Gartry v. The Queen, 94 DTC 1947, [1994] 2 CTC 2021 (TCC)

Bowman, J.T.C.C.:—This appeal is from an assessment for the appellant's 1989 taxation year. It has to do with the deductibility of certain expenses or losses incurred by him in connection with a vessel which he intended to use in a fishing business.

The problem in a nutshell is this: the appellant agreed to buy a retired U.S. navy boat which he intended to use in the commercial fishing business. He commissioned and paid for modifications that had to be made to enable it to be used for that purpose. Before title passed and before the boat was delivered to him in Canada, it sank. He wishes to deduct the money he spent. The Minister disagrees.

The amount claimed by the appellant in his 1989 return of income was $25,500 consisting of the following:

In making and in confirming the assessment the Minister disallowed the amounts claimed on the sole basis that they were not laid out for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(1 )(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

In the reply to the notice of appeal the respondent advanced three reasons in support of the assessment:

(a) that the amounts were not laid out for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(1)(a);

(b) that the appellant did not have a reasonable expectation of profit; and

(c) the expenditures were in any event on capital account within the meaning of paragraph 18(1)(b).

At trial, however, counsel stated that she would not be arguing that the appellant did not have a reasonable expectation of profit and substantially restricted her argument to the proposition that the expenditures were on capital account. She did not contest the accuracy of the figures or the fact that the money had indeed been spent as alleged.

The facts giving rise to the claim may be summarized as follows.

The appellant, Mr. Gartry, has been a conductor on the CNR for 29 years. He moved from Saskatchewan to Vancouver in 1986 where he conceived the idea of going into the commercial fishing business, although he had had no previous experience in that line of work. His reasons for this decision included the freedom, the hours and money and the independence involved in this new type of work. I accept that he had a genuine desire to make a fundamental change in his career, a goal which he pursued with tenacity. To this end he lined up a crew of experienced fishermen, he spent a great deal of time looking for a boat and he took courses to enable him to operate a fishing boat. His intention was to use the boat to transport fish from other fishing boats to places where they could be transferred to trucks, such as Nanaimo.

Ultimately he became aware of a retired U.S. Navy torpedo retriever vessel which seemed to fill his requirements. He inspected it in San Diego and on March 16, 1987 agreed to purchase it for $95,000 (Cdn). It was, he testified, in good condition and seaworthy but required modifications and refitting to make it suitable for use as a fish transport. The purchase was effected through Pacific Marine Ventures and Associates of Nanaimo, British Columbia. The work was to be done by a California firm, Sea Tree Enterprises, Inc., and was done under the direction of Mr. Lakowsky, one of the crew that the appellant had lined up.

The work done ranged from relatively minor modifications to parts of the boat to a replacement of a number of parts. It included the installation of new engines and new generators and refitting or replacement of the hydraulic, electronic and navigational equipment and the running gear, as well as changes to the hold and the installation of refrigeration equipment necessary for the storage and transport of fish.

To raise the money he approached the Bank of Montreal [Which], after receiving reports about the economic viability of the enterprise, agreed to lend him $80,000. He also borrowed money from Trans-Canada Credit and a credit union. He made arrangements with nine owners of boats holding "G" licences to utilize the boat for transporting such marine delicacies as sea urchins, geoducks, horse clams, red urchins, green urchins, seacucumbers, and pink scallops. Currently there are only 20 such licences issued in British Columbia permitting the harvesting of these exotic sea creatures. His projections were that in two years the boat would be paid off out of the profits of the enterprise. He continued to draw down on his line of credit to pay for work being done by Sea Tree on the boat. He obtained all of the licences necessary for him to operate the boat.

In November of 1989 before delivery had been made to Mr. Gartry in Canada and, it seems, before title had been formally passed to him, the boat sank in heavy seas south of Santa Barbara.

The named beneficiary under the Lloyd's policy was Sea Tree. Evidently some amount was paid by the insurers to Mr. Gartry under a policy of insurance that he had taken out and this was used to reduce a part of his liability to the bank and also to reduce his loss to some degree.

He claimed the loss and the expenses in 1989 and this deduction was denied on the sole basis that the amounts expended by him which formed components of his loss were not laid out for the purpose of gaining or producing income within the meaning of paragraph 18(1)(a).

