A-666-76
Lawrence H. Mandel (Appellant)
v.
The Queen (Respondent)
Court of Appeal, Urie and Ryan JJ. and MacKay
D.J.—Toronto, May 30; Ottawa, October 26,
1978.
Income tax — Income calculation — Deductions — Capital
cost allowance — Partnership bought film for audited cost of
production — Purchase price payable by $150,000 cash pay
ment with the balance payable out of earnings — Whether
appellant entitled to claim capital cost allowance for his share
of total stipulated price or whether limited to claiming his
share of cash payment.
The appellant, with eleven others, formed a partnership
together with a corporation incorporated for the purpose, and
in 1971 the partnership bought a film in an advanced state of
production. The purchase price was the audited cost of produc
tion to the date of purchase, payable by a cash payment of
$150,000, the balance to be paid out of earnings. The question
to be determined is whether the appellant is entitled to claim,
by way of capital cost allowance for 1971, his share of the total
stipulated price, or whether he was limited to his share of the
cash payment, having in mind that the balance would be
payable only if and when there would be earnings. The answer
to the question depends on whether the liability to pay the
balance of the price was a "real" or a contingent liability.
Held, the appeal is dismissed. The purchasers incurred a
liability both in respect of the cash payment and the balance. It
was not, however, as to the balance, a liability to pay merely on
the expiration of a period of time or on the happening of an
event that was certain or even likely to occur. It was a liability
(from which the purchasers could not unilaterally withdraw) to
become subject to an obligation to pay the balance if an event
occurred which was by no means certain to occur. The obliga
tion was thus contingent on the happening of the uncertain
event. The relevant capital cost figure is the cost of the film to
the taxpayers, not the expenditures made by the vendors in
producing it nor the obligations to which they may have
become subject in raising the production funds. The appropri
ate method of determining the capital cost to the taxpayers in
1971 is to include the cash payment and to exclude the
contingent liability. Future payments, if any, could be brought
in when made.
Winter and Others (Executors of Sir Arthur Munro
Sutherland (deceased)) v. Inland Revenue Commissioners
[1963] A.C. 235, considered and distinguished.
INCOME tax appeal.
COUNSEL:
D. K. Laidlaw, Q.C. and P. H. Harris for
appellant.
G. W. Ainslie, Q.C. and W. Lefebvre for
respondent.
SOLICITORS:
Perry, Farley & Onyschuk, Toronto, for
appellant.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment
rendered in English by
RYAN J.: This is an appeal from a judgment of
the Trial Division dated August 9, 1976, [[1977] 1
F.C. 673]. The Trial judgment dismissed the
appellant's appeal from a re-assessment of his
income tax for the 1971 taxation year. This and
eleven related appeals were disposed of at trial on
common evidence, the points of law involved in all
of the cases being identical. The eleven other
appeals were, of course, also dismissed. They, too,
are being appealed and, the issues being once
again identical, all of the appeals will be disposed
of on the basis of the submissions in the present
appeal. Copies of these reasons will be filed on the
appeal files of the other cases'.
The appeal involves a capital cost allowance
question. The appellant, along with eleven others,
formed a partnership together with a corporation
which they incorporated for the purpose, and the
partnership bought a film in 1971, the film then
being in an advanced state of production. The
purchase price was the audited cost of production
to the date of purchase, which was computed at
$577,892, payable by way of a cash payment of
$150,000, the balance to be paid out of earnings.
The question to be determined is whether the
appellant was entitled to claim, as he did, by way
of capital cost allowance for 1971, his share of the
total stipulated price, or whether he was limited to
' The other appeals are:
Ralph O. Howie v. The Queen, A-667-76
Sigmund J. Vaile v. The Queen, A-668-76
Robert W. Macaulay v. The Queen, A-669-76
Kenneth E. Howie v. The Queen, A-670-76
Keith Munro Gibson v. The Queen, A-671-76
Donald Lilly v. The Queen, A-672-76
Ian W. Outerbridge v. The Queen, A-673-76
William P. Rogers v. The Queen, A-674-76
Frank A. Rush v. The Queen, A-675-76
James M. Farley v. The Queen, A-676-76
V. R. E. Perry v. The Queen, A-677-76
his share of the cash payment, having in mind that
the balance would be payable only if and when
there were earnings, the position taken by the
Minister. As became apparent from the expert
accountancy testimony, the answer to the question
depends on whether the liability to pay the balance
of the price was a "real" or a contingent liability.
