquisition
and
that
interest
upon
the
sum
invested
or
borrowed
is
not
part
of
such
cost.
Fraser
v.
Commissioner
of
Internal
Revenue,
25
F.
(2d)
658.
On
the
question
whether
interest
on
borrowed
money
could
be
treated
as
part
of
the
cost
of
real
property
for
the
purposes
of
income
tax
the
court
said
at
p.
655
:
Again,
at
least
as
to
interest
charges,
we
should
have
to
include
not
only
that
actually
paid
upon
borrowed
money,
but
that
cal
culated
upon
the
amount
invested.
Otherwise
the
profit
of
a
speculator
would
be
less
than
that
of
an
investor,
a
result
contrary
to
common
understanding.
Certainly
it
can
make
no
difference
how
the
owner
procures
the
purchase
price,
whether
from
funds
in
hand,
or
on
his
bare
credit,
or
on
security,
or
with
the
help
of
sureties.
Hays
v.
Gauley
Mountain
Co.,
247
U.S.
189,
88
S.
Ct.
470,
62
L.
Ed.
1061,
decided
that
interest
upon
the
amount
invested
was
not
part
of
the
cost,
and
the
principle
there
settled
seems
to
us
to
involve
interest
on
borrowed
money
as
well.
Georgia
Cypress
Co.
v.
South
Carolina
Tax
Commission,
22
S.H.
2d
419,
at
page
422:
In
construing
the
word
“cost”
as
employed
in
the
Statute,
this
Court
has
said:
“It
distinctly
provides
that
the
basis
of
taxation
and
allowances
for
depreciation
shall
be
the
cost
(not
the
value)
of
the
property
and
additions.
Now
in
the
nature
of
things
the
cost
of
the
property
is
the
price
paid
for
it
at
the
time
of
its
acquisition
and
the
cost
of
any
improvements
and
betterments
at
the
time
they
were
made.”
.
.
.
There
are
differing
views
as
to
whether
interest
during
construction
is
part
of
the
cost
of
assets
acquired
or
constructed
with
the
borrowed
money.
However,
as
stated,
it
is
necessary
to
go
further
and
consider
whether
such
interest
is
part
of
the
capital
cost
to
the
taxpayer
of
property
within
the
meaning
of
Section
11(1)
(a).
The
subsection
is
as
follows:
11.
(1)
Notwithstanding
paragraphs
(a),
(b)
and
(h)
of
subsection
(1)
of
section
12,
the
following
amounts
may
be
deducted
in
computing
the
income
of
a
taxpayer
for
a
taxation
year:
(a)
such
part
of
the
capital
cost
to
the
taxpayer
of
property,
or
such
amount
in
respect
of
the
capital
cost
to
the
taxpayer
of
property,
if
any,
as
is
allowed
by
regulation;
There
is
no
decision
binding
on
this
court
on
that
question,
so
far
as
I
am
aware.
In
my
view
the
question
is
fairly
arguable,
but
I
am
disposed
to
think
that
interest
during
construction
can
be
a
part
of
the
capital
cost
of
property
within
Section
11(1)
(a)
and
that
in
Sherritt’s
case
a
portion
of
the
payments
of
bond
interest
and
commitment
fee
during
construction
was
part
of
the
capital
cost
to
Sherritt
of
the
depreciable
property
upon
which
the
bond
money
was
expended,
within
the
meaning
of
that
subsection.
The
commitment
fee
payments
were
necessarily
made
to
obtain
the
bond
money
and
were
payments
on
account
of
capital
and,
although
there
are
differences
between
bond
interest
and
commitment
fee,
I
see
no
persuasive
reason
why
Sherritt’s
payments
of
commitment
fee
during
construction
should
not
be
treated
as
part
of
the
capital
cost
of
the
property
if
the
payments
of
bond
interest
during
construction
are
to
be
so
treated.
