Buston v. The Queen, 93 DTC 1048, [1993] 2 CTC 2720 (TCC)

Brulé, T.C.C.l.:—ln this appeal the taxpayer was refused a deduction of $46,000 in his 1986 taxation year which was incurred as a licensing expense. The Minister of National Revenue ("Minister") treated the amount as an eligible capital expenditure as opposed to a current expense.

Facts

The appellant is a fish plant operator. During 1985 and 1986, the appellant was in the business of fishing roe herring and salmon and computed his income on a cash basis. In this regard, the appellant entered into several agreements for the leasing and assigning of various roe herring fishing licences which are discussed below.

First, the appellant signed a lease agreement with Roger Gus Robert ("Robert") in 1986 respecting the exclusive right to the use of a roe herring gillnet licence ("licence"), owned by Robert, for a 99-year period at a cost of $21,000. The contract stipulated the following: that the appellant would be responsible for all licence fees during the operation of the lease; that, should the Department of Fisheries and Oceans ("Department") permit the transfer of the said licence, Robert would in fact transfer the licence to the appellant or his assignee free and clear of all liens, charges and encumbrances; that should the Department reduce or cancel the fishing privileges presently permitted by the licence, Robert would provide the appellant with any compensation granted to him by the Department as a consequence thereof; and that Robert would be responsible for renewing the licence. Finally, the agreement stipulated that Robert would execute a limited power of attorney, to be filed with the Department, authorizing the appellant to deal with the licence and to execute any necessary documents for the renewal, transfer or control of the licence.

The appellant entered into a vessel purchase and assignment of lease agreement dated June 11, 1986 with Richard Wood ("Wood"). The document stipulated that Ernest William David ("David"), as owner of a licence and a herring skiff ("skiff"), agreed to lease all rights, title and interest in the licence to Wood by an agreement dated 1985. Wood in turn assigned his rights, title and interest in and to the licence to the appellant for $20,000 and further agreed to transfer the above-mentioned skiff to the appellant at a cost of $5,000. The assignment of lease stipulated that the appellant would require from David a consent to the assignment, a power of attorney and an agreement from David's spouse. As a result, a power of attorney was signed and executed between David and the appellant. Moreover, an agreement by Evelyn David, wherein she acknowledged that she was familiar with the terms of the roe herring licence lease agreement between her husband and the appellant and that the lease of the licence was a benefit to her, was also executed. She further agreed to ensure that the appellant would have continued use of the licence in the event of her husband's death and that the licence would be transferred to the appellant should it become transferable in her lifetime. Both of these latter documents were dated June 11, 1986.

A third lease agreement was executed between the appellant and John Charlie (” Charlie”) for the use of a licence at a cost of $5,000 and the transfer of a skiff for $9,000. The contract was accompanied by a power of attorney executed by Charlie and a bill of sale all of which were dated October 13, 1983. At the outset of trial, the parties agreed that should the expenditure, at issue, be characterized as a capital outlay, then the $5,000 licence expense from Charlie would be included in the 1986 taxation year although it was paid in 1983.

During the course of trial, the appellant stated that he also maintained a salmon fishing licence. However, he explained that, unlike the roe herring licence which is non-transferable and expires at the end of the calendar year for which it is issued, the salmon licence is transferable. He emphasized that his intention was to renew the licences each year and that he hoped to derive a benefit from them for at least two or three years in light of the expenses incurred. The appellant also, testified that the roe herring season includes the months of February, March and at times April. Therefore, at least two of the three lease agreements would have taken effect at a time when the roe herring fishing season had closed for the year.

Stephen J. Brownlee, manager of the commercial licence unit for the Department, was called as a witness on behalf of the appellant. The witness explained that a roe herring licence was issued on a yearly basis and was valid for the year until December 31 of the year in which it was issued. At that time, an application could be made such that a new licence would be issued. However, the witness emphasized that there was no automatic right of renewal and that the application was at all times subject to the discretion of the Minister of Fisheries and Oceans. In addition, the witness stated that following 1975, roe herring licences were issued only to a limited number of persons. In terms of the lease agreements, the witness explained that the Department did not recognize these contracts as binding on the Department as the Minister of Fisheries and Oceans was not a party to them. Furthermore, the witness testified that the licence agreements and the powers of attorney caused problems in the industry such that by 1991, the Department allowed for the direct transfer of roe herring fishing licences without the need for the execution of other documents.

Issue

The sole question to be determined is whether or not the fishing licence payments of $46,000 are current expenses or eligible capital expenditures for the appellant's 1986 taxation year.

Appellant's position

Counsel for the appellant discussed two categories of expenses: those which are incurred annually and those which are paid up front for future years. He submitted that although the expense, in the case at bar, has characteristics of both types of expense, the amount at issue took on more of the character of a prepaid expense. In this respect, counsel explained that the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") denies a taxpayer the right to deduct prepaid expenses pursuant to subsection 18(9). However, he submitted that fishermen are exempt from the application of this provision pursuant to subsection 28(1) of the Act and that therefore, a deduction to the appellant should be allowed.