The applicable income tax legislation and regu
lations were those in effect for the 1971 taxation
year.
There is really very little dispute over the facts.
They are clearly set out in the appellant's memo
randum of fact and law, and I will accordingly
quote all of the paragraphs from 4 to 18 of the
memorandum, with the exception of paragraphs 13
and 16 which were questioned by the respondent. I
have deleted paragraph numbers and the page
references to the evidence, and I have made some
minor consequent changes in punctuation.
As of September 14, 1971, an agreement was entered into
between Topaz Production Limited, Niagara Television Lim
ited, Robert Lawrence Productions (Canada) Limited and John
T. Ross, for the production of a film known as "Mahoney's
Estate", for a projected budget of $653,000. Production was
scheduled to be completed by December 31, 1971.
Topaz sold 25% of its rights, title and interest in the film to
Niagara, thus retaining a 75% interest. Under the Agreement,
Topaz was to receive $20,000.00 deferred compensation and
25% of the profits. Robert Lawrence Productions were to
receive $15,000.00 deferred compensation and 8% of the profits
and was to arrange financing for the costs in excess of $375,-
000.00 exclusive of deferred costs. Niagara advanced $125,000
repayable out of revenues. Upon completion, Deloitte, Haskins
& Sells, Chartered Accountants, were to audit and verify total
production costs. The net profits in excess of expenses were to
be divided as follows: 20% to the Canadian Film Development
Corporation, 22% to Niagara, 8% to Robert Lawrence Produc
tions, 25% to Topaz, 7% to Harvey Hart, 1.5% to Harvey Hart,
1.5% to Maud Adams, 1.5% to Sam Waterston, the remaining
15% to such persons jointly designated by Topaz and Robert
Lawrence Productions and in default of designation, equally
between these two corporations.
By additional Agreement dated September 14, 1971, the
Canadian Film Development Corporation agreed with Topaz
and Niagara as owners, Topaz as producer, and John T. Ross
as executive producer, to advance $250,000 and to receive 20%
of the net profits in return for so doing.
By Agreement dated August 31, 1971 between Topaz and
Niagara, as licensors, and International Film Distributors Lim
ited, as distributors, arrangements were made for distribution
of the film on a percentage basis of gross receipts.
On December 9, 1971 the Bank of Montreal loaned $100,000
in consideration of 21% participation in profits at a rate of
interest 2 1 / 2 % above prime, repayment to start three months
after production was complete.
As of 1971, the above named financial agreements formed
part of what can be termed as standard financing arrangements
in the industry.
On December 22nd, 1971 a letter agreement was reached
between the law firm of Thomson, Rogers (of which eleven of
the plaintiffs were then members) and Topaz and Niagara as
owners of the film, confirming that they had assembled $150,-
000.00 in order to purchase on behalf of a limited partnership,
the film on December 31, 1971, provided Niagara would
advance the $125,000.00 bearing no interest and repayable by
the same terms as the $250,000 advance by the Canadian Film
Development Corporation. The balance of the purchase price
was to be paid by the assumption of all the obligations of the
producer for payment or repayment including the monies
advanced by the Canadian Film Development Corporation and
by Niagara, and the monies agreed to be paid by the producer
under all agreements, contracts and arrangements in existence
or made thereafter for the purchase of completing the film. The
repayments were to be paid out of revenues.
For purposes of acquiring this film the individuals involved
were to be formed, and were formed, into a limited partnership
with a company to be incorporated as the general partner and
the individuals to be limited partners. The company was incor
porated as "One Flag Under Ontario Investments Limited" and
the limited Partnership was known as "One Flag Under
Ontario Investments Limited and Film Associates". Each part
ner held an interest limited and proportionate to his
contribution.
