Canderel Ltd. v. R., 98 DTC 6100, [1998] 1 S.C.R. 147, [1998] 2 C.T.C. 35

Iacobucci J.:

1 In a narrow sense, this appeal raises one issue: how is a taxpayer to treat a payment made to a prospective tenant for the purpose of inducing that tenant to lease space in the taxpayer's premises? More specifically, is the expenditure, commonly referred to as a tenant inducement payment (“TIP”), to be deducted from income entirely in the year in which it was made, or is it to be amortized over the term of the lease to which it relates?

2 More broadly, however, this Court is required to revisit the fundamental concept of profit computation for income tax purposes. The appeal raises serious questions about the ability of the taxpayer to calculate his or her income in accordance with well-accepted principles of business practice and with the provisions of the Income Tax Act, as interpreted by the courts. In the absence of statutory provisions or overriding legal principles to the contrary, is the Minister of National Revenue entitled to insist on a particular method of profit computation? Put another way, what is the analytical framework within which taxpayers can compute, and the Minister can dispute, profit?

3 This appeal was heard along with the appeals in Toronto College Park Ltd. v. R. (S.C.C.)and Ikea Ltd. v. R. (S.C.C.), reasons for which are being released simultaneously herewith.

I. Facts

4 The following summary of facts is taken substantially from the comprehensive factual summary of the trial judge, Brulé J., in the Tax Court of Canada.

5 In 1984, the appellant, Canderel Limited (“Canderel”), a company engaged in the development and management of commercial real estate, entered into an agreement with Mount-Batten Properties Limited to develop a commercial office development which eventually became Churchill Office Park (“C.O.P.”). The development was to be located in west-end Ottawa, where rental rates were generally around 30% lower than in downtown Ottawa. The project was part of a general business strategy in the area to provide private sector buildings and thereby centralize an area of business outside the downtown core. It was anticipated that lower rents and property taxes would attract tenants from downtown.

6 The duties assumed by Canderel in connection with the development of the project were wide-ranging, and included marketing, advertising, and negotiation of leases (subject to written approval and execution by the owners), among other things. Part of Canderel's development fee was contingent upon 90% leasing. A separate agreement provided for Canderel to serve as property manager as well, and among its managerial duties was the ongoing negotiation and renewal of leases.

7 The projects in which Canderel participated were generally financed with mortgages to minimize equity requirements. Because the co-venturers did not supplement the cash flow of less successful projects, each project was required to succeed on its own merits and consequently, an early positive cash flow was imperative. The key to the success of a project, therefore, was leasing velocity. C.O.P. was no exception to this rule.

8 In a document entitled “Executive Summary of Carling Churchill Project”, dated January 18, 1984, prepared by Canderel and used to create and administer a construction budget by allocating projected expenses and costs, a “downside” view of capitalized losses by velocity of lease-up was projected. A total capitalized loss of $2,034,604 for the first two years was projected, and an allowance for this loss was accordingly made. The estimated time for the project to break even was in the ninth to tenth month of the second year.

9 For the development stage of the project, short-term “bridge financing” was arranged in the form of what essentially amounted to a demand loan. Jonathan Wener, the sole owner of Canderel, estimated that once the building was 75% to 85% leased, permanent financing would be obtainable, but testified at trial that if it had taken more than three years to obtain permanent financing, the co-venture would have risked seizure of the debt.

10 When construction of C.O.P. was commenced, there were no commitments to lease, owing to an aberration in the Ottawa market whereby prospective tenants generally required substantial completion before leasing. However, market surveys conducted by Royal LePage and verified by Canderel indicated that there was only a 1.67% vacancy in downtown Ottawa of the class of space offered by C.O.P. for the 1983 market, and a 3.42% vacancy in 1982. The short supply of space in the downtown area at the time construction commenced led Canderel to anticipate that the project would reach its break-even point by the time it opened. However, throughout construction and at completion, the amount of space available downtown was rising. Six to eight months into construction, Canderel realized that there were problems with the market: by 1984, the vacancy rate had risen to 11.2% and continued to rise, reaching 14% in 1986. When C.O.P. opened in June, 1985, only 2.3% of the building was leased. Several new office developments, both downtown and in the west end, created intense competition for tenants, and the absorption by the west end of downtown clients therefore came later than Canderel had initially expected.

11 In response to these developments, and to its intense need to attract tenants to its new complex, Canderel decided to reallocate budgeted losses to tenant inducement payments. A leasing blitz was commenced, and whereas about $2 million had initially been allocated to TIPs, just over $4 million was in fact paid out in the end. This tactic proved successful, because by the end of June, 1986, C.O.P. was 59% leased, and by June, 1987, it was 85% leased. Had Canderel failed to secure tenants at project completion or shortly thereafter, several adverse consequences could have occurred with respect to the interim financing provided by the Toronto Dominion Bank. The operating and financing costs of approximately $2.9 million might have had to be borne entirely by the joint venturers, permanent financing would not likely have been obtained, and the project could have become known as not having gained market acceptance, which would have reduced the likelihood of attracting stable tenants. Instead, on June 17, 1989, the project received a permanent financing commitment from Sunlife of Canada.

12 In the auditor's report of January, 1986, an operating loss of $1,219,00 was shown, reflecting in part the treatment of the TIPs as capitalized. By 1986, $4 million had been capitalized and amortized, and income before amortization was minus $800,000. For income tax purposes, however, Canderel adopted a different approach, opting to deduct the TIPs from income entirely in 1986, the year in which they were paid. The deduction was disallowed by the Minister of National Revenue (the “Minister”) in a reassessment, and Canderel appealed to the Tax Court of Canada. The Tax Court allowed the appeal, but this decision was overturned on further appeal by the Minister to the Federal Court of Appeal.

