T-2027-79
Brooke Bond Foods Ltd. (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Decary J.—Montreal, January 19
and February 15, 1983.
Income tax — Income calculation — Deductions — Appeal
from reassessment — Plaintiff proposing to build head office
in Sheridan Park Research Community — Outlays for plans
and specifications required by Ontario Development Corp., and
soil analysis of site — Community vetoing project because
insufficient research space provided — Expenses capital not
current — Related to creation of capital property — Plans and
specifications having value — Abandonment of project not
altering nature of expenses — Not part of constant evaluation
of business resources nor otherwise usual outlays of business
consisting in income-production from building — Certain
"nothings" formerly excluded from cost of depreciable prop
erty made deductible under "eligible capital property" provi
sions of 1972 amendments — Soil-analysis expenditures made
to determine site's suitability so deductible under s. 20(1)(dd)
— Plans and specifications prepared after decision as to
suitability and not figuring in Community's decision so costs
thereof eligible capital expenditures and deductible under s.
20(1)(b) — Appeal allowed in part — Income Tax Act, S.C.
1970-71-72, c. 63, ss. 14(5)(a),(b), 18(1)(a),(b),(c),
20(1)(a),(b),(dd), 54(d) (French version rep. and sub. S.C.
1976-77, c. 4, s. 77 (Item 5)).
The plaintiff corporation wished to construct a head-office
building in the Sheridan Park Research Community. Before it
could do so, it had to submit plans and specifications for the
building to the Ontario Development Corporation, and obtain
the approval of the Community. The plans and specifications
were duly, and carefully, prepared. Moreover, a soil analysis of
the proposed site was performed. The Community, however,
would not consent to construction, because an insufficient
portion of the building's space was to be devoted to scientific
research. Consequently, the building was not erected.
The Minister issued a reassessment in which the monies
spent on the plans and specifications and on the soil analysis
were treated as a capital outlay—more particularly, as an
outlay deductible under paragraph 20(1)(b) as a cumulative
eligible capital amount. The plaintiff appealed, maintaining
that the monies constituted current expenses. In the alternative,
it argued that if the sums spent were in fact capital outlays,
then they were site-investigation expenses deductible under
paragraph 20(1)(dd).
Held, the appeal should be allowed in part and dismissed in
part.
If the building had been constructed, the expenses in question
would (as the parties agree) have formed part of its capital
cost. They related to the creation of a capital property, and the
plans and specifications which they yielded had value; hence
they were payments on account of capital. The abandonment of
the project does not alter the nature of the expenses. The
plaintiff was not in the business of purchasing and selling real
estate, and did not regard the proposed building as a substan
tive element of such a business. Nor was the plaintiff interested
in renting out the building. It had no intention of generating
income from the building by either of these direct means; and
the expenditures at issue were not the current or usual outlays
involved in the realization of such an intention. In particular,
they were not expenses attendant upon a constant evaluation of
resources, such as might occur in the carrying-on of a real-
estate or other business. They related instead to a one-shot
assessment of the plaintiffs needs with respect to a head office.
Until 1972, the Income Tax Act did not allow any deduction
in respect of special capital outlays that were not included in
the cost of depreciable property, and such outlays were there
fore referred to as "nothings". The treatment accorded them
was, however, considerably altered by the 1972 amendments,
which made certain of these expenditures deductible under the
provisions governing "eligible capital property".
All of the expenses in question are, prima facie, within the
ambit of those provisions; but to be considered an "eligible
capital expenditure", a capital outlay must be deductible nei
ther under the capital cost allowance sections, nor under certain
other provisions of the Act. Paragraph 20(1)(dd) is one of those
other provisions, and the plaintiff is correct in his contention
that the monies spent on the soil analysis are within its scope.
The balance of the plaintiffs expenditures, though, were not
made with a view to determining the site's suitability. The
plaintiff had already arrived at the conclusion that the site was
very suitable for it—had done so independently of and prior to
the preparation of the plans and specifications. The issue which
really confronted the plaintiff was whether its projected opera
tions suited the Community. Furthermore, in the final analysis,
the plans and specifications did not figure in the Community's
decision on that point.