With respect to the licence agreements, it was submitted that the fishing licences were valid on a year to year basis such that at the end of the year the appellant incurred the risk of losing the licences and any benefits derived thereunder either as a result of a change in Departmental policy in issuing and renewing fishing licences or as a result of the death of the lessor. Counsel emphasized that although there was an expectation that the licences would be renewed in subsequent years, there was, in essence, no guarantee that this would occur. The appellant was therefore, faced at the end of each year with a degree of uncertainty given that the lease agreement and the assignment could be frustrated at any time. Consequently, counsel submitted that the appellant did not acquire an enduring asset in the lease and assignment of the roe herring fishing licences.

In closing, the appellant argued that the rental payment in respect of the Robert and Wood fishing licences constituted an expense incurred for the purpose of gaining or producing income in the 1986 taxation year. In other words, counsel emphasized that the licence agreements allowed the appellant the right to earn income for his business. These were expenses incurred on revenue and not capital account. Therefore, it was submitted that $41,000 for these two licences was deductible in toto as a prepaid expense in the year in which it was made and therefore treated as a current expense.

The appellant made reference to the following authorities in support of his position:

Williams Brothers Canada Ltd. v. M.N.R., [1962] C.T.C. 448, 62 D.T.C. 1276 (Exch. Ct.);

Oxford Shopping Centres Ltd. v. The Queen, [1980] C.T.C. 7, 79 D.T.C. 5458 (F.C.T.D.); aff'd [1982] C.T.C. 128, 81 D.T.C. 5065 (F.C.A.);

Johns-Manville Canada Inc. v. The Queen, [1985] 2 S.C.R. 46, [1985] 2 C.T.C. 111, 85 D.T.C. 5373;

Smith v. Humchitt Estate, 48 B.C. B.C.L.R. (2d) 361, [1990] 2 C.N.L.R. 176 (sub

nom. Smith v. Seymour) (B.C.S.C. S );

Sewid v. Ocean Fisheries (1987), 20 B.C.L.R. (2d) 201 (B.C.S.C.); and

Metropolitan Taxi Ltd. v. M.N.R., [1967] C.T.C. 88, 67 D.T.C. 5073 (Exch.Ct.); aff'd [1968] S.C.R. 496, [1968] C.T.C. 163, 68 D.T.C. 5098.

Respondent's position

Counsel for the respondent emphasized the fact that “intangible” assets fall within the ambit of the definition of property" in the Act. She submitted that, in the case at bar, the appellant acquired the right to use roe herring fishing licences under the terms of various written agreements.

It was said that the $46,000 deducted by the taxpayer constituted eligible capital expenditures and comprised the following amounts:

Counsel for the respondent agreed that the licences in question were non- transferable but could likely be renewed on an annual basis. It is the respondent's position that the appellant acquired leases and rights thereunder which were of a "beneficial interest" to the appellant. It was argued that the above amounts were payments on account of capital, and therefore properly characterized as eligible capital expenditures. As a result, they were not deductible as prepaid expenses in accordance with the provisions in subsection 18(9) of the Act. Moreover, she noted that the income tax statute contains a specific prohibition against the deduction of capital payments pursuant to paragraph 18(1)(b).

The respondent made reference to the following case law in support of its arguments:

Re Bennett (1988), 24 B.C.L.R. (2d) 346, 67 C.B.R. (N.S.) 314, (B.C.S.C.);

B.C. Packers Ltd. v. Sparrow (1988), 22 B.C.L.R. (2d) 302 (B.C.S.C.); aff’d (1989) 35 B.C.L.R. (2d) 334, [1989] 4 C.N.L.R. 63 (B.C.C.A.);

Brooke Bond Foods Ltd. v. The Queen, [1984] C.T.C. 115, 84 D.T.C. 6144 (F.C.T.D.);

D. Morgan Firestone v. The Queen, [1987] 2 C.T.C. 1, 87 D.T.C. 5237 (F.C.A.);

Johns-Manville Canada Inc. v. The Queen, [1985] 2 S.C.R. 46, [1985] 2 C.T.C. 111, 85 D.T.C. 5373; and

Smith v. Humchitt Estate (1990), 48 B.C.L.R. (2d) 361, [1990] 2 C.N.L.R. 176 (sub nom. Smith v. Seymour) (B.C.S.C.).