II. Relevant Statutory Provisions

13 Income Tax Act, S.C. 1970-71-72, c. 63, (now R.S.C., 1985 (5th Supp.), c. 1)

9. (1) Subject to this Part, a taxpayer's income for a taxation year from a business or property is his profit therefrom for the year.

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;

(9) Notwithstanding any other provision of this Act,

(a) in computing a taxpayer's income for a taxation year from a business or property (other than income from a business computed in accordance with the method authorized by subsection 28(1)), no deduction shall be made in respect of an outlay or expense to the extent that it can reasonably be regarded as having been made or incurred

(i) as consideration for services to be rendered after the end of the year,

(ii) as, on account or in lieu of payment of, or in satisfaction of, interest, taxes..., rent or royalty in respect of a period after the end of the year, or

(iii) as consideration for insurance in respect of a period after the end of the year...;

(b) such portion of each outlay or expense made or incurred as would, but for paragraph (a), have been deductible in computing a taxpayer's income for a taxation year shall be deductible in computing his income for the subsequent year to which it can reasonably be considered to relate;...

III. Judicial History

1. Tax Court of Canada (Brulé J.), (1994), 94 D.T.C. 1133 (T.C.C.)

14 Brulé J. began by noting that it has generally been held that an expense is deductible although it may not give rise to any directly resulting income: Vallambrosa Rubber Co. v. Farmer (Surveyor of Taxes) (1910), 5 T.C. 529 (Scotland Ct. Sess.). However, he recognized that the instant case turned not on deductibility itself but on the timing of the deduction, and found that this required a determination of whether the TIPs were running expenses and whether or not there should have been “matching” of the expense and revenue. He relied on Naval Colliery Co. (The) v. Inland Revenue Commissioners (1928), 12 T.C. 1017 (U.K. H.L.), and Oxford Shopping Centres Ltd. v. R. (1979), 79 D.T.C. 5458 (Fed. T.D.), for the proposition that running expenses are those which cannot be linked directly to any corresponding items of revenue, and therefore are not matched to revenue but are deductible in full in the year incurred. That is, the “matching principle” of accounting does not apply to such expenses.

15 Relying on the case of Cummings v. R. (1981), 81 D.T.C. 5207 (Fed. C.A.), and the interpretation thereof in the trial judgment in Toronto College Park Ltd. v. R. (a companion case to the instant appeal), Brulé J. found that in certain cases, tenant inducement payments may be classified as running expenses, which in some cases may be deducted in the year of the expense. Further, he found that the matching principle had been held not to apply to such expenses. To Brulé J., these cases were determinative, such that the TIPs here at issue qualified as running expenses.

16 Brulé J. rejected the Minister's argument that the TIPs were incurred for the purpose of earning income over the whole terms of the leases and therefore, to arrive at true profits, each lease should have the TIPs amortized over its terms. He noted that in support of this argument the Minister had relied on Neonex International Ltd. v. R. (1978), 78 D.T.C. 6339 (Fed. C.A.), but that Neonex did not deal with a running expense situation and was therefore inapplicable. He relied in this regard (at p. 1141) on the judgment of this Court in Symes v. R., [1993] 4 S.C.R. 695 (S.C.C.), where the words of Wilson J. in Mattabi Mines Ltd. v. Ontario (Minister of Revenue), [1988] 2 S.C.R. 175 (S.C.C.), at p. 189, were interpreted as “rejecting both the need for a causal connection between a particular expenditure and a particular receipt, and the suggestion that a receipt must arise in the same year as an expenditure is incurred.”

17 In response to the Minister's argument that matching should have been employed in this case because it gave a better picture of Canderel's true income, Brulé J. observed that although accounting theory may be helpful in considering the appropriate treatment of income for tax purposes, it is not determinative. He agreed with the submission by Canderel, relying on Oxford Shopping Centres, supra, that even if the law in many cases seemed to require matching, the expenses in this case should be matched against current benefits, as was in fact done here, since the use of the matching principle in cases such as Minister of National Revenue v. Tower Investment Inc., [1972] F.C. 454 (Fed. T.D.), gave rise to no general principle of law.

18 Brulé J. found that the benefits generated by the TIPs for Canderel included (1) the prevention of a “hole in income” caused by maintaining a vacant building; (2) the satisfaction of its interim financing requirements and the ability to obtain permanent financing; (3) the ability to maintain its market position and reputation; and (4) the ability to earn revenues through rental, management, and development fees. Therefore, he concluded (at p. 1142) that “the expenses deducted by the Appellant were running expenses, that matching is not in this case the appropriate method for tax purposes, and that the Appellant should be allowed to adopt the expensing method.” Noting also that “there is no requirement under the law for consistency in accounting methods between financial statements and income tax calculation,” Brulé J. allowed the appeal and referred the matter back to the Minister for reconsideration and reassessment in accordance with the law as set out in his reasons.

(2) Federal Court of Appeal, [1995] 2 F.C. 232 (Fed. C.A.)

(a) Reasons of Stone J.A., for the majority

19 Stone J.A. began by asserting at p. 236 that “the matching principle of accounting has, at least in this Court, been elevated to the status of a legal principle.” He found support for this position in the Court's decision in West Kootenay Power & Light Co. v. R. (1991), 92 D.T.C. 6023 (Fed. C.A.), where MacGuigan J.A. stated at p. 6028:

The approved principle is that whichever method presents the “truer picture” of a taxpayer's revenue, which more fairly and accurately portrays income, and which “matches” revenue and expenditure, if one method does, is the one that must be followed.

20 Stone J.A. agreed with the trial judge that “running expenses” need not be matched with corresponding items of revenue for tax purposes, but found that the TIPs here at issue did not fit the classical description of “running expenses” in Naval Colliery, supra. He recognized, at pp. 237-38, that it could be argued that the TIPs were “in the nature of running expenses on the basis that they represented a cost of doing business in the 1986 taxation year and also that [Canderel] would likely have faced significant financial disadvantages if they had not been laid out and did achieve significant financial advantages by laying them out.” However, he found that the expenditures were not incurred in earning income solely in 1986, but in all of the years during which the leases were to run.

