LeDain, J (dissenting):—This is an appeal from a judgment of the Trial Division allowing the respondent’s appeal from income tax assessments for the taxation years ending in February 1966, 1967, 1968 and 1969.
What is in issue is the nature of an expenditure of $268,623.48 made by the respondent in 1953 but amortized by it over a period of twenty-five years and deducted in the proportion of 1/25, or the amount of $10,744.94, from income in each of the taxation years in question. The issue is whether the expenditure was an income expenditure or an outlay of capital, and if the latter, whether it resulted in an asset or advantage that is subject to capital cost allowance.
The respondent was incorporated in 1952 under the Canada Corporations Act, pursuant to an agreement dated August 15, 1951 (hereafter referred to as the “Main Agreement”) between Anglo-Canadian Pulp and Paper Mills Ltd (hereafter referred to as “Anglo-Canadian”) and Deerfield Glassine Company Inc (hereafter referred to as “Deerfield”). The respondent was incorporated as a subsidiary of Deerfield, a Massachusetts company, to manufacture glassine and grease-proof papers and other lightweight specialty papers. The interest of Anglo- Canadian in the arrangement was to supply the respondent with the pulp it required. The proposed arrangement permitted Anglo-Canadian to offer the respondent its pulp requirements on a long-term basis at a price sufficiently advantageous to make it worthwhile for Deerfield to establish a subsidiary business in Canada. The inducement also included an undertaking by Anglo-Canadian to supply the respondent’s requirements of steam upon certain terms and conditions.
The Main Agreement provided for incorporation of the respondent with a certain authorized share capital, the sale by Anglo-Canadian to the respondent of land for the location of its plant, and the execution by Anglo-Canadian and the respondent of an agreement (hereafter referred to as the “Construction Contract”) whereby Anglo Canadian would undertake to construct at its own expense two underground pipelines to convey slush pulp and steam from its plant to that of the respondent, an agreement (hereafter referred to as the “Pulp Contract”) whereby Anglo-Canadian would undertake to supply the respondent for an initial period of twenty years with its requirements of slush pulp, and an agreement (hereafter referred to as the “Steam Contract”) whereby Anglo-Canadian would undertake to supply the respondent for an initial period of five years with its requirements of steam. The Construction Contract, the Pulp Contract and the Steam Contract were executed on April 25, 1952 in essentially the form provided for in the Main Agreement.
The Main Agreement provided that in consideration of the sale by Anglo-Canadian of land to the respondent, the construction by Anglo- Canadian of the pulp and steam pipelines, and the execution by Anglo- Canadian of the Pulp Contract and the Steam Contract, the respondent would allot and issue to Anglo-Canadian Class “B” shares and other securities to an amount or value equal to twenty-five percent of the issued and outstanding shares and other securities of the respondent. In accordance with this provision Anglo-Canadian subscribed for and was allotted and issued in June 1953, Class B shares and 5% notes of the respondent upon the following terms:
THAT the subscription of Anglo-Canadian Pulp and Paper Mills Limited (hereinafter called “Anglo-Canadian”) for 100,000 fully paid and nonassessable Class “B” Shares without nominal or par value of the capital stock of the Company at an aggregate price of $171,518.22 and for 5% Notes of the Company in the aggregate principal amount of $281,250, the whole for and in consideration of the aggregate sum of $452,768.22 made up as follows:
(a) The sum of $150,922.74, which represents cash advances already made by Anglo-Canadian to the Company, and
(b) The sum of $301,845.48, which represents the value of
(i) the land in the City of Quebec transferred by Anglo-Canadian to the Company,
(ii) the agreement made by Anglo-Canadian to complete, at its expense, the construction, before the Company’s plant is ready to begin operations, of underground steam and pulp pipelines from Anglo-Canadian's plant to the Company’s plant, both in the City of Quebec, subject to the condition that the cost of the steam pipeline be reimbursed to Anglo- Canadian by the Company, and
(iii) the execution by Anglo-Canadian of the Pulp Contract and the Steam Contract with the Company;
as set forth in the Agreement made between Anglo-Canadian and the Company on the 25th day of April, 1952;
be and it is hereby accepted; and
THAT the sum of $171,518.22 be and it is hereby fixed as the aggregate price or consideration for the allotment and issue of the said Class “B” ares and;
THAT the said land transferred by Anglo-Canadian to the Company for the sum of $1.00 be and it is hereby valued at $33,222; and
THAT the said agreement made by Anglo-Canadian to complete the construction, at its expense, of underground steam and pulp pipelines, which agreement has been carried out by Anglo-Canadian and the execution by Anglo-Canadian of the Pulp Contract and the Steam Contract with the Company be and they are hereby valued at $268,623.48;
The Construction Contract provided that the underground pipelines running from the plant of Anglo-Canadian to the plant of the respondent would remain the property of Anglo-Canadian, although the respondent was to reimburse Anglo-Canadian for the cost of their maintenance and repair. The contract further provided that the respondent was to reimburse Anglo-Canadian for the cost of construction of the steam pipeline to the extent of advances made by Anglo- Canadian, and it is agreed by the parties that the full cost of the steam pipeline in the amount of $71,882 was in fact reimbursed by the respondent. There was no obligation to reimburse Anglo-Canadian for the cost of the pulp pipeline. In determining the cost of pulp and steam for purposes of the pulp and steam contracts no charge was to be included by Anglo-Canadian for depreciation of the pipelines.
