A-552-86
D. Morgan Firestone (Appellant)
v.
The Queen (Respondent)
INDEXED AS: FIRESTONE V. CANADA
Court of Appeal, Heald, Urie and MacGuigan
JJ.—Toronto, April 7 and 8; Ottawa, May 1,
1987.
Income tax — Income calculation — Deductions — Tax
payer acquiring ailing businesses with view to turning them to
profitable account and creating holding company to hold
shares thereof — Whether expenditures incurred in organizing
such corporate conglomerate on account of capital or revenue
— Expenditures for investigation of investment opportunities
not deductible — Expenditures for supervision of acquired
companies deductible — Income Tax Act, R.S.C. 1952, c. 148,
s. 12(1)(a),(b): S.C. 1970-71-72, c. 63, s. 18(1)(a),(b).
In 1968, the appellant started a venture-capital business
whereby he would acquire small to medium-sized manufactur
ing concerns in financial difficulty and turn them to profitable
account. From 1969 to 1972, the appellant and his employees
investigated 50 business opportunities. Four businesses were
bought and their operation supervised (general direction and
guidance was given, without involvement in day-to-day opera
tions). In 1971, the appellant incorporated a holding company
to hold the shares of these companies.
The appellant claimed the investigation and supervision
expenses as a deduction from his income in his 1969 to 1972
taxation years. The Minister disallowed the deductions. This is
an appeal from the Trial Division judgment dismissing the
appeal from the Minister's decision.
Held, the appeal should be allowed only with respect to
supervision expenses.
The principal issue (whether a particular expenditure is on
account of capital or revenue) is a traditional question of law
(mixed with fact) which cannot be put to rest solely on the
basis of either generally accepted accounting principles or
findings of fact by the Trial Judge. There is no single decisive
test for making such a determination. However, there has been
general agreement that an expenditure for the acquisition or
creation of a business entity is on capital account. Such is the
case here with respect to the investigation of opportunities
expenditures. And it makes no difference whether the investiga
tion costs led to acquisitions—the appellant has acknowledged
the capital nature of those costs—or not: Neonex International
Ltd. v. Her Majesty the Queen (1978), 78 DTC 6339 (F.C.A.).
They were the same kinds of expenses, and they were made for
the same purpose.
Supervision costs, however, are deductible. Those costs were
incurred to monitor the fiscal policy and business operations of
the companies and give general direction and guidance with a
view to making them more profitable. The courts have sanc
tioned a distinction between going into business and being in
business, between the acquisition of new property and the
improvement of existing property. Deductibility depends on
whether the expenditures were made for the purpose of earning
income and that depends on the particular facts of each case.
The appellant's business was not principally share manage
ment, in which case supervision costs would not have been
deductible; it was rather the profitable (indirect) management
of his operating companies. Nor is the appellant's case weak
ened by the fact that there is neither immediate income nor an
immediate source of income in his business: Vallambrosa
Rubber Company Limited v. Farmer (1910), 5 T.C. 529 (Ct
Sess., Scot.). A realistic, common sense, business approach will
not be defeated by narrow technicalities unless they are clearly
imposed by law.
CASES JUDICIALLY CONSIDERED
APPLIED:
Neonex International Ltd. v. Her Majesty the Queen
(1978), 78 DTC 6339 (F.C.A.); aff g (1977), 77 DTC
5321 (F.C.T.D.); British Insulated and Helsby Cables v.
Atherton, [1926] A.C. 205 (H.L.); Sun Newspapers Ltd.
v. Federal Commissioner of Taxation (1938), 61 C.L.R.
337 (H.C. of Aust.); Johns-Manville Canada Inc. v. The
Queen, [1985] 2 S.C.R. 46; 85 DTC 5373; [1985] 2 CTC
111; B.P. Australia Ltd. v. Comr. of Taxation of the
Commonwealth of Australia, [1966] A.C. 224 (P.C.);
Hallstroms Pty. Ltd. v. Federal Commissioner of Taxa
tion (1946), 72 C.L.R. 634 (H.C. of Aust.); Canada
Starch Co. v. Minister of National Revenue, [1969] 1
Ex.C.R. 96; (1968), 68 DTC 5320; The Minister of
National Revenue v. M. P. Drilling Ltd. (1976), 76 DTC
6028 (F.C.A.); Irrigation Industries Limited v. The Min
ister of National Revenue, [1962] S.C.R. 346; Bowater
Power Co. Ltd. v. Minister of National Revenue, [1971]
F.C. 421; 71 DTC 5469 (T.D.); Odeon Associated
Theatres Ltd v Jones (Inspector of Taxes), [1972] 1 All
ER 681 (C.A.); Oxford Shopping Centres Ltd. v. R.,
[1980] 2 F.C. 89; (1979), 79 DTC 5458 (T.D.); Vallam-
brosa Rubber Company Limited v. Farmer (1910), 5
T.C. 529 (Ct Sess., Scot.).
