Date: 20000210
Docket: A-449-97
CORAM: STRAYER J.A.
ROBERTSON J.A.
NOËL J.A.
BETWEEN:
URBANDALE REALTY CORPORATION LIMITED,
Appellant,
- and -
HER MAJESTY THE QUEEN,
Respondent.
Heard at Ottawa, Ontario on Wednesday, November 3, 1999
Judgment rendered at Ottawa, Ontario on Thursday, February 10, 2000
REASONS FOR JUDGMENT: NOËL J.A.
CONCURRED IN BY: STRAYER J.A.
DISSENTING REASONS BY: ROBERTSON J.A.
Date: 20000210
Docket: A-449-97
CORAM: STRAYER J.A.
ROBERTSON J.A.
NOËL J.A.
BETWEEN:
URBANDALE REALTY CORPORATION LIMITED,
Appellant,
- and -
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
NOËL J.A.
[1] This is an appeal against the judgment of Dubé, J. of the Federal Court, Trial Division,1 dismissing an appeal against the judgment of Bonner J.T.C.C. of the Tax Court of Canada,2 dismissing an appeal against a reassessment for the appellant"s 1986 taxation year.
[2] The issue in this appeal is whether an amount of $2,908,000 paid by the appellant during its 1986 taxation year to the Regional Municipality of Ottawa-Carleton on account of a regional development charge ("RDC") was deductible in computing the profit from its land development business for that year for the purposes of subsection 9(1) of the Income Tax Act3 (the "Act") and if so, whether this deduction is prohibited by paragraph 18(9)(a ). In light of Dubé J."s conclusion that the outlay was not deductible under subsection 9(1), he made no finding regarding paragraph 18(9)(a ).
Facts
[3] The material facts are not in dispute.
[4] The appellant carries on business as a land developer and, as such, buys "raw" or undeveloped land, subdivides it into building lots, services the lots and sells them to builders. It also holds and manages various rental properties.
[5] The land with respect to which the RDC was paid consisted of approximately 160 hectares of "raw" land in the City of Kanata proposed for residential development. The stage of development at the time of the payment was that the activities necessary to produce a plan of subdivision had been performed and a draft plan had been filed with the Region. No physical construction had yet taken place.
[6] Prior to the imposition of RDC, developers were required as a condition of the subdivision agreement to install, at their own expense, services, such as sewers and water, within the boundaries of the subdivision plan. As well, developers were forced to dedicate lands for roads and parks located within the plan and otherwise to bear the costs directly and indirectly linked to the subdivision itself. However, many general costs were borne by existing ratepayer.
[7] The RDC was introduced in 19854 as a one-time payment imposed in respect of land to be developed for residential use and was designed to reduce the impact on the existing tax base of the indirect capital required for new developments. It was imposed for a public purpose, namely, financing the costs incurred by the Region of providing various municipal services related to general urban expansion. Both the appellant and the respondent agree with Dubé J."s finding that the RDC was a form of property tax.5
[8] The RDC was imposed as a condition of a land severance approval and was payable following registration of the subdivision plan.6 In order to ensure its payment, the Regional Municipality made arrangements with the area municipalities whereby the municipalities agreed to refrain from issuing building permits unless the applicant could produce a certificate establishing that the RDC had been paid.7
[9] The RDC was computed by reference to a rate based on the type of dwelling unit contemplated by the subdivision plan. These rates were to be phased in over three years as follows: 1985, 1/3 of the full rate; 1986, 2/3 of the full rate and 1987, full rate plus indexing in accordance with a specified scale.8
[10] The appellant paid the RDC in late 1986 so as to avoid the rate increase scheduled to take effect January 1, 1987. The amount paid was computed by reference to the draft plan of subdivision which had been submitted by the appellant with the application for payment.9
[11] During its 1986 taxation year, the appellant had land sales of $7,410,489, but the RDC was not related to those sales.
[12] In its return of income for the 1986 taxation year, the appellant deducted the RDC in computing the profit from its land development business. The deduction was listed under the heading "taxes-development fees" in the "Schedule of Administrative Overhead" appended to the tax return.10 It was listed with other expenses such as realty taxes and interest charges. The RDC was treated the same way for financial statement purposes.