Income tax provisions

The relevant provisions of the Act are listed, in part below, as they read in the 1986 taxation year. Paragraph 18(1)(a) of the Act stated:

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

(a) General limitation. — 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;

In conjunction with the above provision, paragraph 20(1)(b) read:

20.(1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(b) Cumulative eligible capital amount. — such amount as the taxpayer may claim in respect of any business, not exceeding ten per cent of his cumulative eligible capital in respect of the business at the end of the year;

The term “eligible capital expenditure" is defined at paragraph 14(5)(b) of the Act:

(b) “ Eligible capital expenditure" —"eligible capital expenditure" of a taxpayer in respect of a business means the portion of any outlay or expense made or incurred by him, as a result of a transaction occurring after 1971, on account of capital for the purpose of gaining or producing income from the business, other than any such outlay or expense

(i) in respect of which any amount is or would be, but for any provision of this Act limiting the quantum of any deduction, deductible (otherwise than under paragraph 20(1)(b)) in computing his income from the business, or in respect of which any amount is, by virtue of any provision of this Act other than paragraph 18(1)(b), not deductible in computing such income,

(ii) made or incurred for the purpose of gaining or producing income that is exempt income, or

(iii) that is the cost of, or any part of the cost of,

(A) tangible property of the taxpayer,

(B) intangible property that is depreciable property of the taxpayer,

(C) property in respect of which any deduction (otherwise than under paragraph 20(1)(b)) is permitted in computing his income from the business or would be so permitted if his income from the business were sufficient for the purpose, or

(D) an interest in, or right to acquire, any property described in any of clauses (A) to (C),

but, for greater certainty and without restricting the generality of the foregoing, does not include any portion of

Moreover, paragraph 18(9)(a) stipulated the following:

(9) Limitation respecting prepaid expenses. 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

As an exception to the above provision, paragraphs 28(1)(a) and (c), applicable to fishermen, stated:

(1) Farming or fishing business. — For the purpose of computing the income of a taxpayer for a taxation year from a farming or fishing business, the income from the business for that year may, if the taxpayer so elects, be computed in accordance with a method (in this section referred to as the cash method") whereby the income therefrom for that year shall be deemed to be an amount equal to the aggregate of

(a) all amounts that

(i) were received in the year, or are deemed by this Act to have been

received in the year, in the course of carrying on the business, and

(ii) were in payment of or on account of an amount that would, if the income from the business were not computed in accordance with the cash method, be included in computing income therefrom for that or any other year, and

minus the aggregate of

(c) all amounts that

(i) were paid in the year, or are deemed by this Act to have been paid in the year, in the course of carrying on the business, and

(ii) were in payment of or on account of an amount that would, if the income from the business were not computed in accordance with the cash method, be deductible in computing income therefrom for that or any other year, and . . .

Analysis

Expenses that are deductible in computing the income from a fishing business must satisfy the tests of deductibility which apply to all businesses. However, the timing of the deduction will depend on whether the taxpayer uses the cash or accrual method of computing income. Section 28 of the Act, applicable to fishermen who compute their income on a cash basis, provides that these taxpayers bring into income all amounts actually received in the year or which are deemed by the Act to have been received in the year in the course of carrying on the fishing business. Similarly, those amounts actually paid in the year or deemed by the Act to have been paid in the year are deductible under the cash method.

Counsel for the appellant submitted that the expenditure at issue contained the character of a prepaid expense. In this regard, subsection 18(9) of the Act requires a taxpayer to match certain specified expenses to the taxation year to which they can reasonably be considered to relate. This provision was enacted for greater certainty and although it does not specifically deal with all types of expenses that can be prepaid, it is aimed at ensuring that all costs that could clearly be related to future periods be expensed in those periods, if they are important and where failure to defer the expense would distort the net profit not only of the year during which the expense was incurred but also subsequent years to which the benefit relates. (See in this regard Interpretation Bulletin No. IT-417R dated July 5, 1982.) It is important to note that as subsection 18(9) is a prohibitive provision, it must be strictly interpreted since it creates a restriction on a taxpayer's right to deduct an expense when it is incurred. For our purposes, the Act clearly provides that fishermen who elect to use the cash method of computing income as provided for under subsection 28(1) are expressly excluded from the provisions in subsection 18(9). In other words an exception to the prohibition against prepaid expenses is made for certain groups of taxpayers.

Turning to the issue of characterization, in the past expenses attributed to “capital nothings” such as goodwill and other capital expenses were not deductible as current expenses because they were on capital account and could not be amortized under the Act as they did not fit within the ambit of one of the classes established for capital cost allowance purposes. Fishing licences and other government rights fell within this category of "capital nothings". Currently/capital nothings" are characterized as an “ eligible capital expenditure” ("EC expenditure") pursuant to the Act. An EC expenditure is defined at paragraph 14(5)(b) which indicates that where an expenditure is made after 1971, is on account of capital, and is incurred for the purpose of gaining or producing income from a business, the expense is classified as an EC expenditure.

An EC expenditure encompasses those expenses attributed to the purchase of a non-depreciable property such as a licence. Moreover, where a taxpayer pays an amount either in conjunction with or separate from the purchase price of assets or a business of another individual for the right to stand in the place of that other person in making an application or renewal for a licence, the expense incurred may also qualify as an EC expenditure. Interestingly, in the case at bar, the appellant does not in fact make the application for renewal of the various roe herring licences. The application must always be made in the name of the licence owner.

