The Assistant Chairman:
1 This is the appeal of Jack Spratt Mfg Inc from income tax assessments in respect of the 1971 and 1972 taxation years.
2 The issue to be determined in this appeal is whether the whole amount of $124,584 received by the appellant on December 2, 1971 as a grant under the Regional Development Incentives Act (SC 1968–69, c 56) is to be deducted in computing the capital cost of the property pursuant to paragraph 20(6)(h) of the Income Tax Act (RSC 1952, c 148), as contended by the Minister of National Revenue, or whether only that portion of the grant calculated on the basis of 10% of the approved capital cost of the facility is to be deducted in arriving at the capital cost of the property to the taxpayer for capital cost allowance purposes.
3 The facts in this appeal are as follows: On February 26, 1971, the Department of Regional Economic Expansion authorized an offer of a combined development incentive in respect of a new facility that the appellant proposed to acquire and expand at Sherbrooke, Que (Exhibit A-2).
4 On December 2, 1971 the appellant received a cheque for $124,584 representing the first payment of a development incentive under the Regional Development Incentives Act. The covering letter stated that this payment was based on approved capital cost of the facility in the amount of $244,802 and on the average estimate of 175 new jobs to be created in the second and third years following the commencement of commercial production (Exhibit A-1).
5 There is between the parties concerned no dispute as to the figures which make up the first payment of the grant, and which were based on 10% of approved capital costs incurred to September 30, 1971 and 175 new jobs to be created. These figures are as follows:
10% of $244,802 $ 24,480
175 jobs at $750 each $131,250
--------
$155,730
Less 20% holdback as
required by the
Regional Development
Incentives Act $ 31,146
--------
Net payment received
by appellant $124,584
6 In calculating the capital cost of the property pursuant to paragraph 20(6)(h) of the Income Tax Act, the appellant deducted only $24,480, contending that only that portion of the grant was directly related to the capital cost of the project and should be deducted in computing the capital cost allowance thereon.
7 By notices of assessment dated July 26, 1974 the capital cost allowances claimed by the appellant for each of the taxation years 1971 and 1972 were reduced by the Minister by also including as part of the deduction referred to in paragraph 20(6)(h) of the Income Tax Act that portion of the grant which was calculated on the basis of new jobs to be created and which amounted to $105,000 after taking into account the 20% holdback required by the Regional Development Incentives Act.
8 The appellant, who was represented by Mr Barry Klar, the company's comptroller, contends that the criteria for determining the amount of the incentive are not based solely on the cost of the project and that section 6 of the Regional Development Incentives Act refers to several other economic and social factors on which the amount of the grant is determined. The appellant claims, therefore, that there are two distinct parts of a development incentive, and that only that part which relates to the capital cost of the project should be deducted from the capital cost of the property before calculating capital cost allowance.
9 Counsel for the respondent produced as a witness Mr Claude Roy, Manager of the Regional Development Incentives Act who, under oath, explained the difference between a primary, a secondary and a combined incentive.
10 According to Mr Roy, a primary incentive (subsection 5(1) of the Regional Development Incentives Act) is an incentive based exclusively on the approved capital cost of establishing, expanding, or modifying a particular facility, which incentive cannot exceed 20% of the approved capital costs of such property. The amount of a primary incentive does not take into account, and is independent of, the job-creating potential of the said facility.
11 The secondary development incentive (subsection 5(2) of the Regional Development Incentives Act) is based on the approved capital costs of establishing or expanding the facility for the manufacture of new products, but it is also based on the number of new jobs to be created by the operation. This secondary incentive shall not exceed 5% of the approved capital costs and $5,000 for each new job created in the operation, these being the maximum amounts payable therefor.
12 Both Exhibit A-1 and Exhibit A-2 refer to the appellant's development incentive as “a combined incentive”, the amount of which was determined, first, on the basis of 10% of the approved capital costs, and secondly, on $750 for each new job arising from the construction and/or expansion of facilities in the process of manufacturing new products.
13 Mr Roy explained in his testimony that no payment of a development incentive was possible without the construction or expansion of the required physical facilities and that the “new job” criterion was used in the calculation of the amount of the incentive to be granted in order to allow for a possible increase in the amount of the incentive if it was felt that a straight grant of 20% of the approved capital cost of the project would not be sufficient to bring the project to fruition.
14 It would therefore appear that, owing to countless different circumstances, the methods used to determine the amount of incentive necessary to realize successfully a given project must necessarily be flexible. It was pointed out by Mr Roy that a situation may arise where an improvement in technology or the acquisition of more modern equipment may result in a reduction in the number of available jobs. In such circumstances, the new job criterion for determining the amount of the incentive payment would of course be replaced by some other more practical consideration.
15 In my opinion, all these criteria for determining the amount to be granted as an incentive, including the estimated number of new jobs to be created, are simply mathematical formulae used to arrive at a specific amount of incentive considered to be best or most useful in encouraging the building of new manufacturing facilities or in the expansion or modification of already-existing enterprises in designated areas.
16 There is no doubt that the purpose of the Regional Development Incentives Act is to promote the development of productive employment opportunities and to facilitate economic and social adjustment in certain designated areas. The appellant's representative is quite correct when he states that the Act was meant to have a strong social and economic impact in those designated areas, and that its main objective is to create jobs and increase productivity by means of financial incentives. However, the method of attaining that objective is primarily through the construction of new enterprises or the expansion of existing ones.
17 Since the construction or the expansion of the physical aspects of an enterprise is a sine qua non condition for the granting of all development incentive payments, it seems to me that the basis on which the amount of the grant is calculated in a particular set of circumstances does not change the motive or the purpose of the incentive, which, ultimately, is to encourage the creation or the expansion of both large and small enterprises. In my view, whether the amount of the incentive is calculated on the basis of its being a primary, secondary or combined development incentive as set out in the Act, it is still, in my opinion, “a grant, subsidy or other assistance in respect of or for the acquisition of property”, and falls squarely within the meaning and intent of paragraph 20(6)(h) of the Income Tax Act. The capital cost of the property in respect of which the incentive is paid must therefore be deemed to be the capital cost of the property to the taxpayer minus the amount of any grant, subsidy or other assistance received from a government. In this appeal, the amount was $124,584.
18 In the light of the definition of property found in paragraph 139(1)(ag) of the Income Tax Act, I am also satisfied that the word “property” as used in section 20(6)(h) of the Income Tax Act includes the word “facility” used in the Regional Development Incentives Act, and that paragraph 20(6)(h) is, in that respect, also applicable to the capital cost of the facility.
19 In its notice of appeal, the appellant referred to section 12 of the Regional Development Incentives Act, which states that an amount payable on account of a development incentive under the said Act is exempt from income tax. Income tax was, of course, not paid by the appellant on the $124,584 received as a development incentive and, in my opinion, the application of section 12 can, in no way, be interpreted so as to prohibit the reduction of capital cost allowances by reason of the development incentive received by the appellant in this instance. Such an amended calculation does not, in my view, constitute taxation of the incentive received.
20 I hold therefore that the whole amount of $124.584 received by the appellant as a development incentive under the Regional Development Incentives Act must, pursuant to paragraph 20(6)(h) of the Income Tax Act, be considered to have reduced the capital cost to the taxpayer of the facility in question and must be deducted from the actual capital cost of the property for purposes of calculating capital cost allowances, and therefore the Minister's assessments for the appellant's 1971 and 1972 taxation years are correct and the capital cost allowances allocated therein in respect of those should not be changed.
21 The appeal is therefore dismissed.
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