REFERRED TO:
Van Den Berghs, Ld. v. Clark (Inspector of Taxes),
[1935] A.C. 431 (H.L.); Stein et al. v. The Ship "Kathy
K" et al., [1976] 2 S.C.R. 802.
COUNSEL:
David C. Nathanson for appellant.
D. H. Aylen, Q.C. and Paul E. Plourde for
respondent.
SOLICITORS:
McDonald & Hayden, Toronto, for appellant.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment
rendered in English by
MACGUIGAN J.: This case reveals new wrinkles
in the old cloth of income tax law, specifically with
respect to the traditional problem of whether a
sum of money has the quality of income or of
capital. This kind of problem may arise either
under the category of receipts or under that of
expenditures. As Lord Macmillan put it in Van
Den Berghs, Ld. v. Clark (Inspector of Taxes),
[1935] A.C. 431 (H.L.), at page 439, "the argu
mentative position alternates according as it is an
item of receipt or an item of disbursement that is
in question, and the taxpayer and the Crown are
found alternately arguing for the restriction or the
expansion of the conception of income." In the
case at bar what is in question are expenditures,
which the taxpayer is claiming as admissible
deductions, and which the Crown is maintaining
are capital items.
I
This is an appeal from a judgment of McNair J.
[(1986), 4 F.T.R. 223; 86 DTC 6405] dated July
7, 1986, the corrected pronouncement of which (by
order dated August 27, 1986 [[1987] C.C.L.
4095]) allowed the appellant's appeal against
ministerial reassessments made for his 1969 to
1972 taxation years inclusive, with respect to the
deductibility of certain expenses which the parties
agreed were deductible, but in every other respect
upheld the reassessments.
The learned Trial Judge accordingly rejected
the appellant's contention that the Minister of
National Revenue should also be required to
reconsider and reassess on the basis that expenses
incurred by the appellant during the 1969 to 1972
taxation years and categorized under the headings
of "Investigation of Opportunities" and "Supervi-
sion of Companies" in total amounts of $77,590
and $101,640 respectively, should also be allowed
as deductions in the relevant years.
The facts are essentially these. In 1968 the
appellant resigned as President of Firestone Tire
and Rubber Company of Canada Limited with a
view to starting his own "venture-capital" business
whereby he would acquire small to medium-sized
manufacturing concerns that were ailing or finan
cially distressed but had the potential for being
turned around through proper supervision and
direction of their affairs. He hoped to put together
a group of companies diversified in the manufac
turing sector as a "mini-conglomerate", the shares
of which might eventually be traded publicly.
To achieve his goal, the appellant leased office
space and hired full-time and part-time employees
to assist him in investigating various business
opportunities and in supervising the operation of
acquisitions once made. During the years 1969-
1972 the appellant and his employees investigated
and evaluated a wide range of business opportuni
ties or prospects, approximating 50 in number, and
including products, patents, licences and know-
how, as well as companies.
The appellant made no acquisitions in 1969, but
acquired all the issued shares of three companies
in 1970. In 1971 he caused to be incorporated and
acquired all the shares of Firan International Lim
ited ("Firan"), which then acquired all the shares
of the capital stock of a further acquisition. In
1972 the appellant transferred all his shares in the
three companies acquired in 1970 to Firan, which
then became the holding company for the shares of
the four companies.
After the first acquisitions in 1970 the appellant
and his employees were engaged in supervising,
monitoring and conferring with the management
of the acquired companies, giving them general
direction and guidance without becoming involved
in day-to-day operations, with a view to making
the companies more profitable. They also, of
course, continued investigating new opportunities.
After the transfer of the shares of the operating
companies to Firan in 1972, the appellant's two
key employees became employees of Firan, but
also continued to be employed and paid by the
appellant to do investigations in other industries.
The relevant provisions of the Income Tax Act
[R.S.C. 1952, c. 148 (as am. by S.C. 1970-71-72,
c. 63, s. 1)] are set out by the Trial Judge, whose
careful analysis is worth quoting at some length
[at pages 225-230 F.T.R.; 6407-6410 DTC]:
For the 1969, 1970, and 1971 taxation years, the statutory
provisions more particularly applicable to the plaintiffs case
were ss. 3 and 4, paragraphs 12(1)(a) and (b) and subsection
203(1) of the Income Tax Act, R.S.C. 1970, c. I-5. On
December 23, 1971, the Income Tax Act, was substantially
amended by the enactment of an amending Act, S.C. 1970-71-
72, c. 63. The former statutory provisions were revised and
renumbered to read:
3. The income of a taxpayer for a taxation year for the
purposes of this Part is his income for the year determined by
the following rules:
(a) determine the aggregate of amounts each of which is
the taxpayer's income for the year (other than a taxable
capital gain from the disposition of a property) from a
source inside or outside Canada, including, without
restricting the generality of the foregoing, his income for
the year from each office, employment, business and prop
erty; ...