The Pulp Contract has an initial term of twenty years, and is automatically renewable for successive periods of five years, unless terminated by either party upon giving at least five years’ notice to take effect at the end of the initial period or a subsequent period of renewal. The comptroller of the respondent testified that the Pulp Contract was still in force, having been automatically renewed at the end of the initial period. Under the Pulp Contract Anglo-Canadian undertakes to supply all the pulp requirements of the respondent up to a maximum of 12,000 tons per annum. It agrees that it will not, without the prior written consent of the respondent, deliver pulp to any other producer of glassine or grease-proof papers or other lightweight specialty papers. The respondent, for its part, agrees that it will not, without the prior written consent of Anglo-Canadian, use the pulp delivered to it by Anglo-Canadian for the manufacture of any pulp or any kind or variety of papers other than glassine and grease-proof papers and other lightweight speciality papers. The central provision of the Pulp Contract is, of course, the clause respecting price, which provides, in effect, that the price to the respondent will be the prevailing price to destinations in the United States east of the Mississippi River less one half the amount of freight from Anglo-Canadian’s plant in Quebec City to the Deerfield plant in Massachusetts. Since the prevailing price includes freight to destination, the essence of the agreement between Anglo-Canadian and the respondent is to share the saving in freight resulting from the pipeline supply arrangement. This appears to have been the principal consideration that led Deerfield to establish a Canadian subsidiary on land adjacent to the Anglo- Canadian plant. The saving in the cost of pulp to the respondent during the years 1955-1972 was some $802,000.
The Steam Contract is for an initial period of five years and is automatically renewable for successive periods of one year unless terminated by either party upon two years’ notice given at any time after the first three years of the contract. The evidence in the Trial Division showed that the steam contract was still in force. An assured supply of steam is essential to the respondent since its machinery is operated by steam turbines.
The respondent set up what it obtained for the sum of $268,623.48, namely the construction of the pipelines and the execution of the pulp and steam contracts, as an asset on its financial statements, and showed the annual amortization of it as a charge against income. tt was shown as “Leasehold improvements” on the balance sheet and other documents reflecting the assets of the company and their depreciation.
The deductions from income were disallowed by the appellant. The notices of reassessment contained the following notation:
Add:
Capital cost allowance claimed on land improvements $10,744.94
In its Notice of Objection the respondent indicated its reasons for objection as follows:
The taxpayer alleges that the sum of $268,623.48 paid to Anglo constitutes the cost of the right of using the steam and slush pulp pipelines and was therefore a leasehold interest on which deductions could be claimed under the provisions of subparagraph (a) of paragraph (1) of Section 11 of the Income Tax Act of Canada, and subparagraph (b) of paragraph (1) of Section 1100 of the Regulations, AND ALTERNATIVELY constitutes an outlay or expense, incurred by the taxpayer for the purpose of earning income from its business and as such deductible under the provisions of subparagraph (a) of paragraph (1) of Section 12 of the Income Tax Act of Canada, properly amortized over the lifetime of the Pulp and Steam Contracts in accordance with proper accounting practice in a business of the kind with which the taxpayer is concerned.