I have no hesitation in finding that the basis of the assessment has, to use Mr. Justice Rand's expression in Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182, been "demolished". The money spent by the appellant was unquestionably spent to earn income from a business. The money obtained from the bank and other lending institutions was borrowed for that purpose and the interest claimed is deductible under paragraph 20(1 )(c). The purpose of all of the outlays was the earning of income from the fishing business. The converted U.S. navy torpedo retriever was obviously no pleasure craft and the appellant had a specific, concrete and realizable commercial purpose in mind.

There was also some suggestion that the business may not have commenced when the expenses were incurred and that, if there was no business in existence when the money was spent, it could not have been laid out for the purpose of gaining or producing income from a business within paragraph 18(1 )(a). Even if the premise were correct I doubt that the conclusion follows. I do not however think that the premise is correct. In determining when a business has commenced, it is not realistic to fix the time either at the moment when money starts being earned from the trading or manufacturing operation or the provision of services or, at the other extreme, when the intention to start the business is first formed. Each case turns on its own facts, but where a taxpayer has taken significant and essential steps that are necessary to the carrying on of the business it is fair to conclude that the business has started. That is certainly the case here. The appellant had borrowed money, agreed to buy the boat, arranged for a crew, obtained the necessary licences, arranged with a substantial number of owners of boats with "G" licences to utilize his services when the boat became available, arranged and paid for modifications to be made to the boat and placed insurance. In my view the business had been commenced and was well underway when the expenses in question were incurred. Interpretation bulletins are of course not the law and they should be referred to with some caution. However the observations in Interpretation Bulletin IT-364 as to when a business commences make eminently good sense both as a matter of law and as a matter of business reality. The appellant has met the criteria set out in that bulletin. Accordingly, even if the costs of modifying the vessel were on capital account the other running expenses, such as accounting, legal, office expenses, travel and insurance would be deductible. The interest expense, as noted above, is deductible under paragraph 20(1 )(c).

The decision of the Federal Court of Appeal in M.N.R. v. M.P. Drilling Ltd., [1976] C.T.C. 58, 76 D.T.C. 6028 supports this conclusion as well. At page 62 (D.T.C 6031), Urie, J., speaking for the Court, stated:

As I understand it, it is basic to the appellant's submissions that the expenditures incurred by the respondent in 1964, 1965 and 1966 were for the purpose of creating or acquiring a business structure. In appellant counsel's submission its activities during those years were preparatory to or for the initiation of a business and were not outlays made for the purpose of gaining or producing income from a business. If this submission were accepted the payments would have been on account of capital, falling within paragraph (a) of Jackett, C.J.’s test propounded in Canada Starch Co. v. M.N.R., [1968] C.T.C. 466, 68 D.T.C. 5320 (Ex. Ct.), at page 471 (D.T.C. 5323).

In my view this argument does not withstand scrutiny in that it ignores the fact that the business structure perse came into existence in late September when the respondent commenced its business operations by continuing the marketing negotiations, supply negotiations and technical studies through its consultants until June of 1964 when it opened its own office and engaged the services of its first employees, utilizing for such purposes funds advanced by its principal, Mr. Bawden, or other companies controlled by him.

It also ignores the fact that in the early summer of 1964 Mr. Van Wielingen joined the respondent as a full time general manager and chief operational officer. His duties at that time were, according to his testimony, firstly, to develop a market for the product, secondly, to negotiate with actual and potential suppliers of liquid petroleum gases and, thirdly, to consider the technical aspects of production, storage, transportation and the like.

In short, the company was then in existence and was engaged in doing the normal things that any new business must do to bring its wares to the market place, hopefully with profitable results. As I see it, this business activity falls within paragraph (b) of Jackett, C.J.'s test in the Canada Starch case, supra. Not to characterize such activity under this head is to ignore the commercial reality of the situation, which was that the respondent's efforts at all times were directed to bring products it expected (by negotiation) to be able to acquire, to users who, through the promotional efforts of the respondent's officers, indicated that they would be interested in becoming purchasers thereof. Negotiations proceeded with some twelve suppliers and the same number of potential foreign customers culminating in expressions of intent from some of each. The permanent structure, the market and the products all existed and the efforts of the respondent were directed to bringing them together with a resultant profit to it. The desired result was never accomplished and that part of the respondent's business had to be abandoned although it continued in operation in the drilling business with profitable results. But the abandonment caused no transformation of the expenditures made in an effort to achieve profitability into expenditures capital in nature.