[13] By an initial assessment dated December 14, 1988, the Minister disallowed the deduction of the RDC in the computation of the appellant"s profit for the year. Upon an objection being filed, the Minister by reassessment dated August 21, 1989, maintained the disallowance. In issuing the reassessment, the Minister relied on the assumption that Generally Accepted Accounting Principles (GAAP) did not authorize the deduction of the RDC in 1986.11
[14] An appeal to the Tax Court ensued which was eventually denied by Bonner J.T.C.C. Upon a further appeal to the Federal Court, Trial Division, Dubé J. again denied the appeal. Although the appeal before the Federal Court was by way of trial de novo, the matter proceeded solely on the basis of the evidence adduced before the Tax Court without any witnesses being called.
[15] This appeal is from the foregoing decision of Dubé J.
The Judgment at Trial
[16] In dismissing the appeal, Dubé J. held that the RDC was not deductible in the appellant"s 1986 taxation year because it could not be "matched" against revenues in that year from the land. For this conclusion, he relied on the opinion of this Court in Canada v. Canderel, that "the matching principle of accounting has ... been elevated to the status of a legal principle",12 and in The Queen v. Toronto College Park Limited13 that the issue is not "which [accounting method] gives the truer picture of the taxpayer"s profit or net income" but rather is "whether an expense in question can be matched with a specific source of revenue".14
[17] Dubé J. further stated that, in view of this holding, it was not necessary to deal with the respondent"s alternative contention that the RDC was paid "in respect of a period" after 1986 and that its deduction was accordingly denied by paragraph 18(9)(a ).15
[18] Subsequent to the decision of Dubé J., the Supreme Court of Canada reversed the decisions of this Court in Canderel and Toronto College Park,16 holding, inter alia, that the "matching principle" is not to be elevated to a rule of law and that the goal in determining profit under the Act is to obtain an accurate picture of the taxpayer"s income and true financial position for the year and not necessarily to apply the "matching principle" or any other method of accounting even though required by GAAP.
[19] Relying on the decision of the Supreme Court in Canderel and Toronto College Park, the appellant takes the position that the reasoning advanced by Dubé J. for disallowing the deduction of the RDC is obviously flawed and must be disregarded. Quoting portions of the analytical framework laid down by the Supreme Court in these cases, the appellant maintains that it has discharged the onus of demonstrating that its method of computation of income is consistent with the Act and yields an accurate picture of its income for the year. It adds that the Minister has failed to demonstrate that deducting the RDC as and when the land with respect to which it was paid is sold, would provide a more accurate picture of its income.
Analysis and Decision
[20] Dubé J., as he was bound to do, reached his decision on the basis that, as a legal matter, expenses had to be matched with revenues before they could be deducted. Because in this instance the expense could not be traced to any revenues generated during the year in which it was paid, he denied the appeal.17 Having regard to the two intervening decisions of the Supreme Court, reversing the decisions of this Court on which the Trial Division relied in giving judgment, I am of the opinion, for the reasons set out below, that the decision of the Trial Division must be set aside, and that this Court must give the judgment that the Trial Division should have given.