The determination of whether an expenditure is characterized as being either an EC expenditure or a current expense is a question of fact which depends upon the circumstances of each individual case.

The term "licence" is defined in Interpretation Bulletin No. IT-477 dated April 30, 1981 and may be referred to for assistance with this definition. There is found at paragraph 11 the following:

11. The words “franchise, concession or licence", are not capable of easy definition. Generally, they must be given the meaning or sense in which they are normally employed by businessmen on this continent and they extend, not only to certain kinds of rights, privileges or monopolies conferred by or pursuant to legislation or by governmental authority, but also to analogous rights, privileges or authorities created by contract between private parties. Again, generally, these words are used to refer to some right, privilege or monopoly that enables the holder to carry on his business or earn income from property, or that facilitates the carrying on of his business or the earning of income from property. . . .

It is therefore evident that where a taxpayer pays an amount for the right to stand in place of another person in applying or renewing a licence then the amount expended is not property pursuant to class 14 of the capital cost allowance scheme of the Act but may, as we have seen, qualify as an EC expenditure.

In turning to the jurisprudence with respect to the issue under review, the case law undoubtedly confirms that no single test or legal principle is useful in and of itself in the determination of the characterization of an expenditure as either being on capital or income account. In R. Bruce Graham Ltd. v. M.N.R., [1986] 1 C.T.C. 2326, 86 D.T.C. 1256, the Tax Court of Canada cited several authorities on the issue. At page 2337 (D.T.C. 1264) it was pointed out:

In B.P. Australia Ltd. v. Commissioner of Taxation, [1966] A.C. 224 (P.C.), Lord Pearce stated, at page 264:

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 common sense appreciation of all the guiding features which must provide the ultimate answer. Although the categories of capital and income expenditure are distinct and easily ascertainable in obvious cases that lie far from the boundary, the line of distinction is often hard to draw in border line cases; and conflicting considerations may produce a situation where the answer turns on questions of emphasis and degree.

Very recently Mr. Justice Estey, in the reasons for judgment of 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, extensively reviewed the jurisprudence and appropriate principles of law to be considered and applied to the determination of the classification of an expenditure as being either expense or capital. On page 56 (C.T.C. 117, D.T.C. 5377) he noted the pronouncement of Lord Pearce in B.P. Australia Ltd., supra, and cited Dixon, J. in Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946), 72 C.L.R. 634, 648 wherein it was stated:

[The answer] depends on 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.

At pages 2337-38 (D.T.C. 1265)the Court added:

Returning to the decision of Mr. Justice Estey in Johns-Manville, supra, at page 5383 he noted the observations made by Lord Wilberforce in Tucker v. Granada Motorway Services, [1979] 2 All E.R. 801 at 804:

It is common in cases which raise the question whether a payment is to be treated as a revenue or as a capital payment for indicia to point different ways. In the end the courts can do little better than form an opinion which way the balance lies. There are a number of tests which have been stated in reported cases which it is useful to apply, but we have been warned more than once not to seek automatically to apply to one case words or formulae which have been found useful in another.. . . Nevertheless reported cases are the best tools that we have, even if they may sometimes be blunt instruments.

Similarly, Lord Reid in Regent Oil Co. Ltd v. Inland Revenue Commissioners, [1966] A.C. 295 (H.L.) stated, at page 313:

So it is not surprising that no one test or principle or rule of thumb is paramount. The question is ultimately a question of law for the court, but it is a question which must be answered in light of all the circumstances which it is reasonable to take into account, and the weight which must be given to a particular circumstance ina particular case must depend rather on common sense than on strict application of any single legal principle.

In the present case if the payment, or the expense, was not made there would not have been a transfer of the licence and thus no resulting income capable of being earned. The payment was necessary and the provisions of section 28 of the Act should apply.

Counsel for the respondent stressed the decision of Brooke Bond Foods Ltd., supra, for the proposition that possible future events have no bearing on the proper characterization of expenses. In that case, a deduction was claimed for the expenses incurred with respect to plans and specifications for the construction of a building on land which the taxpayer intended to purchase. The project was eventually abandoned. The Federal Court—Trial Division held that the expenses were outlays on capital and not revenue account. The costs incurred therefore, were treated as eligible capital expenditures.

The following cases contain factors and circumstances which specifically deal with various issues relating to roe herring licences and are therefore factually more akin to the case at bar.