It follows that, while the expenses relating to the soil analysis
are deductible under paragraph 20(1)(dd), those incurred in
drawing up the plans and specifications are not. The latter are
instead deductible under paragraph 20(1)(b).
CASES JUDICIALLY CONSIDERED
APPLIED:
Siscoe Gold Mines Ltd. v. Minister of National Revenue,
[1945] Ex.C.R. 257; 2 DTC 749; Queen & Metcalfe
Carpark Limited v. Minister of National Revenue
(1973), 74 DTC 6007 (F.C.T.D.).
DISTINGUISHED:
Bowater Power Company Limited v. Minister of Nation
al Revenue, [1971] F.C. 421; 71 DTC 5469; [1971]
C.T.C. 818 (T.D.); Pigott Investments Limited v. Her
Majesty the Queen, [1973] CTC 693; 73 DTC 5507
(F.C.T.D.); Minister of National Revenue v. Freud,
[1969] S.C.R. 75; 68 DTC 5279.
REFERRED TO:
Collins v. Joseph Adamson and Co. (1937), 21 T.C. 400
(Eng. K.B.); Henderson v. Meade-King Robinson & Co.,
Ltd. (1938), 22 T.C. 97 (Eng. K.B.); Sherbrooke Street
Realty Corporation v. Minister of National Revenue
(1951), 51 DTC 105 (T.A.B.); Afrukhteh v. Minister of
National Revenue (1972), 73 DTC 12 (T.R.B.); Interna
tional Nickel Company of Canada Limited v. Minister of
National Revenue (1969), 69 DTC 5092 (Ex. Ct.); Oriole
Park Fairways Limited v. Minister of National Revenue
(1956), 56 DTC 537 (T.A.B.).
COUNSEL:
L. J. Giroux for plaintiff.
R. Roy for defendant.
SOLICITORS:
Bronstetter, Wilkie, Penhale, Donovan,
Giroux & Charbonneau, Montreal, for plain
tiff.
Deputy Attorney General of Canada for
defendant.
The following is the English version of the
reasons for judgment rendered by
DECARY J.: The fundamental issue in this case
is as follows:
(a) whether the expense is a current expense of
plaintiff, making the amount deductible under
paragraph 18(1)(a) of the Act [Income Tax
Act, R.S.C. 1952, c. 148 (as am. by S.C. 1970-
71-72, c. 63, s. 1)], or whether the expense is a
payment on account of capital, which would
bring paragraph 18(1)(b) into play and prevent
it from being deducted except as expressly per
mitted by Part I of the Act;
(b) if the expense is a capital outlay, there then
arises the issue of whether the amount is deduct
ible under paragraph 20(1) (b) of the Act, as in
the assessment, or under paragraph 20(1)(dd)
of the Act, as plaintiff maintains.
Defendant alleges that the expense constitutes a
payment on account of capital. The parties agree
that if the building had been constructed as
planned, the expense in question would have been
part of the capital cost of the building. This is how
plaintiff treated the expense in its financial state
ments before the project was abandoned.
The fact the project was abandoned does not
alter the nature of the expense, which remains an
outlay on account of capital. As Thorson P. of the
Exchequer Court wrote in Siscoe Gold Mines Ltd.
v. Minister of National Revenue, [1945] Ex.C.R.
257; 2 DTC 749, at page [266 Ex.C.R.]:
The fact that it was decided to abandon the option and not to
acquire the [mining] claims cannot change the character of the
disbursements. They were losses incurred in connection with a
capital venture .... I think it is clear that an expenditure
incurred for the purpose of enabling a taxpayer to decide
whether a capital asset should be acquired is an outlay or
payment on account of capital .... '
Counsel for the plaintiff relied on the judgments
of Noël A.C.J. in Bowater Power Company Lim
ited v. Minister of National Revenue, [1971] F.C.
421; 71 DTC 5469; [1971] C.T.C. 818 (T.D.), and
Pigott Investments Limited v. Her Majesty the
Queen, [1973] CTC 693; 73 DTC 5507
(F.C.T.D.). We are of the view, with respect, that
the facts of these two cases are very different from
those in the case at bar.