[21] The approach espoused by the Supreme Court in Canderel and Toronto College Park is based on the following set of principles:
| (1) The determination of profit is a question of law. |
| (2) The profit of a business for a taxation year is the determined by setting against the revenues from the business for that year the expenses incurred in earning said income: M.N.R. v. Irwin, supra, Associated Investors, supra. |
| (3) In seeking to ascertain profit, the goal is to obtain an accurate picture of the taxpayer"s profit for the given year. |
| (4) In ascertaining profit, the taxpayer is free to adopt any method which is not inconsistent with |
| (a) the provisions of the Income Tax Act; |
| (b) established case law principles or rules of law; and |
| (c) well-accepted business principles. |
| (5) Well accepted business principles, which include but are not limited to the formal codification found in G.A.A.P., are not rules of law but interpretive aids. To the extent that they may influence the calculation of income, they will do so only on a case-by-case basis, depending on the facts of the taxpayer"s financial situation. |
| (6) On reassessment, once the taxpayer has shown that he has provided an accurate picture of income for the year, which is consistent with the Act, the case law, and well-accepted business principles, the onus shifts to the Minister to show either that the figure provided does not represent an accurate picture, or that another method of computation would provide a more accurate picture.18 |
[22] The evidence at trial was that the appellant had consistently followed a policy of recording interest, taxes and other carrying costs on undeveloped land held for resale as an expense in its financial statements and that it adopted the same approach for income tax purposes. That in itself is not controversial. It seems clear that under the Act and the case law (except for those years in which subsection 18(2) prohibited such deductions) real estate taxes and interest expenses paid by a trader with respect to raw land held in inventory can be deducted in the computation of profits as they are normal operating expenses of a land trader.19 This treatment also appears to be acceptable under GAAP.20
[23] Where raw land undergoes development however, the expert evidence adduced at trial indicated that GAAP require that all expenses incurred from that point on be added to the cost of the land, to the extent that they can be linked to the land on some rational basis. While the differences in the testimony of the two experts who gave evidence appear extensive at first blush, a detailed review of the transcript shows that the only real issue separating them was whether or not the underlying land was being developed when the RDC was paid. Once it is recognized that the land was being "developed" as I think it must be,21 it becomes clear, based on the literature referred to by both experts, that GAAP required that the RDC be added to the cost of the land.22
[24] I understood counsel for the appellant to concede as much during the hearing. He insisted however that GAAP were not determinative of the treatment of the expenditure under the Act and invited the Court to consider the framework of analysis proposed by the Supreme Court in Canderel and Toronto College Park.
[25] The issue to be decided raises two questions:
| a) Was the RDC an outlay or expense that was made or incurred for the purpose of earning income from the appellant"s business so as to be deductible in computing income from its business notwithstanding paragraph 18(1)(a )? |
| b) If so deductible, was the RDC deductible in computing income for the taxation year in which it was paid? |
[1] The answer to these questions can be given by reference to the first three principles enunciated by the Supreme Court in Canderel. This case does not, in my view, raise any question requiring that resort be had to the other three Canderel principles.23
Paragraph 18(1)(a)
[2] In my view, the RDC is deductible in computing the income from the appellant"s business notwithstanding the general limitation embodied in paragraph 18(1)(a ):
| 18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
| (a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property; |
|
18(1) Dans le calcul du revenu du contribuable, tiré d"une entreprise ou d"un bien, les éléments suivants ne sont pas déductibles:
| (a) un débours ou une dépense, sauf dans la mesure où ce débours ou cette dépense a été fait ou engagé par le contribuable en vue de tirer un revenu d"une entreprise ou d"un bien; |
|
[3] In considering the application of this limitation, one must have in mind the exact nature of the appellant"s business: it buys raw land, services it, subdivides it and sells it in lots to builders. In the normal course, this involves substantial expenses being incurred in a taxation year prior to the year of the sale of the lots. In other words, the owners of the business had to envisage incurring losses in one year in order to earn income in a subsequent year.
[4] While paragraph 18(1)(a), when read with subsection 9(1),24 provides that an expense may only be deducted if made or incurred in the year, it has long been established that it need not be traceable to revenues generated in the year. What is required is that the expense be made or incurred in the year "for the purpose of gaining or producing income from the business".25
[5] Here, there is no doubt that the payment was made in the course of the appellant"s income earning process and that it was a bona fide business expense in the year in which it was made. The appellant was confronted with a payment which it had to make in order to turn its land inventory to account. It had the choice of paying $2,908,000 in 1986, or a substantially higher amount in the following year.
[6] The decision to make the payment earlier rather than later cannot be put into question when the matter is considered, as it must be, in the perspective of the appellant"s business. Even though the expense cannot be associated with any sale in the year, it is clear that it was made for the purpose of earning income from the business. The RDC is therefore deductible in computing the appellant"s income notwithstanding the general limitation embodied in paragraph 18(1)(a ).