In
the
absence
of
any
definition
in
the
statute
of
the
expression
“capital
cost
to
the
taxpayer
of
property’’
and
in
the
absence
of
any
authoritative
interpretation
of
those
words
as
used
in
Section
11(1)
(a),
insofar
as
they
are
being
considered
with
reference
to
the
acquisition
of
capital
assets,
I
am
of
opinion
that
they
should
be
interpreted
as
including
outlays
of
the
taxpayer
as
a
business
man
that
were
the
direct
result
of
the
method
he
adopted
to
acquire
the
assets.
In
the
case
of
the
purchase
of
an
asset,
this
would
certainly
include
the
price
paid
for
the
asset.
It
would
probably
include
the
legal
costs
directly
related
to
its
acquisition.
It
might
well
include,
I
do
not
express
any
opinion
on
the
matter,
the
cost
of
moving
the
asset
to
the
place
where
it
is
to
be
used
in
the
business.
When,
instead
of
buying
property
to
be
used
in
the
business,
the
taxpayer
has
done
what
is
necessary
to
create
it,
the
capital
cost
to
him
of
the
property
clearly
includes
all
monies
paid
out
for
the
site
and
to
architects,
engineers
and
contractors.
It
seems
equally
clear
that
it
includes
the
cost
to
him
during
the
construction
period
of
borrowing
the
capital
required
for
creating
the
property,
whether
the
cost
is
called
interest
or
commitment
fee.
Such
cost
is
a
capital
cost
that
could
not
be
deducted
as
an
operating
expense,
without
special
authority.
Possibly
as
good
a
way
as
any
of
testing
the
matter
is
to
consider
the
possibility
of
a
third
person
creating
the
required
assets
to
the
taxpayer’s
specifications
to
sell
them
to
him
when
completed.
All
their
financing
costs
would
enter
into
the
price
that
the
taxpayer
would
have
to
pay
for
the
assets
and
there
would
be
no
doubt
that
the
price
would
be
the
capital
cost
of
the
property
to
him
if
he
bought
it
ready
to
use.
If
that
be
so,
why
should
those
costs
be
classified
otherwise
when
he
creates
the
asset
himself?
The
inclusion
of
interest
during
construction
as
part
of
the
capital
cost
of
property
within
the
meaning
and
for
the
purposes
of
Section
11(1)
(a)
may
present
problems
in
some
instances,
but
I
do
not
think
that
an
interpretation
that
includes
such
interest
is
inconsistent
with
the
scheme
of
the
Act
or
its
capital
cost
allowance
provisions.
On
the
contrary,
that
treatment
of
interest
during
construction
should,
I
think,
help
to
accurately
reflect
the
result
of
each
taxation
year’s
operations
and
the
profit
therefrom
for
that
year
for
both
business
and
income
tax
purposes,
without
unduly
interfering
with
the
smooth
working
of
the
Act.
Next
there
is
the
contention
that
Section
11(1)
(c),
governing
the
deduction
of
interest,
is
a
specific
provision
and
that
it
permits
deduction
of
interest
only
as
a
current
expense
in
the
year
in
which
it
is
incurred
or
paid,
and
that
a
taxpyaer
has
no
option
to
deduct
interest
through
Section
11(1)
(a).
Section
11(1)
(c)
is
as
follows:
11.
(1)
Notwithstanding
paragraphs
(a),
(b)
and
(h)
of
subsection
(1)
of
section
12,
the
following
amounts
may
be
deducted
in
computing
the
income
of
a
taxpayer
for
a
taxation
year:
(c)
an
amount
paid
in
the
year
or
payable
in
respect
of
the
year
(depending
upon
the
method
regularly
followed
by
the
taxpayer
in
computing
his
income),
pursuant
to
a
legal
obligation
to
pay
interest
on
(i)
borrowed
money
used
for
the
purpose
of
earning
income
from
a
business
or
property
(other
than
borrowed
money
used
to
acquire
property
the
income
from
which
would
be
exempt),
or
(ii)
an
amount
payable
for
property
acquired
for
the
purpose
of
gaining
or
producing
income
therefrom
or
for
the
purpose
of
gaining
or
producing
income
from
a
business
(other
than
property
the
income
from
which
would
be
exempt),
or
a
reasonable
amount
in
respect
thereof,
whichever
is
the
lesser;
There
is
also
the
argument
that
if
deduction
of
payments
of
commitment
fee
is
permissible
it
is
by
virtue
of
Section
11(1)
(cb),
which
was
not
enacted
until
1955
and
is
not
applicable
to
the
years
1952,
1953
and
1954
in
which
the
payments
here
under
consideration
were
made,
and
this
subsection
permits
deduction
of
expenses
only
in
the
year
in
which
they
are
incurred.
