Start-Up and Close-Down Expenditures

Various professional expenses that the taxpayer incurred with respect to a proposed venture of providing on-site mobile message therapy services to corporate clients through massage buses were for the creation of a business entity or structure and, therefore, on capital account.

The taxpayer (with modest success) sought to follow a pattern of first investigating and developing opportunities and then dropping any resulting assets (e.g., a patent portfolio) to a corporation (one for each such venture) for an equity interest therein. In finding that the expenses that he directly incurred prior to any such drop-down transaction were capital expenditures, Monaghan J stated (at paras 52, 53 and 57):

Mr. Robinson’s circumstances are strikingly similar to the circumstances in the Neonex and Firestone cases. In other words, the expenses were not incurred in the course of the operation or running of a business, but as part of the process of creating, or acquiring the assets for a business, the objective of which was to acquire investments in entities engaged in innovation from which he might derive income.

… Ikea did not overrule Firestone or Neonex. Rather, it emphasized the purpose test. … The Supreme Court has endorsed the principle that the underlying purpose of an expense must be considered in the context of the taxpayer’s business.

…[T]he expenses … [Mr. Robinson] incurred, put in the most favourable light, are expenditures relating to the acquisition or creation of a business, not the running of a business. Therefore, they are capital expenditures.

Expenses incurred by the taxpayer in sending senior offices to Australia to review a potential opportunity to expand its business there were deductible. Brulé T.C.J. stated (at p. 579):

"A major expenditure of many business today is monies expended to maintain or increase market share under increasingly competitive conditions. To this purpose many corporations spend significant amounts each year in advertising, promotions and market surveys. The expenditures in issue in these appeals, in my view, related to such an endeavour."

Unlike the Firestone case (87 DTC 5237) the taxpayer was already carrying on a business and had no plan to acquire or create a new business structure.

The taxpayer, which had a 25% interest in an oil field under the North Sea, was not permitted to deduct a provision for the estimated costs to be incurred at a future date, on completion of production, in order to: restore to their original condition rigs and tankers that it had leased and adapted for use in connection with extracting or transporting the oil; removing a manifold, loading lines and buoy from the area; and capping wells and removing well heads.

The lease contracts were clearly capital assets, and expenditures to reconvert such assets should have the same character as expenditures to initially adapt them for purposes of the trade. The manifold, loading lines and buoy were installed under the authority of the license that required that they be removed when the exploitation of the field was completed and, accordingly, the cost of removal formed part of the cost that had to be incurred or which the consortium had to agree to incur in the future before it could commence its trading operations.

Various fees including architectural fees and project planning fees paid by the taxpayer in connection with the proposed development of land as a luxury condominium development were incurred "for the purpose of creating a business entity" (p. 1050) and, therefore, on the authority of the Firestone case, were non-deductible capital expenditures.