In Bowater, the company operated an electricity
development and marketing business. As appears
from the reasons, this type of business involved a
constant evaluation not only of the energy
resources available but also of development meth
ods. In the case at bar the situation was entirely
different as regards the building that was planned
to be constructed. Plaintiff was not at all involved
in the purchase and sale of real property and was
not trying to generate income by renting the build
ing. Bowater Power Company Limited continually
evaluated the energy resources available and the
See also, to the same effect: Collins v. Joseph Adamson
and Co. (1937), 21 T.C. 400 (Eng. K.B.), at page 408; Hender-
son v. Meade-King Robinson 8c Co., Ltd. (1938), 22 T.C. 97
(Eng. K.B.), at page 105; Sherbrooke Street Realty Corpora
tion v. Minister of National Revenue (1951), 51 DTC 105
(T.A.B.). By analogy, see also Afrukhteh v. Minister of Na
tional Revenue (1972), 73 DTC 12 (T.R.B.).
expenses incurred were current in nature. The
situation is entirely different in the case at bar; the
expenses in question are not current or usual.
Plaintiff evaluated its needs with respect to its
head office only once, when it incurred the
expenses in question.
Similar comments apply, with respect, to the
same Judge's judgment in Pigott Investments
Limited. In that case the company operated a
construction business. As the Judge wrote, at page
5514 [DTC] (page 702 CTC):
... the benefit sought by the payments made was sought by
Pigott and for Pigott was not of a capital nature but rather of a
revenue nature to Pigott's construction business and, therefore,
the expenses are deductible.
Noël A.C.J. applied Minister of National Reve
nue v. Freud, [1969] S.C.R. 75; 68 DTC 5279,
where the facts, we respectfully believe, have noth
ing to do with the case currently before the Court.
The facts in these two cases can therefore be
distinguished from the facts in the case at bar. To
our knowledge there is no judgment to the effect
that the cost of plans and specifications for the
construction of a building constitutes a current
expense if the building is not constructed.
The treatment reserved for special outlays that
are not included in the cost of depreciable property
under the Act was altered considerably by the
provisions added to the Income Tax Act in 1972
[S.C. 1970-71-72, c. 63]. Under the old Act such
expenses were commonly referred to as "nothings"
because they did not qualify for any deduction in
computing income.
At present certain such capital outlays are
deductible under the provisions governing "eligible
capital property". Such property is defined in
paragraph 54(d) of the Act [French version rep.
and sub. S.C. 1976-77, c. 4, s. 77 (Item 5)] as
"any property, 1/2 of any amount payable to the
taxpayer as consideration for the disposition of
which would, if he disposed of the property, be an
eligible capital amount in respect of a business
within the meaning given that expression in sub
section 14(1)".
Section 14 of the Act provides for the creation
of an account called "cumulative eligible capital".
This account is composed of "1/2 of the aggregate
of the eligible capital expenditures" (paragraph
14(5)(a)).
"Eligible capital expenditure" is defined in
paragraph 14(5)(b). It means the portion of any
outlay or expense made or incurred by a taxpayer
on account of capital for the purpose of gaining or
producing income from his business. A capital
expenditure will be regarded as an "eligible capital
expenditure" only if it is not an outlay or expense
(14(5)(b)(i)):
that would be deductible but for any provision
of the Act limiting the quantum of the deduc
tion. This provision implies that an amount
deductible under paragraph 20(1) (a) is exclud
ed (the words "otherwise than under paragraph
20(1) (b)" were added because 20(1) (b) limits
the quantum but this is precisely what was
intended with respect to the "cumulative eligible
capital" account); or
that would not be deductible under the provi
sions of the Act. This would apply, for example,
to a paragraph 18(1)(c) deduction (the words
"other than paragraph 18(1)(b)" were added
because the draftsman wished specifically to
provide for capital outlays under paragraph
18(1)(b) that would not otherwise be deductible
by creating the "cumulative eligible capital"
account).
An "eligible capital expenditure" is thus a capi
tal outlay that is not deductible under the Act
either under the capital cost allowance provisions
or under the provisions of section 20, for example.
