Bowater Power Company Limited (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Noël A.C.J.—Montreal, June 17;
Ottawa, November 9, 1971.
Income Tax—Capital cost allowances—Demise of water
power rights in river for 99 years with right of renewal—
Whether lease or licence—Income Tax Regulations,
Schedule B, classes 13 and 14.
In 1955 appellant bought from another company for
$941,989 certain water power rights in a Newfoundland
river which had been demised to that company in 1915 for
99 years by the Newfoundland Government. The contract,
which was ratified by the Newfoundland Parliament, per
mitted further terms of 99 years in perpetuity at the gran-
tee's option and gave the grantee the right to divert and dam
the river and construct works therein. In consideration the
grantee paid $20 and undertook to do some construction
work and to supply electrical power to the public.
In 1959 and 1960 appellant spent over $33,000 for engi
neering studies of the cost of developing additional power
and the location of physical plant.
Held: (1) The demise of the water power rights was a
lease and appellant was entitled to deduct capital cost
allowances on the cost thereof under Schedule B of the
Income Tax Regulations, class 13. If it was not a lease, it
was a concession, franchise or licence for a limited period
(being renewable at the grantee's option) and therefore
subject to capital cost allowances under class 14. Sevenoaks
v. London and Dover Rly. Co. (1879) 11 Ch.D. 625; Erring-
ton v. Errington and Woods [1952] 1 K.B. 290, referred to.
(2) The expenditure in 1959 and 1960 on the engineering
study was properly deductible as a current expenditure in
computing appellant's income from its business for those
years. Canada Starch Co. v. M.N.R. [1968] C.T.C. 466,
applied.
INCOME tax appeal.
Bruce Verchère for appellant.
F. J. Dubrulé, Q.C. for respondent.
Noel. A.C.J.—This is an appeal from assess
ments to income tax for the taxation years
1958, 1959 and 1960 whereby certain capital
cost allowances claimed by the appellant with
respect to certain rights called Corner Brook
rights and Humber River rights of $104,665.47
and $941,989.32 respectively and leasehold
interests within the meaning of section
1100(1)(b) of the Income Tax Regulations were
disallowed by the Minister. The Minister also
disallowed expenditures of $18,195 and
$15,801 in 1959 and 1960 respectively, as prop
erty of class 2 of Schedule B of the Income Tax
Regulations, nor did he accept that` they were
deductible as operating costs.
The position taken by the Minister is that (a)
neither of the power rights acquired by the
appellant, and described as "Humber River"
and "Corner Brook" are property within class
13 of Schedule B of the Income Tax Regula
tions in that neither is a`leasehold interest; (b)
neither of the power rights acquired by the
appellant, and described as "Humber River"
and "Corner Brook" is property within class 14
of Schedule B of the Income Tax Regulations in
that neither is a patent, franchise, concession or
licence or (c) as an alternative to (b) hereof, if
the property described as "Humber River" and
"Corner Brook" is within the meaning of said
class 14, that is, it is one of a patent, franchise,
concession or licence, the patent, franchise,
concession or licence is not for a limited period.
The appellant was incorporated in 1955 under
the Newfoundland Companies Act for the pur
pose of carrying on the business of, generating
and selling electrical power and energy and has
been since that time a wholly-owned subsidiary
of the Bowater Corporation of North America
Limited. By deed dated June 1, 1955, appellant
acquired from Bowater's NewfoundlandVulp &
Paper Mills Limited (also a wholly-owned sub
sidiary of the Bowater Corporation of North
America Limited) rights relating to Corner
Brook and the Humber River in Newfoundland,
hereafter called the Corner Brook rights and the
Humber River rights.
In filing its 1958, 1959 and 1960 income tax
returns, appellant took the position that the
capital cost of the Corner Brook rights and
Humber River rights was $2,321,320.78 and
claimed capital cost allowance accordingly.
Subsequently, appellant and respondent agreed
that the capital cost of both rights was $1,046,-
654.79 of which appellant says $104,665.47
may reasonably' be regarded as consideration
for the Corner Brook rights and the balance, or
$941,989.32, may reasonably be regarded as
consideration for the Humber River rights.
The Corner Brook and Humber River rights
had been obtained by the predecessors in title
to appellant from the Governor of Newfound-
land in 1913' and from the Governor of New-
foundland in Council in 1915 respectively.
During its 1959 and 1960 taxation years,
appellant made, or incurred, expenditures of
$18,195 and $15,801 respectively for engineer
ing studies of the cost of developing additional
power and location of physical plant for appel
lant's power system - . For the purposes of com
puting its income for the 1959 and 1960 taxa
tion years, appellant added the amounts of
$18,195 and $15,801 respectively to the capital
cost of its assets following class 2 of Schedule
B of the Income Tax Regulations and deducted
capital cost allowance accordingly. The appel
lant, however, has now abandoned this position
and relies only, as far as these items are con
cerned, on having them accepted as operating
costs as made or incurred for the purpose of
gaining or producing income from appellant's
business and, therefore, deductible pursuant to
sections 4 and 12`(1)(a) of the Income Tax Act.
