Verne K Olson v. Minister of National Revenue, [1978] CTC 2625, [1978] DTC 1439

The Assistant Chairman:—When this case was recently called for hearing at a sittings of this Board at Calgary, Alberta, counsel for the appellant advised that he would like to have the appeal of Bruce A Lawrence, who had also appealed to this Board, heard and decided on the evidence presented in this appeal. I was advised that, while the amount involved in each appeal was different, the principle was the same. Counsel for the Minister concurred in the request. The Board granted the request of counsel for the appellant with the result that judgment will be issued in the Lawrence appeal in the same fashion as judgment in this case for the reasons given in this appeal.

Mr Olson (the appellant) is a chartered accountant practising his profession in the City of Calgary, in the Province of Alberta, as a partner in a nationally known accounting firm. The appellant had as a friend for many years, Bruce A Lawrence (hereinafter referred to as “Lawrence”) also of the City of Calgary. Mr Lawrence in 1974 had recently retired as vice-president of a large house-building firm, which he believed was the largest in Canada. Lawrence was also a client of the partnership of which the appellant was a member. About 1971 a corporation known as Sprung Instant Structures Ltd (hereinafter referred to as “Sprung Ltd’’) was incorporated. The main shareholder of Sprung Ltd was Phillip Davis Sprung (hereinafter referred to as “Sprung”) who, at all relevant times, owned about 80% of its issued shares, and the appellant owned about 20%. There were other shareholders, but in total they owned less than 1%. Neither Mr Olson nor his firm were the auditors for Sprung Ltd. Lawrence, on December 15, 1974, might have only just recently become acquainted with Sprung. The appellant introduced Lawrence to Sprung. Lawrence stated that he endeavoured to become a shareholder of Sprung Ltd both before and after December 15, 1974, but without success. The appellant, for many years before he became a shareholder of Sprung Ltd, had been a friend of Sprung.

The Sprung family had been associated with the manufacture and sale of tents for many years. If I recall the evidence correctly, Sprung’s grandfather was in that business early in the 20th century. In about 1970, Sprung was an employee of Western Tent & Awning Company Limited (hereinafter referred to as “Western”), which company was controlled by his father. In the late 1960s, Western had purchased an expensive piece of equipment to use in the repair of air support structures which had been damaged. After it had been used for a period of time, his father decided to dispose of the equipment. About this time, Sprung thought he could make better tents by inventing a new fabric and attaching the fabric to supports, which would give the tents a longer life. The support would go the whole length of the fabric rather than just in one place. The concept of Sprung was developed and, in due course, was patented, he believes, in 1972. In about 1972 he received a grant from the Department of Industry, Trade and Commerce under the Program for the Advancement of Industrial Technology, of about $500,000 and to get the grant a new company, Sprung Ltd, was caused to be incorporated to manufacture the tents based on the patents. Sprung described his patent as a conceptual patent.

The word “tent” is apt to convey the wrong impression as to the type of shelter referred to herein. To assist the Board in this respect counsel for the appellant stated: “A picture is worth a thousand words”, and he had Sprung describe about fifteen pictures of tents to the Board, all of which were filed as exhibits. The support for the fabric was initially wooden hardware, but later was aluminum. The aluminum posts were affixed to the ground by pegs driven into the ground with a sledge hammer. If the shelter being erected was a very large one, then two posts would be set in cement and bolted to it. The fabric which had been specially treated to be sun, wind and wear resistant (although not always successfully) was placed on top of the aluminum supports and drawn taut. The fabric was in sheets and joined at the seams with a sealant. The seams were not supposed to split but they did. A tent did not have a size, but rather it was, within limits, any size one wished to make it. One of the pictures shown was that of a tent at the Calgary Stampede in 1973. Its dimensions were 50 feet by 150 feet by 20 feet high. It took about two weeks to put that tent up.