In the Trial Division the respondent made three alternative submissions:
(a) that the expenditure of $268,623.48 constituted the cost of the right to use the steam and slush pulp pipelines and was a leasehold inierest on which capital cost allowance could be claimed under paragraph 11 (1)(a) of the Act and paragraph 1100(1)(b) of the Regulations;
(b) that the said expenditure constituted money paid for a franchise on which capital cost allowance could be claimed under paragraph 11(1)(a) of the Act and paragraph 1100(1)(c) of the Regulations; and
(c) that the said expenditure was an outlay or expense for the purpose of earning income from its business and not an outlay or payment on account of capital, and that it was properly amortized for purposes of deduction from annual income over a period of twenty-five years, being the Initial term, plus one renewal period, of the Pulp Contract.
The learned trial judge held that the contracts did not give the respondent a leasehold interest in the pipelines since Anglo-Canadian retained the possession of them and the contracts therefore lacked an essential element of a contract of lease, namely, the delivery of the thing leased to the lessee so as to give him the possession or enjoyment of it.
The trial judge further held that the contracts did not give the respondent a franchise within the meaning of Class 14 of Schedule B of the Regulations since, even assuming that the rights acquired by the respondent could be considered to be a franchise, they were not a franchise for a limited period as required by the terms of Class 14.
Finally, the trial judge held that the expenditure in question was an expenditure incurred for the purpose of earning income from the business of the taxpayer within the meaning of paragraph 12(1)(a) of the Act, that it was not an outlay or payment on account of capital within the meaning of paragraph 12(1)(b), and that it was properly deductible and could be amortized for such purposes, in accordance with proper accounting practices and principles, over a twenty-five year period.
The reasoning of the learned trial judge in support of this conclusion was that the advantage which the taxpayer obtained by the expenditure in question was not one for the “enduring benefit” of its trade, within the meaning of the well-known dictum of Viscount Cave, LC in British Insulated and Helsby Cables, Limited v Atherton, [1926] AC 205, at 213-14, which reads:
. . . But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.
The trial judge held that “enduring” meant “permanent”, and that since the Pulp Contract and the Steam Contract were for fixed terms and terminable by Anglo-Canadian upon giving the required notice they could not be said to confer enduring benefits.
He relied on the decision in Anglo-Persian Oil Company, Limited v Dale, [1932] 1 KB 124, as reflecting principles or considerations that covered the facts of the present case, and concluded that like the payment made in that case for the cancellation of an onerous agency agreement, the expenditure in question here was made for the purpose of reducing the taxpayer’s operating expenses and did not make any addition to its fixed capital.
The trial judge held that the expenditure could be amortized over a twenty-five year period in accordance with the ‘‘matching principle” allowed in MNR v Tower Investment Inc, [1972] CTC 182; 72 DTC 6161.
It has been said on the highest authority that there is no single, clear test for determining whether a particular expenditure is to be considered an income expenditure or a capital expenditure, and that the decisions afford at most a series of illustrations indicative of the various factors to be considered and on which a court must in the final analysis exercise a commonsense judicial judgment in the light of the particular circumstances of each case. See BP Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia, [1966] AC 224 at 264; Regent Oil Co Ltd v Strick (Inspector of Taxes), [1966] AC 295 at 312-13; MNR v Algoma Central Railway, [1968] S.C.R. 447 at 449; [1968] CTC 161; 68 DTC 5096.
A number of criteria or expressions of the essential distinctions have been suggested as working approaches in the cases. The one most frequently referred to and, indeed, the one treated in many of the decisions as the authoritative test is the concept of “an asset or an advantage for the enduring benefit” of the trade of the taxpayer, expressed by Lord Cave in British Insulated and Helsby Cables, Limited v Atherton (supra). Then there is the distinction between an expenditure for the establishment or enlargement of the profit-making structure or organization of a company and an expenditure incurred in the operation of that structure or organization. See Van den Berghs Ltd v Clark, [1935] AC 431 at 442-3; Sun Newspapers Limited v The Federal Commissioner of Taxation (1938), 61 CLR 337 at 359-361; Halistroms Proprietary Limited v The Federal Commissioner of Taxation (1946), 72 CLR 634 at 646-7; Canada Starch Company Limited v MNR, [1968] CTC 466 at 471; 68 DTC 5320 at 5323. Emphasis has also been placed on the distinction between fixed capital and circulating capital: Anglo-Persian Oil Company, Limited v Dale, [1932] 1 KB 124 at 138. There has been approval of the following formulation of the essential considerations by Dixon, J (as he then was) in the Sun Newspapers case (supra) at page 363:
There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.