9.(1) Subject to this Part, a taxpayer's income for a taxation
year from a business or property is his profit therefrom for
the year.
(2) Subject to s. 31, a taxpayer's loss for a taxation year
from a business or property is the amount of his loss, if any,
for the taxation year from that source computed by applying
the provisions of this Act respecting computation of income
from that source mutatis mutandis.
18.(1) In computing the income of a taxpayer from a busi
ness or property no deduction shall be made in respect of
(a) an outlay or expense except to the extent that it was
made or incurred by the taxpayer for the purpose of
gaining or producing income from the business or prop
erty; [or]
(b) an outlay, loss or replacement of capital, a payment on
account of capital or an allowance in respect of deprecia
tion, obsolescence or depletion except as expressly permit
ted by this Part;
248.(1) In this Act,
"business" includes a profession, calling, trade, manufac
ture or undertaking of any kind whatever and, includes an
adventure or concern in the nature of trade but does not
include an office or employment;
"property" means property of any kind whatever whether
real or personal or corporeal or incorporeal and, without
restricting the generality of the foregoing, includes
(a) a right of any kind whatever, a share or a chose in
action,
For the sake of brevity and convenience, I will refer to the
relevant statutory provisions according to the numbering
sequence of the 1971 amendments. They are essentially the
same as the predecessor sections of the former Act.
In order for an expense to be deductible in computing a
taxpayer's income, two preconditions must be met. The expense
must have been made or incurred for the purpose of gaining or
producing income from the business or property of the taxpayer
within the ambit of s. 18(1)(a) of the Income Tax Act. Once it
is found that a particular expenditure is one made for the
purpose of gaining or producing income then it must still be
determined whether or not such expenditure is a payment on
account of capital within the prohibition of s. 18(1)(b): see B.C.
Electric Railway Co. Ltd. v. M.N.R., [1958] S.C.R. 133; 58
D.T.C. 1022. It is the position of the defendant that neither of
these preconditions have been met with respect to the expenses
in question.
It is common ground that the plaintiffs ultimate goal was to
earn profits from the businesses which he acquired. The evi
dence leaves little doubt that the activity in which he was
engaged occupied much of his time, attention and energy.
Counsel for the defendant strongly urged that the purchase of
shares with a view to profit by holding them as an investment is
not a business. It was pointed out that the plaintiff charged no
management fees to the conglomerate companies. Emphasis
was laid on the fact that there was no business of providing
management services. Hence, there was no source of income
nor a reasonable expectation of profit from an activity that
could be classified strictly as a business. There was at best only
the expectation of ultimately benefiting as an investor. Counsel
for the defendant argued therefore that the outlays incurred in
the investigation of corporate opportunities and the supervision
of companies acquired as a result thereof were not deductible
on revenue account.
Revenue derived from the ownership of corporate shares is
generally regarded as income from property that does not
normally require the exertion of much activity or energy on the
part of the owner in order to produce the anticipated return:
Hollinger v. M.N.R., 73 D.T.C. 5003 (F.C.T.D.).
The companies acquired by the plaintiff were ailing or
stagnant businesses which were targeted because of their
unrealized profit potential. Much time, care and energy was
exerted in the initial acquisitions and thereafter. The evidence
goes to show that these acquisitions would not have been likely
to produce gainful income without the active and extensive
business-like intervention of the plaintiff and his key employees.
The crux of the matter, as it seems to me, is whether the
expenditures in question were paid on revenue account as
running expenses incurred in the process of operation of the
plaintiffs venture capital business or whether they were capital
expenditures paid as part of a plan for the assembly or putting
together of the very business structure itself, that is, the
corporate conglomerate.
This feature has been the subject of many cases over the
years .... [He then referred to Canada Starch Co. Ltd. v.
M.N.R., [1969] 1 Ex. CR 96; 68 DTC 5320; Bowater Power
Co. Ltd. v. Minister of National Revenue, [1971] F.C. 421; 71
DTC 5469 (T.D.); Minister of National Revenue v. Algoma
Central Railway, [ 1968] S.C.R. 447; 68 DTC 5096; Oxford
Shopping Centres Ltd. v. R., [1980] 2 F.C. 89; (1979), 79 DTC
5458 (T.D.); Johns-Manville Canada Inc. v. The Queen,
[1985] 2 S.C.R. 46; 85 DTC 5373; [1985] 2 CTC 111; and
Neonex International Ltd. v. The Queen (1977), 77 DTC 5321
(F.C.T.D.); affd. (1978), 78 DTC 6339 (F.C.A.)].
There is [...] no single overriding principle applicable to all
sets of facts or circumstances. Each case must be decided on its
own merits, so to speak. In any event, there would seem to be
little doubt that the plaintiffs expenditures were made or
incurred "for the purpose of gaining or producing income",
whether it be from property or a business. The plaintiffs
contention is, of course, that the expenditures were running
expenses laid out as part of the profit earning process of his
business. This is the crux of the case and the remaining
question, as I see it, is whether the expenditures were on
revenue account or were capital outlays within the prohibition
of s. 18(1.)(b).