On December 30, 1971 the agreement was finalized between
Topaz, Niagara, Canadian Film Development Corporation,
Robert Lawrence Productions, John T. Ross, and One Flag,
acting through its general partner. The 15% net profits previ
ously to be designated by Topaz and Robert Lawrence were
now to be distributed in the proportion of 12.5% to the purchas
ers, and 2.5% to the Bank, all percentages of the other parties
remaining unchanged.
In addition, it was provided that the firm of Deloitte, Has-
kins & Sells would provide an audit determining the total cost
of production at December 31, 1971. This was done, and
production and acquisition costs were determined by audit to be
$577,892.00 as of that date.
Final production costs were also to be determined by
Deloitte, Haskins & Sells, but for purposes of the 1971 taxation
year, and for the purchase price, the audit closed on December
31, 1971 and costs were certified as above.
Plaintiffs paid $150,000.00 against the figure of $577,-
892.00, the balance to be paid out of revenues pursuant to the
agreement defined above.
As at the date of purchase, the filming was basically com
plete, with editing only remaining.
An Agreement dated February 1, 1973 between Canadian
Film Development Corporation, Amaho Limited referred to as
the assignee, Topaz Productions Limited, Niagara Television
Limited, Robert Lawrence Productions Limited, John T. Ross,
and One Flag Under Ontario Investments Limited & Film
Associates and Alexis Kanner sets out that Niagara provided
financing of the film in the amount of $125,000.00 and paid a
further sum of approximately $10,000.00 in connection with
the completion of it. It assigns all its rights save for the
$10,000.00 to Amaho Limited, the assignee, and in consider
ation of $1.00 the Canadian Film Development Corporation
assigns any interest which it had to recoupment of monies
advanced by it out of a share of the profits the film made and
the parties release the corporation from any demands or claims
for the balance of its $250,000.00 commitment which it had not
yet paid ($3,420.00).
On February 11, 1974, an agreement was entered into be
tween Topaz Productions Limited and British Lion Films Lim
ited which sets forth that principal photography in the motion
picture film has been completed but that additional finance is
required to complete production and deliver same ready for
exhibition which Lion has agreed to provide in return for the
acquisition of distribution rights in the film and media through
out the world.
The appellant claimed a capital cost allowance
for 1971 based on his share of the stipulated price
of the film, including the total amount of the
balance to be paid when and if there were earn
ings. The Minister re-assessed the appellant on the
basis that the capital cost to the purchasers of the
film in 1971 was limited to the cash payment of
$150,000. The appellant appealed to the Federal
Court. The Trial Judge dismissed the appeal. He
held that the capital cost of the film to the pur
chasers in 1971 was the cash payment and did not
include the balance of the price because, in his
view, the liability to pay it was contingent.
The appellant submitted that the learned Trial
Judge erred in failing to find that the appellant's
capital cost allowance for 1971 was calculable on
the basis of the total price, as determined by the
auditors, of $577,892 and, in particular, in holding
that the excess over the $150,000 cash payment
was a contingent liability.
The appellant, at the trial, introduced evidence
of an expert in accountancy, Robert Fraser. The
respondent called Mr. Bonham, also an expert in
accountancy. The Trial Judge said of these wit
nesses: "... both are highly qualified experts".
In this case, expert accountancy evidence on the
question whether, in the circumstances, the
amount of the unpaid balance of the price was
properly includable in the capital cost of the film
in the year of its purchase was clearly pertinent.
And there was nothing in the relevant legislation
or regulations to limit its normal impact.
As I read this evidence, the experts were in
agreement that the unpaid balance ought to have
been included if it were a "real" liability, but not if
it were a contingent liability. And it is clear that
the Trial Judge also so read the evidence.
Mr. Fraser was of opinion that the liability of
the purchasers in respect of the balance was
"real", that it was not, for relevant purposes,
contingent. Its payment was, it is true, contingent,
but the contractual liability to pay the precisely
ascertained sum was itself, in his view, "real".