There has, however, been a certain amount of judicial skepticism expressed from time to time with respect to the suggested criteria, and there has been an increasing disposition to emphasize the approach suggested by Dixon, J himself in the Halistroms case (supra) when he said that the distinction between income expenditure and capital expenditure must depend upon . what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process”. This approach has been characterized as a search for the business or commercial reality of what was sought by the expenditure: Bowater Power Company Limited v MNR, [1971] CTC 818 at 837; 71 DTC 5469 at 5480-81; Pigoit Investments Limited v The Queen, [1973] CTC 693 at 702: 73 DTC 5507 at 5514; R v F H Jones Tobacco Sales Co Ltd, [1973] CTC 784 at 791; 73 DTC 5577 at 5581.
What the respondent obtained by the expenditure in this case was the construction by Anglo-Canadian of underground pipelines for the delivery of pulp and steam from its plant to that of the respondent and the execution by Anglo-Canadian of long-term contracts for the supply of pulp and steam to the respondent. The appellant contends that what the respondent thus obtained was an assured means of supplying itself with pulp and steam, and that this was an advantage of enduring benefit to its business. It is said that the expenditure was part and parcel of the fundamental financial arrangements --—-- the basic capital transactions — by which the respondent was established, and that the Construction Contract, the Pulp Contract, and the Steam Contract constituted the basis on which it was to operate. The respondent contends that the expenditure was part of the cost of obtaining pulp and steam, an advance or “front-end” payment that must be included in operating costs. Alternatively, the respondent contends that if the expenditure be regarded as an outlay of capital. what was obtained by it was a franchise for which capital cost allow- ance may be taken. In this Court the respondent abandoned the contention that it obtained a leasehold interest.
There are, therefore, two aspects to the consideration for which the respondent paid $268,623.48 in the form of Class B shares and 5% notes: the pipelines and the supply contracts. Obviously, they are closely related; the one would not exist without the other. Together they constitute a special arrangement or system for the long-term supply of pulp and steam upon: particularly favourable conditions.
Anglo-Canadian remains owner of the pipelines and retains full possession and control of them. As such, they are assets of Anglo- Canadian and not of the respondent. The respondent has no right to them whatever. It was obliged to reimburse Anglo-Canadian for the cost of the steam pipeline and for the maintenance and repair of both pipelines, but it has acquired no interest in them. At the same time the pipelines exist for the exclusive purpose of delivering pulp and steam to the respondent. Although the respondent enjoys no right of property in. them they afford it a direct, immediate physical access to its source of supply of pulp and steam which undoubtedly carries with it particular advantages. It may be assumed, for example, that such physical access assures ready and rapid supply with close control over delivery problems. Can this access to the pipelines be considered to be an advantage of enduring benefit to the business of the respondent, within the meaning of Lord Cave’s dictum? For a time I was much impressed with the possibility that it could. Upon further consideration, however, I am of the opinion that the access to the pipelines is indistinguishable in its essential nature from the advantage which any customer may be said to derive from the means by which his supplier makes delivery to him. The physical assets of a supplier cannot be said to be an advantage of enduring benefit to the business of its customer, for purposes of income tax, merely because they are essential to the maintenance of supply.
lt is true that what was obtained by the expenditure in this case was indicated on the financial statements of the respondent as an asset under the designation “Leasehold Improvements”, but that does not, as I see it, prevent the respondent from adopting the alternative position that it adopted in its Notice of Objection to the assessments and before this Court, that the expenditure was an income expenditure that could be spread over twenty-five years. The manner in which the respondent amortized the expenditure and charged it against income in each of the taxation years in question was consistent with this alternative position. The character of this expenditure or what was obtained for it is to be determined by reference to the applicable agreements and the terms upon which the Class B shares and 5% notes were allotted and issued, and not by subsequent designations of it on the financial statements of the respondent. I agree with the conclusion of the trial judge that the agreements, in so far as the pipelines are concerned, lack an essential requirement or characteristic of the civil law contract of lease, namely, the obligation to deliver the thing so as to afford a peaceable enjoyment of it; and, indeed, in this Court, the respondent abandoned the contention that it had obtained a leasehold interest. I do not think that a mistaken legal characterization in the respondent’s financial statements should prevent it taking the alternative position as to the nature of the expenditure. Further, it is clear, I think, that the operation by Anglo- Canadian of the pipelines for the exclusive purpose of delivering pulp and steam to the respondent cannot be said to be a franchise. obtained by the respondent .Even if the term “franchise” were appropriate to designate an exclusive right to use pipelines, the respondent has not been given such a right. Anglo-Canadian has the use of the pipelines to deliver pulp and steam to the respondent; whatever advantage this confers on the respondent, it is not one that is subject to capital cost allowance. The elusive character of this advantage, viewed from the point of view of capital, reinforces my conviction that the expenditure should be regarded, in so far as the pipelines are concerned, not as an outlay of capital but as an operating cost of obtaining pulp and steam.