In Re Bennett, supra, an assignment in bankruptcy was executed by the appellant who held a 1987 herring gillnet licence issued under the Fisheries Act, R.S.C. 1970, c. F-14. The trustee in bankruptcy agreed to accept $9,000 from the bankrupt as the value of the licence to him. The inspector of the estate refused to allow the transfer of the commercial fishing licence. The issue before the Court was whether the licence could properly be characterized as "property" under the Bankruptcy Act, R.S.C. 1970, c. B-3. The British Columbia Supreme Court held that the Bankruptcy Act applies to interests which extend beyond the general notion of the term "property" and therefore includes a bankrupt's interest in such assets as a commercial fishing licence. Furthermore, the Court emphasized that the right to fish for roe herring must at least be considered an "interest" or a "profit" in, arising out of or as an incident to property. In this regard, reference was made to the case of Johnson v. Ramsay Fishing Company Ltd. (1987), 15 F.T.R. 106, 47 D.L.R. (4th) 544 (F.C.T.D.) wherein Joyal, J. said at page 117 (D.L.R. 558):

It is true that by the nature of the licence, it constitutes an asset which wastes away from year to year, the Crown reserving at all times its unfettered discretion to issue or to refuse to issue a licence. The evidence before me, however, is that a roe herring licence is an asset on which the cost of acquisition may be depreciated or which may be rented out from time to time for gainful sums. There is also evidence that since 1975 and to the present day, roe herring licences have in fact been issued for all applicants who were licensees at the terminal date of 1974 or 1977 as the case may be, and who otherwise continued to comply with the conditions of issuance from time to time. In my mind, such a licence becomes something pretty close to a chose in action, as is a patent right, a bank note, a share in a company. In more vernacular language, it is property. .. . .

In other words, the Court, in Bennett, noted that the Johnson, supra, decision affirmed that a licence per se is very similar to a chose in action given that this type of asset is often" rented out" to others by the licence owner.

In addition, Ryan, L.J.S.C. in Bennett, made reference to the decision of Mr. Justice Macdonell in B.C. Packers Ltd., supra, wherein it was held that notwithstanding the fact that a licence is non-transferable, an agreement between parties, to lease the "beneficial interest" in a commercial fishing licence from a licence holder to another individual on a year-to-year basis is an enforceable and valid contract between those parties. Macdonell, J. stated at page 307:

I conclude, from examining the contract between the parties . . . that what is being sold is a beneficial interest in the defendant's roe herring licence. Both parties fully realized that there was a restriction on transfer at the time and provided that, should the licence become transferable without consent at a later time, a transfer document would be forthcoming. The agreement also envisaged the transfer to the plaintiff or its nominee. As I see it, the defendant is for all practical purposes a nominee of the plaintiff, or trustee holding the licence until it could be transferred and, in the meantime, the plaintiff has bought and paid for the benefits of the fishing licence. . . .

Furthermore, the Sparrow case firmly established that a licence is not personal to the holder. In this regard, Ryan, L.J.S.C. stated, in Bennett, at page 349 (C.B.R. 317):

Given that what the trustee in bankruptcy possesses with respect to the bankrupt's property is the capacity to do what the bankrupt might have done, it follows that if Mr. Bennett had the power to contract with respect to the beneficial interest" in his licence then so does the trustee. In this way, the licence is not purely personal to the holder.

The second issue in Bennett dealt with the question of whether any property interest, in the fishing licence, vested in the trustee beyond 1987 namely, the year for which the licence was granted. In reliance on the decision of Strayer, J. in Joliffe v. R., [1986] 1 F.C. 511, the British Columbia Supreme Court held, in Bennett, at pages 350-51 (C.B.R. 318-19):

What counsel characterized as a "right to reapply" for the licence is in reality merely an ability to acquire property, but is not a property interest in itself. It might be suggested that if the licence is property in the sense that it is an "interest or profit incidental to property", then the right to reapply must be a contingent interest in the same thing. The answer lies in the nature of the asserted interest. The licence holder has no right of renewal. The granting of the licence is purely discretionary. Although it has been different in the past, my reading of the regulations indicates that anyone may apply for a roe herring licence. For purely historical reasons Mr. Bennett belongs to a group which is more likely to find success in obtaining a licence than other groups or individuals. Mr. Bennett, in the result, has no higher legal right to obtain the licence than any other applicant. His interest is illusory.

Consequently, the Court found that no interest vested in the trustee in bankruptcy in the fishing licence beyond the 1987 year. It was held that there was no vesting of the licence beyond the rights derived therein for the year in which it was issued.

Interestingly, both counsel for the appellant and the respondent relied upon the decision in Smith, supra, in support of their respective positions. The appellant emphasized that, in the case at bar, the appellant does not acquire an enduring asset. The respondent conversely, distinguished the facts in Smith from the circumstances before this Court.