21 Moreover, Stone J.A. found that the present case was not analogous to Oxford Shopping Centres, supra, as in that case it was not possible to match the expenses with particular items of revenue. While acknowledging that in Cummings, supra, Heald J.A. was prepared in obiter to characterize lease pick-up expenses as running expenses, Stone J.A. was of the opinion that this too assumed that the expenses in question could not be allocated directly to corresponding revenue. In the present case, because the TIPs could be matched with revenue from the respective leases in accordance with the matching principle, and were in fact so matched for accounting purposes, Stone J.A. (Robertson J.A. concurring) would have allowed the appeal.

(b) Concurring reasons of Desjardins J.A.

22 Desjardins J.A. began with a brief discussion, based largely on that in Symes, supra, of the limited role to be played by generally accepted accounting principles (“G.A.A.P.”) in the determination of profit for tax purposes. She found at p. 244 that the trial judge erred in applying to the case at bar the interpretation in Symes of Wilson J.'s rejection in Mattabi Mines, supra, of “both the need for a causal connection between a particular expenditure and a particular receipt, and the suggestion that a receipt must arise in the same year as an expenditure is incurred,” as Symes was not concerned with the timing of a deduction, which was the only issue in the case at bar.

23 Desjardins J.A. turned next to the cases relied upon by the Minister in support of the proposition that where there are two methods acceptable both under G.A.A.P. and for tax purposes, the court will prefer the one that results in a “truer picture” of the taxpayer's profit, including West Kootenay, supra, Maritime Telegraph & Telephone Co. v. R. (1992), 92 D.T.C. 6191 (Fed. C.A.), and Friedberg v. R., [1993] 4 S.C.R. 285 (S.C.C.). She concluded at p. 256 that “[i]n essence, what the courts have been looking for is the true realized gains and losses of a taxpayer in the relevant taxation year,” and that to determine whether matching is the appropriate method in any given case would require an analysis of the specific facts in light of the cases in which the matching principle had been specifically developed. In this connection, she relied on Symes for the proposition that the determination of profit for tax purposes is a question of law, to be determined in accordance with “well accepted principles of business (or accounting) practice” (at p. 257), unless they run counter to an express statutory provision or a principle of tax law.

24 Thus, Desjardins J.A. identified the key question as assessing which method most accurately shows the taxpayer's actual profit. After reviewing Oxford Shopping Centres, supra, in which the taxpayer's disbursement was considered to be a running expense and the matching principle therefore did not apply, even though amortization was available at the taxpayer's option and would have provided a more accurate picture of income for the particular year, she found that where an expense could be related to a particular item of income, the matching principle would apply. She concluded, at p. 264, that TIPs are “clearly” related to particular items of income, as there is a “direct contractual relationship between the TIP and the stream of revenues gained over the period of the lease.” Therefore, in her view at p. 264, “[m]atching of TIPs is compulsory.”

25 Canderel had argued that the foundation on which rests the compulsory matching of expenses when related to a particular item of income, namely Commissioners of Inland Revenue v. Gardner Mountain & D'Ambrumenil Ltd. (1947), 29 T.C. 69 (U.K. H.L.), was inapplicable because it dealt with costs of inventory, for which special rules have developed. Desjardins J.A. disagreed, noting that Viscount Simon's words in that case were directed to both “services completely rendered or goods supplied”, and that Canderel was in a type of service industry, namely the rental of commercial premises. Therefore, she held that the TIPs were to be deducted as the services were rendered -- that is, over the period of the lease. She distinguished Vallambrosa Rubber, supra, and Naval Colliery, supra, as cases in which the expenses in question truly could not be matched to specific items of revenue. Further, she found that because timing was not raised in Cummings, supra, which dealt only with whether lease pick-up expenses were on account of income or capital, the obiter comments in that case concerning TIPs were neither binding nor persuasive.

26 Therefore, Desjardins J.A. was in agreement with the majority that the TIPs paid by Canderel in 1986 were to be amortized over the life of the respective leases, and that such would be (at p. 270) “the only method acceptable for income tax purposes.”

IV. Issues

27 As already stated, this appeal raises only one direct issue: whether tenant inducement payments are deductible from income entirely in the year in which they are incurred, or whether the Minister of National Revenue is entitled to insist that they be amortized over the terms of the leases to which they relate. To answer this question, however, it will first be necessary to examine the fundamental principles of profit computation under the Income Tax Act.

V. Analysis

(1) General principles of profit computation

28 In the relatively recent case of Symes, supra, this Court considered the general principles which govern the computation of profit for income tax purposes. However, because some of the principles enunciated in Symes may have been misinterpreted, I propose to review these general principles in order to resolve the issue in this appeal and to clarify the critical issue of profit computation for the purposes of the Income Tax Act.

(a) The interpretive framework

29 It is appropriate to begin the consideration of profit with s. 9(1) of the Act, which defines a taxpayer's income for a taxation year from a business or property source as “his profit therefrom for the year.” Significantly, “profit” is not defined in s. 9(1) or anywhere else in the Act. It seems to me that this approach was a deliberate legislative choice, particularly given that the Act contains exhaustive definitions of numerous other concepts and terms with which it deals. This choice reflects the reality that no single definition can adequately apply to the millions of different taxpayers bound by the Act. Under our self-assessment system, each taxpayer must be able to compute his or her income in such a way as to constitute an accurate picture of his or her income situation, subject, of course, to express provisions in the Act which require specific treatment of certain types of expenses or receipts.