Taxation Year
[7] In my view, the RDC is deductible in computing the appellant"s income for the taxation year in which it was paid for the following reasons:
| a) In the case of an ordinary trading business, money used to acquire inventory does not usually appear, as such, (even though it is an outlay for the purpose of earning income from the business), in the profit and loss account because that money is replaced in the taxpayer"s statement of non-capital assets, by the inventory purchased (at cost); |
| b) The background for each calculation of profit for a taxation year from a business of buying and selling (or buying manufacturing and selling) is "the practice which has hardened into a rule of law" of computing profit for a year by, inter alia, valuing "inventory" "at the beginning and at the end of the period" at "cost or market, whichever is the lower".26 |
[8] The result is that when inventory is sold in the year of acquisition, the "cost" is deducted from the sale price to determine profit; but when without being sold, its value has fallen below cost before the end of the acquisition year, the fall in value is charged in the year of acquisition and, when it is sold in the next year, it is only the remainder of the cost that is deducted in computing profit for that year.
[9] This shows that an accurate reflection of the profit from such a business is obtained by recognizing a decrease in the value of non-capital property that is inventory in the year although any loss inherent in this decrease has yet to be realized. A fortiori, a decrease in the traders non-capital property resulting from a payment actually made in the year may be reflected in that year. What is deducted in computing the profit for a year from such a business is what has been removed from the traders non-capital property, without being replaced by something else, whether this removal occurs by way of a payment of money, a delivery of property27 or, if that should happen, a fall in the value of inventory.
[10] In this instance, no asset has been received to fill the hole left by the payment of the RDC in the appellant"s non-capital assets. Although the accountants suggest that the payment be treated as though it gave rise to the acquisition of an asset of commensurate value, there is no evidence and indeed no suggestion that such an acquisition took place.28
[11] The sole assumption which supports the Minister"s assessment is that the deduction of the RDC was not in conformity with GAPP. Upon this assumption being proven to be indeterminate, the burden of demonstrating that the reassessment should nevertheless be upheld fell on the Minister. The only way in which the Minister could have discharged this burden is to show that the fair market value of the appellant"s land at the close of the year was greater than the amount shown in its financial statements by the amount of the RDC. The Minister made no assumptions and led no evidence on this point.
[12] That being so, it follows based on the above reasons, that in order "to obtain an accurate picture of the taxpayer"s profit" for the year of payment, the RDC must be deducted in computing the appellant"s income for that year. Having come to this conclusion, I must address the respondent"s alternative contention.
Paragraph 18(9)(a)
[13] Even if the payment was properly deductible in the determination of the appellant"s profit pursuant to subsection 9(1), the respondent contends that its deduction is nevertheless prohibited by virtue of paragraph 18(9)(a ):
| 18(9) Notwithstanding any other provision of this Act,
| (a) in computing a taxpayer"s income for a taxation year from a business ... no deduction shall be made in respect of an outlay or expense to the extent that it can reasonably be regarded as having been made or incurred |
| (i) as consideration for services to be rendered after the end of the year, |
|
18(9) Nonobstant toute autre disposition de la présente loi,
| a) dans le calcul du revenu d"un contribuable pour une année d"imposition tiré d"une entreprise [...] il n"est accordé aucune déduction au titre d"un débours ou d"une dépense dans la mesure où ils peuvent raisonnablement être considérés comme faits ou engagés |
| (i) en contreprartie de services à être rendus après la fin de l"année, |
|
| (ii) as, on account or in lieu of payment of, or in satisfaction of, interest, taxes (other than taxes imposed on insurance premiums), rent or royalty in respect of a period after the end of the year, or |
| (iii) as consideration for insurance in respect of a period after the end of the year (other than an amount paid in respect of reinsurance by an insurer); |
|
| (ii) à l"égard, au titre ou en paiement intégral ou partiel d"intérêts, d"impôts ou taxes (à l"exclusion des taxes imposées sur les primes d"assurance), de loyer ou de redevances visant une période postérieure à la fin de l"année, ou |
| (iii) en contrepartie d"assurance visant une période postérieure à la fin de l"année (à l"exclusion d"une somme payée à l"égard de réassurance par un assureur); |
|
[emphasis added]
[14] In my view, the respondent"s contention fails on two grounds. First subparagraph 18(9)(a )(i) is restricted in its application to "taxes", "interest", "rent" or "royalty" that are "paid with respect of a period ...", that is payments, the liability for which accrues over time. The RDC, being a one-time tax, was not a payment of this nature.