In turning to the facts in the Smith decision, the plaintiff leased a herring gillnet licence for the 1984 fishing season from a licensee in accordance with a written agreement. The contract stipulated that the terms of the contract would bind the licensee’s heirs and would be automatically renewed for a 98- year period. The licensee also signed an undated power of attorney which authorized the plaintiff to apply for the renewal of the licence annually on behalf of the licensee. As a result of the licensee's death and upon the Department becoming aware of this fact, the plaintiff's application for renewal was denied on the grounds that eligibility for the issuance of a fishing licence expired upon the death of the licensee. The licence was however, issued to the licensee's son as the Department gave preference to a child or a spouse of a deceased licensee. The plaintiff took action to enforce his lease as either against the administrator of the estate of the licensee or as against the licensee's son.

In light of the case in Sparrow, the British Columbia Supreme Court, in Smith, concluded that the leasing of the fishing licence was not an illegal act. Moreover, in examining the wording of the lease agreement itself, Hinds, J. held that the agreement was intended to be binding upon “the heirs, executors and administrators” of the licensee. The Court also found that as a fact the power of attorney was given to the plaintiff for value and was therefore, irrevocable and did not terminate upon the death of the deceased. With respect to the fishing licence itself, Mr. Justice Hinds held, as follows, at pages 367-68 (C.N.L.R. 181):

On the evidence I make the following findings of fact. A category H roe herring gill net licence is personal to the holder of the licence and cannot be transferred. It expires at the end of the calendar year for which it is issued regardless of whether the licence holder is dead or alive on that date. There is no legal right to its renewal. To conserve the fishery, the number of licences issued by Fisheries is severely restricted. Fisheries follows a policy of giving preference to the issuance of a new licence each year to a fisherman who held a licence in the preceding year and, in the event of the death of a licence holder, of giving preference to the issuance of a new licence to a member of the immediate family of such deceased licence holder. The issuance of a licence by Fisheries is a purely discretionary matter.

On the basis of the foregoing facts, findings of fact, and authorities, I conclude that there was a beneficial interest" in the licence for the remainder of the year in which the deceased died, namely the year 1986. It was of no value because the herring season had closed before the date of his death. In 1986 the plaintiff had had the use of the licence and he had rented it to another fisherman. The “beneficial interest" in the licence did not continue beyond December 31, 1986 because there was no legal right of renewal vested therein.

As a result, the Court concluded that any "beneficial interest” in the fishing licence ceased to exist after 1986 given that there existed no vested right of renewal. Moreover, upon the issuance of the 1988 licence to the deceased licensee's son, the lease agreement and the power of attorney were terminated by frustration and were unenforceable against the licensee's estate and against the licensee's son.

An observation from the above cases is that in comparing the decisions in Bennett and Smith, a certain degree of inconsistency is evident such that in the former case, the Court held that a licence is not personal to the holder unlike the latter case which clearly stipulated the opposite.

Counsel for the appellant relied on the case of Sewid, supra, wherein the plaintiffs executed lease agreements for a 99-year period with the defendant in respect of two of their roe herring licences. Two years later, the plaintiffs requested the right to repurchase the licences alleging that the true nature of the agreement between the parties was one of a loan and that the licences had constituted a form of security. The defendant refused to sell and the plaintiffs subsequently took action. McEachern, C.J.S.C. held that, in essence, the plaintiffs failed to establish any reasonable belief that there was any misunder- standing or mistake between the parties. The plaintiffs could not have thought that they were borrowing money on a loan oasis particularly since no such terms for repayment or interest were mentioned in the contract itself. Furthermore, the Court noted that the agreement failed to contain any right of repurchase.

The appellant also relied on the decision in Oxford Shopping Centres Ltd., supra. In that case, the Federal Court—Trial Division examined an agreement made between the appellant and the City of Calgary wherein the appellant paid the city an amount in respect of the construction of a road by the city which affected the access and use of the appellant’s parking area. The appellant argued that the amount expended was an income expense and deductible in the year it was incurred. Conversely, the Minister treated the moneys paid as eligible capital amounts deductible over a period of years. Thurlow, A.C.J. (as he then was) held, at page 101 (C.T.C. 14, D.T.C. 5463):

Turning now to the several matters to be considered, in my view, it is the nature of the advantage to be gained which more than any other feature of the particular situation will point to the proper characterization of the expenditure as one of capital or of revenue expense. That the payments viewed by themselves were in a sense made once and for all is apparent. But so is almost any item which in isolation may be somewhat unusual in one way or another. That the advantage, whatever it was, was expected to be of a lasting or more or less permanent nature is also apparent. This is perhaps the strongest feature suggesting that the expenditure was Capital in nature. But the advantage is no more permanent in nature than that expected to be realized from the geological survey which had been made in the Algoma case [M.N.R. v. Algoma Central Railway, [1968] S.C.R. 477, [1968] C.T.C. 161]. In the test of "what the expenditure is calculated to effect from a practical and business point of view" such features, while carrying weight, are not conclusive.