The conclusion that the money was laid out for the purpose of gaining or producing income from a business does not, of course, end the matter. As Mr. Justice Abbott said in B.C. Electric Railway Co. v. M.N.R., [1958] S.C.R. 133, [1958] C.T.C. 21, 58 D.T.C. 1022, at page 137 (C.T.C. 31, D.T.C. 1027):

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.

Counsel for the appellant contended that once the basis for the assessment and confirmation had been destroyed that was effectively the end of the case. In most cases this would be so. It is however open to the respondent to plead and advance arguments in support of an assessment that were not relied upon in making the assessment. The onus is, of course, on the respondent to establish facts that support the alternative argument that the payment is on capital account. See M.N.R. v. Pillsbury Holdings Ltd., [1964] C.T.C. 294, 64 D.T.C. 5184 (Ex. Ct.).

The cost of the vessel is, of course, a capital cost to the appellant of depreciable property. Here we have the costs of certain modifications to a boat which the appellant incurred for legitimate commercial reasons but which are lost when the boat sinks. The respondent's argument would consign this loss to a fiscal no man’s land on the basis that they were of a capital nature but since title to the boat remained in the vendor, either for security reasons or as a matter of California law (which was not proved by expert evidence), no terminal loss was available. In determining whether the law unequivocally compels such an extraordinary result it is useful to consider the analysis of the guiding principles made in the judgment of Estey, J. in the Supreme Court of Canada in Johns-Manville Canada Inc. v. The Queen, [1985] 2 S.C.R. 46, [1985] 2 C.T.C. 111, 85 D.T.C. 5373. In the course of his analysis Estey, J. said at page 67 (C.T.C. 123, D.T.C. 5382):

On the other hand, if the interpretation of a taxation statute is unclear, and one reasonable interpretation leads to a deduction to the credit of a taxpayer and the other leaves the taxpayer with no relief from clearly bona fide expenditures in the course of his business activities, the general rules of interpretation of taxing statutes would direct the tribunal to the former interpretation.

At page 72 (C.T.C. 126, D.T.C. 5384) he said, in concluding that the expenses in question were on revenue as opposed to capital account:

Such a determination is, furthermore, consistent with another basic concept in tax law that where the taxing statute is not explicit, reasonable uncertainty or factual ambiguity resulting from lack of explicitness in the statute should be resolved in favour of the taxpayer.

Bearing these principles in mind, I propose to approach the problem from two perspectives:

(a) are the expenses on revenue or capital account?

(b) if they are on capital account does the fact that the vendor retained title to the vessel until full payment of the purchase price was made prevent the deduction of a terminal loss under paragraph 20(16) of the Income Tax Act? This question itself breaks down into two parts:

(i) did the appellant have sufficient of the incidents of title to the ship to warrant the conclusion that the ship, with the modifications, was depreciable property acquired by him?

(ii) if not, did he own the modifications, independently of the ship, so that they constituted depreciable property acquired by him for the purposes of paragraph 13(21 )(b) and subsection 20(16)?

A useful review of the authorities in this area of the law is the decision of the Federal Court of Appeal in Firestone v. The Queen, [1987] 2 C.T.C. 1, 87 D.T.C. 5237, where it was held that an investigation of business opportunities was on account of capital but the cost of supervising certain companies was on revenue account. It was pointed out by MacGuigan, J. that the cost of assembling assets was generally on capital account. Here we are concerned with modifications to a boat that were being made at the appellant’s specific directions and at his cost. I think that the evidence is consistent with the position that some of the expenses are on revenue account and, to the extent that they are not, some, such as the acquisition of new motors, represent the cost to the appellant of acquiring depreciable property. The appellant had a clear and substantial interest in the boat even though title had not formally passed and the cost of such modifications as he had ordered was more in the nature of modifications necessary to enable the boat to be used in the fishing business rather than a fundamental reconstruction of a capital asset. It is of passing interest, although not determinative, that the idea that these expenses were of a capital nature seems not to have occurred to anyone either at the assessment or the appeals level of the Department of National Revenue. The argument was first advanced in the reply to the notice of appeal.