[15] Second, even if the payment of the RDC could be regarded as having been made or incurred in respect of a period, it cannot be regarded as having been made "in respect of a period after the end of the [appellant"s 1986 taxation] year", as contemplated by paragraph 18(9)(a ). The RDC was a payment required to be made in order to obtain land severance approval and which was in fact made in 1986 in order to avoid announced rate increases which were to take effect thereafter. The only period in respect of which the outlay was made, therefore, was the period during which the appellant chose to make it, that is during its 1986 taxation year.
Conclusion
[16] For these reasons, I would allow the appeal with costs here and before the Trial Division, and refer the reassessment back to the Minister for reconsideration and reassessment on the basis that the RDC was properly deductible in the computation of the appellant"s profit for the 1986 taxation year.
"Marc Noël"
J.A.
"I agree.
Barry L. Strayer J.A."
Date: 20000210
Docket: A-449-97
CORAM: STRAYER J.A.
ROBERTSON J.A.
NOËL J.A.
In the Matter of an Appeal from the
Trial Division
In Re: the Income Tax Act
BETWEEN:
URBANDALE REALTY CORPORATION LIMITED,
Appellant,
(Plaintiff),
- and -
HER MAJESTY THE QUEEN
Respondent
(Defendant)
DISSENTING REASONS FOR JUDGMENT
ROBERTSON J.A.
[1] In December 1986 the appellant taxpayer, a real estate developer, prepaid $2.9 million in regional development charges in respect of a proposed subdivision. The taxpayer did so in anticipation of a substantial increase in the charges due to come into effect on January 1, 1987 for each of the proposed residential lots in the 160 hectare development. The Regional Municipality of Ottawa-Carleton readily accepted the prepayment even though the legal obligation to pay did not arise until an approved subdivision plan had been registered and an application for a building permit had been sought in regard to a particular lot. The regional development charge was imposed to off-set those costs that ultimately would be incurred by the regional municipality because of general urban expansion. It was not imposed for the purpose of covering the cost of services to be provided to the taxpayer"s development.
[2] The taxpayer sought to deduct the $2.9 million from unrelated land sales of $7.4 million on the basis that the amount in question was a current expense. The Minister of National Revenue reassessed the taxpayer on the basis that the amount in question could not be deducted under section 9 of the Income Tax Act. The appeal to the Tax Court of Canada proved unsuccessful. Judge Bonner preferred the expert testimony of the Minister"s witness who testified that according to generally accepted accounting principles (GAAP) the amount in question would be added to the cost of the land and, furthermore, that GAAP "more closely accorded with ordinary commercial principles". It is apparent that the central disagreement between the parties was whether or not the lands in question had reached the development stage. According to GAAP, once that stage is reached all expenditures are to be added to the cost of the land. On this point the evidence of the Minister"s expert witness was preferred and he testified that the lands had reached the development stage. At page 6, Judge Bonner reasoned:
| In my view the generally accepted accounting principles espoused by Mr. McFadgen more closely accord with ordinary commercial principles than those espoused by Mr. Cogan. I have arrived at that conclusion for several reasons. The primary reason is that deduction in 1986 would depress 1986 profits by charging against the revenues of that year an amount which in reality is a cost of earning the revenues of the later years during which the Bridlewood III building lots will ultimately be sold. The 1986 payment of the development charge was quite unrelated to the process of earning the Appellant"s 1986 revenues. The charge cannot reasonably be regarded as an administrative or overhead cost or as a "running expense" of the business as a whole as described by Rowlett J. in Naval Colliery Co. Ltd. v. C.I.R. The outlay was not made to satisfy a recurrent demand arising from the operation of the business as a whole. It is obvious that the direct and immediate result of the payment of the charges was an increase in the value of the Appellant"s inventory of building lots within Bridlewood Phase III all of which were on hand at the end of 1986. |
[3] The taxpayer initiated a de novo appeal to the Trial Division of this Court and with the consent of the Minister the evidence before Judge Bonner was placed before Justice Dubé thereby eliminating the need to call expert testimony. Justice Dubé agreed with Judge Bonner that GAAP accords with ordinary commercial principles. Justice Dubé also held that those principles accord with the matching principles as articulated by the Federal Court of Appeal in Canderel Ltd. v. Canada [1995] 2 F.C. 232 and Toronto College Park Ltd. v. Canada [1996] 3 F.C. 858. Both of these decisions were subsequently overruled by the Supreme Court which held, inter alia, that the matching principle could not be elevated to a rule of law: see Canderel Ltd. v. Canada [1998] 1 S.C.R. 147 and Toronto College Park Ltd. v. Canada [1998] 1 S.C.R. 183. The decisions of this Court in Canderel and Toronto College Park had not been decided at the time Judge Bonner rendered his decision.