Mr. Bonham did not agree. It is true that when,
before the trial, the respondent consulted him and
asked for his opinion, he was asked to give it on
certain assumptions, and his affidavit received in
evidence was based on them. One of these assump
tions was:
The obligations incurred by One Flag [the purchasing part
nership] by which it acquired the said film were:
(a) Unconditional to the extent of paying $150,000, and
(b) Conditional or contingent with respect to the payment of
any further amounts up to a maximum of $427,892, as
established as of December 31, 1971 (for a total maximum
consideration at that date of $577,892); the condition being
that there must first be monies available from the exploita
tion of the film according to the terms of the relative
agreements.
In both his direct examination and under cross-
examination, Mr. Bonham clearly expressed his
opinion that such a condition would render the
obligation to pay the balance of the price contin-
gent for relevant accountancy purposes 2 .
The Trial Judge, after careful analysis of the
expert testimony, decided that the liability to pay
the balance was contingent for relevant purposes,
and I agree with him. The consequence, of course,
was that the balance was not properly includable
in the taxpayer's capital cost for the taxation year.
The amounts actually paid in the future from
earnings, if any, would be taken into capital cost in
the years of payment.
There is no doubt, as the Trial Judge indicated,
that, in contracting to buy the film on the agreed
terms, the purchasers incurred a liability both in
respect of the cash payment and the balance. It
was not, however, as to the balance, a liability to
pay merely on the expiration of a period of time or
on the happening of an event that was certain, or
even likely, to occur 3 . It was a liability (from
which the purchasers admittedly could not unilat
erally withdraw) to become subject to an obliga
tion to pay the balance if, but only if, an event
occurred which was by no means certain to occur.
The obligation was thus contingent on the happen
ing of the uncertain event.
In reaching this conclusion, I have derived
assistance from the speech of Lord Reid in Winter
and Others (Executors of Sir Arthur Munro
Sutherland (deceased)) v. Inland Revenue
Commissioners°. That case involved deciding
whether a possible liability of a corporation to pay
2 It should be added that Mr. Bonham was also asked to
assume that:
... [as] "at the end of the 1971 fiscal year there was no
reasonable basis to predict that the economic prospects for
the exploitation of the film were such that the conditional
obligation referred to above would almost certainly become
payable. In other words the acquisition of the film by One
Flag was clearly a speculative venture".
The learned Trial Judge said [at page 687]:
What the purchasers actually did was to invest $150,000 in a
highly risky business adventure with the knowledge that,
even if it were not successful, they would benefit from
substantial tax advantages while if, by some chance, it should
prove to be highly successful then of course they would
benefit by the profits from same.
[1963] A.C. 235.
tax on a capital cost recapture on a future disposi
tion of an asset was a contingent liability for
purposes of subsection 50(1) of the Finance Act,
1940. The case concerned estate duty. The
deceased was controlling shareholder in a corpora
tion which, before his death, had taken capital cost
allowance on ships owned by it and in respect of
which it would be bound to pay recapture if the
ships were sold for more than the undepreciated
capital cost. The value of the deceased's shares for
estate tax purposes would under the applicable
legislation be determined by reference to the value
of the assets of the corporation at the time of the
shareholder's death. In valuing the assets, the
Commissioners were required to "... make an
allowance from the principal value of those assets
for all liabilities of the company (computed, as
regards liabilities which have not matured at the .
date of the death, by reference to the value thereof
at that date, and, as regards contingent liabilities,
by reference to such estimation as appears to the
Commissioners to be reasonable) ...."
The problem in the Winter case was whether the
liability in question was a contingent liability for
purposes of the valuation or no liability at all. I
venture to quote Lord Reid at length. The precise
problem in that case was, of course, the meaning
of "contingent liabilities" within the particular
statute. His words, however, have in my view
wider significance. He said at pages 247 to 249:
No doubt the words "liability" and "contingent liability" are
more often used in connection with obligations arising from
contract than with statutory obligations. But I cannot doubt
that if a statute says that a person who has done something
must pay tax, that tax is a "liability" of that person. If the
amount of tax has been ascertained and it is immediately
payable it is clearly a liability; if it is only payable on a certain
future date it must be a liability which has "not matured at the
date of `death' " within the meaning of section 50(1). If it is not
yet certain whether or when tax will be payable, or how much
will be payable, why should it not be a contingent liability
under the same section?