In Algoma Central Railway v. M.N.R., [1967] C.T.C. 130, 67 D.T.C. 5091 (Ex. Ct.), Jackett, P. (as he then was) held that the costs of a geological survey intended to enhance generally the company's long-term business opportunities were on revenue account. Such expenditures, which resulted in information that the appellant could give to prospective businesses to attract them to establish businesses on land adjacent to the railway was held not to be "an advantage for the enduring benefit of the appellant company's business". The decision of the Exchequer Court was affirmed by the Supreme Court of Canada, [1968] S.C.R. 447, [1968] C.T.C. 161, 68 D.T.C. 5097. Fauteux, J. stated at page 449-50 (C.T.C. 162, D.T.C. 5098):

Parliament did not define the expressions "outlay . . . of capital" or “payment on account of capital’. There being no statutory criterion, the application or nonapplication of these expressions to any particular expenditures must depend upon the facts of the particular case. We do not think that any single test applies in making that determination and agree with the view expressed, in a recent decision of the Privy Council, B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia, [1966] A.C. 224, [1965] 3 All E.R. 209, by Lord Pearce. In referring to the matter of determining whether an expenditure was of a capital or an income nature, he said, at page 264 (All E.R. 218):

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

The appellant in this case paid for certain modifications to a boat to which title had not passed to him. The object was to make the boat suitable for the transportation of fish. I do not think that the cost of such modifications is part of the cost of "assembling assets” such as was referred to in Firestone, supra.

In Canada Steamship Lines Ltd. v. M.N.R., [1966] C.T.C. 255, 66 DTC 5205 (Ex. Ct.), Jackett, P. dealt with the specific issue of modifications to a vessel. In that case the issue concerned the replacement of the floors and walls of the holds of a number of ships. The taxpayer had also replaced the boilers in the ships. Jackett, P. held that the expenditures for the repairs of the holds were on account of income. At pages 256-57 (D.T.C. 5206-07) he made the following comments:

Where the inside layer of the ship’s bottom, which also serves as the floor for the ship’s cargo-carrying holds, has to be replaced, in whole or in part, by reason of wear and tear and of damage caused by the cargo carried in the ship, it seems clear to me that the expense falls in the same class as the expenses of replacement of portions of the outside skin. So long as the ship survives as a ship and damaged plates are being replaced by sound plates, I have no doubt that the ship is being repaired and it is a deductible current expense.

. . . cannot accept the view that the cost of repairs ceases to be current expenses and becomes outlays of capital merely because the repairs required are very extensive or because the cost is substantial.

Jackett, P. therefore held that the cargo modifications were a current expense. It is also apparent that he would have preferred to treat the cost of the boilers as a current expense as well. However, in the result he considered that he should follow earlier decisions that held that boilers on a ship are separate capital assets.

A similar decision was rendered in Central Amusement Co. v. Canada, [1992] 1 C.T.C. 218, 92 D.T.C. 6225 (F.C.T.D.). The expense in issue involved the installation of a conversion kit in an arcade machine. The conversion kit could be used to insert new games into old machines. The issue was whether the expense was on capital or income account. Rouleau, J. held that it was on account of income. At pages 224-25 (D.T.C. 6231) he said:

Finally, what was the nature of the advantage to be gained by the plaintiff in buying the conversion kits? In my opinion, the expenditure can and should be regarded as having been made as a means of maintaining and enhancing the popularity of the plaintiff's arcades as well as the other locations it serviced, while at the same time avoiding the cost of a new machine. The plaintiff's objective was to preserve the income earning capacity of the machines it owned by making them more attractive to consumers. To the extent that this is the essence of the plaintiff's business, the expenditure can only be seen as a revenue expense.

The premise of the defendant's position here, is that the installation of a conversion kit provided the plaintiff with a new machine and therefore its cost constitutes an outlay on account of capital. That reasoning, in my view, is erroneous because it fails to make any distinction between the video game machine and the video game which it contains. As previously stated the capital asset in question is the machine in its entirety, not the video game which it contains. By using the kits the plaintiff is not creating a new machine. A machine into which a conversion kit has been installed is the same machine but with a new circuit board. The fact that the video game is new does not have the effect of creating a new capital asset as contended by the defendant. The essential elements of the machine, that is, the cabinet, the electronic components, the video monitor, the control panel and the coin box for which the plaintiff initially paid $4,500 remains unchanged. The only alteration is the circuit board at the relatively modest cost in 1983 of $750.