I find on the evidence that the plaintiff was a skilled and
determined entrepreneur who embarked on the venture of
acquiring ailing business enterprises having recognizable profit
potential with a view to turning them to profitable account. The
acquisitions were accomplished in each case through the pur
chase of shares and only after careful deliberation and evalua
tion. Much attention and expertise were devoted to enhancing
the profitability of the acquired companies. A concomitant
purpose, once the desired level of profitability had been
attained, was to superimpose a holding company whose shares
would trade publicly. The long range objective was to reap the
profit reward by dividends funnelled through the holding
company.
Essentially, this was the entrepreneurial design of the plain
tiffs plan. I must now ask myself this question—is it any
different from the taxpayer's plan in Neonex? In my opinion, it
is not. Given the fact that the plaintiff may have looked at a
number of business prospects before finally deciding, the busi
ness itself really came into being with the acquisition of the
operating companies. This saw the establishment of the basic
business entity or structure. The creation of the holding com
pany was the finishing touch. I cannot regard the organization
of the corporate conglomerate as anything other than an invest
ment transaction. It must logically follow that the expenditures
are not running expenses laid out as part of the profit earning
process of the business. Rather, they were laid out as part of a
plan for the assembly of business entities or structures. It is my
opinion therefore that these expenditures were capital outlays
within the prohibition of s. 18(1)(b) of the Income Tax Act.
II
In this Court the appellant argued that the Trial
Judge erred in four respects: (1) in failing to give
weight to the uncontradicted expert evidence as to
accepted accounting practice and principles that
the preferred treatment of the expenses in issue
was not to capitalize or defer them in any way, but
to deduct them as expired costs of the period in
which they were incurred; (2) in failing to appreci
ate that the appellant's venture-capital business
began in 1969 before the acquisitions and con
tinued throughout the relevant period; (3) in fail
ing to distinguish the Neonex decision, supra; (4)
in assuming that every expenditure incurred by a
taxpayer whose business involves acquiring capital
assets necessarily is on capital account.
The overall argument of the respondent was that
findings of fact by a trial judge should not be
disturbed by an appellate court unless there are
palpable overriding errors (Stein et al. v. The Ship
"Kathy K" et al., [1976] 2 S.C.R. 802), and that
that principle applies in respect of all the fact
findings that enter into the decision here.
It has to be said with respect to the arguments
of both parties, that what is principally in issue is a
traditional question of law (mixed with fact) which
cannot be put to rest solely on the basis of either
generally accepted accounting principles or find
ings of fact by the Trial Judge, the question being
whether a particular expenditure is on account of
capital or revenue.
There is no single decisive test for making such
a determination. One classic dictum is that of
Viscount Cave L.C. in British Insulated and
Helsby Cables v. Atherton, [ 1926] A.C. 205
(H.L.), at pages 213-214:
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, I think that there is 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.
Another is that of Dixon J. (as he then was) in
Sun Newspapers Ltd. v. Federal Commissioner of
Taxation (1938), 61 C.L.R. 337 (H.C. of Aust.),
at page 363, where he proposed the consideration
of three essential matters:
There are, I think, three matters to be considered, (a) the
character of the advantage sought, and in this its lasting
qualities may play a part, (b) the manner in which it is to be
used, relied upon or enjoyed, and in this and under the former
head recurrence may play its part, and (c) the means adopted
to obtain it; that is, by providing a periodical reward or outlay
to cover its use or enjoyment for periods commensurate with
the payment or by making a final provision or payment so as to
secure future use or enjoyment.
Estey J. has spoken recently in the Johns-Man-
ville case supra, at pages 59 S.C.R.; 5378 DTC;
119 CTC, of "almost an endless rainbow of expres
sions used to differentiate between expenditures in
the nature of charges against revenue and expendi
tures which are capital". Estey J. himself, at pages
72 S.C.R.; 5384 DTC; 126 CTC, clearly prefers
"the application of the common sense approach to
the business of the taxpayer in relation to the tax
provisions," which in turn echoes the words of
Lord Pearce in B.P. Australia Ltd. v. Comr. of
Taxation of the Commonwealth of Australia,
[1966] A.C. 224 (P.C.), at page 264:
It is a commonsense appreciation of all the guiding features
which must provide the ultimate answer.
Lord Pearce's view, in turn, drew upon the
approach suggested by Dixon J. in Hallstroms
Pty. Ltd. v. Federal Commissioner of Taxation
(1946), 72 C.L.R. 634 (H.C. of Aust.), at page
648, that the answer "depends on what the expen
diture is calculated to effect from a practical and
business point of view, rather than upon the juris-
tic classification of the legal rights, if any, secured,
employed or exhausted in the process."
Despite this climate of uncertainty as to the
exact test, there has nevertheless been general
agreement that an expenditure for the acquisition
or creation of a business entity is on capital
account. Hence Jackett P. in Canada Starch Co. v.