Problems always beset the erected tents. The aluminum used improved from year to year as did the fabric and, while each is of better quality today than it was in 1972, nonetheless there are still problems. Sprung estimated that there have been maybe twenty changes in fabric in a few years. Sun, snow, wind, rain and cold (should one say, the elements) together with mutilation on the fabric have all caused Sprung Ltd endless trouble. In addition, the movement of the fabric over the supports causes the fabric to wear out. If the fabric were made thicker to minimize the damage from sun, cold and wind, then of course its translucency decreased and it became opaque which, in solving one problem, caused another. Sprung gave many illustrations of the difficulties Sprung Ltd had with the tents it leased and concluded that the average life of a tent was around six months. In his opinion, it was quite likely that, on an average, all the fabric Originally on a tent would have been replaced within six months of its erection and the aluminum hardware, on the average, would have been replaced in around the same period of time or it would have been replaced as it became obsolete. If the wind were strong enough, it would move the tent on its Supports and soon the whole shelter would collapse. Possibly it could be re-erected (Sprung Ltd did all erecting and re-erecting of tents), but it was more usual that the fabric would have been torn, the seams pulled apart and the hardware bent. Cold weather caused the fabric to crack and too much exposure to the ultraviolet rays of the sun disintegrated the fabric. Another cause for concern with that the oil which was used in the manufacture and treating of the fabric in time would appear as a black smudge on the fabric, much to the annoyance of the user of the tent. With respect to the sales of tents Sprung Ltd, in its first few years and even to date, did not have great success. Purchasers or potential purchasers were reluctant to buy as they were, to put it mildly, skeptical about the durability of the product. The result was that, in the main, Sprung Ltd ended up renting or leasing its tents as opposed to selling them. This was not, as I understand the evidence, a matter of choice but because purchasers were reluctant to buy. Among those who have used their tents are car dealers and oil companies. By about 1974, Sprung Ltd had produced twenty to fifty tents or units, and in 1974 about thirty were in use. Some of them would last a year or two and in that time, if all repairs were considered to have been done, they may have been replaced one and one-half times.

Some brochures put out by Sprung Ltd were filed by the appellant’s counsel as exhibits. They showed the constructed shelters being used to create a hockey rink with lights (120 feet by 240 feet), a fertilizer storage (60 feet by 150 feet), a riding arena (50 feet by 75 feet) and, for a while, a showroom (50 feet by 100 feet). Many users or potential users were also listed. As counsel for the respondent pointed out, life expectancy was referred to as follows: “Beams—indefinite. Fabric 10 yrs”. This was from a brochure issued in late 1976. A 1972-73 brochure with respect to life expectancy stated: “Beams—indefinitive. Fabric—15 years”. Sprung stated that on sales they would give a five year guarantee on a pro rata basis. If used for one year, they would replace at 20 per cent of cost plus the cost of installation. On leased goods they would be replaced at Sprung Ltd expense.

The tent, units, or shelter can be a tent or shelter, or components of a tent or shelter. Sprung stated that, at the time of the hearing, there was no tent on Sprung Ltd premises which could be sold and moved to the premises of the purchaser. Rather, there was on Sprung Ltd premises, fabric and hardware which could be used to erect a shelter or a tent wherever the purchaser or lessee wished it to be erected. A purchaser or lessee, if I understand the evidence correctly, did not say to Sprung Ltd that they would buy or lease a specific tent or shelter, but rather, they would tell Sprung Ltd to erect a tent or shelter, which would be the same as a picture in a brochure, on the purchaser’s or lessee’s premises.

In the fall of 1974 Sprung, on behalf of Sprung Ltd, was looking for further financing for the company, but he was not successful due to the risk involved. As a shareholder and officer of Sprung Ltd, the appellant was also aware of the financial needs of the company since a business which is new and optimistic about its future is always looking for further financing. He made known to Lawrence and to another person (MacLean from Vancouver) this need of the company and, after considering all features especially the risk involved, by relying on the judgment of the appellant who relied on the business acumen of Sprung, those three persons bought either tents or components from Sprung Ltd in December 1974. Lawrence stated that he did not see the physical property. The appellant stated he realized there was a risk, but there was initially a return of 12 per cent on his investment as well as a tax shelter involved. According to Exhibit A-21, two things happened on December 15, 1974. I should. mention that, as I recall the evidence, the transaction had to be completed promptly as the year-end for tax purposes, insofar as the individuals were concerned, was just approaching. The impression I have is that, while documentation was signed by the three persons at that time, it was orally agreed with Sprung Ltd that the agreements would be renegotiated the next year. On December 15, 1974, Sprung Ltd sold to the appellant certain goods for $27,075 and on the same day the appellant leased those goods back to Sprung Ltd. The invoice re the sale reads as follows:

Mr V K Olson

3703 Underhill PI NW

Calgary, Alberta

Dec 15/74 Cash against shareholder loan

To purchase of tents to cover 5,700 square feet when assembled, composed of the following components:

24 Aluminum arches for 30’ wide tent to include base plates,

splice plates

76 Spreader bars and sleeves, sufficient nuts, bolts, washers
2 overhead garage type doors and 5 total walk-in doors —	$14,250
Fabric polyester coated vinyl—16 oz per square yard prepared
and assembled in panels sufficient to enclose 24—30’ aluminum
arches in accordance with the company’s patents and assembling
procedures currently in effect.	$12,825
	$27,075

Normal commercial terms apply—2% per month to be charged on overdue balances.