The modifications here can be viewed in the same light. The appellant paid, or was going to pay some $95,000 for a vessel. He wanted a special vessel of a certain size, power and capabilities. He paid further amounts in order to make certain changes to the boat. The expenditures here appear to be similar to the expenses for hold alterations in Canada Steamship Lines Ltd., supra, and for the installation of a conversion kit in Central Amusement Co., supra.

In analyzing this question one cannot ignore the anomalous result that a denial of deductibility on any basis would entail. Either the expenditures resulted in the appellant’s obtaining an asset or they did not. If they did, and if the asset so acquired was depreciable property, it must follow that the provisions of subsection 20(16) were available to the appellant to permit the deduction of a terminal loss when the boat sank. If they did not result in the acquisition of an asset for the enduring benefit of the business they cannot, in light of the decisions in Algoma Central Railway, supra, and in Bowater Power Co. v. M.N.R., [1971] C.T.C. 818, 71 D.T.C. 5469 (F.C.T.D.), be regarded as capital in nature. The Crown's position would relegate the appellant to the worst of both possible worlds. It says, in effect, to Mr. Gartry "You were spending money on a capital asset, a boat, and if those expenses had matured into full ownership before the boat sank you would have been able to claim a terminal loss. As it happens, the boat sank before title was transferred to you and you obtained nothing. But they are still capital expenditures and so you can deduct nothing.”

This position is inconsistent with ordinary fairness, common sense and commercial reality. The disposition which in my view accords most closely to the facts and the authorities as I understand them is that the expenses should be treated as on revenue account or, to the extent that any are on capital account, as the cost of acquiring depreciable property which, when disposed of, are the subject of a claim for a terminal loss under subsection 20(16). Since either conclusion leads to deductibility it is not necessary that I determine specifically into which category they fall.

If I am wrong in treating them all as being on revenue account I propose to consider whether the appellant's accountant was correct in treating $18,000 of the $25,500 claimed as a terminal loss. If any of the expenditures were on capital account it must be on the premise that they were made to obtain a benefit or advantage for the enduring benefit of the trade. The “benefit or advantage” that resulted from the expenditures was the effecting of modifications, includin the installation of some new equipment, such as engines. The application of subsection 20(16) is premised upon the taxpayer's having "acquired" depreciable property within the meaning of paragraph 13(21)(b). Had I been compelled to conclude that the costs were on capital account I would have decided that notwithstanding that title remained in the vendor for security reasons until full payment was effected the appellant had sufficient of the incidents of ownership to entitle him to treat the boat as his depreciable property. The appellant exercised sufficient dominion over the boat to entitle him to commission the modifications and make the payments he did. His interest in it and in the modifications that he ordered be made and that he paid for put him over the threshold test of acquisition contained in paragraph 13(21)(b). I am not unmindful of the principle in M.N.R. v. Wardean Drilling Ltd., [1969] C.T.C. 265, 69 D.T.C. 5194 (Ex. Ct.), at page 271 (D.T.C. 5198):

As I have indicated above, it is my opinion that a purchaser has acquired assets of a class in Schedule B when title has passed, assuming that the assets exit at that time, or when the purchaser has all the incidents of title, such as possession, use and risk, although legal title may remain in the vendor as security for the purchase price as is the commercial practice under conditional sales agreements. In my view the foregoing is the proper test to determine the acquisition of property described in Schedule B to the Income Tax Regulations.

While I am of course in respectful agreement with what Cattanach, J. said, I do not think that the tests enunciated by him can be treated as exhaustive or as applicable to every situation. It may well be that a mere agreement of purchase and sale is insufficient. Where, however, a taxpayer in the position of Mr. Gartry has exercised sufficient dominion over a depreciable property that, having committed himself to purchase it, he orders its modification for his specific purposes, and supervises and pays for those modifications, even if passage of title is deferred until full payment for the boat is received, he has acquired a sufficient interest in the property and indicia of title thereto that it becomes depreciable property in his hands, so as to justify the application of subsection 20(16).