It is said that where there is a contract there is an existing
obligation even if you must await events to see if anything ever
becomes payable, but that there is no comparable obligation in
a case like the present. But there appears to me to be a close
similarity. To take the first stage, if I see a watch in a shop
window and think of buying it, I am not under a contingent
liability to pay the price: similarly, if an Act says I must pay
tax if I trade and make a profit, I am not before I begin trading
under a contingent liability to pay tax in the event of my
starting trading. In neither case have I committed myself to
anything. But if I agree by contract to accept allowances on the
footing that I will pay a sum if I later sell something above a
certain price I have committed myself and I come under a
contingent liability to pay in that event. This company did
precisely that, but its obligation to pay arose not from contract
but from statute. I find it difficult to see why that should make
all the difference.
It would seem that the phrase "contingent liability" may
have no settled meaning in English law because, in this case,
Danckwerts J. thought it necessary to resort to a dictionary,
and in In re Duffy (a case much relied on by the respondents)
the Court of Appeal regarded its meaning as an open question.
But the Finance Acts are United Kingdom Acts, and there is at
least a strong presumption that they mean the same in Scotland
as in England. A case precisely similar to this case could have
come from Scotland and your Lordships would then have
considered the meaning of this phrase in Scots law. So I need
make no apology for reminding your Lordships of its meaning
there. Perhaps the clearest statement of the Law of Scotland is
in Erskine's Institute, 3rd ed., vol. 2, Book III, Title 1, section
6, p. 586, when he says: "Obligations are either pure, or to a
certain day, or conditional .... Obligations in diem ... are
those in which the performance is referred to a determinate
day. In this kind ... a debt becomes properly due from the very
date of the obligation, because it is certain that the day will
exist; but its effect or execution is suspended till the day be
elapsed. A conditional obligation, or an obligation granted
under a condition, the existence of which is uncertain, has no
obligatory force till the condition be purified; because it is in
that event only that the party declares his intention to be
bound, and consequently no proper debt arises against him till
it actually exists; so that the condition of an uncertain event
suspends not only the execution of the obligation but the
obligation itself .... Such obligation is therefore said in the
Roman law to create only the hope of a debt. Yet the granter is
so far obliged, that he hath no right to revoke or withdraw that
hope from the creditor which he had once given him."
So far as I am aware that statement has never been ques
tioned during the two centuries since it was written, and later
authorities make it clear that conditional obligation and contin
gent liability have no different significance. I would, therefore,
find it impossible to hold that in Scots law a contingent liability
is merely a species of existing liability. It is a liability which, by
reason of something done by the person bound, will necessarily
arise or come into being if one or more of certain events occur
or do not occur. If English law is different—as to which I
express no opinion—the difference is probably more in ter
minology than in substance.
I must now turn back to the provisions df section 50(1) of the
Finance Act, 1940. It directs the commissioners to make an
allowance for (or deduction in respect of) all liabilities of the
company, and it divides liabilities, as one might expect, into
three classes. First, where the liability is a sum immediately
payable there is no need for computation and the whole is
deducted. Secondly, the liability may be one which has not
matured: that would include a sum payable at a definite future
date or a sum payable on an event which must occur some time,
for example, the death of A. There the commissioners are to
take the present value of the debt. The third class is "contin-
gent liabilities," which must mean sums, payment of which
depends on a contingency, that is, sums which will only become
payable if certain things happen, and which otherwise will
never become payable. There calculation is impossible, so the
commissioners are to make such estimation as appears to be
reasonable.
The last class appears to me to cover exactly the conditional
obligation dealt with by Erskine in the passage I have quoted. I
agree with the respondents' argument to this extent, that this
class can only include liabilities which in law must arise if one
or more things happen, and cannot be extended to include
everything that a prudent business man would think it proper to
provide against. That is the distinction which I have already
tried to explain. But I cannot agree with the respondents'
further argument that there must be an existing obligation
because that would exclude at least all Scottish conditional
obligations.
