Lain C. Taylor v. Minister of National Revenue, [1986] 1 CTC 2036, 86 DTC 1018

Rip, T.C.J.:—The appellant, lain C. Taylor, appeals from a reassessment of income tax for 1980 wherein the respondent, the Minister of National Revenue, Taxation, did not permit him to deduct the sum of $3,292.22 in computing his income from a business in accordance with paragraph 18(1)(a) of the Income Tax Act (“Act”).* [1]

Mr. Taylor commenced carrying on a business of importing and marketing antique maps and prints as a sole proprietor under the name and style of North by West in 1978. The business was operated out of Mr. Taylor's home in Edmonton.

In 1980 Mr. Taylor expended $3,292.22 for the purchase of research materials and books required for his business in the preparation of a catalogue of inventory he had available for sale. Mr. Taylor testified that the marketing of the inventory requires research as to the origin and nature of the documentation sold. Some items of inventory are in excess of 100 years old, some being as old as 400 years. To determine the source of a particular item requires that it be accurately researched and described. He owns a reference library consisting of about one dozen basic books and documents which were in his possession prior to 1980; he uses these books and documents in his research. The treatment of the cost of these materials is not in issue. However during 1980 he purchased approximately 100 separate research documents from various suppliers. Each document was purchased for the purpose of facilitating the sale of a particular item of inventory. Mr. Taylor claimed the cost of the acquisitions of these research materials in the amount of $3,292.22 as a current expenditure.

Mr. Taylor produced two of his catalogues in evidence, one catalogue for 1982 and the other for 1983. He explained that the various research materials he purchased were in respect of a specific item he had for sale and which provided background for the sale of a particular item. For example, he referred to item number 115 in the 1982 catalogue, to wit, Kane, Elisha Kent. Kane was an Arctic explorer during the mid-nineteenth century and the research material on Kane provided biographical information on Kane which served as a background in selling the Kane prints. Mr. Taylor claims his chances of referring to Kane research material again, once the prints are sold, is very unlikely. The cost of the material on Kane has been built into the cost of the Kane prints.

The research material acquired by Mr. Taylor in 1980 is still in his possession; they are stored in the attic of his home and, he says, may be used for a specific purpose sometime in the future. The materials are not for sale and if a client offered to purchase a particular material from him, Mr. Taylor advised the Court he would have to make a judgment to determine if he really needed that material.

Mr. Taylor says he did not purchase the research materials for the purpose of acquiring a library but rather to satisfy research requirements necessary to sell a particular map or related item.

The Minister takes the position that the cost of the research materials was an outlay or payment on account of capital and Mr. Taylor is only permitted to deduct 20 per cent of the capital cost of the research material since the research material is a Class 8 asset (paragraph 20(1)(d) of the Act, section 1100 of the Regulations to the Act and Schedule II of the Regulations).

Counsel for the Minister cited the following cases: F. Davida Beadle v. M.N.R., [1979] C.T.C. 2917; 79 D.T.C. 775 and The Queen v. Leonard R. Young, 83 D.T.C. 5408, which held that the cost of acquisition of certain literature was not a deduction from income permitted by paragraph 18(1)(a) of the Act. Both of these reported cases are concerned with the deductibility of the cost of subscriptions to certain literature which related to investments; the literature in Beadle (supra), dealt with information with respect to general economic trends and developments and the literature in Young (supra), provided information on the current status of corporations the shares of which Mr. Young owned or contemplated acquiring. The Federal Court of Canada upheld the decision of the Tax Review Board in Young (supra), that the cost of the literature was a capital expenditure that ought to be added to the adjusted cost base of the taxpayer's shares. The Beadle (supra) appeal was dismissed as well.

In most cases research materials, including books, have an enduring and intrinsic value to the purchaser since the materials are acquired to obtain information and knowledge which may be used and applied over several years.

In this case however the evidence is that Mr. Taylor purchased the research materials in issue solely for the purpose of selling a particular item in his inventory. Mr. Taylor made an expenditure not in order to acquire an asset of an enduring nature but in order to derive income by having available to him a tool that would be useful in the sale of his inventory. At the same time the research materials acquired by Mr. Taylor for this purpose were available to him in the unlikely event he required them.

In the reasons for judgment of the Supreme Court of Canada in Johns- Manville Canada Inc. v. The Queen, [1985] 2 C.T.C. 111; 85 D.T.C. 5373, Mr. Justice Estey discusses in depth the appropriate principles of law to be applied to the determination of the classification of an expenditure as being either expense or capital.

On page 125 (D.T.C. 5383), Mr. Justice Estey cites the pronouncement by Lord Wilberforce in Tucker v. Granada Motorway Services, [1979] 2 All E.R. 801, where he said 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. [Emphasis added]

Justice Estey adds that the words of Lord Pearce in B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia, [1966] A.C. 224 at 264 are not to be forgotten:

It is a commonsense appreciation of all the guiding features which must provide the ultimate answer.

In my view the expenditures for the research materials were current expenses. The word "research" as used by Mr. Taylor is in my view a misnomer. Based on the evidence at trial, the material was acquired by Mr. Taylor not so much for research in itself as for use as a tool in selling products. It is really no different than a manufacturer's literature describing a particular model and year of product he has for sale. The material in issue permitted Mr. Taylor to satisfactorily explain to prospective customers the nature of the product he had for sale. The cost of the material was a cost of doing business: the character of the advantage sought by these expenditures is that of an advantage in the current operations of the taxpayer. The practice was recurring and the manner in which the object of the expenditures was applied was directly incorporated into the retail operations of the taxpayer. The means adopted by Mr. Taylor to gain an advantage in his current operations were the periodic outlay of his funds for this material which was used in the business operations. It is no different than the purchase of land by Johns-Manville Canada Inc. (supra).

The expenditures incurred by Mr. Taylor were bona fide in the course of his regular day-to-day business operations. Common sense dictated that these expenditures be made, otherwise he would have had great difficulty in selling his inventory. The expenditures were not part of a plan for the assembly of a library or bank of research material. The expenditures were laid out in the course of Mr. Taylor’s business. That the material was available to him at some indefinite time in the future does not in my view taint the purpose and use of the expenditure.

I will therefore allow the appeal with costs, if any.

Appeal allowed.