Minister of National Revenue, [1969] 1 Ex.C.R.
96, at page 102; (1968), 68 DTC 5320, at pages
5323-5324, was able to lay down this much:
Applying this test [that of Dixon J. in the Sun Newspapers
case] to the acquisition or creation of ordinary property con
stituting the business structure as originally created, or an
addition thereto, there is no difficulty. Plant and machinery are
capital assets and moneys paid for them are moneys paid on
account of capital whether they are
(a) moneys paid in the course of putting together a new
business structure,
(b) moneys paid for an addition to a business structure
already in existence, or
(c) moneys paid to acquire an existing business structure.
This approach was followed in this Court by Urie
J. in The Minister of National Revenue v. M. P.
Drilling Ltd. (1976), 76 DTC 6028. Subsequently,
in the Johns-Manville case supra, at pages 73
S.C.R.; 5384 DTC; 126 CTC, Estey J. emphasized
in his summation that the expenditures which he
there found to be on current account "were not
part of a plan for the assembly of assets."
What is true of a plan for the assembly of assets
must, I think, be a fortiori true if the assets in
question are shares of capital stock. As Martland
J. expressed it for the majority of the Supreme
Court in Irrigation Industries Limited v. The
Minister of National Revenue, [1962] S.C.R. 346,
at page 352; 62 DTC 1131, at pages 1133-1134:
Corporate shares are in a different position [from adventures
in the nature of trade] because they constitute something the
purchase of which is, in itself, an investment. They are not, in
themselves, articles of commerce, but represent an interest in a
corporation which is itself created for the purpose of doing
business. Their acquisition is a well-recognized method of
investing capital in a business enterprise.
Counsel for the appellant acknowledged in the
course of argument that the costs of the investiga
tion of opportunities in relation to the four operat
ing companies actually acquired were capital ex
penditures, and made it clear that they had in fact
been capitalized here (Agreed Statement of Facts,
Schedule B, Column 7, Appeal Book, vol. 2, page
216). However, he submitted that the investigation
costs of the other fifty-odd opportunities that did
not lead to acquisitions must be regarded rather as
expenditures of an operating nature.
I find it impossible to accept this contention. It
seems to me that all of the expenditures relating to
the investigation of opportunities must be con
sidered on the same footing. They were the same
kinds of expenses, and they were made for the
same purpose. They were, in effect, all part of the
same venture-capital business which, the appellant
strenuously urged, existed from 1969 on. It makes
no sense to separate off the few which led to
acquisitions from the many that did not. All were
equally part of the appellant's plan of assembly of
business assets. It was only to be expected, and
indeed was the premise of the appellant's inves
tigative method, that some possibilities would on
examination turn out to be good risks, others too
poor to be proceeded with. In my view, the very
common-sense approach for which the appellant
contended vitiates his attempted distinction.
Moreover, I believe the matter has already been
decided by this Court in Neonex International
Ltd. v. Her Majesty the Queen (1978), 78 DTC
6339. In that case the taxpayer corporation, in
addition to its electric sign and outdoor advertising
business, was the parent company of a conglomer
ate of subsidiary or affiliated companies engaged
in various unrelated types of business. Among the
issues under appeal was the deductibility of legal
expenses for a proposed takeover which ultimately
failed. The only real difference between the facts
in the Neonex case and those in the case at bar is
that in the former the corporate takeover actually
got underway, even though it ultimately proved
abortive, and that the expenditures could thus be
linked to a specific transaction. Urie J. wrote as
follows for a unanimous Court at page 6346,
upholding the decision of the Trial Judge:
[T]he learned Trial Judge [...1 found it difficult to accept that
the buying of shares with a view to retaining them can itself be
said to be a business. Rather, he held, the Appellant was in the
business of making and selling signs and, as well, in the
business of supplying management expertise, services and funds
to the companies, the control of which it had acquired by the
purchase of shares. The acquisition of the shares was, in his
view, not in itself a business but was, in each case, an invest
ment made with a view to earning income ....
I wholly agree with this finding. I also agree with the Trial
Judge that the legal expenses at issue herein—those incurred in
an effort to complete the takeover and those incurred in seeking
compensation in lieu of shares—were outlays associated with
an investment transaction and thus were made on capital
account. That being so the Trial Judge correctly held, in my
opinion, that the expenses were not deductible ....
The distinction urged by the appellant between
the two cases does not, to my mind, exist. In the
Neonex case what was material to the Court was
that the legal expenses were made in relation to
the assembly of assets. This was clearly stated by
Marceau J. in the Trial Division, (1977), 77 DTC
5321, at page 5325 (whose approach was approved
in this Court):
The conclusion to be drawn is unavoidable: the legal expenses
here in question—those incurred in an effort to complete the
take-over as well as those incurred in seeking to get compensa
tion in lieu of shares—were outlays associated with an "invest-
ment transaction", they were made in connection with the
acquisition of a captial asset. They were, therefore, expendi
tures on capital account. [Emphasis added.]