In so far as the expenditure was made for the execution by Anglo- Canadian of the Pulp Contract and the Steam Contract, can it be said to have created an advantage of enduring benefit to the business of the respondent, within the meaning of Lord Cave’s dictum? There would appear to be little or no direct authority on the nature of a lump sum payment to obtain a supply contract. In John Smith and Son v Moore, [1921] 2 AC 13, a taxpayer who had acquired the coal merchant’s business of his father attempted unsuccessfully to deduct in the determination of profits an amount of £30,000 which was the value that had been placed in the acquisition on certain short-term contracts with collieries for the supply of coal to the business. The son had not actually disbursed this sum but had paid something less as the net value of the business as a whole. A majority in the House of Lords held that the sum of £30,000 was not a permissible deduction for the purpose of determining profits. Two of the members of the majority, Lord Haldane and Lord Sumner, held that it was in the nature of a capital expenditure—a sum to be employed in fixed capital. The third member of the majority, Lord Cave, rested his conclusion on the view that the business was a continuing one, and that the expenditure for the supply contracts was not made by the business for its trading purposes but by the son out of his own pocket. It was a payment that could have no bearing on the profits of the continuing business. Viscount Finlay, dissenting, held that the sum in question was a payment for coal.
There has been considerable judicial commentary on the Smith case, but the general conclusion would appear to be that in view of its very special facts and the differing reasons for the majority opinions there is little, if anything, in the way of general principle to be drawn from it. See Commissioner of Taxes v Nchanga Consolidated Copper Mines Ltd, [1964] AC 948 at 962-4; BP Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia, [1966] AC 224 at 268-9; Regent Oil Co Ltd v Strick (Inspector of Taxes), [1966] AC 295 at 322- 3 and 353. It cannot be said to be authority for the proposition that a lump sum payment made to a supplier to obtain a supply contract is to be considered a capital expenditure. As Lord Pearce put it in the BP Australia case (supra) at page 269: “One certainly cannot deduce that the result would have been the same if the son had paid £30,000 to the collieries for the contracts.”
In my opinion a supply contract, whatever its term and however advantageous it may be, is not an asset or advantage in the nature of fixed capital. It cannot be considered in any sense a part of the profitmaking structure or organization of an enterprise. It is not productive or generative or distributive of anything. It is what is supplied under it that is used to make profit. The contract is simply evidence of legal obligations with respect to operating transactions. No doubt it is a thing of value to the enterprise but that does not mean that it has the value of fixed capital. Its value is reflected by and is of the same nature as that which is to be supplied under it. In my view a payment for the contract must be considered to be a payment for the supply.
The appellant relied particularly on the decision in Hood Barrs v Inland Revenue Commissioners, [1957] 1 All ER 832, as indicating that a lump sum payment to obtain a means of supplying oneself with raw material or stock-in-trade is a capital expenditure. In that case payments were made for the right to cut large quantities of standing timber. It was held by a majority in the House of Lords that they were capital expenditures. The taxpayer had not purchased stock-in-trade but a means by which he could obtain stock-in-trade. Lord Keith of Avonholm said:
. . . I find it impossible to hold that this very peculiar right is capable of being treated as stock-in-trade of the appellant. The nature of the right, the indefiniteness of the period for its exercise, and the lack of identification of the trees on which the right was to be exercised, to which may be added the size of the transaction and the absence of any evidence of intention or means to complete it within any foreseeable time, all, in my opinion, negative the idea that the appellant had anything that could be called stock-in-trade.
In my opinion, what the appellant acquired here was merely a right to go on to the company’s land to mark, cut and carry away such trees, up to a specified number, as fell within the size and description mentioned in the agreements. The money paid for this right was, in my opinion, a capital and not a revenue expenditure.