30 What, then, is the true nature of “profit” for tax purposes? While the concept has been variously expressed, perhaps the clearest and most concise articulation of the term is to be found in the oft-quoted decision of this Court in Irwin v. Minister of National Revenue, [1964] S.C.R. 662 (S.C.C.), at p. 664, where profit in a year was taken to consist of “the difference between the receipts from the trade or business during such year... and the expenditure laid out to earn those receipt.” (emphasis in original) This definition was echoed by Jackett P. in Associated Investors of Canada Ltd. v. Minister of National Revenue, [1967] 2 Ex. C.R. 96 (Can. Ex. Ct.), where he stated at p. 102:

Ordinary commercial principles dictate, according to the decisions, that the annual profit from a business must be ascertained by setting against the revenues from the business for the year, the expenses incurred in earning such revenues.

31 Accepting this fundamental definition, in Symes, supra, at pp. 722-23, the majority made the following observations about the computation of profit:

...the “profit” concept in s. 9(1) is inherently anetconcept which presupposes business expense deductions. It is now generally accepted that it is s. 9(1) which authorizes the deduction of business expenses; the provisions of s. 18(1) are limiting provisions only....

Under s. 9(1), deductibility is ordinarily considered as it was by Thorson P. in Royal Trust, [ Royal Trust Co. v. Minister of National Revenue, 57 D.T.C. 1055 (Ex. Ct.)] (at p. 1059):

...the first approach to the question whether a particular disbursement or expense was deductible for income tax purpose was to ascertain whether its deduction was consistent with ordinary principles of commercial trading orwell accepted principles of business...practice... (Emphasis added.)

Thus, in a deductibility analysis, one's first recourse is to s. 9(1), a section which embodies, as the trial judge suggested, a form of “business test” for taxable profit.

This is a test which has been variously phrased. As the trial judge rightly noted, the determination of profit under s. 9(1) is a question of law: Neonex International Ltd. v. The Queen.... Perhaps for this reason, and as Neonex itself impliedly suggests, courts have been reluctant to posit a s. 9(1) test based upon “generally accepted accounting principles” (G.A.A.P.).... Any reference to G.A.A.P. connotes a degree of control by professional accountants which is inconsistent with alegaltest for “profit” under s. 9(1). Further, whereas an accountant questioning the propriety of a deduction may be motivated by a desire to present an appropriately conservative picture of current profitability, the Act is motivated by a different purpose: the raising of public revenues. For these reasons, it is more appropriate in considering the s. 9(1) business test to speak of “well accepted principles of business (or accounting) practice” or “well accepted principles of commercial trading”. [Emphasis in original.]

32 The great difficulty which seems to have plagued the courts in the assessment of profit for income tax purposes bespeaks the need for as much clarity as possible in formulating a legal test therefor. The starting proposition, of course, must be that the determination of profit under s. 9(1) is a question of law, not of fact. Its legal determinants are two in number: first, any express provision of the Income Tax Act which dictates some specific treatment to be given to particular types of expenditures or receipts, including the general limitation expressed in s. 18(1)(a), and second, established rules of law resulting from judicial interpretation over the years of these various provisions.

33 Beyond these parameters, any further tools of analysis which may provide assistance in reaching a determination of profit are just that: interpretive aids, and no more. Into this category fall the “well-accepted principles of business (or accounting) practice” which were mentioned in Symes, also referred to as “ordinary commercial principles” or “well-accepted principles of commercial trading”, among other terms. A formal codification of these principles is to be found in the “generally accepted accounting principles” (“G.A.A.P.”) developed by the accounting profession for use in the preparation of financial statements. These principles are accepted by the accounting profession as yielding accurate financial information about the subject of the statements, and become “generally accepted” either by actually being followed in a number of cases, by finding support in pronouncements of professional bodies, by finding support in the writings of academics and others, or by more than one of these methods: see Peter W. Hogg and Joanne E. Magee, Principles of Canadian Income TaxLaw (2nd ed. 1997), at pp. 180-81. What must be remembered, however, is that these are non-legal tools and as such are external to the legal determination of profit, whereas the provisions of the Act and other established rules of law form its very foundation.

34 That is not to minimize the key role played by such well-accepted business principles (as I shall hereafter refer to them) in the profit-computation process. In Friesen v. R., [1995] 3 S.C.R. 103 (S.C.C.), in dissent, Major J. made the following observation at p. 127, with which the majority did not disagree:

The Act does not define “profit” nor does it provide any specific rules for the computation of profit. Tax jurisprudence has established that the determination of profit under s. 9(1) is a question of law to be determined according to the business test of “well-accepted principles of business (or accounting) practice” or “well-accepted principles of commercial trading” except where these are inconsistent with the specific provisions of the Income Tax Act....

35 I think this statement aptly describes the proper relationship between tax law and business principles. In the absence of a statutory definition of profit, it would be unwise for the law to eschew the valuable guidance offered by well-established business principles. Indeed, these principles will, more often than not, constitute the very basis of the determination of profit. However, well-accepted business principles are not rules of law and thus a given principle may not be applicable to every case. More importantly, these principles must necessarily take a subordinate position relative to the legal rules which govern.

36 The reason for this is simple: generally speaking, well-accepted business principles will have their roots in the methodology of financial accounting, which, as was expressed in Symes, is motivated by factors fundamentally different from taxation. Moreover, financial accounting is usually concerned with providing a comparative picture of profit from year to year, and therefore strives for methodological consistency for the benefit of the audience for whom the financial statements are prepared: shareholders, investors, lenders, regulators, etc. Tax computation, on the other hand, is solely concerned with achieving an accurate picture of income for each individual taxation year for the benefit of the taxpayer and the tax collector. Depending on the taxpayer's commercial activity during a particular year, the methodology used to calculate profit for tax purposes may be substantially different from that employed in the previous year, which in turn may be different from that which was employed the year before. Therefore, while financial accounting may, as a matter of fact, constitute an accurate determinant of profit for some purposes, its application to the legal question of profit is inherently limited. Caution must be exercised when applying accounting principles to legal questions.