It is noteworthy that Cattanach, J. in Wardean Drilling Ltd., supra, stated at page 271 (D.T.C. 5197):

In my opinion the proper test as to when property is acquired must relate to the title to the property in question or to the normal incidents of title, either actual or constructive, such as possession, use and risk.

[Emphasis added.]

It may in a particular case be a difficult question to determine when the threshold of acquisition has been crossed. Nonetheless, certain factors may assist in making that determination. In this case legal title for whatever reason continued to be retained by the vendor. If there is no "actual" ownership, it becomes necessary to determine whether there exists a "constructive" ownership in the sense in which Cattanach, J. used those terms. Some assistance in this matter can be obtained from D.W.M. Waters in Law of Trusts in Canada, 2nd edition. At page 54 the learned author makes the following comment:

A contract arises when parties enter into mutual obligations. The link is that those obligations may concern land, chattels, or any other property. In a contract for the sale of land? for example, the vendor is bound from the moment of contracting to hold the land for the purchaser, and to be ready on the day fixed for conveyance to convey that land to the purchaser. Between the time of contract and the time of conveyance the law designates the vendor as a constructive trustee for the purchaser. In this situation the constructive trust is more a description of existing obligations than a creator of new obligations, since the purchaser has his action for breach of contract if the vendor fails to perform, and his action for specific performance if he wants performance rather than damages. But the courts find the description "constructive trust" a useful reference to the sum of the vendor's obligations.

[Emphasis added.]

A contract for the sale of property can entail different rights depending on the property in question and the nature of the relationship between the parties. In a contract for sale of land, although the vendor has legal title, but the rights of legal ownership are circumscribed by the trust obligations in favour of the purchaser. In a contract for the sale of chattels constructive ownership will not necessarily immediately arise. It is apparent from Waters, supra that a constructive trust is descriptive of the right of the purchaser under the contract. In particular it is a description of the purchaser's right to specific performance. [1] Therefore if there was a right to specific performance under the contract, this, coupled with the other acts of the parties of the type evident in this case, will indicate the existence of a proprietary right in the property amounting to the acquisition and ownership of the property for the purposes of paragraph 13(21 )(b). It is therefore important to a decision on this point to determine whether the appellant would, in a court of competent jurisdiction, have had a right to an order for specific performance had the vendor sought to repudiate the contract.

In Behnke v. Bede Shipping Co., [1927] 1 K.B. 649, [1927] All E.R. Rep. 689, the plaintiff had entered into a contract to purchase a ship. The defendant denied the contract and refused to sell the ship. The plaintiff sought specific performance. Wright, J. held that specific performance should be awarded. He concluded at page 661 (AIl E.R. Rep. 691) as follows:

In the present case there is evidence that the city was of peculiar and practically unique value to the plaintiff. She was a cheap vessel, being old, having been built in 1892, but her engines and boilers were practically new and such as to satisfy the German regulations, and hence the plaintiff could, as a German shipowner, have her at once put on the German register. A very experienced ship valuer has said that he knew of only one other comparable ship, but that may now have been sold. The plaintiff wants the ship for immediate use, and I do not think damages would be an adequate compensation. I think he is entitled to the ship and a decree of specific performance in order that justice may be done. What is the position between the defendants and other buyers, whose contract was later in time than that of the plaintiff, is irrelevant in this action.

I think the decision of Wright, J. is a persuasive, albeit not binding, precedent that would be followed in Canada and that specific performance would, in particular circumstances, be available in the case of the purchase of a ship. The right to specific performance arising out of the contract and supported by the vendor's acceptance of the appellant’s interest in and dominion over the ship by making the modifications ordered by him connotes constructive ownership in the purchaser. I have no reason to believe that the Behnke case, supra, would not be regarded as good law in Canada. [2] In the absence of any evidence that the law of California is different I shall assume that the law of California is the same as the law of Canada.? [3]

The rights of Mr. Gartry in this case are significant. He undertook an exhaustive search for this particular ship. He made substantial expenditures on the ship including the purchase of new equipment and the vendor carried out his detailed instructions in making the modifications and installing the equipment. The ship had attained a uniqueness that would in my view have entitled him to an order for specific performance of the contract in a court of competent jurisdiction. His interest in the property had gone far beyond that arising from a merecontract of purchase and sale of the type considered in Wardean Drilling Ltd., supra.