The lease from the appellant to Sprung Ltd is as follows:

Mr V K Olson

3703 Underhill PI NW

Calgary, Alberta	December 15, 1974
Dear Sir:

Sprung Instant Structures Ltd hereby agrees to lease 5,700 square feet of tents, either assembled or disassembled, from you under the following terms and conditions:

1. Term of lease—1 year commencing December 15, 1974.

2. Consideration—$270 per month payable in advance or the first day of each month for the period January, 1975 to November, 1975 together with $135 on December 15, 1974 for the period December 15, 1974 to December 31, 1974 and $135 on December 1, 1975 for the period December 1, 1975 to December 1, 1975 [sic] to December 15, 1975.

3. Identification of product—See invoice copy attached hereto marked Exhibit ‘‘A’’. Since the tents are modular, interchangeable and are set up on a temporary basis, Sprung Instant Structures Ltd agrees to retain components at all times, during the tenure of this lease agreement, equivalent to the components listed outlined in Exhibit “A”, and acknowledges your ownership of these components.

4. Sublease—Sprung Instant Structures Ltd retains the right to sublease the components as listed in Exhibit “A” and to assemble them in any manner the Company deems necessary. If at the termination of this lease, Sprung Instant Structures Ltd will have the right to continue the sublease and extend this lease with respect to such components. Under these circumstances lease payments under this agreement will continue on a pro rata basis. Title to the components involved in such sublease will revert to you disassembled in Calgary, upon termination of the sublease.

5. Sprung Instant Structures Ltd will be responsible for all damages to the components, from any cause excepting normal wear and shall keep them in good repair.

6. Sprung Instant Structures Ltd will be responsible for insurance, business taxes and all costs relating to the tents, either assembled or disassembled. This is a net lease arrangement, therefore, you will not be responsible for any costs or expenses pertaining to the tents or components during the term of this lease.

The tent, components, or units acquired by the appellant, according to Exhibit A-24, were to be at the concern and place shown and in the quantity indicated as follows:

The invoice with respect to Lawrence, also dated December 15, 1974, reads as follows:

Normal commercial terms apply—2% per month to be charged on overdue balances.

The lease back was in the following terms:

December 15, 1974

Mr B A Lawrence

301—14 St NW

Calgary, Alberta

Dear Sir:

Sprung Instant Structures Ltd hereby agrees to lease 21,050 square feet of tents, either assembled or disassembled, from you under the following terms and conditions:

1. Term of lease—1 year commencing December 15, 1974.

2. Consideration—$1,000 per month payable in advance on the first day of each month for the period January 1975 to November, 1975 together with $500 on December 15, 1974 for the period December 15, 1974 to December 31, 1974 and $500 on December 1, 1975 for the period December 1, 1975 to December 1, 1975 [sic] to December 15, 1975.

3. Identification of product—See invoice copy attached hereto marked Exhibit “A”. Since the tents are modular; interchangeable and are set up on a temporary basis, Sprung Instant Structures Ltd agrees to retain components at all times, during the tenure of this lease agreement, equivalent to the component listing outlined in Exhibit “A”, and acknowledges your ownership of these components.

4, Sublease—Sprung Instant Structures Ltd retains the right to sublease the components as listed in Exhibit “A” and to assemble them in any manner the Company deems necessary. If at the termination of this lease, any or all of the components referred to herein are subject to a sublease, Sprung Instant Structures Ltd will have the right to continue the sublease and extend this lease with respect to such components. Linder these circumstances lease payments under this agreement will continue on a pro rata basis. Title to the components involved in such sublease will revert to you disassembled in Calgary, upon termination of the sublease.

5. Sprung Instant Structures Ltd will be responsible for all damages to the components, from any cause excepting normal wear and shall keep them in good repair.