The appellant also relied on the statement of
Estey J. in the Johns-Manville case, at pages 67
S.C.R.; 5382 DTC; 123 CTC, concerning situa
tions where the taxpayer is left with no tax relief
of any kind:
[I]f the interpretation of a taxation statute is unclear, and one
reasonable interpretation leads to a deduction to the credit of a
taxpayer and the other leaves the taxpayer with no relief from
clearly bona fide expenditures in the course of his business
activities, the general rules of interpretation of taxing statutes
would direct the tribunal to the former interpretation.
Admittedly, the appellant is left in such a position
in the case at bar under the pre-1972 Act [R.S.C.
1952, c. 148], but I do not find that the interpreta
tion of the statute is unclear in relation to him. I
believe his situation falls clearly within the Neonex
decision.
With respect to the expenditures relating to the
investigation of opportunities, I would therefore
maintain the conclusion of the learned Trial Judge
that they should not be allowed as deductions in
computing the appellant's income or loss from a
business or property for the taxation years in
which they we:e incurred.
III
The Trial Judge made no distinction in his holding
between the appellant's expenditures for the inves
tigation of opportunities and those for the supervi
sion of his companies, once acquired. He neverthe
less found (at pages 230 F.T.R.; 6410 DTC), that
"the business itself really came into being with the
acquisition of the operating companies. This saw
the establishment of the basic business entity or
structure." Of course, he went on to draw the
inference that even these expenditures "were laid
out as part of a plan for the assembly of business
entities or structures."
The appellant argued that the Trial Judge's
inference was based on an error of law in failing to
distinguish between the costs of acquisition and
those of current improvement of a property, and
that the supervision costs in the case at bar were
analogous to those accepted by the Crown in the
Neonex case.
The respondent replied that the Crown allowed
the supervision costs in Neonex because the tax
payer was receiving management fees from its
subsidiaries, whereas here the appellant had no
contracts for management services, no fees were
paid and there was no expectation of profit reason
able or otherwise. There was not even a source of
profit. Thus supervision expenses, since they relat
ed to the management of the portfolio or assets,
must be considered as incurred in building the
structure of his business.
On the facts the appellant had no supervision
expenditures in 1969 because he had no operating
companies, but he claimed deductions of $46,886
for 1970, $44,575 for 1971, and $10,179 for 1972
under the categories of (1) entertainment; (2) Lear
jet; (3) office expenses; (4) salaries and benefits;
(5) telephone, postage and stationery; (6) automo
bile expenses; and (7) miscellaneous. The respond
ent rightly pointed out that the question is not
what money is spent on but rather what it is spent
for. Consequently, the ordinariness of the appel
lant's disbursements does not establish their status
as running expenses. Nevertheless, they were
clearly spent, as the Trial Judge found (at pages
225 F.T.R.; 6406 DTC), "to monitor the fiscal
policy and business operations of the companies
and give general direction and guidance with a
view to making them more profitable." [Emphasis
added.] In this connection it is worthy of note that
the holding company paid annual dividends to the
appellant totalling $860,000 during the years 1979
to 1984. The Trial Judge gives the credit for this
change in profitability to the appellant (at pages
227 F.T.R.; 6408 DTC):
Much time, care and energy was exerted in the initial acquisi
tions and thereafter. The evidence goes to show that these
acquisitions would not have been likely to produce gainful
income without the active and extensive businesslike interven
tion of the [appellant] and his key employees.
The distinction apparently sanctioned in Bowa-
ter Power Co. Ltd. v. Minister of National Reve
nue, [1971] F.C. 421; 71 DTC 5469 (T.D.) is one
between costs for the acquisition of new property
and those for the improvement of existing prop-
erty. There the taxpayer corporation, which was in
the business of generating and selling electric
power and energy, incurred engineering costs with
respect to the feasibility of increasing the capacity
and capability of its plants, so as to attain the
maximum utilization of its existing watershed.
Noël A.C.J. said, at pages 441-443 F.C.; 5480-
5481 DTC:
The costs here of the engineering studies conducted to exam
ine the potential of appellant's drainage area or to determine
the feasibility of constructing power developments at certain
sites in Newfoundland were also incurred in my view or laid out
while the business of the appellant was operating and was part
of the cost of this business. Had it led to the building of plants,
business profits would have resulted. Should these expenses be
less current expenses because instead of being laid out in the
process of inducing the buying public to buy the goods or with a
view to introducing particular products to the market, they
were laid out for the purpose of determining whether a depre-
ciable asset should be constructed from which business gains
could be collected and would then have been added to the value
of this capital asset which would have been subject to capital
cost allowances. I do not think so.
These expenditures, it is true, did not materialize into any
concrete assets for which capital allowances could have been
abtained but they were made for the purpose of effecting an
increase in the volume and the efficiency of its business and,
therefore, for the purpose of gaining income ....