Their lordships referred with approval to the decision in the similar case of Stow Bardolph Gravel Co Ltd v Poole, [1954] 3 All ER 637, in which it was held that payments made for deposits from which the taxpayers excavated sand and gravel for sale in their business were capital expenditures.
In my opinion the rights which were obtained by the expenditures in these cases are not truly analogous to the supply contracts in the present case, or to the whole supply arrangement, including the physical means of delivery provided by the pipelines. By virtue of the supply contracts and by means of the pipelines the respondent is supplied directly with pulp and steam without the necessity of any intervening productive or extractive activity on its part, such as was involved in the exercise of the right to cut timber or to excavate sand and gravel. Whether the rights in these cases be regarded as an interest in land or otherwise they are clearly different in their essential nature from the rights which the respondent enjoys under the pulp and steam contracts.
Counsel for the appellant laid great stress on the contention that, to use his words, the expenditure was part and parcel of the fundamental financing arrangements, the basic capital transactions, by which the respondent was established. The expenditure was incurred before the respondent commenced manufacturing, as part of the contractual and financial arrangements by which it was established, but this is not, in my opinion, conclusive that it was a capital rather than an income expenditure. Entering into supply contracts is a necessary part of the operations of a company, and if the expenditure was a special lump sum payment in advance to obtain raw material and power, as I think it was, it would be an income expenditure although incurred at the time the company was organized. Operating expenses may be incurred contemporaneously with organizational and capital expenses. Considerable emphasis was placed on the form in which Anglo-Canadian took payment, namely, Class B shares and 5% notes, in accordance with the provision in the Main Agreement that it would hold at least twenty-five per cent of the outstanding shares and other securities of the respondent with a right to representation on its board of directors. Obviously, it is not because a payment takes the form of shares or other securities of a company that it is to be considered a capital expenditure; payment may be made in such a form to meet an income expenditure. It is argued, however, from the manner in which the amount of the expenditure was determined and related to the financing operations by which the respondent was established that the expenditure bore no relationship to the cost of pulp and steam. As it was put by counsel, the expenditure was not referable to units of pulp and steam. It is not necessary, In my opinion, in order for the expenditure as a whole to be regarded as a payment for pulp and steam that it be clearly applicable in certain proportions to the price to be paid for units of pulp and steam. It need not be a prepayment, in the strict sense, to be considered as part of the operating cost of obtaining pulp and steam .
While I arrive at the same conclusion as the learned trial iudae I do so for somewhat different reasons. As I see it, the expenditure was simply part of the operating cost to the respondent of obtaining a supply of pulp and steam and did not obtain for it anything that can be regarded as an asset or advantage in the nature of fixed capital. I would not rest this conclusion on the meaning to be given to the term “enduring” in the dictum of Viscount Cave nor on the idea that the purpose of the expenditure was to reduce operating expenses. If a supply contract could be considered to be an advantage in the nature of fixed capital, I would be disposed to hold that the contracts in this case were sufficiently lasting to be treated as of enduring benefit. The life of every asset has some limit. The broad distinction is between what is intended to be kept for its entire life and that which is to be turned over. Nor do I think the fact that an expenditure is intended to reduce operating expenses is conclusive that it is an income expenditure. One of the purposes of many, if not most, expenditures in the form of fixed capital is to reduce operating expenses. Certain locations and designs of plant and certain kinds of manufacturing machinery and process are adopted in order to effect operating economies. The whole purpose of capital expenditure is to achieve a profitable cost of operation.
There remains the question of whether the expenditure may be spread over a period of twenty-five years and deducted in the proportion of 1/25, or $10,744.94, as the respondent has done, in each of the taxation years in question. The proper treatment of income and expense in determining profits for income tax purposes, so as accurately to reflect the true income position of the taxpayer, is a question of law for determination by a court, having regard to evidence of accepted accounting practice and principles. Accounting practice does not by itself automatically determine the issue. If it is to be adopted in a particular case as the rule for income tax purposes it must not be in conflict with the provisions of the Income Tax Act, however prudent or reasonable it may appear to be from a business point of view: MNR v Anaconda American Brass Lid, [1956] AC 85; [1955] CTC 311; 55 DTC 1220.