37 I do not wish to be taken, however, as minimizing the role of G.A.A.P. in the determination of profit for income tax purposes. Some have inferred from my reasons in Symes an intention that G.A.A.P. are to be rejected entirely: see, for example, Hogg and Magee, supra, at pp. 185-87. This is not what I intended. In fact, the better view is that G.A.A.P. will generally form the very foundation of the “well-accepted business principles” applicable in computing profit. It is important, however, for the courts to avoid delegating the criteria for the legal test of profit to the accounting profession, and therefore a distinction must be maintained. That is, while G.A.A.P. may more often than not parallel the well-accepted business principles recognized by the law, there may be occasions on which they will differ, and on such occasions the latter must prevail: see, for example, Friedberg v. R., supra.

38 Moreover, there will, of course, be situations in which G.A.A.P. will offer various acceptable options in the preparation of financial statements, and the taxpayer will be free, for financial accounting purposes, to adopt whichever option best suits his financial objectives at the given time. In such cases, G.A.A.P. will surely not be determinative as to the method by which an accurate picture of profit may be obtained for taxation purposes, though it may still be useful as a guide to the various acceptable methods of computation, one of which may yield the appropriate result for taxation.

39 A good example of the relationship among the provisions of the Act, the principles developed in the case law, and G.A.A.P. or well-accepted business principles can be found s. 18(9) of the Act, which requires the amortization of certain prepaid expenses over the periods of time to which they relate. It is possible, although I express no specific opinion on this matter, that some of these expenses could be treated otherwise for the purposes of G.A.A.P. or business practice; perhaps they might be deducted entirely in the year incurred, or even capitalized. However, this possibility is negated for tax purposes by their specific legislative treatment.

40 I pause here for a moment to distinguish the role of the courts in this regard from that of Parliament. Generally speaking, the courts are free, in the absence of contrary legislation or established rules of law, to assess the taxpayer's computation of income in accordance with well-accepted business principles. Obviously, this will require an assessment in each case of which of these principles apply to the particular circumstances which present themselves. However, it is not for the court to decide that one principle is paramount, or applicable to the exclusion or subordination of all others by saying that it has been elevated to the status of a rule of law which is to be applied in all situations. That is exclusively within the province of Parliament, and the willingness of Parliament to exercise this power is exemplified by s. 18(9) and by countless other codifications in the Act of what would otherwise likely be considered well-accepted business principles: see Symes, supra, at pp. 723-725.

41 For the court to usurp this inherent power of Parliament is rife with unnecessary danger. As was observed in Royal Bank v. Sparrow Electric Corp., [1997] 1 S.C.R. 411 (S.C.C.), at p. 485:

All that is needed to effect the desired result is clear language of that kind. In the absence of such clear language, judicial innovation is undesirable, both because the issue is policy charged and because a legislative mandate is apt to be clearer than a rule whose precise bounds will become fixed only as a result of expensive and lengthy litigation.

42 Of course, this is distinct from the interpretation of such rules, such as, for example, the elucidation of the otherwise undefined concept of “profit”, which is well within the jurisdiction of the courts. Such interpretive jurisprudence will fall within the category of “rules of law” which, as a matter of course, will predominate over well-accepted business principles. However, when no specific legal rule has been developed, either in the case law or under the Act, the taxpayer will be free to calculate his or her income in accordance with well-accepted business principles, and to adopt whichever of these is appropriate in the particular circumstances, is not inconsistent with the law, and, as I shall elaborate upon below, yields an accurate picture of his profit for the year. The simple application by a court of one or another well-accepted business principle to a particular case or cases, moreover, will not ordinarily amount to the elevation of that principle to the status of a “rule of law”. In general, the Minister will not be entitled to insist that one method supported by business practice and commercial principles be employed over another, equally supported method, unless, as I will develop below, the method chosen by the taxpayer fails to yield an accurate picture of his or her income for the taxation year.

(b) The interpretive goal: an accurate picture of income

43 Having established an appropriate framework for analysis, I should now like to discuss what exactly is the question that must be answered when attempting to assess a taxpayer's profit for tax purposes. A good place to begin is with the decision of the Federal Court of Appeal in West Kootenay, supra, where MacGuigan J.A. stated at p. 6028:

The approved principle is that whichever method presents the “truer picture” of a taxpayer's revenue, which more fairly and accurately portrays income, and which “matches” revenue and expenditure, if one method does, is the one which must be followed.

44 In the court below, Stone J.A. took this passage as grounding his conclusion that the matching principle of accounting has been elevated to a rule of law. Obviously, in light of my previous comments, I do not, with respect, subscribe to that point of view. To my mind, the significance of this statement is to confirm a much sounder proposition: that the goal of the legal test of “profit” should be to determine which method of accounting best depicts the reality of the financial situation of the particular taxpayer. If this is accomplished by applying the matching principle, then so be it. On the other hand, if some other method is appropriate, is permissible under well-accepted business principles, and is not prohibited either by the Act or by some specific rule of law, then there is no principled basis by which the Minister should be entitled to insist that the matching principle -- or any other method, for that matter -- be employed. MacGuigan J.A. in West Kootenay seemed to advert to this notion at p. 6028, in the passage immediately following the above-quoted portion:

The result often will not be different from what it would be using a consistency principle, but the “truer picture” or “matching approach”is not absolute in its effect, and requires a close look at the facts of a taxpayer's situation. [Emphasis added.]

