7 October 1991 Income Tax Severed Letter - Landfill Site Acquisitions

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Subject: XXX Landfill Site Acquisitions

We are writing in response to your memorandum to the Audit Applications Division, dated February 27, 1991, wherein you requested direction regarding the tax treatment of the cost incurred to acquire land which will be used by the purchaser as a landfill site. The Audit Applications Division referred your memorandum to us for consideration and reply.

Our understanding of the facts are as follows:

XXX

According to representation to you by the Taxpayer, once a landfill site is full, it will be covered over with earth and will have no further use or value. However, you have provided us with information that this may not necessarily be the case. The Ontario "Environmental Protection Act" restricts use of land used for the disposal of waste for a period of twenty-five (25) years, but even with this legislative restriction, the Act provides a certain amount of relief, in that the land may be used for a specific purpose prior to the expiration of the twenty-five (25) year period provided approval from the Environment Minister has been previously obtained. XXX One more piece of evidence that detracts from the Taxpayer's representation is found in the March 1991, edition of the CA Magazine, published by the Canadian Institute of Chartered Accountants, where an article entitled "Caveat Creditors" appeared. The article discusses the sale of lands which have been used for the purpose of waste disposal. Accordingly you believe that there exists a market and uses for landfill sites after they are no longer being used as a waste disposal depositary.

XXX

Based on these recent occurrences you requested advice as to whether this treatment of landfill acquisition costs is correct for tax purposes, and if it is, how the annual deduction should be calculated?

Taxpayer's Opinion

You stated the Taxpayer's position as follows:

• 1) In order to match annual revenues with costs, it is good accounting to write off the cost of a landfill site over its useful life. The landfill site will have no value when filled and therefore the entire cost of acquiring the site may be written of over this time frame.
• 2) The Supreme Court of Canada in Johns-Manville Canada Inc. v. The Queen [[1985] 2 C.T.C. 111] 1985 DTC 5373, ruled that the taxpayer was allowed to claim as an expense, the cost of land acquired that was adjoining an open pit mine. In this particular case the land was acquired in order to maintain an appropriate and safe slope to the pit walls so that the walls would not be too steep and cave in. The Taxpayer reasoned that their situation is similar to that of Johns-Manville Canada Inc. and they should be permitted similar treatment.

District Office's Opinion

That Paragraph 18(1)(b) of the Income Tax Act (the "Act") does not permit a deduction in respect of an outlay or payment on account of capital or an allowance in respect of depreciation, obsolescence, or depletion except as expressly permitted by Part I of the Act.

It was your opinion that the acquisition cost of a landfill site is a capital cost and that there is no provision in the Act which provides a deduction for the cost of land.

The estimated future fair market value of a capital property has no relevance in calculating a deduction for income tax purposes. For example, buildings often appreciate in value, but capital cost allowance is allowed as a deduction.

There appears to be no relevant tax cases involving a deduction for cost of a landfill site used for waste disposal.

Rulings Opinion

The Taxpayer proposed that their situation parallels the situation found in Johns-Manville Canada Inc. v. The Queen [[1985] 2 C.T.C. 111] 1985 DTC 5373, where the Supreme Court of Canada ruled that the yearly land cost incurred by the company, so that the walls of an open pit mine would not collapse, qualified as an operating expense. We disagree with the Taxpayer's opinion regarding this case. The land acquisition by Johns-Manville Canada Inc. (Johns-Manville) had the following characteristics which distinguishes it from the land purchases of the Taxpayer;

• 1. The land acquired by Johns-Manville was not the initial acquisition at that site,
• 2. The land acquired by Johns-Manville was not the principal capital asset, it was only subordinate to the mine,
• 3. The expense incurred by Johns-Manville was to maintain an existing operation at that site, it did not add to nor increase the operation,
• 4. The yearly land expense by Johns-Manville was only incidental to the production and sale of the output from the operation.

With regards to the Taxpayer's operation, the land acquisition was not incidental to it, the land is an essential element, especially given the environmental issues of today and the difficulty in obtaining permits to operate one in the area as well as fending off any public opposition. Each outlay was to acquire a principal asset of an enduring benefit that was not incidental to its operations. Given these differences we are unable to accept the representations presented by the Taxpayer that the Johns-Manville case parallels their own situation and should act as a precedent in this particular case.

Seeing that there is no precedent case for us to follow with regards to this issue, we are required to deal with this situation by analyzing it under the general principles of income tax law.

In accordance with paragraph 18(1)(a) of the Act, an expense is generally not deductible in determining taxable income. An expense will only be permitted as a deduction for tax purposes when it is incurred for the purpose of gaining or producing income from a business or property, and then only when that outlay is not disqualified under another provision of the Act. In the present case, should it be resolved that the expense is incurred for the purpose of producing income from a business or property, the determination of whether the specific outlay is deductible or not, is dependant on the fact of whether the particular outlay is on account of capital or not. Should the resolve be that it is on account of income, it will be deductible, with a subsidiary question as to the timing of the deductibility, i.e. when should the deduction be taken? If on the other hand, it is determined that the expense was incurred on account of capital, the subsidiary question to answer would then be whether the particular asset acquired would qualify for a deduction under either paragraph 20(1)(a), or section 14 of the Act or not at all.