The only evidence in the present case. of accepted or proper accounting practice was that of an accountant in the respondent’s firm of auditors. The essentials of his opinion as to the proper treatment of the expenditure are contained in the following passages of an affidavit which were read into the record and on which he was cross-examined by counsel for the appellant:
On the assumption that such sum constitutes an expenditure properly deductible in determining the income of Canadian Glassine Co Ltd, it is my opinion that in accordance with proper accounting practices and principles such sum should be amortized or written off over a reasonable period of years. My opinion is based on the fact that revenues are normally matched with expenditures. This expenditure has permitted the company to reduce their cost of production in each subsequent year. Therefore, this amount of $268,623.48 is properly amortized over such reasonable period of years.
In view of the fact that the contractual arrangements between the companies for the supply of pulp extend for a period of 20 years, renewable In 5 year periods, unless appropriate notice of termination is given, it Is my opinion that in these circumstances a reasonable period for such amortization would be a term of 25 years.
This uncontradicted evidence must be taken to establish the fact of accepted accounting practice in a case such as this. The question is whether such practice is permitted by the Income Tax Act. On this question the learned trial judge relied on the judgment in MNR v Tower Investment Inc, [1972] CTC 182; 72 DTC 6161, in which after a review of the pertinent decisions, Collier, J came to the conclusion that the “matching principle” was proper in that case, as reflecting the true income position of the taxpayer, and was not prohibited by the Act. The question is whether we are to infer from the terms of paragraph 12(1)(a) of the Income Tax Act that is applicable in the present case—“In computing income, no deduction shall be made in respect of 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 property or a business of the taxpayer”—that an expenditure must be wholly deducted from income in the year in which it was made or incurred. In Rossmor Auto Supply Limited v MNR, [1962] CTC 123; 62 DTC 1080 at 126 [1082] Thorson, P expressed the following opinion on this point:
As I view Section 12(1)(a), the outlay or expense that may be deducted in computing the taxpayer’s income for the year, namely, an outlay or expense made or incurred by the taxpayer for the purpose of gaining or producing income from property or a business of the taxpayer is limited to an outlay or expense that was made or incurred by the taxpayer in the year for which the taxpayer is assessed.
The learned President referred to his earlier opinion in Consolidated Textiles Limited v MNR, [1947] Ex CR 77 at 82; [1947] CTC 63 at 69; 3 DTC 958, to the same effect, with reference to paragraph 6(a) of the Income [War] Tax Act, RSC 1927, c 97, in which he said:
In my opinion, section 6(a) excludes the deduction of disbursements or expenses that were not laid out or expended in or during the taxation year in respect of which the assessment is made. This is, I think, wholly in accord with the general scheme of the Act, dealing as it does with each taxation year from the point of view of the incoming receipts and outgoing expenditures of such year and by the deduction of the latter from the former with a view to reaching the net profit or gain or gratuity directly or indirectly received in or during such year as the taxable income of such year.
In Associated Investors of Canada Limited v MNR, [1967] CTC 138; 67 DTC 5096, at 142 [5098] (note), Jackett, P expressed the opinion that the principle affirmed by Thorson, P was not “applicable in all circumstances”, and that “there are many types of expenses that are deductible in computing profit for the year ‘in respect of’ which they were paid or payable.” In the Tower Investment case Collier, J concluded: “In my view, the distinctions made by Jackett, P are applicable in a case such as this. The advertising expenses laid out here were not current expenditures in the normal sense. They were laid out to bring in income not only for the year they were made but for future years.”
I agree with the learned trial judge that this conclusion is equally applicable to the expenditure in this case. The opinion of Thorson, P is not a conclusion that is dictated by the terms of paragraph 12(1)(a) but a principle deduced from “the general scheme of the Act”, and as such it should be subject to necessary qualification for cases such as the present one in which its application would seriously distort rather than fairly and reasonably reflect the taxpayer’s position with respect to income and expenditure. Indeed, in this Court counsel for the appellant did not dispute the right to apply the “matching principle” to the present case, assuming that the expenditure was found to be one that was deductible in determining income. He merely contended that it was not appropriate to apportion the whole of the expenditure over the life of the Pulp Contract since some part of it must be attributable to the cost of steam. In view of the fact that the expenditure was for pulp and steam, without any indication of the proportions to be assigned to each, and that both the pulp and steam contracts have remained in force beyond the initial period of twenty years, as might have been expected at the time they were entered into, I am of the opinion that it was not unreasonable to apportion the expenditure as a whole over a period of twenty-five years.
I would dismiss the appeal with costs.