I do not indeed feel that merely because the expenditure was
made for the purpose of determining whether to bring into
existence a capital asset, it should always be considered as a
capital expenditure and, therefore, not deductible. In distin
guishing between a capital payment and a payment on current
account, regard must always be had to the business and com
mercial realities of the matter.
The M.P. Drilling case, supra, also laid great
stress on the distinction between going into busi
ness and being in business. Urie J. wrote for this
Court, at pages 6031-6032:
[T]he Appellant made no distinction, apparently either at trial
and certainly not during the argument on the appeal, between
the various kinds of expenditure for which deductibility was
sought. In my view, while some were clearly made in the
income earning process such as, for example, expenses incurred
during the negotiations of the various contracts for the supply
and sale of gas, others did not so readily fall within that
category. Counsel took the position that, in substance, all of the
expenditures were for a like purpose, i.e., to ascertain the
feasibility of going into the business of purchase and sale of
liquified natural gas to certain Pacific rim countries and this
was so whether the work involved in such studies was carried
out by the Respondent's own personnel or by outside consult
ants. He argued that none were made as part of the operation
of the profit earning process of an existing business but were
made as part of the formation of the structure necessary to
engage in that process.
In my opinion, that argument is not supported by the evi
dence and, in fact, there is evidence which points in the opposite
direction. Not the least important of that kind of evidence was
the fact that negotiations undertaken by the Respondent's
officers had culminated in some expressions of intent by poten
tial customers to buy the gas and some by producers of the gas
to sell it to the Respondent for the purpose of resale. Quite
clearly then, the Respondent was in fact in business and was
not simply bringing the business into existence. No particular
expenditures were drawn to our attention to enable us to reach
a conclusion that anyone or more of them could be character
ized as capital expenses while others might fall solely into the
category of revenue expenses. I have no reason, therefore, to
alter the view which I have previously expressed that all must
be held to have been incurred for the purpose of earning income
and accordingly were properly deductible in the years in which
they were incurred.
It was then argued that there must be revenue before any
deduction can be made for expenses which might otherwise
properly be deductible as made for the purpose of earning
income. I cannot agree that because the Respondent had not
generated any revenue, let alone profit, makes it any less "the
process of operation of a profit making entity". Nor does the
fact that no revenues were generated from the activity trans
form what would have been deductible outlays for the purpose
of gaining income, had there been any revenue, into expendi
tures made for the acquisition or creation of a business entity,
or, to put it in the way earlier cases have put it, to bring into
existence an asset or advantage of an enduring benefit of a
trade (British Insulated and Helsby Cables v. Atherton, (1926)
A.C. 205 at pp. 213-14.)
In my opinion the short answer to the proposition advanced is
that if the expenditures were made for the purpose of earning
income and were not capital in nature and thus not rendered
non-deductible by virtue of section 12(1)(b) or by any other
provision of the Act, they were proper expenses to the charge
able against income whether or not any income resulted from
such expenditures. [Emphasis added.]
An added perspective is provided by Odeon
Associated Theatres Ltd y Jones (Inspector of
Taxes), [ 1972] 1 All ER 681 (C.A.), where the
taxpayer company claimed as deductions substan
tial sums of money spent on repairs and renewals
at a newly acquired cinema. Buckley L.J. put the
matter this way, at page 693:
The cost of acquiring or creating a physical capital asset for
use in a trade or business is clearly capital expenditure. The
cost of improving such an asset by adding to it or modifying it
may well be capital expenditure. On the other hand, the cost of
works of recurrent repair or maintenance of such an asset
attributable to the wear and tear occurring in the course of use
of the asset in his trade or business by the person carrying out
the works is revenue expenditure, and so constitutes a proper
debit item in the profit and loss account of the business.
Whether, where there has been a change of ownership, the cost
of works of repair or maintenance attributable to wear and tear
which occurred before the change of ownership should be
regarded as revenue expenditure or capital expenditure is a
question the answer to which must, in my opinion, depend on
the particular facts of each case.
There are, evidently, three distinct situations
rather than just two. At one extreme there is the
cost of acquiring or creating a capital asset, which
is always a capital expenditure. At the other
extreme there is the cost of current repair or
maintenance, which is always a running expense.
But in between there is the cost of improving a
capital asset by adding to it or modifying it, which
may well be a capital expenditure, but which must
be characterized as one or the other on the par
ticular facts of each case, especially—though I
think not exclusively—when there has been (as in
the case at bar) a change of ownership. In the
Odeon case the Court concluded that the expendi
ture was by nature on revenue account.
Similarly, in Oxford Shopping Centres Ltd. v.