The matter is susceptible of a different analysis that leads to the same result. Let us assume for a moment, first, that my conclusion is wrong that the extensive rights which the appellant acquired in the ship itself as modified did not amount to an acquisition or ownership of the boat within the meaning of paragraph 13(21)(b), and second, as contended by the respondent that, the expenses are on capital account on the basis that the appellant acquired an asset for the enduring benefit of the business. If that asset is not the ship as modified the asset must be the new equipment that was installed and that, for the purpose of determining the ownership of depreciable property, exists independently of the ship. In Canada Steamship Lines Ltd., supra, Jackett, P. held that while he would have preferred to treat the replacement of a major component of a ship as a current expense he considered that he should follow two previous decisions of the Exchequer Court and hold that they were separate capital assets. At pages 258-59 (D.T.C. 5208) he stated:

In the case of ordinary plant or machinery in a factory or a machine shop, I should have thought that there is no doubt that each engine and each machine is a capital asset quite separate and distinct from the building in which it is installed and in which it is used. The cost of acquisition of such an asset is, I should have thought, an outlay of capital. On the other hand, in the case of a ship, the function of which involves movement, I should have thought that it was a tenable or arguable view that the equipment or machinery required to effect such movement is, from a businessman’s point of view, an integral part of the ship as a capital asset. If this were the right view, I should have thought that it would follow that the cost of the replacement of the whole of the propulsion machinery or of some unit thereof would be a current expense even though the thing replaced were an asset that, by itself, was an engine or machine that could be installed in a factory as a distinct and separate capital asset. I do not, however, feel free to consider whether I should adopt that approach in disposing of the present problem having regard to two previous decisions of this Court. I refer to Thompson Construction (Chemong) Ltd. v. M.N.R., [1957] C.T.C. 155, 57 DTC 1114, and M.N.R. v. Vancouver Tug Boat Co., [1957] C.T.C. 178, 57 DTC 1126.

In Thompson Construction (Chemong) Ltd. v. M.N.R., [1957] C.T.C. 155, 57 D.T.C. 1114 (Ex. Ct.), an engine was replaced on a power shovel. It was held that this expense involved the acquisition of a separate capital asset. At pages 162-63 (D.T.C. 1117-18), Cameron, J. stated:

In the instant case I have reached the conclusion that the outlay in question did brin into existence a new Capital asset, namely, the new engine. The evidence is that the old engine was in use for at least five years and at the end of that period still had a substantial commercial value. It is probable that the new engine would have a useful life of at least the same number of years. The expenditure therefore brought into existence an advantage for the enduring benefit of the trade and which should be considered to be a capital asset. . . .

. . .I am of the opinion that under the Income Tax Act and the special provisions relating to capital cost allowances, the sale of a capital asset — or of a substantial part thereof as in the instant case — and the replacement of the asset or part so sold by the acquisition of a new asset or such part, must be dealt with only as has been done in this case by the respondent in assessing the appellant.

A similar conclusion was reached by Thurlow, J. (as he then was) in M.N.R. v. Vancouver Tug Boat Co., [1957] C.T.C. 178, 57 D.T.C. 1126 (Ex. Ct.), and by the Chairman of the Tax Review Board in Dubé v. M.N.R., [1979] C.T.C. 2241, 79 D.T.C. 10.

If the assets acquired in making the modifications are capital assets that are independent from the ship in which they are installed it is unquestionable on the evidence that the appellant, who had paid for them, owned them. There is no presumption that improvements to a chattel vest in the owner of the chattel, as is the case with land. [4] When they were lost only the appellant was entitled to claim their cost in determining the terminal loss.

It follows therefore that even if the expense of the modifications is not on revenue account and even if the appellant had not "acquired" the boat before it sank, he did acquire such of the assets used in making the modifications that were capital assets. The cost of these assets is the cost to him of depreciable property falling within Class 7 of Schedule II to the Regulations made pursuant to the Income Tax Act.

Accordingly the deduction claimed by the appellant of $18,000 is permitted either under section 9 or subsection 20(16). The balance of $7,500 is, to the extent of $2,500, deductible under paragraph 20(1 )(c) and to the extent of $5,000 under section 9.

The appeal is allowed with costs and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment to permit the deduction in 1989 of the amount of $25,500 claimed by the appellant in respect of the boat.

Appeal allowed.