[4] Leaving aside Justice Dubé"s reliance on decisions which are no longer good law, the question remains whether the taxpayer is entitled to deduct the $2.9 million prepayment as a current expense under section 9 of the Income Tax Act having regard to the principles set out by Justice Iacobucci in Canderel, supra. The critical passage from that judgment is found at page 6110:
| (1) The determination of profit is a question of law. |
| (2) The profit of a business for a taxation year is to be determined by setting against the revenues from the business for that year the expenses incurred in earning said income: M.N.R. v. Irwin, supra, Associated Investors, supra. |
| (3) In seeking to ascertain profit, the goal is to obtain an accurate picture of the taxpayer"s profit for the given year. |
| (4) In ascertaining profit, the taxpayer is free to adopt any method which is not inconsistent with |
| (a) the provisions of the Income Tax Act; |
| (b) established case law principles or rules of law; and |
| (c) well-accepted business principles. |
| (5) Well-accepted business principles, which include but are not limited to the formal codification found in G.A.A.P., are not rules of law but interpretive aids. To the extent that they may influence the calculation of income, they will do so only on a case-by-case basis, depending on the facts of the taxpayer"s financial situation. |
| (6) On reassessment, once the taxpayer has shown that he has provided an accurate picture of income for the year, which is consistent with the Act, the case law, and well-accepted business principles, the onus shifts to the Minister to show either that the figure provided does not represent an accurate picture, or that another method of computation would provide a more accurate picture. |
[5] In summary, the taxpayer is free to choose any method which is not inconsistent with the provisions of the Act, established principles or rules developed from case law and, finally, well-accepted business principles. In turn, well-accepted business principles include, but are not limited to, GAAP which themselves are not rules of law but rather interpretative aids.
[6] In the present case the taxpayer has modified the argument which it advanced before Judge Bonner. It concedes that the payment in question is not deductible as a current expense under GAAP. Moreover, it accepts that property taxes receive the same treatment under GAAP. Counsel for the taxpayer argues that under well-accepted business principles property taxes are deductible as a current expense, notwithstanding GAAP, and that the development charge in question is a property tax. In support of its argument, the taxpayer submits that the fact that the limit on deductions of property taxes under subsection 18(2) of the Act does not apply to property taxes paid by a land trader is a "valuable hint" that Parliament did not contemplate any such limit in computing business profit under subsection 9(1) in accordance with well-accepted business principles. Therefore, the taxpayer submits that its calculation of profit represents an accurate picture of profit and that the onus shifts to the Minister to show otherwise or that there is another method which provides a more accurate picture.
[7] According to the expert evidence, when raw land reaches the development stage, which it had in this case, then all expenses incurred from that moment forward are to be added to the cost of the land. This is the result mandated by GAAP and which, according to the judges below, most closely accords with ordinary commercial principles. Regardless of what one may derive from subsection 18(2) of the Act, one cannot use that section to argue by implication as to what are the well-accepted business principles when in fact there is evidence, which was accepted by the judges below, that the deduction of the expense in question would be contrary to such principles. I find the taxpayer, having failed to adduce any evidence that its calculation of profit is consistent with the Act, the case law and well-established business principles, has not satisfied the initial onus. There is no evidence that an accurate picture of income for the year can be derived by deducting the $2.9 million prepaid development expense rather than adding it to the cost of the undeveloped land in respect of which it was paid. Therefore, the onus did not shift to the Minister to show that another method of computation would provide a more accurate picture.