45 As an aside, I would also observe that the compartmentalization of income calculation has led to a process that is far more complicated than necessary. To attempt to achieve a useful picture of profit by reference only to rigid categories of expenses -- running expenses, matchable expenses, etc. -- can become a frustrating exercise in futility: see Richard B. Thomas, “The Matching Principle: Legal Principle or a Concept?” (1996), 44 C.T.J. 1693. Rather than trying to discern into which pigeonhole a particular income expenditure falls, the taxpayer's focus should be on attempting to portray his or her income in the manner which best reflects his or her true financial position for the year, that is, which gives an “accurate picture” of profit. To do otherwise is to lose sight of the taxation forest for the practice or principle trees. In other words, the competing concepts of running expenses and matching which appear to be at play in this appeal fall into the category of well-accepted business principles, no more, no less. They are simply important interpretive aids which may assist, but are not determinative, in the illumination of an accurate picture of the taxpayer's income.

46 This should not be taken as casting doubt upon those previous decisions which have applied such well-accepted business principles to the computation of profit, even where this might appear to have been the determining factor in the end. In Oxford Shopping Centres, supra, for example, an amount paid by the taxpayer to the City of Calgary to effect a certain traffic diversion for the benefit of its business was held to be a running expense. In his reasons, Thurlow A.C.J. (as he then was) held that the matching principle did not apply to a running expense even though deducting the expense entirely in the year incurred would distort the income for that particular year. While on first glance, this decision might appear to fly in the face of the “accurate picture” principle, in my view, the facts of the case gave rise to a choice between two difficult positions: either to permit the distortion of the taxpayer's income for a single year by allowing the immediate deduction of a running expense, or to require the distortion of its income for a number of years by forcing the arbitrary amortization of an expense which was not clearly referable to any particular item of future revenue. Given this choice, it is apparent that Thurlow A.C.J. recognized that to apply the matching principle of accounting, as a well-accepted business principle, not a rule of law, would not have assisted in obtaining an accurate picture of the taxpayer's income. Thus, he ruled it inapplicable to the circumstances of the case before him while expressly adverting to the freedom of the taxpayer to so amortize in appropriate cases, as had been held previously in Tower Investment, supra, and in Minister of National Revenue v. Canadian Glassine Co., [1976] 2 F.C. 517 (Fed. C.A.).

47 To my mind, this is a excellent example of the proper approach to be taken to the computation of profit. To the extent that they may be applicable to particular circumstances, well-accepted business principles are to be assessed and applied only on a case-by-case basis, and only for the purpose of achieving an accurate picture of profit for the year in question for income tax purposes. In this light, I have no hesitation in finding that to the extent that the majority decision of the Federal Court of Appeal was premised on the view of the matching principle as a rule of law, it was clearly in error.

48 In reaching these conclusions, I am well aware of my remarks in Friesen, supra, at p. 165, to the following effect:

The appellant's interpretation would also undermine the matching principle underpinning s. 9 of the Act: Neonex International Ltd. v. The Queen... (for an affirmation of the importance of this principle and an invalidation of an attempt to claim expenses in a year in which they were not incurred); see also West Kootenay Power and Light Co. v. Canada, [ supra]. This principle emphasizes that receipts and expenditures which produce the net income are to be properly “matched” in the same time period: [V. Krishna, The Fundamentals of Canadian Income Tax (4th ed. 1993), at p. 279. The importance of the “match” flows from the critical role timing considerations play in taxation matters.

49 While at first glance this statement might be taken to support the recognition of the matching principle as a rule of law, such was not the true meaning of these remarks. Rather, I was simply acknowledging the general principle that the computation of profit involves the offsetting of revenues against the expenditures incurred in earning them. This is hardly a novel concept (see Irwin, supra, for example), and clearly goes to the quest for an accurate picture of the taxpayer's income. In circumstances where an expenditure is incurred principally for the specific purpose of earning a discrete and identifiable item of revenue, it will generally yield a more accurate picture of profit to deduct that expenditure from taxable income in the year in which the revenue is realized. However, it will always be a matter of debate, in light of well-accepted business principles, whether a particular expenditure was in fact made principally for this purpose, and whether it is possible or appropriate to “match” the expenditure against some specific revenue, either current or future. Nothing in my remarks in Friesen serves to cast doubt upon this fundamental premise.

50 It follows from all of this that in calculating his or her income for a taxation year, the taxpayer must adopt a method of computation which is not inconsistent with the Act or established rules of law, which is consistent with well-accepted business principles, and which will yield an accurate picture of his or her income for that year. In the simplest cases, it will not even be necessary to resort formally to the various well-accepted business principles, as the simple formula by which revenues are set against the expenditures incurred in earning them is always the basic determinant.

51 However, where the income picture is more complicated, as is frequently the case, the taxpayer is free to employ whichever well-accepted business principles will be most useful in depicting profit, provided again that the method adopted is not inconsistent with the law. As a general rule, and as I have already stated, the Minister is in no position to insist on the application of one principle or another, in the absence of some legal rule so requiring, unless, as I shall discuss next, the application of an alternative rule would yield a more accurate picture of income than that which was obtained by the taxpayer.

52 Revenue Canada is free to indicate its disapproval of the taxpayer's chosen method of computation by means of assessment. In Johnston v. Minister of National Revenue, [1948] S.C.R. 486 (S.C.C.), this Court held that the onus is on the taxpayer, in the face of an assessment, to establish that the factual findings on which the assessment is based are wrong. However, to satisfy this onus where the dispute is over the appropriate method of computation, the taxpayer need only show that his or her income was calculated in a manner consistent with the foregoing paragraph, that is, that the figure attained was in conformity with the then-existing legal framework and represents an accurate picture of his or her financial position for the year in question. The onus then shifts to the Minister to prove either that the figure does not constitute an accurate picture of income or that some other method of computation would yield a more accurate picture. In so doing, however, I emphasize that the Minister is not entitled to rely on particular well-accepted business principles as being inherently preferable over others. If the method chosen by the taxpayer is otherwise acceptable by law and in accordance with such well-accepted principles, then it is no answer for the Minister to say that other principles should have been employed unless to do so would have yielded a more accurate picture of income.