Section
11(1)
(cb)
is
as
follows:
11.
(1)
Notwithstanding
paragraphs
(a),
(b)
and
(h)
of
subsection
(1)
of
section
12,
the
following
amounts
may
be
deducted
in
computing
the
income
of
a
taxpayer
for
a
taxation
year:
(cb)
an
expense
incurred
in
the
year,
(i)
in
the
course
of
issuing
or
selling
shares
of
the
capital
stock
of
the
taxpayer,
or
(ii)
in
the
course
of
borrowing
money
used
by
the
taxpayer
for
the
purpose
of
earning
income
from
a
business
or
property
(other
than
money
used
by
the
taxpayer
for
the
purpose
of
acquiring
property
the
income
from
which
would
be
exempt),
but
not
including
any
amount
in
respect
of
(iii)
a
commission
or
bonus
paid
or
payable
to
a
person
to
whom
the
shares
were
issued
or
sold
or
from
whom
the
money
was
borrowed,
or
for
or
on
account
of
services
rendered
by
a
person
as
a
salesman,
agent
or
dealer
in
securities
in
the
course
of
issuing
or
selling
the
shares
or
borrowing
the
money,
or
(iv)
an
amount
paid
or
payable
as
or
on
account
of
the
principal
amount
of
the
indebtedness
incurred
in
the
course
of
borrowing
the
money,
or
as
or
on
account
of
interest;
Apart
from
Section
11(1)
(a),
(c)
and
(cb),
interest
on
borrowed
capital
and
the
expenses
covered
by
paragraph
(cb)
would
not
be
deductible,
because
they
are
expenses
in
relation
to
capital
and
are
not
operating
expenses.
As
regards
interest
paid
in
a
year
or
payable
in
respect
of
a
year
while
the
company
was
carrying
on
its
business,
Section
11(1)
(c)
provides
for
its
deduction
in
computing
its
income
of
that
year.
Similarly,
insofar
as
an
expense
within
Section
11(1)
(cb)
is
concerned,
if
it
was
incurred
in
a
year
while
the
company
was
carrying
on
its
business,
Section
11(1)
(cb)
applies
to
er
mit
its
deduction
in
computing
its
income
of
that
year.
Neither
Section
11(1)
(c)
nor
Section
11(1)
(cb)
has
any
application
to
interest,
or
to
expenses
covered
by
paragraph
(cb),
incurred
in
respect
of
a
year
in
which
the
company
is
building
its
plant
and
before
it
starts
to
carry
on
its
business.
It
cannot
have
a
computation
of
income
from
a
non-existent
business.
(Note
Section
11(1)
(c)
(i)
:
“borrowed
money
used
for
‘he
purpose
of
earning
income
from
a
business’’).
Section
11(1)
(a)
was
designed
to
allow
capital
costs
to
be
written
off
as
such
and
clearly
applies
—
as
paragraphs
(c)
and
(cb)
do
not
—
to
the
costs
of
a
capital
nature
incurred
before
the
business
was
commenced.
There
is,
therefore,
nothing
inconsistent
between
applying
paragraphs
(c)
and
(cb)
to
expenses
incurred
during
the
operation
of
a
business
and
allowing
such
eosts
incurred
before
the
starting
of
the
business
as
capital
costs
under
Section
11(1)
(a).