6. Sprung Instant Structures Ltd will be responsible for insurance, business taxes, and all costs relating to the tents, either assembled or disassembled. This is a net lease arrangement, therefore, you will not be responsible for any costs or expenses pertaining to the tents or components during the term of this lease.

An attachment to Exhibit A-25 which shows where the property Lawrence acquired was located, reads as follows:

For purposes of identification, the components as listed on invoice #9082 are presently assembled into tents which are located or described as follows:

	Sq Ft
Tisdale Motors, Kindersley	5,000
Willow Park Community, Calgary	6,000
Tucker & Assoc Ft St John	4,150
Mount Royal College, Calgary	2,400
Mid Canada Plastics, Melville, Sask	3,500
	21.050

I mentioned previously that, as I recall the evidence, at the time of the lease on December 15, 1974, it was orally agreed that the leases would be renegotiated the next year. The evidence was that renegotiation of the leases with respect to Lawrence and MacLean commenced about March 1975 and the leases were signed effective June 1, 1975. With respect to the appellant, his lease was renegotiated and signed on December 15, 1975. The new lease of the appellant and the components involved, as set forth in Exhibit “A” thereto, are as follows:

December 15, 1975

Mr V K Olson

3703 Underhill PI NW

Calgary, Alberta

Dear Sir:

Sprung Instant Structures Ltd hereby agrees to lease 5,700 square feet of tents, either assembled or disassembled, from you under the following terms and conditions:

1. Term of lease—5 years commencing December 15, 1975.

2. Consideration—$540 per month payable in advance on the first day of each month commencing January, 1976.

3. Identification of product—See invoice copy attached hereto marked Exhibit ‘‘A’’. Since the tents are modular, interchangeable and are set up on a temporary basis, Sprung Instant Structures Ltd agrees to retain components at all times, during the tenure of this lease agreement, equivalent to the components listed outlined in Exhibit “A”, and acknowledges your ownership of these components.

4. Sublease—Sprung Instant Structures Ltd retains the right to sublease the components as listed in Exhibit “A” and to assemble them in any manner the Company deems necessary. If at the termination of this lease, Sprung Instant Structures Ltd will have the right to continue the sublease and extend this lease with respect to such components. Under these circumstances lease payments under this agreement will continue on a pro rata basis. Title to the components involved in such sublease will revert to you disassembled in Calgary, upon termination of the sublease.

5. Sprung Instant Structures Ltd will be responsible for all damages to the components, from any cause excepting normal wear and shall keep them in good repair.

6. Sprung Instant Structures Ltd will be responsible for insurance, business taxes and all costs relating to the tents, either assembled or disassembled. This is a net lease arrangement, therefore, you will not be responsible for any costs or expenses pertaining to the tents or components during the term o'f this lease.

Exhibit “A”

Mr V K Olson

3703 Underhill Pl NW

Calgary, Alberta

Dec 15/74 Cash against shareholder loan

To purchase of tents to cover 5,700 square feet when assembled, composed of the following components:

24 Aluminum arches for 30’ wide tent to include base plates,

splice plates

76 Spreader bars and sleeves, sufficient nuts, bolts, washers
2 overhead garage type doors and 5 total walk-in doors —	$14,250
Fabric polyester coated vinyl—16 oz per square yard prepared
and assembled in panels sufficient to enclose 24—30’ aluminum
arches in accordance with the company’s patents and assembling
procedures currently in effect.	$12,825
	$27,075

Normal commercial terms apply—2% per month to be charged on overdue balances.

With respect to Lawrence, the renegotiated lease and schedule thereto read as follows:

THIS AGREEMENT dated the 1st day of June, AD 1975.

BETWEEN:

BRUCE LAWRENCE, Executive, of 301—14th Street North West, in the City of Calgary, Province of Alberta,

(hereinafter called the “Lessor”)

OF THE FIRST PART

AND:

SPRUNG INSTANT STRUCTURES LTD, a body corporate, duly incorporated under the laws of the Province of Alberta, and having an office at 1001—10th Avenue South West, in the City of Calgary, Province: of Alberta,

(hereinafter called the “Lessee”)

OF THE SECOND PART

WHEREAS the Lessor owns the units of equipment described in the Schedule annexed hereto;

AND WHEREAS the Lessee wishes to lease the units of equipment from the Lessor on the terms and conditions hereinafter contained:

NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the rental payments set out in the Schedule hereto, and other good and valuable consideration, the parties hereto covenant and agree as follows:

1. The Lessor hereby grants an irrevocable Option to purchase the equipment to the Lessee for cash at a price equal to the depreciated value of the leased equipment. The aforesaid Option to purchase shall be exercisable as to 50% of the leased equipment at any time up to March 31, 1976, and as to the remaining 50% of the equipment at any time up to March 31, 1977. The Option shall be exercised by the Lessor serving notice of its intention to exercise the said Option on the Lessee at its address shown on the face of this Agreement prior to the dates set out herein, and to pay by cash or certified cheque the depreciated value of the leased equipment to the Lessor within 7 days of the date each Option is exercised. Upon exercise of the first Option on or before March 31, 1976 the lease payments shall decrease.by 50%.

2. The Lessee shall not remove the leased equipment outside the legal limits of the Province of Alberta without the consent of the Lessor, such consent not to be unreasonably withheld.

3. The Lessor covenants and agrees to permit the Lessee the right to sub-lease the components as listed in the Schedule hereto and to assemble them in any manner the Lessee deems necessary.

4. Term of lease—twenty-two months from the date of commencement, namely the 1st of June, 1975, up to and including the 31st day of March, 1977.

5. Rental rate—the sum of $2,000 per month commencing on the 1st of June, 1975 and continuing on the 1st days of each month thereafter during the term hereof, subject to reduction of 50% if the first Option referred to in paragraph 1 of these special covenants is exercised and the Option price fully paid to the Lessor.

6. Definitions:

(a) “cost of the leased equipment” shall mean the Lessor’s actual cost of the equipment at any given time and shall decrease by the same percentage as the percentage of equipment purchased by the Lessee from the Lessor pursuant to the Option arrangement set out in paragraph 1 of these special covenants.

(b) "equipment” shall mean those chattels set out in the Schedule hereto and shall be deemed to include any additions thereto or exclude any deletions therefrom by a sale to the Lessee from the Lessor as herein provided.

(c) ‘‘depreciated value of the leased equipment” shall mean the cost of the leased equipment less wear and tear.

Schedule

SCHEDULE annexed to and forming part of the Lease dated the 1st day of June, 1975 and made between Bruce Lawrence as Lessor, and Sprung Instant Structures Ltd as Lessee.

The units of equipment referred to in the Lease herein particularly paragraph 2 thereof, are hereinafter described as follows:

21,050 square feet of assembled tent material composed of the following components:

42 Aluminum arches for 50’ wide tents, each arch to include base

plates, splice plates;

150 spreader bars and sleeves, sufficient bolts, nuts and washers;

9 aluminum arches for 30’ wide tent to include base plates, splice plates;

32 Spreader bars and sleeves, sufficient nuts, bolts, washers;

5 total overhead garage type doors and

5 total walk-in doors;

‘Fabric polyester coated vinyl—16 oz square yard prepared and assembled in panels sufficient to enclose 36—50’ and 19—30’ aluminum arches in accordance with the company’s patents and assembling procedures currently in effect.

For purposes of identification, the components as listed are presently assembled into tents which are located or described as follows:

Tisdale Motors, Kindersley	5,000 square feet
Willow Park Community, Calgary	6,000 square feet
Tucker & Assoc Fort St John	4,150 square feet
Mount Royal College, Calgary	2,400 square feet
Mid Canada Plastics, Melville, Saskatchewan	3,500 square feet
	21,050 square feet
(herein referred to as “units of equipment”)
SPECIAL COVENANTS:

In addition to the covenants set out herein, the Lessor and Lessee covenant and agree as follows.

(Not reproduced)

The appellant stated that his lease was still in force at the date of the hearing and its term still had until December 15, 1980, to: run. Lawrence’s lease is no longer operative as in 1976 the property was repurchased and he was paid for it in accordance with the lease in 1976 and 1977. Neither Lawrence nor Sprung could advise the court what the price paid was. It was pointed out that the rate of return (since they were all net-net leases) on the first leases was 12%, and on the renegotiated leases it was 24%. Stress was made that neither of the appellant’s leases gave the lessee an option to buy the property, nor did the first Lawrence lease, but that the second Lawrence lease did. When queried on this, Sprung first stated that, when he sold the tents to Lawrence, they were under lease to Bechtel Canada Limited with an option by them to buy, and he had overlooked this fact. He had to buy them back from Lawrence when Bechtel Canada Limited exercised its option. However, an attachment to Exhibit A-25 (December 15, 1974) indicating the location of the Lawrence property, makes no reference to Bechtel Canada Limited nor does Exhibit R-1, the renegotiated lease dated June 1, 1975.