53 The outlined framework for analysis is, of course, only as useful as its application to actual cases. Turning to the facts of this case will illustrate how this principled approach to the computation of income is intended to operate. Before I do this, however, it may be both convenient and useful to summarize the principles which I have set out above:

• (1) The determination of profit is a question of law.

• (2) The profit of a business for a taxation year is to be determined by setting against the revenues from the business for that year the expenses incurred in earning said income: Minister of National Revenue v. Irwin, supra, Associated Investors, supra.

• (3) In seeking to ascertain profit, the goal is to obtain an accurate picture of the taxpayer's profit for the given year.

• (4) In ascertaining profit, the taxpayer is free to adopt any method which is not inconsistent with

  • (a) the provisions of the Income Tax Act;

  • (b) established case law principles or “rules of law”; and

  • (c) well-accepted business principles.

• (5) Well-accepted business principles, which include but are not limited to the formal codification found in G.A.A.P., are not rules of law but interpretive aids. To the extent that they may influence the calculation of income, they will do so only on a case-by-case basis, depending on the facts of the taxpayer's financial situation.

• (6) On reassessment, once the taxpayer has shown that he has provided an accurate picture of income for the year, which is consistent with the Act, the case law, and well-accepted business principles, the onus shifts to the Minister to show either that the figure provided does not represent an accurate picture, or that another method of computation would provide a more accurate picture.

(2) Application of general principles to this case

54 It is evident that the method of income calculation adopted by Canderel in the instant case was not inconsistent with any provision of the Income Tax Act or other rule of law. The general income provision, s. 9(1), provides no definition of “profit”, and no other section of the Act touches, either directly or indirectly, upon the income treatment to be given TIPs. Section 18(9) of the Act does require the amortization of certain “prepaid expenses”, but TIPs are not included in this provision.

55 To my mind, this exclusion not only exempts TIPs from any statutory amortization requirement, but also provides a valuable hint as to Parliament's lack of intention to require such treatment of TIPs. I do not mean to suggest that the expressio unius maxim of statutory interpretation applies here, as s. 18(9) certainly does not purport to be an exhaustive compendium of amortizable expenses, and it is arguable that TIPs do not really fall into the same category as the prepaid expenses touched upon by the section, but the fact that Parliament has directed its mind to requiring the amortization of some expenses without requiring this of TIPs is nonetheless telling to some extent. Parliament would be free to institute this requirement, but has not done so.

56 The case law also supports this method of computation. In Cummings, supra, the court considered the timing of deduction of lease pick-up payments, by which the appellant taxpayer agreed to pay rent to the landlords whose premises were vacated by the appellant's new tenant. The rents which the tenant was still obliged to pay under existing leases was a major obstacle in lease negotiations and was resolved only by the appellant's agreement to assume the lease pick-up payments; that is, the assumption of the payments was a necessary inducement for the tenant to enter the lease. After considering expert accounting evidence to the effect that immediate deduction of such expenses was permissible for tax purposes, Heald J.A. concluded, at p. 5211,

...that subject expenditure was a “running expense” and in the same category as for example, an extensive advertising campaign to obtain tenants or an offer to a prospective tenant of a rent-free period as an inducement to enter into a long-term lease or a finder's fee for obtaining tenants and leases.

57 While the analogies contained in the last part of the quotation are obviously obiter dicta, as was correctly pointed out by both Stone and Desjardins JJ.A. in the court below, I believe the implication of the decision is clear nonetheless. To distinguish the lease pick-up payments from the cash TIPs advanced in the instant case is, in my opinion, virtually impossible. Both are contractual payments voluntarily incurred by landlords for the purpose of inducing tenants to enter into long-term leases. While both payments may give rise to benefits which are realized in years subsequent to that in which they are incurred, the fact that in Cummings the Federal Court of Appeal found the expenses in question to be running expenses, not referable to any specific items of income, and thus fully deductible in the year incurred, is most instructive. There is simply no meaningful distinction between the two cases: see also T. E. McDonnell, “Running Headlong into the GAAP (Again)” (1995), 43 C.T.J.. 179.

58 The decision of the Federal Court-Trial Division in Tower Investment Inc., supra, in which advertising expenses incurred for the purpose of attracting tenants to new buildings were held to be amortizable over a period of years, poses no analytical problem in this regard. All that appears to have been decided in that case was that in the particular circumstances, amortization was an acceptable way to obtain an accurate picture of income. No general rule of law was thereby developed, nor was amortization held to be the only acceptable treatment of the expenses. Again, the appropriate treatment will turn on the facts of each individual case.

59 At this stage, then, Canderel was free to deduct the payments entirely in the year incurred. But that does not end the matter. It remains to be seen whether the method chosen by Canderel was in accordance with the case law principles as outlined above and with well-accepted business principles, and whether it provided an accurate picture of its income for the year in question. Even if that were so, the Minister would still be entitled to insist on an alternative treatment of the expenditures if it could be shown that such would provide a more accurate picture. To answer these questions will require an examination of the evidence and the findings of the trial judge.

60 The accounting evidence adduced by the parties was somewhat inconclusive at best. It disclosed that at the time of the payments, G.A.A.P. allowed for three alternative and acceptable methods of accounting for TIPs. The payer was entitled to treat the payments either as operating expenses, fully chargeable to the results of operations in the year incurred, as capital expenditures to be added to the cost of the building and depreciated, or as deferred expenses to be amortized over the life of the relevant leases. The experts called by Canderel were of the opinion that the first option was to be preferred because the expenditures were incurred in the ordinary course of generating revenue from Canderel's business and that this method would thus give the most accurate picture of income. Those called by the Minister, as might be expected, testified that the preferred method was the third, as the payments were causally linked to rental revenue while any other benefits to which they gave rise were not revenue and could not be the subject of “matching”. To my mind, this evidence is useful only to demonstrate that G.A.A.P. at the time endorsed the options contended for by both parties. However, I cannot draw from this alone any specific conclusion as to which method was preferable in terms of yielding the more accurate picture of Canderel's income.