R., [1980] 2 F.C. 89; (1979), 79 DTC 5458
(T.D.), where a taxpayer company claimed a
deduction for money paid to a municipality under
an agreement for improved roads to ease traffic
congestion and provide better access to the taxpay
er's property, Thurlow J. (as he then was) was
prepared to uphold the deduction even though it
appeared to be a once and for all payment. He
wrote at pages 101 F.C.; 5463 DTC:
For if, as I think, the expenditure can and should be regarded
as having been laid out as a means of maintaining, and perhaps
enhancing, the popularity of the shopping centre with the
tenants' customers as a place to shop and of enabling the
shopping centre to meet the competition of other shopping
centres, while at the same time avoiding the imposition of taxes
for street improvements, the expenditure can, as it seems to me,
be regarded as a revenue expense notwithstanding the once and
for all nature of the payment on the more or less long term
character of the advantage to be gained by making it.
If the only possible profit from the appellant's
supervision expenses were to have been an accre
tion in the market value of the appellant's shares
of capital stock in the operating companies, then
his failure to charge management fees to those
companies might have been fatal to his claim to
deduct them as running expenses. But there were
always intended to be operating profits, and ulti
mately (i.e., from 1979) there were. The appel
lant's business was in no sense solely or even
principally share management. It was rather the
profitable management of his operating compa
nies, even though that was achieved at one remove
from and without direct involvement in their day-
to-day operations. It was in fact skilful indirect
business management of a high order. It was no
less so because the appellant did not keep proper
accounts or issue financial statements of his own.
Nor is the appellant's case weakened by the fact
that there is neither immediate income nor an
immediate source of income in his business. One of
the early cases in the field, Vallambrosa Rubber
Company Limited v. Farmer (1910), 5 T.C. 529
(Ct Sess., Scot.) rendered that argument ineffica-
cious, as explained by Lord President Dunedin, at
pages 534-535:
The Junior Counsel for the Crown, encouraged by certain
expressions which he found used by various learned Judges who
had given judgments in Tax Cases, wished your Lordships to
accept this proposition, that nothing ever could be deducted as
an expense unless that expense was purely and solely referable
to a profit which was reaped within the year ....
I think the proposition only needs to be stated to be upset by
its own absurdity. Because what does it come to? It would
mean this, that if your business is connected with a fruit which
is not always ready precisely within the year of assessment you
would never be allowed to deduct the necessary expenses
without which you could not raise that fruit. This very case,
which deals with a class of thing that takes six years to mature
before you pluck or tap it, is a very good illustration, but of
course without any ingenuity one could multiply cases by the
score. Supposing a man conducted a milk business, it really
comes to the limits of absurdity to suppose that he would not be
allowed to charge for the keep of one of his cows because at a
particular time of the year, towards the end of the year of
assessment, that cow was not in milk, and therefore the profit
which he was going to get from the cow would be outside the
year of assessment. As I say, it is easy to multiply instances, but
the real truth is that it is just one of those mistakes which are
made by fixing your eyes too tightly upon the words of Rules
and Cases which are given in the Act of 1842. These, after all,
are only guides, because the real point is, What are the profits
and gains of the business? Now, it is quite true that in arriving
at the profits or gains of a business you are not entitled, simply
because—for what are likely quite prudent reasons—you either
consolidate your business by not paying the profit away or enter
into new speculations or increase you plant and so on—you are
not entitled on that account to say that what was a profit is a
profit no more. The most obvious illustration of that is a sum
carried to a reserve fund. It would be a perfectly prudent thing
to do, but none the less if that sum is carried to a reserve fund
out of profit it is still profit, and on that Income Tax must be
paid. But when you come to think of the expense in this
particular case that is incurred for instance in the weeding
which is necessary in order that a particular tree should bear
rubber, how can it possibly be said that that is not a necessary
expense for the rearing of the tree from which alone the profit
eventually comes? And the Crown will not really be prejudiced
by this, because when the tree comes to bear the whole produce
will go to the credit side of the profit and loss account. When
the year comes when the tree produces the only deduction will
be the amount which has been spent on the tree in that year;
they will not be allowed to deduct what has been deducted
before.
Again, it seems to me, the rule is the same: a
realistic, common-sense, business approach will
not be defeated by narrow technicalities, unless
they are clearly imposed by the law. In my opin
ion, no such rigidities are here imposed by the law,
and the appellant must be allowed a deduction for
his supervision expenses.
It will be obvious, from what I have said, that I
take the view that the appellant equally meets the
tests of paragraphs 18(1)(a) and 18(1)(b) of the
post-1971 Act (or of paragraphs 12(1)(a) and
12(1) (b) of the pre-1972 Act).
IV
In the result I would allow the appellants' appeal
in part and vary the Trial Judge's order of August
27, 1986, by adding a new paragraph immediately
following paragraph 1 as follows:
2. those of the expenses incurred by the appellant during the
1970 to 1972 taxation years which were described in paragraph
10 of the Agreed Statement of Facts and in the schedules
appended thereto as Supervision of Companies should be
allowed as deductions in computing the appellant's income for
the relevant taxation years.
I would also renumber the remaining paragraphs
of the order.
In view of the appellant's substantial success, he
is entitled to his costs both here and below.
HEALD J.: I agree.
URIE J.: I agree.
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.