When both the appellant and Lawrence filed their income tax returns for 1974, each showed he was in the rental business and showed gross revenue of $135 and $500 respectively (2 weeks rent per the lease) and charged as an expense his respective purchase price of tents. The appellant showed a loss of $26,940 which he deducted from other income, and Lawrence showed a loss of $99,488 which he likewise deducted from other income. In due course the Minister reassessed each, disallowing, with respect to the tents purchased, the full purchase price and allowing in its stead capital cost allowance on that property at the rate of 20%, contending that that property was a capital purchase and only an allowance for capital cost could be made. Both Olson and Lawrence disputed the disallowance and, following confirmation of the assessments by the respondent, appealed to this Board. The issue in each appeal is, Did the appellant and Lawrence acquire, by their purchase on December 15, 1974, capital property or was it an expense made or incurred for the purpose of gaining or producing income from a business or property? Both counsel agree that either the position taken by the appellant (and Lawrence) or the position taken by the Minister is correct—there is no third position.

The two relevant paragraphs of the Income Tax Act after tax reform read as follows:

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

(b) an outlay, loss or replacement of capital. a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part.

The normal approach to these two paragraphs is that set forth by Mr Justice Abbott when he was considering paragraphs (a) and (b) of subsection 12(1) of the Income Tax Act before tax reform in the case of British Columbia Electric Railway Company Limited v MNR, [1958] SCR 133; [1958] CTC 21; 58 DTC 1022. In that case at pages 137, 31 and 1027 respectively, he stated:

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 paragraph 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 paragraph 11(1)(a) of The Income Tax Act.

In the same case at the same citation he continues as follows:

The general principles to be applied to determine whether an expenditure which would be allowable under paragraph 12(1)(a) is of a capital nature, are now fairly well established. As Kerwin J, as he then was, pointed out in Montreal Light, Heat & Power Consolidated v MNR, applying the principle enunciated by Viscount Cave in British Insulated and Helsby Cables, Limited v Atherton, the usual test of whether an expenditure is one made on account of capital is, was it made “with a view of bringing into existence an advantage for the enduring benefit of the appellant’s business”.

In a subsequent case, MNR v Haddon Hall Realty Inc, [1962] SCR 109 at 110; [1961] CTC 509 at 511; 62 DTC 1001 at 1002, the same judge set forth his approach once again on this point as follows:

The general principles to be applied in determining whether a given expenditure is of a capital. nature are fairly well established: Montreal Light Heat and Power Consolidated v MNR', British Columbia Electric Railway Company Limited v MNR. Among the tests which may be used in order to determine whether an expenditure is an income expense or a capital outlay, it has been held that an expenditure made once and for all with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade is of a capital nature.

Counsel for the appellant submitted that the disbursement by the appellant (and Lawrence) was clearly within the ambit of paragraph 18(1)(a). He continued that it was not within the scope of paragraph 18(1)(b), but rather, that expenditure should be approached and considered in the same fashion as the Exchequer or Federal Court approached similar expenses in several cases. The cases to which he referred were: Canada Steamship Lines Limited v MNR, [1966] Ex CR 972; [1966] CTC 255; 66 DTC 5205; Algoma Central Railway v MNR, [1967] 2 Ex CR 88; [1967] CTC 130; 67 DTC 5091; Canada Starch Company Limited v MNR, [1969] 1 Ex CR 96; [1968] CTC 466; 68 DTC 5320; Bowater Power Company Limited v MNR, [1971] FC 421; [1971] CTC 818; 71 DTC 5469; The Elias Rogers Company v MNR, [1972] FC 1303; [1972] CTC 601; 73 DTC 5030; Asamera Oil (Indonesia) Limited v The Queen, [1973] FC 534; [1973] CTC 305; 73 DTC 5274. He did not suggest that those cases were the same as or similar to this appeal, but rather submitted that when the issue in this appeal was being considered, the same consideration should exist as those cases set forth. Counsel did refer specifically to page 836 of the CTC report (p 441 of the FC report, p 5480 of the DTC report) of the Bowater case where Mr Justice Noël stated in part:

The law with regard to the deduction of what might be called border-line expenses or ‘"nothings” has moved considerably ahead in the last few years, as can be seen from the above decisions.

