F Davida Beadle v. Minister of National Revenue, [1979] CTC 2917, 79 DTC 775

Delmer E Taylor:—This is an appeal heard in the City of Vancouver, British Columbia, on June 26, 1979, against an income tax assessment for the year 1967 in which the Minister of National Revenue disallowed as a deduction an amount of $1,446.95 claimed by the taxpayer against investment income earned. The respondent relied, inter alia, upon paragraphs 18(1)(a), 18(1)(b) and 20(1)(bb) of the Income Tax Act, SC 1970-71-72, c 63 as amended.

Background

The taxpayer inherited a substantial portfolio of investments and incurred the following expenses servicing these investments:

Investment Services—$943.24

Telephone Charges— 503.71

$1,446.95

Contentions

The position of the appellant was as follows:

— In order to maintain her investment portfolio in good standing for the purpose of ensuring a proper return of income the taxpayer subscribed for various investment services, and kept in continual contact with various brokers by a business telephone specifically used for that purpose.

—The expenses were incurred for the purpose of gaining or producing income and are therefore deductible pursuant to paragraph 18(1)(a) of the Income Tax Act.

The assertions of the respondent were the following:

—The Investment Services subscribed to by the appellant provided her with information with respect to general economic trends and developments based on which she could maintain or alter her investment portfolio.

—The amount paid for the said Investment Services was not an amount paid by the appellant to a person for advice as to the advisability of purchasing or selling a specific share or security of the appellant.

—The expenses were incurred for the purpose of maintaining the appellant’s investment portfolio in good standing and not for the purpose of gaining or producing income therefrom.

—The expenses were an outlay on account of capital.

Evidence

The taxpayer relied upon the advice and guidance of her husband, Mr Lawrence W Beadle, a lawyer in professional practice. He gave testimony that prior to this investment portfolio he had known little if anything about the market, but by studying and using the publications purchased he gave himself a “crash course” in the investment field which, in his view, resulted in a substantial improvement in the earnings and earnings capability of the portfolio. The telephone expense claimed was for a special private line used only for conversations with brokers, virtually a “hot line” never used by anyone other than himself and then for investment purposes.

Argument

The relative position of the parties is demonstrated by the following excerpts from the submissions of counsel:

For the appellant:

Mrs Beadle was attempting to improve her income, and at the same time the capital may have been improved hopefully, not always, but hopefully. They tie in, one with the other, and it was just an ordinary expense incurred to earn income, whether it be an income account or a capital account, and amounts incurred in this nature should be deductible.

. in connection with this issue of capital outlay, I wish to point out that there has been a dramatic change in recent years as to what constitutes a capital outlay. Originally, Canadian and English courts adopted rigid attitudes as to what would constitute a capital outlay. One of the first cases to take a less rigid approach was the decision of President Jackett in Algoma Central Railway v MNR, [1976] CTC 130; 67 DTC 5091, and that case sort of started a trend which continued to this day, and the courts adopted a much more lenient attitude as to what should be deductible under paragraph 12(1)(b).

. . . expenses related to it might at first blush appear to be items related to capital, but . . . the courts have said we’re prepared to recognize that since there’s an income element connected therewith, we won’t apply the narrow, rigid approach of holding that the items were capital nature, and therefore the expenses were deductible.

For the respondent:

. . . the expenses incurred by Mr Beadle were an expenditure to provide, enlarge or alter his portfolio, which was the machinery for his profit earnings, and it was not incurred in the actual operation of the portfolio, the administering, but it was incurred to give him greater knowledge in the administration of the portfolio, to guide him.

.. . by subscribing to these investment publications, Mr Beadle tried to acquire such a fund of knowledge that he could draw on—when the need arose in administering, and that therefore he did acquire an asset or an advantage of a lasting nature, because he obviously through the years of this intensive reading gained an incredible knowledge of the workings of the market and economic trends in general.

It is therefore, the Minister’s submission that this is a capital expenditure and it falls within paragraph 18(1)(b).

Findings

The question in this appeal is simply whether or not there was a capital element—any capital element—which remained to the benefit of the taxpayer as a result of the expenditures. In my view that has been answered definitively and affirmatively by counsel for the appellant in the quotations noted above. Counsel provided extensive judifical reference upon which it was contended the Board might hold that even accepting the existence of a capital element in the expenditures did not place it outside the ambit of a deductible expense. I have been unable to discern in the more recent jurisprudence the perspective put forward by counsel and, by way of contrast and clarification, I would make reference to the case of Her Majesty The Queen, v Baine, Johnston & Company Limited, [1977] CTC 556; 77 DTC 5394. At the Tax Review Board level (unpublished), that appeal was allowed—a determination that no substantial asset of a continuing or capital nature had been acquired. That view was not accepted by the Federal Court, Trial Division, the expenditure was held to include a capital element, and the Minister’s assessment was reinstated. Comments to be found at pp 558 and 5396 respectively in the judgment of Addy, J are significant:

It has been held previously that in certain cases where the only thing purchased is a portfolio list of clients and file copies of current insurance policies in force in the name of the clients, the cost of same is deductible as a current operational expense. (Refer Harbord Investments Limited v MNR, [1970] Tax ABC 717; 70 DTC 1488.) However, whether or not, as stated in that case, it is to be considered as settled law that an expenditure for a list of customers, which includes file copies of current insurance policies, is nevertheless to be considered as a current operational expense, it is clear that, where the goodwill of the business is included as part of the assets transferred, the transaction is regarded as the sale of a business as a going concern and the whole expenditure is considered to be of a capital nature. . ..

The mere fact that work was required on the part of the purchaser subsequent to the purchase to generate income from the portfolios purchased, does not prevent the assets purchased from being of a capital nature for it is very seldom that any capital asset will of itself generate income without additional time, effort and money being expended by the owner. . . .

. . . the Defendant has failed to discharge the onus cast upon it of establishing in either case that the expenditure did not include assets and advantages for the enduring benefit of its trade in insurance and was therefore not in the nature of a capital expenditure, (italics mine)

The case, in my view, is actually much more favourable to the taxing authority from a factual standpoint than the case of Cumberland Investments Limited v Her Majesty The Queen, [1973] CTC 821; 74 DTC 6001 wherein my brother Heald held against the taxpayer. His decision in that case was unanimously upheld by our Federal Court of Appeal (refer [1975] CTC 439; 75 DTC 5309).

It would appear from the above that the learned Justice determined that at least some, and possibly all, of the expenditures claimed could be regarded as on account of capital and he therefore viewed the entire amount as covered by paragraph 18(1)(b), as not deductible.

In the instant case, it might be reasonable to conclude that the expenditures in question produced some current results, perhaps even increased income, but it is just as clear that there was some element therein with benefits of longer duration—an improvement in the investment portfolio itself, added knowledge for Mr Beadle, or both.

Viewing the appeal from the perspective of the law outlines in Baine, Johnstone (supra), I reach the conclusion on the facts that the expenditures claimed provided to the taxpayer “assets or advantages for the enduring benefit of its trade’’, and therefore are precluded as a deduction by virtue of paragraph 18(1)(b) of the Act.

Decision

The appeal is dismissed.

Appeal dismissed.