For if, as I think, the expenditure can and should be regarded as having been laid out as a means of maintaining, and perhaps enhancing, the popularity of the shopping centre with the tenants' customers as a place to shop and of enabling the shopping centre to meet the competition of other shopping centres, while at the same time avoiding the imposition of taxes for street improvements, the expenditure can, as it seems to me, be regarded as a revenue expense notwithstanding the once and for all nature of the payment o[r] the more or less long term character of the advantage to be gained by making it.

The Court, in other words, emphasized that the once and for all nature of a payment and the long-term character of the advantage to be gained, although features of a capital nature, do not alter the fact that the expense was one of the necessities arising in the course of running the appellants business. The Associate Chief Justice explained that the expenditure was incidental to the carrying on of the business. He stated, in this regard, at page 103 (C.T.C. 15, D.T.C. 5464):

It was, as I see it, just one of the broad range of needs or demands which arise in the course of running such a business and which, for the success of the operation, must be met or provided for out of the revenues of the business.

With respect to the method of commercial accounting applied by the appellant, the Court, in the Oxford case, explained that the appellant had properly charged the expense to its revenue and had attempted to amortize the profits over a 15-year period given that in essence no tangible asset was acquired for the payment made. Thurlow, A.C.J. stipulated that the appellant acquired an intangible which was realizable by way of increased revenues in the appellant's business the duration of which could not be assessed with precision. In light of these factors, the Court held that, from a practical and business perspective, the expenditure was more appropriately characterized as an income expense rather than a capital outlay. It was stated at page 105 (C.T.C. 17, D.T.C. 5465):

In the present case, the position taken on behalf of the Crown was that, if the amount was not a capital expenditure, it was incumbent on the taxpayer to amortize it over a period of years and claim only a part of it as deductible each year. Counsel contended that, except where the Income Tax Act makes a specific provision, the recognized principles of commercial accounting apply for the purpose of determining the income from a business for the year and that to deduct the whole amount in the year 1973, rather than to amortize and deduct it over a period of years, distorts and unduly reduces the income for 1973. He made no attack on the accounting method adopted by the plaintiff in computing its profit for corporate purposes by amortizing the amount over a 15-year period.

Thurlow, A.C.J. concluded as follows, at pages 107-08 (C.T.C. 18,D.T.C. 5466-67) :

Thus while there is in the present case some evidence that accepted principles of accounting recognize the method adopted by the plaintiff in amortizing the amount in question for corporate purposes and there is also evidence that to deduct the whole amount in 1973 would distort the profit for that year, it appears to me that as the nature of the amount is that of a running expense that is not referable or related to any particular item of revenue, . . . the amount is deductible only in the year in which it was paid. . . . And there is no specific provision in the Act which prohibits deduction of the full amount in the year it was paid. I do not think, therefore, that the Minister is entitled to insist on an amortization of the expenditure or on the plaintiff spreading the deduction in respect of it over a period of years.

Consequently, this case establishes that an expense incurred for the operation of a business is deductible in the year it was paid. Moreover, the above decision emphasizes that a deduction is allowable unless specifically prohibited by the Act and that the Minister cannot insist on the amortization of an expense over a period of years.

The Federal Court of Appeal upheld the decision agreeing that the amount paid to the City of Calgary was a current expense fully deductible in the year made.

Counsel for the appellant also cited the case of Williams Brothers Canada Ltd., supra, as analogous to the situation at bar. The taxpayer, in that case, was in the business of constructing pipelines as a contractor. He acquired an assignment of the rights in a contract for the construction of a pipeline by another company. In filing its return, the appellant deducted the payment of the cost of the assignment of the interest of the company as an expense incurred for the purpose of gaining or producing income from the business. Cattanach, J. held at page 379 (C.T.C. 452, D.T.C. 1279):

The appellant was in the business of pipe line construction as contractor which means that it was not a seller of goods but its function is merely to put the pipe into the ground and it is from this work any profit is derived. Therefore, to earn a profit the appellant must do two things, first it must get the job and secondly it must complete the job and it follows that expenditures made for the purpose of getting the job would be an outlay or expense made or incurred by the taxpayer for the purpose of gaining income from the business of the taxpayer, (if not otherwise prohibited by the Act).

During the course of argument the respondent distinguished, in detail, the facts, in the case at bar with those set out in Johns-Manville, supra. Counsel argued that in this case the expense attributed to the fishing licences related to the future use of an asset, that it was not recurring as an integral part of the day- to-day operations of the undertakings of the appellant's business and that it was not a constant and easily discernable expense which occurred on an annual basis. Moreover, it was submitted that the lease of the licence itself possessed an intrinsic value in 1986 and that the cost attributed to it reflected the possible future advantage that might be derived by the appellant over several years of its use. In addition, counsel contended that the expense added to the appellant's capacity to fish thereby increasing the appellant's opportunity to earn income from his business and that the significance of the expenditure in question was evident by the relatively high cost paid by the appellant with respect to the lease in comparison to the actual cost of running the appellant's business.