[8] In light of the above finding it is, strictly speaking, unnecessary to deal with the Minister"s argument that the analogy being drawn by the taxpayer between a regional development charge and property taxes levied and paid on an annual basis is in error. That being said, I agree that the analogy is inappropriate. There is no doubt that the development charge in issue is a tax and it is equally true that it is a tax on property, but it does not follow that both should receive identical treatment for income tax purposes. Property taxes are more akin to a running expense, that is to say, a recurring and annual expense which inevitably must be paid within each taxation year. The regional development charge, however, is a one-off payment which is integrally connected to the development of the lands in question. Without that payment residential construction cannot begin. I hasten to add that there is another reason why the Minister may be prepared to accept the deductibility of annual property taxes at the pre-development stage. That reason has nothing to do with a taxpayer providing an accurate picture of income (profit). It is common knowledge that in relative terms taxes on raw land are much lower than on developed land, and may pale into insignificance. For example, in the present case the taxpayer paid realty taxes totalling $113,000 for the 1986 taxation year [see Appeal Book at 29]. In short, even if real property taxes were deductible under well-accepted business principles that is no basis for inferring that regional development charges should or would receive the same accounting treatment.
[9] My colleague, Justice Noel, has concluded that the taxpayer is entitled to the deduction sought having regard to a "practice which has hardened into a rule of law". That practice pertains to the way in which inventory is valued under subsection 10(1) of the Act which provides that a taxpayer"s inventory at the end of the year shall be valued at the lower of cost or fair market value. With great respect, I fail to see how the taxpayer is able to benefit from the rules relating to inventory valuation. My understanding of the law is as follows.
[10] There is no doubt that the $2.9 million regional development charge is on income account. The real issue is whether it should be added to the cost of the taxpayer"s land inventory or treated as a running expense for the year of payment. Only in the latter case would it be deductible as the taxpayer claims. However, both courts below found that, according to GAAP and well-established business principles, the regional development charge must be added to the cost of the taxpayer"s land inventory. That being the case, it becomes an amount that cannot be taken into account in computing profit until the land is sold or is found to have a value that is less than its cost.
[11] Thus, in the present case, if the taxpayer had paid, for example, $10 million for the lands in 1986 together with $2.9 million in regional development charges, then the cost of the land as of the end of 1986 would be $12.9 million. If the value of the land as of that time was $12.9 million or more, the inventory would be carried as an asset at its cost. If that were the case, the value represented by the $12.9 million expenditure made in 1986 would be reflected as an asset of the taxpayer in that year. However, if the value of the land as of the end of 1986 was less than $12.9 million, the taxpayer could claim the difference as an inventory write-down under subsection 10(1) of the Act.
[12] The taxpayer did not seek to claim a business loss on this basis, presumably because the fair market value of the lands in question had not fallen below their cost. In any event, no evidence was presented as to the fair market value of the lands at the end of 1986. The absence of such evidence means that subsection 10(1) cannot be applied. But more importantly, the absence of any such evidence as to the value of the land means that one cannot conclude that the value of the land in respect of which the $2.9 million was paid was not enhanced by the expenditure. For that reason, I must respectfully disagree with Justice Noel"s conclusion that the "hole" left by the expenditure is not represented by an asset. [I also am unable to agree with the conclusion at paragraph 36 of his reasons to the effect that the onus was on the Minister to establish that the value of the land in question was enhanced by the expenditure. To me it is simply unfair to impose this obligation on the Minister when the taxpayer did not even claim a loss under subsection 10(1). As well, I could find no evidence in the appeal record to support the understanding that the subsection 10(1) argument was raised either before Bonner J.T.C.C. or Dubé J.]
[13] I would dismiss the appeal with costs.
"J.T. Robertson"
J.A.
[14]
__________________
1Reported at 97 D.T.C. 5353.
2Reported at 93 D.T.C. 154.
3R.S.C. 1952, c. 148 as amended.