I have underlined the passages that I have found of
particular assistance.
I have also found helpful the definition of "con-
tingent liability" appearing in the speech of Lord
Guest in the same case at page 262:
Contingent liabilities must, therefore, be something different
from future liabilities which are binding on the company, but
are not payable until a future date. I should define a contingen
cy as an event which may or may not occur and a contingent
liability as a liability which depends for its existence upon an
event which may or may not happen. [The underlining is mine.]
It is of interest to note that Lord Guest also
referred to the law of Scotland on conditional
obligations, in particular to part of the passage
quoted by Lord Reid from Erskine's Institute of
the Law of Scotland and to Gloag on Contract. He
said of this law at page 263: "I see no reason why
these principles should not be applicable to a
United Kingdom statute and no authority was
quoted to show that English law differed in any
way."
Before concluding, I would advert to a submis
sion made by counsel for the appellant which was
also made to the Trial Judge. The Trial Judge put
the submission this way: the argument was [at
page 701]
... that since the purchasers assumed all of Topaz's obligations
in addition to paying $150,000 cash they are in the place and
stead of the vendors and ... the capital cost of the film to them
at the end of 1971 was the same as it would have been to the
vendors.
The Trial Judge reviewed several cases, includ
ing Ottawa Valley Power Company v. M.N.R. 5 ,
relied on by counsel, and D'auteuil Lumber Co.
Ltd. v. M.N.R. 6 , in which President Jackett (as he
then was) explained observations he had made in
the Ottawa Valley Power Company case. The
Trial Judge then said [at pages 700-701]:
In making the purchase they incurred an obligation to pay the
balance but only out of the proceeds of the film so that both the
time of payment and whether the payment would ever be made
were contingent and these amounts should only be claimed
when and if they are so paid. Certainly, to use the words of
Chief Justice Jackett in the D'auteuil Lumber case "what was
received can easily be valued and what was given is almost
impossible to value". He goes on to say however "Where the
value of the thing given for the capital asset in question can be
determined with the same kind of effort as is required to value
the capital asset itself, I should have thought that the Court
would not look kindly on attempts to lead evidence as to the
value of the capital asset in lieu of, or in addition to, evidence
as to the value of what was given for it". It appears to me in the
present case that the value of the consideration can eventually
be determined with complete accuracy when the net proceeds of
the distribution of the film are finally received and there is no
statutory or other requirement that an estimate be made of this
as of the end of the 1971 taxation year, in which event these
proceeds would have been impossible to value.
This, with respect, appears to me an adequate
disposition of the submission, subject to a reserva
tion I would make concerning the ease of valuing
the film before sale. Quite clearly, the relevant
capital cost figure is cost of the film to the taxpay
ers, not the expenditures made by the vendors in
producing it, nor the obligations to which they
may have become subject in raising the production
funds. On the basis of the accountancy evidence
properly accepted by the Trial Judge, the appro
priate method of determining the capital cost to
the taxpayers for the 1971 taxation year was to
include the cash payment and to exclude the con
tingent liability. Future payments, if any, could be
brought in when made. There was no real problem,
once the accountancy evidence was accepted, in
determining the capital cost of the film to the
5 [1969] 2 Ex.C.R. 64.
6 [1970] Ex.C.R. 414.
taxpayers, and thus no occasion to resort to any
presumption based on costs to others or on any
other circumstance. As a matter of fact, I would
observe that, while it might have been easy, to
determine the costs to the vendors, the "value" of
the film before the sale would not, as I see it, have
been all that obvious.
In disposing of this appeal, it is not, of course,
necessary to deal with submissions that were made
to us on the assumption that the obligation to pay
the balance of the price was real, not contingent.
There was no cross-appeal.
I would dismiss the appeal with costs. There
should, however, be only one set of costs for all of
the appeals, this and the appeals cited in
footnote 1.
* * *
URIE J.: I concur.
* * *
MACKAY D.J.: I concur.
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.