Interestingly, both the appellant and the respondent relied on the case of Johns-Manville for the principle that one must apply, a common-sense appreciation of the guiding features and considerations of the appellant's situation in the determination of the issue at bar. Counsel for the appellant further submitted the decision in Johns-Manville for the proposition that where there appears to be a degree of uncertainty in the Act, the statute must be interpreted in the taxpayer's favour.

The Court, in Firestone, supra, explained that an expenditure for the acquisition or creation of a business entity is on capital account whether or not an acquisition is actually made. This case was cited by the respondent and dealt with a situation where deductions relating to the investigation of business opportunities were denied by the Court as they were held to be on capital, and not revenue, account.

In reply to the Minister's submissions, the appellant emphasized that, in the case at bar, the fishing licence payment at issue was to be treated as a prepaid expense and deductible as such. Reference was made to the decision in Metropolitan Taxi Ltd., supra.

Counsel for the appellant distinguished the facts in the Metropolitan case on the basis that the roe herring licences contain only an expectation that they will be renewed and further, that these types of commercial fishing licences were not transferable to the appellant.

Conclusion

The fundamental difficulty in this case is the proper characterization and treatment of an expenditure relating to various fishing licences. Its complexity is created by the fact that the appellant is not the owner of the various licences per se but has derived benefits from the asset through various leases and assignment agreements.

Moreover, the factual situation, in the case at bar, does not fall squarely into the pattern of cases cited above. Consequently, one must consider the fact that each case is special and therefore should be confined to its very unique factual circumstances. I do not believe that any attempt on my part to synthesize the above decisions would bring significant enlightenment or assistance to the case before the Court.

Generally speaking, a taxpayer, in order to take a deduction, must bring himself within the ambit of a specific provision of the Act. An expenditure in accordance with the Act, may be incurred either as on capital or revenue account. As suggested above, an EC expenditure includes the portion of any outlay or expense that is on account of capital, where the purpose of the outlay is to gain or produce taxable income from a business and where the outlay is not otherwise deductible or depreciable.

In this case, the lease and assignment of the fishing licences is an intangible asset and may be characterized as eligible capital property. However, while the expenditure before me contains elements which, prima facie, point towards capital account, it is important not to be misled by appearances. The subject of the expenditure may not reflect its true characteristic.

The following are general questions which where answered in the affirmative are indicative of an expenditure made on income and not capital account and therefore deductible in accordance with the Act unless specifically prohibited:

1. Was the purchase of a lease and assignment of licence agreements incurred for the purpose of gaining or producing income from the appellant's herring fishing business? In other words, was it a necessary expense in order for the taxpayer to earn business income in the fishing industry?

2. Were the payments made by the appellant consistent with the overall business and commercial practice of the roe herring fishing trade?

3. Did the licence payment not bring into existence an advantage for the enduring benefit of the appellant's trade as a fixed capital?

4. Was the fishing licence expenditure used as a means of earning a profit and therefore part of the profit earning process of the appellant's fishing business?

5. Did the appellant lack the intention of creating a going concern in executing the licence agreements?

In other words, the demarcation between an expenditure on revenue account or capital outlay is essentially a question of fact to be decided in light of the circumstances of the appellant's situation. Undoubtedly, the evidence here established that: the appellant incurred the expense for the purpose of gaining or producing income from his business, the appellant's overall conduct is in keeping with the business and practical reality of the fishing industry, and the appellant acquired a "beneficial interest" by acquiring the roe herring licences. However, it should be noted that this “ beneficial interest” was valid only until December 31 of the year the various licences were issued. The “beneficial interest" did not go beyond this date as there was no legal right of renewal vested in the licence. Moreover, since the licence was granted to the appellant at the close of the herring fishing season, the licence carried no value.

In conclusion, the Court must approach the circumstances of this case in a broad and purposeful way. Moreover, as noted in the jurisprudence, no rigid test is to be used in the determination of the issue. I consider that the evidence in its entirety, bringing to it a commonsense appreciation of all the guiding features, weighs in favour of a bona fide expenditure having been made by the appellant in the course and for the purpose of his regular day-to-day business operations. The expenditure was thus, incurred in the operation of the appellant's profit making structure. Rather than enhancing the business, and thus acquiring an advantage of an enduring nature as in an asset in the capital structure of a business, the expenditure here was incurred to allow the appellant the opportunity to maintain the appellant's current operations. The purchase of the fishing licences is one of the necessities in the running of the appellant's business. The expense was therefore incurred on revenue account and was not a capital outlay. Moreover, the purpose and use of the expenditure is not tainted by the length of the use of the fishing licences for some indefinite time in the future. Finally, as the Act (section 28) makes express exception to the prohibition against deduction of prepaid expenses incurred by a taxpayer, who is a fisherman, the amount may be deducted as a current expense.

The appeal is allowed, with costs, and the matter is returned to the Minister for reconsideration and reassessment.

Appeal allowed.