61 But the findings of fact made by the trial judge are more instructive. Brulé J. found that the payments yielded four primary benefits for Canderel: the prevention of a “hole in income” which otherwise would have been caused by maintaining a vacant building, the ability to satisfy the underlying requirements of its interim financing and to obtain permanent financing, the ability to meet its competition and to maintain its market position and reputation, and the generating of revenues through rentals and through management and development fees (which were to some extent contingent upon the rate of lease-up). From this, he concluded that the payments constituted “running expenses”, as they could not be causally linked to any single or specific stream of revenue, and that the matching principle therefore did not apply in the circumstances, as contended for by the Minister.

62 It is immediately apparent that, while some of the benefits identified by Brulé J. are of a type that would be realized over a period of years, others, such as the satisfaction of interim financing requirements and the maintenance of market position and reputation, are benefits that were immediately realized by Canderel in the year the payments were made. From this observation emerges one serious practical difficulty inherent in the Federal Court of Appeal's view of the law: even if it can properly be argued that the payments are “directly referable” to some future revenues, what is to be made of a situation where they are also referable to other, immediate benefits? It would be unduly arbitrary to allocate the expenses only to the specific revenues while ignoring the other, less tangible benefits. But there also exists no specific legal formula for the apportionment of the expenses among the various benefits. Perhaps some appropriate amortization formula could be devised to cover such an apportionment, but any such device would need to be a creature of statute; anything less would constitute judicial legislation of a very intrusive variety. It is similarly no answer to suggest that because the payments were amortized by Canderel for financial accounting purposes, they can be similarly amortized for taxation purposes. As I have already explained, the two portrayals of profit are substantially different in nature and purpose.

63 In its submissions before this Court, Canderel posited a variety of other questions which would arise out of the treatment of the matching principle as a compulsory rule of law. For example, if an induced tenant were to break its lease before the end of the term, how, and pursuant to what authority, would the balance of the TIP be deducted from income? What if the rate of rent varied over the term of the lease; would this affect the rate of amortization? Additionally, without any clear, principled distinction between this case and Cummings, supra, what other expenses incurred in the course of securing tenants for a building would be required to be amortized rather than currently deducted? Moreover, what would happen if the leased premises were disposed of before the TIPs were fully deducted? These are questions which simply cannot be answered by reference to the law as it presently exists, and for good reason: in a case such as this, there is simply no uniform solution by which the most accurate picture of the taxpayer's profit may be obtained. It is therefore an artificial and arbitrary solution to impose the matching principle, as a matter of law, upon circumstances where its application quite evidently creates serious difficulty. To my mind, the uncertainties created by the type of judicial legislation engaged in by the Federal Court of Appeal stand as clear examples of the difficulties contemplated in Sparrow Electric, supra.

64 In light of all of this, I find it difficult, particularly given the findings of the trial judge as to the various benefits generated by the TIPs, to conclude that the amortization of the payments over the terms of the leases, as contended for by the Minister, would provide a more accurate picture of Canderel's income than would their immediate deduction in the year expended. In such a case, where no one method emerges as clearly superior or more properly applicable than another, the taxpayer should retain the option of ordering its affairs in accordance with any method which is in accordance with well-accepted business principles and which is acceptable in light of the reality of its business. That is to say, just because a particular tactic is acceptable under well-accepted business principles will not necessarily justify its application in a given context if it is out of step with the actual manner in which the taxpayer conducts its affairs. However, once the taxpayer has established that the method adopted gives an accurate picture of its income, the onus is clearly on the Minister to prove that the method adopted by the taxpayer is inappropriate in the particular circumstances of each case. In the instant case, I believe that the findings of the trial judge make it impossible to conclude that the Minister has discharged this burden in the instant case.

65 Indeed, in my view, the fact that in the instant case, Brulé J. found that the TIPs were properly attributable to a number of different expenses makes inevitable the conclusion that they constituted running expenses. As I have already noted, I do not see how, under these circumstances, it is possible with any accuracy to amortize the payments over the term of the lease, in the absence of an established formula acceptable for tax purposes, which was not advanced by the Minister. It follows, then, that the TIPs were not referable to any particular items of income, i.e., they cannot be correlated directly, or at least not principally, with the rents generated by the leases which they induced. They therefore qualify as running expenses to which the matching principle does not apply: see Oxford Shopping Centres, supra. The findings of fact made by Brulé J. in this regard are entitled to considerable deference. There is no indication that these findings were unsupported by the evidence, and I can see no reason to reject them.

66 In light of the foregoing, I am compelled to the view that the Federal Court of Appeal erred in requiring that the TIPs be amortized over the terms of the leases which they induced, rather than being deducted entirely in the year incurred. As I have already made clear, there is no basis for treating the matching principle as a “rule of law”, as the Federal Court of Appeal chose to do, and for my part, I am unable to conclude that to apply this particular principle of accounting to the present case would serve to achieve a more accurate picture, for tax purposes, of the taxpayer's financial position for the year in question than the immediate deduction of the expenses favoured by Canderel. While the matching principle will certainly be useful in some cases, its specific application in the present case is unnecessary, as the payments related at least partially to benefits realized entirely in the year incurred, and the taxpayer therefore should not be constrained to amortize. The method employed by Canderel was consistent both with the law and with well-accepted business principles, and gave at least as accurate a picture of the taxpayer's income as would the amortization method. Therefore, it ought not to be disturbed.

VI. Disposition

67 For the foregoing reasons, I would allow the appeal, set aside the judgment of the Federal Court of Appeal, and restore the judgment of the Tax Court of Canada. The appellant shall have its costs throughout.