Frederick H Herbert v. Minister of National Revenue, [1984] CTC 2778, 84 DTC 1703

Taylor, TCJ:—This is an appeal heard in Vancouver, British Columbia, on May 31, 1984 against an income tax assessment for the year 1976 in which the Minister of National Revenue disallowed capital cost allowance of $40,000 claimed under the provisions of Income Tax Regulations 1100(1 )(a)(xii) of the Income Tax Act, on the basis that the video tape in question was properly described in Class (10) of Schedule II of that Regulation. The appellant asserted that the property had been acquired before May 26, 1976; or in the alternative, was not subject to the “leasing property” restriction of Regulation 15 because Regulation 18 excluded the video tape from the definition of “leasing property”.

The major elements of the taxpayer’s position were provided in the notice of appeal:

— In or about 1975, the Appellant engaged Mr Robert M Paterson, Chartered Accountant, of Vancouver, British Columbia, to be his tax consultant and business advisor.

— Ina a period ending before May 26, 1976, Mediavision Incorporated of 1709 Bloor Street West, Toronto, Ontario created a series of videotapes called “The Fabulous Talking Time Machine” consisting of 52 half-hour shows of videotape children’s programming.

— Upon the recommendation of Mr Paterson and before May 26, 1976, the Appellant purchased the videotape in the series identified as Episode 29, for a consideration of $40,000. The Appellant paid $15,000 cash and gave Mediavision Incorporated a promissory note for the balance of $25,000. The promissory note will be due and payable at the end of seven years.

As opposed to that, the respondent proposed:

— the Appellant on November 8, 1976 purchased from Mediavision Inc Episode 28 of a videotape series . . .* [1]

— there was no agreement express or implied between the Appellant and Mediavision Incorporated for the purchase by the Appellant of the said Episode 28 prior to May 26, 1976;

— the Appellant did not before May 26, 1976 demonstrate a bona fide intention to acquire the said Episode 28 for the purpose of gaining or producing gross revenue, that is rent royalty or leasing revenue;

— there were no arrangements evidenced in writing respecting the acquisition by the Appellant of the said Episode 28 substantially advanced before May 26, 1976.

Mr Herbert, a Mr Brian Shaw the former president of Mediavision, and Mr Robert Paterson all gave testimony in support of the appellant’s prime intention. The respondent called no witnesses.

Without wishing in any way to minimize the excellent efforts of both parties at the hearing and in the later written submissions, I find that I need only concentrate my view on the alternative submission of counsel for the appellant. In simple terms, while I can visualize grave difficulties in reaching a conclusion that, in fact and in law, there had been an “acquisition” by the appellant before May 26, 1976, there is no such struggle with regard to any such position before December 31, 1976, the respondent having conceded that point, (supra). On this alternative argument, the appellant concludes in the written submission:

In the alternative if this court does not find that a binding agreement was reached before May 26, 1976 the Appellant submits that the videotape is not subject to the leasing property restrictions contained in the Regulations. The Appellant refers to Regulation 1100(18)(c) which provides:

“Leasing property of a taxpayer . . . referred to in section 17 does not include

(c) property that the taxpayer . . . acquired on or before December 31, 1976 or was obligated to acquire under the terms of an agreement in writing entered into on or before December 31, 1976 if

(i) arrangements, evidenced in writing, respecting the acquisition, construction, manufacture or production of the property had been substantially advanced before May 26, and

(ii) the taxpayer . . . had before May 26, 1976 demonstrated a bona fide intention to acquire the property for the purpose of gaining or producing gross revenue that is rent, royalty or leasing revenue.”

The appellant submits that the agreement in writing, Exhibit A-2, is clearly entered into before December 31, 1976 and pertains to an obligation to acquire the videotape.

There is evidence from Show that the videotapes were in fact produced before May 26, 1976 and that arrangements, in various writings (contracts with artists and actors, letters regarding reproduction facilities, bills and invoices paying for production) had been substantially before May 26, 1976.

And for the respondent:

Further, it is submitted that the arrangements referred to in subsection (i) must have been substantially advanced before May 26, 1976 and the evidence in writing must be evidenced not only of the arrangements but of the advancement before May 26, 1976. The evidence produced in writing with regard to the acquisition relates only to an acquisition in November 1976 and no evidence in writing was produced relating directly to arrangements advanced before May 26, 1976. While there was evidence in writing submitted, it did not support an acquisition before May 26, 1976 but rather supported matters relating to the witnesses’ testimony on collateral matters.

It is my view that the exception would not be denied to the appellant because of his interest in the tax shelter benefits to be gained. There is evidence and testimony regarding his view of the property, with respect to its potential for “gaining or producing gross revenue”, as well as his interest in the possible tax advantages. Even at a 50 per cent tax bracket, the capital cost allowance at issue of $40,000 would have produced a tax benefit of $20,000 to the appellant. I doubt that Mr Herbert would have invested a down payment of $15,000 and taken on a further obligation of $25,000, for a possible immediate net tax benefit of $5,000 ($20,000 — $15,000). But be that as it may, Regulation 1100(18)(c)(II) does not require that the taxpayer have as his sole, even primary, intention, to “gain or produce gross revenue”, nor is the taxpayer required to show that there would have been any “net” income, or even that there was a reasonable expectation of “profit” — only that there would be “gross revenue”. I would rely heavily on the recent Supreme Court judgment in Stubart Investments Limited v The Queen, [1984] CTC 294; 84 DTC 6305, for judicial support on the point that even if the only interest of the taxpayer was in the “tax benefits”, he should not be denied the deduction he seeks in this appeal.

With regard to subsection (2) of the same Regulation, I am satisfied from the testimony of both Mr Shaw and Mr Paterson that the written evidence shows the arrangements to produce the property had been well advanced — possibly com- pleted — by May 26, 1976. I do not believe the Minister can deny the appellant his claim based on that requirement in the Regulations.

In summary, this Court is satisfied that under the circumstances of this appeal, the conditions requisite in Regulation 1100(18)(c) to its exclusion from the category of “Leasehold Property” have been met. The appeal is allowed and the matter is referred back to the respondent for reconsideration and reassessment.

Appeal allowed.