I
would
apply
the
same
reasoning,
although
it
is
a
little
more
difficult,
to
a
case
where,
while
one
business
is
being
carried
on,
a
substantially
different
one
is
being
readied
for
launching.
Heretofore
I
have
dealt
with
the
general
question
whether
interest
during
construction
is
deductible
under
Section
11(1)
(a).
The
circumstances
in
Sherritt’s
case
add
complexities
to
the
problem.
Its
funds
from
all
sources
were
co-mingled
and
were
paid
out
without
identification
as
to
source,
and
when
a
payment
of
bond
interest
or
commitment
fee
was
made
it
was
not
identified
with
any
particular
asset
or
activity.
It
was
argued
by
counsel
for
the
Minister
that
for
these
among
other
reasons
Sherritt
has
not
established
that
a
portion
of
the
commitment
fee
paid
by
it
is
part
of
the
capital
cost
of
the
particular
assets
to
which
Sherritt
has
attributed
and
allocated
payment
of
such
fee
and
in
respect
of
which
it
claims
deductions
under
Section
11
(l)(a).
Counsel
for
Sherritt,
on
the
other
hand,
says
that
the
method
of
attribution
and
allocation
followed
by
the
company
on
the
basis
of
the
pro
rata
amounts
involved
was
in
accordance
with
accepted
business
and
accountancy
practice
and
was
fair
and
reasonable.
Having
regard
to
the
mingling
of
funds
and
the
method
of
Sherritt’s
bookkeeping,
I.
have
no
doubt
that
Sherritt
cannot
establish
exactly
how
much
of
the
bond
money
was
expended
on
the
construction
of
a
particular
asset
in
respect
of
which
it
is
claiming
capital
cost
allowance.
However,
I
think
that
it
probably
was
impractical
in
a
business
sense
for
Sherritt
to
keep
records
showing
the
source
of
the
funds
and
their
application
in
the
case
of
each
item
of
expenditure.
The
President
of
the
company
said
that
it
is
an
impossibility,
or
at
least
he
had
never
heard
of
a
normal
business
attempting
to
do
it,
to
get
money
in
from
various
sources
and
to
pay
them
all
into
separate
accounts
and
then
to
say
out
of
this
account
we
spent
so
much
and
so
much.
Expenditures
were
recorded
on
a
monthly
accrual
basis
and
the
total
amount
spent
on
each
asset
was
known.
The
total
amount
of
bond
money
spent
on
the
project
was
known,
as
was
the
total
amount
spent
from
other
funds.
The
amounts
of
bond
interest
and
commitment
fee
payments
were
known.
The
dates
of
expenditures
and
of
payments
of
interest
and
commitment
fee
were
known.
The
attribution
and
allocation
of
bond
money
and
of
bond
interest
made
by
Sherritt
was
accepted
by
the
Minister
in
respect
of
the
deductions
claimed
by
Sherritt
and
allowed
by
the
Minister
in
connection
with
payments
of
bond
interest
during
construction.
I
think
that
in
the
circumstances
of
Sherritt’s
business
it
was
proper
for
the
company
to
make
a
retroactive
attribution
and
allocation
of
bond
interest.
and
commitment
fee
payments
on
the
basis
of
judgment
and
opinion
and
the
records
of
the
company,
as
Sherritt
did,
and
although
the
fit
may
not
be
perfect
the
attribution
and
allocation
so
made
was
fair
and
reasonable
and
adequate
and
acceptable
for
income
tax
purposes
(except,
as
stated
later
herein
to
such
extent,
if
any,
as
bond
interest
or
commitment
fee
was
attributed
to
the
refinery
at
Fort
Saskatchewan
as
an
exploration
or
development
expense
in
searching
for
minerals).
There
remains
the
matter
of
deductions
of
commitment
fee
payments
claimed
as
exploration
and
development
expenses
under
Section
83A
(2)
and
(3)
which
were
disallowed
by
the
Minister.