XXX

XXX The sums expended have increased the value and desirability of the taxpayer's operations due to the fact that today's society is much more conscious of environmental issues than they were in the past and as a consequence the population in general is opposing landfill sites. This attitude by the public has greatly increased the value of sites which have already been qualified and permitted to operate as a landfill site. The acquisition of the sites were made with a view of bringing into existence an asset for the enduring benefit of the business. As stated previously, the life expectancy of a site in the case of the Taxpayer and its subsidiaries, is a minimum life of three (3) years, up to a maximum of over twenty-two (22) years. The courts have held that an enduring benefit does not necessarily mean of a permanent or perpetual nature. Support for this proposed tax treatment of the expenditures is found in principles the courts have used over the years in making similar determinations.

In British Insulated and Helsby Cables v. IRC (1926) AC 205 Vincent Cave stated at p. 213:

"Now, in Vallambrosa Rubber Co. v. Farmer, 1910 S.C. 519, 525: 5 Tax Cas. 529, 536. Lord Dunedin, ... expressed the opinion that `in a rough way' it was `not a bad criterion of what is capital expenditure - as against what is income expenditure - to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year'; and no doubt this is often a material consideration. But the criterion suggested is not, and was obviously not intended by Lord Dunedin to be, a decisive one in every case; for it is easy to imagine many cases in which a payment, though made `once and for all,' would be properly chargeable against the receipts for the year ... But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade (emphasis added), I think that there is a very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. For this view there is already considerable authority."

This view, expressed in British Insulated and Helsby Cables was accepted by Justice Jacket of the Exchequer Court in Algoma Central Railway v. Minister of National Revenue, [[1967] C.T.C. 134] 1967 CTC 130 at 134 where he stated:

"The `usual test' applied to determine whether such a payment is one made on account of capital is, `was it made `with a view of bring into existence can advantage for the enduring benefit of the appellant's business'?"

However, in a more recent decision concerning this issue the Court expressed its opinion that no single or rigid test applies for the determination of what is an outlay on account of capital or income. This point was made very clear by Justice Jackett in his opening remarks in Canada Starch Company Limited v. Minister of National Revenue, [[1968] C.T.C. 466] 1968 DTC 5320 at 5323 where he quotes Justice Fauteux in the above cited Minister of National Revenue v. Algoma Central Railway, [[1968] C.T.C. 161] 1968 DTC 5096, case when he expressed the unanimous decision of the Supreme Court of Canada at page 5097:

"Parliament did not define the expressions `outlay ... of capital' or `payment on account of capital'. There being no statutory criterion, the application or non-application of these expressions to any particular expenditures must depend upon the facts of the particular case. We do not think that any single test applies in making that determination and agree with the view expressed, in a recent decision of the Privy Council, B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia, (1966) A.C. 224, by Lord Pearce. In referring to the matter of determining whether an expenditure was a capital or an income nature, he said, at p. 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 application of all the guiding features which must provide the ultimate answer.' "

Further support of this line of reasoning is found in the reasons for judgement by Justice Pratte of the Federal Court of Appeal in The Minister of National Revenue v. Canada Glassine Co. Ltd., [[1974] C.T.C. 63] 76 DTC 6083, where he said at page 6083;

"... The sum of $268,623.48, in my opinion, was paid for an advantage which, in fact, increased the value and desirability of the respondent's plant. That payment was made `once and for all'; it was also made, in my opinion, `with a view to bringing into existence an asset or an advantage for the enduring benefit of' the respondent's trade. Furthermore, it was, in my view, an expenditure incurred for the establishment of the profit-making structure of the respondent's trade; it was not incurred in the operation of that structure (emphasis added). Whether I consider that expenditure from a legal or practical point of view, I cannot escape the conclusion that it was a capital outlay."

XXX As stated previously, the sites apparently have a life expectancy of anywhere from three (3) to twenty-two (22) years. Justice Estey in giving the reasons for judgement of the Supreme Court of Canada, in Johns-Manville Canada Inc. v. The Queen [[1985] 2 C.T.C. 111] 85 DTC 5373, stated at page 5378 when discussing the decision by the Privy Council in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd., (1964) A.C. 948:

"The judicial committee added, at p. 960, that when defining what was a capital structure established for `enduring' benefit, `enduring' did not necessarily mean permanent, nor did it mean perpetual (emphasis added)."

What the Court was saying was that the asset acquired had to be examined in light of the taxpayer's business. In the case of the landfill sites, the assets are for the enduring benefit of the operation. The sites although having their use limited after they are full, still have practical uses afterward and are not totally useless as held out by the Taxpayer's staff. In light of all of the above, it is our opinion that any land acquired by the Taxpayer, which is utilized as a landfill site is a capital asset, which capital asset does not qualify for treatment under either paragraph 20(1)(a) or section 14 of the Act.