He submitted reasons for considering the disbursements in this appeal in the same fashion as in those mentioned cases. He referred clearly to the inherent risks which were mentioned by Sprung as well as the fact that everyone was reluctant to buy. In this respect it should be mentioned that when Lawrence gave evidence he stated that, in 1974 when he bought, he did not think the purchase was too risky a proposition, but, after listening to the evidence of Sprung at the hearing, he realized the risk he took was much greater than anticipated. Another submission for treating the expenditures as an expense was that, at least on the average if not in reality, the tents were not in existence six months after (say July 1, 1975) the sale. He argued, based on the evidence of Sprung, that the average life of a tent was six months and, on the average, it is quite likely that were a tent still standing after that period of time, all of its original fabric and hardware would have been replaced. When considering the risk, the durability of the property, the obsolescence of the hardware, the rate of return, and all things generally, the acquisition or purchase price should be considered a current expense and not the purchase of a capital asset.

With respect to the respondent’s submission, I have concluded his main thrust to be that the appellant acquired property for the purpose of turning it to account by leasing it to third parties for rental income, which leasing in the case of Olson will be at least until December 1980 and in the case of Lawrence lasted until sometime in 1976. The appellant acquired an asset which it used by way of leasing to gain revenue and which was not used as part of the income earning process of the appellant—it was that income earning process. It was not used up in the course of the term of the first lease—it was the subject matter of a renewed lease for not only a further term, but, in one case, a term five times as long as the first lease and, in the second case, about four times as long as the first lease. It is obvious, relying on the leases and the duty cast on the lessee, that the property will still be in existence at the termination of the lease. Clause 5 of Exhibit A-21, A-23 and A-25 reads as follows:

5. Sprung Instant Structures Ltd will be responsible for all damages to the components, from any cause excepting normal wear and shall keep them in good repair.

Exhibit R-1, the renewal of Exhibit A-25, in part reads as follows:

The Lessee, at its own expense, shall keep each Unit in good repair, condition and working order and shall furnish any and all parts, mechanisms and devices required to keep each Unit in good mechanical and working order.

In any event the property belonging to Olson was in existence in December 1975 as the lease was renewed for five further years. The Lawrence property was in existence in June 1975 when the lease was renewed for twenty-two months and was still in existence in 1976 when Lawrence resold the property to Sprung Ltd. As to the cases to which counsel for the appellant referred, counsel for the respondent submitted that in those cases where the expenditure was considered to be a current expense, the object which was acquired in itself did not produce any income of itself—there was no direct income from the trade mark, the patent or the dam site. There was income from the renting of the property in this appeal.

What the Board must decide is whether or not the property the appellant acquired by his purchase in December 1974 from Sprung Ltd was property within the ambit of paragraph 18(1)(b). If I so hold, then the. appeal is to be dismissed. If I do not agree, then the appeal is to be allowed. What did the appellant acquire? It was urged on me, and the purchase invoice would seem to indicate, that on the one hand the appellant acquired components out of which a tent or tents could be constructed. It was also urged that those components only had an average life of six months and in that time all the original fabric would be in shreds, ruined, and all the hardware, if it were not twisted out of use, would be obsolete, and consequently, those assets could not be capital assets. However, it was also urged that those parts were acquired to earn income by using them out, as the appellant did for a total of six years. Not only were they tents in 1974, but they were still tents when the lease was renewed and, since rent in each case was paid after 1975, I must presume that they were tents after that year. Even if the fabric tore and the aluminum hardware bent or became obsolete, the lessee had to maintain the tent, except for reasonable wear and tear, and it was not suggested that he did not.

I am of the opinion that, by his purchase in December 1974, the appellant acquired a capital asset within the meaning of paragraph 18(1)(b). He acquired an asset which he used for the purpose of gaining or producing income from the rental of it for a period of years. I cannot see a person spending $28,000 or $100,000 on an asset, even if there were tax shelter consideration, to gain 12 per cent on his investment for one year (let alone six months). Even if the risk were great, I am of the opinion that the appellant contemplated that, through the rental of the property he acquired by the purchase on December 15, 1974, he would have his purchase price returned in due course with the possibility of a profit. The purchase was not an expense made by the appellant to earn the income of one year.

As a result, judgment will issue dismissing the appeal of the appellant. As stated in the opening paragraph of the reasons, for these same reasons a similar decision will be given in the Lawrence appeal.

Appeal dismissed.