4It was imposed by a bylaw enacted on August 14, 1985 pursuant to ss. 50(6) of the Planning Act (1983, S.O. c. 1) and ss. 31(1) and s. 3 of the Regional Municipality of Ottawa-Carleton Act (R.S.O. 1980, c. 439) and 215 of the Municipal Act (R.S.O. 1980, c. 302).
5Paragraphs 39-43, 48 and 51 of the appellant"s Memorandum of Fact and Law and paragraph 27 of the respondent"s Memorandum of Fact and Law.
6Procedural Guidelines, Annex A, para. 5, Appeal Book, vol. I at 125.
7Ibid.
8Ibid at 124 and 126.
9Receipt from the Regional Municipality, Appeal Book, vol. I at 144.
10Appeal Book, vol. I at 27 and 29.
11Statement of Defence, para. 9, Appeal Book, vol. II at 470. The Minister had also assumed that the payment was an account of capital, but that avenue was not pursued at trial or on appeal.
1295 D.T.C. 5101 at 5102.
1396 D.T.C. 6407 at 6411.
14Supra note 1 at 5356.
15Ibid at 5357.
16Canderel Limited v. The Queen, 98 D.T.C. 6100 and Toronto College Park Limited v. The Queen, 98 D.T.C. 6088.
17Supra note 1 at 5356.
18Supra note 17 at 6100 and 6091 respectively.
19See Onyx Realty Confection v. M.N.R., 74 D.T.C. 6352 at 6353-6354; In the case of a trader, leaving aside special revenue items and disbursements, the profit from the business is the gross profit from the trading operations less the normal operating expenses, .... See also M.N.R. v. Irwin, 1964 S.C.R. 662 at 664-665.
20Evidence of Mr. McFadgen, Appeal Book, vol. II at 676.
21I agree with Bonner T.C.C.J."s finding that Mr. Cogan"s opinion to the contrary did not rest on " a realistic view ... of the development process". (Supra note 2 at 158.)
22The exact conclusion reached by Mr. McFadgen, whose expert evidence was accepted by both Dubé J. and Bonner T.C.C.J., was that: [The RDC] should have been classified as property held for development in the balance sheet. Even if the regional development charges were deemed to be a carrying cost or an item of overhead, they should have been capitalized in the financial statements to be in accordance with generally accepted accounting principles. (McFadgen"s expert opinion, Appeal Book, vol. II, page 457 at 462.)
23The Canderel principles are reproduced at para. 21 of these reasons.
24
| 9(1) Subject to this Part, a taxpayer"s income for a taxation year from a business or property is his profit therefrom for the year. |
9(1) Sous réserve des dispositions de la présente Partie, le revenu tiré par un contribuable d"une entreprise ou d"un bien pour une année d"imposition est le bénéfice qu"il en tire pour cette année. |
25For an early statement of this principle see Consolidated Textiles Limited v. M.N.R., 3 D.T.C. 958 per Thorson P. at 960. For a modern restatement, see [1980] 2 S.C.R. 175">Mattabi Mines Ltd. v. Ontario (Minister of Revenue), [1980] 2 S.C.R. 175 at 189 per Wilson J. at 189.
26This rule which is now imbedded in the Act (ss. 14(2) of the 1952 Act and 10(1) of the present Act) has been consistently followed over the years. See for example Whimster & Co. v. Inland Revenue Commissioners (1925), 12 T.C. 813 at 823; M.N.R. v. Irwin, supra note 21 at 664-665; [1980] S.C.R. 350">M.N.R. v. Shofar Investment Corporation, [1980] S.C.R. 350 at 353-354; Friesen v. The Queen, 95 D.T.C. 5551 at 5558-5560; Minister of National Revenue v. Anaconda American Brass Ltd., [1956] A.C. 85 at 100-101.
27I have in mind gifted land in lieu of taxes.
28It is strictly by reference to a cost measurement technique known as "the full costing model" and the theory that costs that will benefit future periods should be matched with revenues of the period benefited that Mr. McFadgen expressed the view that the payment should be "classified" as "property" in the balance sheet. (Evidence of Mr. McFadgen, Appeal Book, vol. II at 676-677.)
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