Thus if the outlays in question constituted
amounts deductible under paragraph 20(1)(dd)
they would not constitute "eligible capital expendi
tures" even if the expense was otherwise capital in
nature.
It follows that some of the former "nothings"
can now be deducted in computing a taxpayer's
income under the "eligible capital property"
provisions. 2 It is clear that the outlays in question
constitute such property. The amounts are pay
ments on account of capital because they relate to
the creation of a capital property and because the
plans and specifications that were prepared had a
certain value, as the witness McDiarmid clearly
stated. If plaintiff had decided to construct a
building these plans could have been used since
they had been prepared carefully. The witness
explained that there had been up to seven revisions
of these documents.;
With respect to plaintiff's argument based on
paragraph 20(1)(dd) of the Act, finally, we are of
the view that this provision applies only to the
amounts paid for investigating the suitability of
the site. As Sweet D.J. wrote in Queen & Metcalfe
Carpark Limited v. Minister of National Revenue
(1973), 74 DTC 6007 (F.C.T.D.), at page 6013:
... it is the suitability of the site which is to be investigated not
a building to be erected on the site.
In the case at bar the evidence adduced showed
that a sum of $625 was paid by Dominion Bridge
Co. Ltd. to a firm specializing in soil analyses to
conduct such a study. This sum of $625 is there
fore deductible under paragraph 20(1)(dd) of the
Act and the appeal should be allowed with respect
to this amount.
The remainder of the amount was paid for the
preparation of plans and specifications for the
building. 4 Even though plaintiff had to submit
plans and specifications to the Ontario Develop
ment Corporation and receive approval from the
2 See International Nickel Company of Canada Limited v.
Minister of National Revenue (1969), 69 DTC 5092 (Ex. Ct.),
at pages 5094 and 5095, for an example of capital outlays that
would probably constitute an "eligible capital expenditure"
under section 14 of the Act.
3 See Oriole Park Fairways Limited v. Minister of National
Revenue (1956), 56 DTC 537 (T.A.B.), at page 540, for an
example of a case where the outlays for architects' fees were
regarded as being capital in nature.
° See Queen & Metcalfe Carpark Limited, at page 6013,
where the Judge disallowed the amount spent on preparing
plans and specifications under item 4.
Sheridan Park Research Community before the
Ontario Development Corporation would agree to
sell, this procedure had nothing to do with the
issue of the site's suitability. According to the
evidence, plaintiff was very keen to build its head
office on the lot, which could not have been more
suitable for it. The site was located in a prestigious
area. Furthermore, it was easily accessible from
downtown Toronto or from the Toronto airport, it
was close to attractive residential neighbourhoods,
it was an ideal size and, finally, it was very reason
ably priced compared with other sites considered.
The stumbling-block in the way of the construc
tion project was the Sheridan Park Research Com-
munity's insistence that the part of the building
that was to be used by the executive personnel and
the administration and financial and accounting
services staff not exceed 33 1 / 2 per cent of the
building. This requirement was designed to protect
the distinctive character of Sheridan Park, whose
primary function was to promote scientific
research and development.
In the final analysis the plans and specifications
played no part in the refusal to allow plaintiff to
construct its building in Sheridan Park. The deter
mining factor was the fact that plaintiff was not
devoting sufficient space to scientific research.
Moreover, we are of the view that the problem
was not determining whether the site was suitable
for plaintiff. The issue was rather whether the
operations plaintiff wished to carry out suited the
Sheridan Park Research Community.
We are of the opinion that plaintiff cannot avail
itself of the provisions of paragraph 20(1)(dd) to
deduct the sum in question except for the amount
of $625.
For these reasons we are of the view that the
appeal should be allowed in part and the reassess
ment referred back to the Minister so that he may
issue a reassessment allowing plaintiff to deduct
the sum of $625 in computing its income under
paragraph 20(1)(dd), but for the remainder,
namely $52,935 less $625, or $52,310, the assess
ment should be upheld, with costs against
plaintiff.'
5 See Queen & Metcalfe Carpark Limited, supra, at page
6014.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.