They
were
claimed
on
the
basis
that
a
portion
of
the
bond
money
was
expended
in
exploration
and
development
of
the
Lynn
Lake
mine
in
the
years
1952,
1953
and
1954
and
that
an
appropriate
portion
of
the
interest
and
commitment
fee
payments
during
the
construction
period
in
those
years
was
attributable
to
exploration
and
development
expenses
and
deductible
as
such
under
Section
83A(2)
and
(3).
As
in
the
case
of
construction
of
depreciable
assets,
these
expenses
were
paid
out
of
a
common
fund
from
all
sources
and
no
record
was
kept
that
would
show
the
particular
source
of
the
money
used
to
pay
a
particular
item
of
expense.
An
attribution
and
allocation
was
made
on
a
pro
rata
basis
(as
already
referred
to
in
the
case
of
depreciable
property)
and
it
was
accepted
by
the
Minister
in
allowing,
as
exploration
and
development
expenses,
bond
interest
attributed
and
allocated
to
such
expenses.
The
pertinent
parts
of
Section
83A(2)
and
(3)
are:
83A.
(2)
A
corporation
whose
principal
business
is
mining
or
exploring
for
minerals
may
deduct,
in
computing
its
income
under
this
Part
for
a
taxation
year,
the
lesser
of
(a)
the
aggregate
of
such
of
the
prospecting,
exploration
and
development
expenses
incurred
by
it
in
searching
for
minerals
in
Canada
as
were
incurred
during
the
calendar
year
1952,
to
the
extent
that
they
were
not
deductible
in
computing
income
for
a
previous
taxation
year,
or
(3)
A
corporation
whose
principal
business
is
(b)
mining
or
exploring
for
minerals,
may
deduct,
in
computing
its
income
under
this
Part
for
a
taxation
year,
the
lesser
of
(c)
the
aggregate
of
such
of
(ii)
the
prospecting,
exploration
and
development
expenses
incurred
by
it
in
searching
for
minerals
in
Canada,
as
were
incurred
after
the
calendar
year
1952
and
before
the
end
of
the
taxation
year,
to
the
extent
that
they
were
not
deductible
in
computing
income
for
a
previous
taxation
year,
or
I
think
that
the
reasoning
that
in
my
view
supports
the
inclusion
of
interest
during
construction
as
part
of
the
capital
cost
of
the
depreciable
property
acquired
or
constructed
through
the
expenditure
of
the
borrowed
bond
money
also
supports
the
inclusion,
as
exploration
and
development
expenses,
of
interest
during
the
construction
period
on
the
borrowed
bond
money
spent
in
exploration
and
development
work
in
that
period.
Similarly
in
respect
of
commitment
fee
payments.
It
is
not
clear
to
me
whether
any
portion
of
the
payments
of
bond
interest
or
commitment
fee
during
the
construction
period
was
attributed
and
allocated
to
the
refinery
at
Fort
Saskatchewan
as
an
exploration
or
development
expense.
I
do
not
think
that
expenses
paid
in
the
development
of
that
refinery
can
be
said
to
be
expenses
in
searching
for
minerals
within
the
meaning
of
Section
88A(2)
and
(3).
The
appeals
are
allowed
and
the
assessments
for
the
appellant’s
1958
and
1959
taxation
years
are
referred
back
to
the
respondent
for
re-assessment
to
allow
deductions
of
the
portions
of
the
payments
of
commitment
fee
claimed
by
the
appellant
as
exploration
and
development
expenses
and
as
capital
cost
allowance
(which
are
referred
to
in
the
Notices
of
Appeal,
particularly
in
paragraph
9
in
each
Notice),
except
insofar
as
such
portions
include
an
amount
allocated
by
the
appellant
to
its
accounts.
concerning
its
refinery
at
Fort
Saskatchewan
as
being
exploration
and
development
expenses
deductible
under
Section
83A
of.
the
Income
Tax
Act.
The
respondent
will
pay
to
the
appellant
its
costs.
of
the
appeals
to
be
taxed.
Email this Content