The Minister, on the other hand, submits that
these amounts were outlays on account of capi
tal within the meaning of section 12(1)(b) and
are, therefore, not deductible for the purpose of
computing appellant's 1959 and 1960 income.
Counsel for the respondent stated at the hear
ing that the Minister was now prepared to admit
that the Corner Brook rights are, for a limited
period, one of a franchise, concession or licence
and that this asset has a capital cost of $104,-
665.47 and, therefore, this issue is now settled
and the appeal should be allowed thereon. The
respondent also abandoned the contention that
the grant of the Humber River rights was not a
patent, franchise, concession or licence within
the meaning of class 14 of Schedule B of the
Regulations although he still maintains that the
grant is not for a limited period.
The parties prepared an agreed statement of
facts, and documents, which was filed as Ex.
A-2 and which is reproduced hereunder:
STATEMENT OF FACTS
1. On 16 April 1915 an agreement was entered into
between the Governor of Newfoundland and its Dependen
cies, in Council, and the Newfoundland Products Corpora
tion, Limited by which inter alia, the water power or powers
in and upon the Humber River, Newfoundland (hereafter
called the "Humber River rights") were demised to the
Newfoundland Products Corporation, Limited. Exhibit ASF
1 is a true copy of this agreement.
2. On 5 June 1915 the Act for the confirmation of the
agreement of 16 April 1915, which had been enacted by the
Governor, the Legislative Council and the House of Assem
bly of Newfoundland, in Legislative Session convened, was
passed. Exhibit ASF 2 is a true copy of the Act.
3. On 9 June 1923 Newfoundland Products Corporation
Limited changed its name to Newfoundland Power and
Paper Company Limited.
4. On 13 July 1923 the General Assembly of Newfound-
land passed an Act which amended exhibit ASF 2. Section 7
of that Act of 13 July 1923 provided:
7. Time in all respects, wherever mentioned in the agree
ment of 1915 and the Act of 1915 (Except as to the
proviso to clause 1 of the agreement of 1915) shall be
deemed to commence to run from the date of passing of
this Act.
(This is important because it means that the
terms of the Humber River grant started to run
from July 1923 and not from 1915 because
although the agreement was originally entered
into in 1915, the 99-year period starts to run
from 1923 only and not 1915).
Paragraphs 5, 6 and 7 of the above statement
of facts deal with the transfer of the Humber
River rights, through the chain of companies,
and, as this is not contested, they are not repro
duced here.
S. In 1955 Bowater Power Company Limited (the appel
lant) was incorporated and its objects included carrying on
the business of generating and selling electrical power and
energy. It has carried on that business from its incorpora
tion to the present time.
9. On 1 June 1955 Bowater's Newfoundland Pulp and
Paper Mills Limited sold to appellant the Humber River
rights. The capital cost of the Humber River rights to
appellant was $941,989.32.
As a result of the admissions made by the
respondent, the issues are narrowed down to
three: (1) did the grant of the Humber River
rights constitute a leasehold interest within the
meaning of class 13? (2) As an alternative to the
first issue, was the grant of the Humber River
rights (which admittedly was a franchise,
concession or licence) for a limited period
within the meaning of class 14 of Schedule B of
the Regulations? and (3) are the amounts of
$18,195 and $15,801 expended in 1959 and
1960 on account of certain engineering studies,
deductible as ordinary business expenses pursu
ant to sections 4 and 12(1)(a) of the Act?
If the respondent's position with regard to the
$941,989.32 expended for the Humber River
rights and the above two amounts of $18,195
and $15,801 expended for engineering studies is
right, we would have here what is termed in
fiscal jargon two "nothings" of which no allow
ance would be possible nor deduction permit
ted. The problems involved herein arise in the
three years under review 1958, 1959 and 1960
and the solution reached herein will apply to
those three years.
The agreed statement of facts and documents
produced as Ex. A-2 comprise the sole evidence
submitted with regard to the two first issues, i.e.
whether (1) the grant of the Humber River
rights amounted to a leasehold interest and (2)
was it for a limited period. As for the third
issue, the deductibility of the cost of the engi
neering studies, one witness only was heard, a
Mr. Sansome. Before dealing, however, with
the cost of the engineering studies, we will look
at the two first issues.
The important paragraph of Ex. ASF-1 is
paragraph 1, on page 5, of which the opening
part only is relevant to the determination of
whether the Humber River rights is a leasehold
interest, as submitted by the appellant, or a
licence, as submitted by the respondent and it is
reproduced hereunder:
1.—The Government hereby demises, for a term of nine-
ty-nine years, from the date of this Agreement, to the
Company (so far as the Government can consistently with
any grants, leases or licenses heretofore made and actually
subsisting, demise the same), the water power or powers in
and upon the Humber River, and in and upon Junction
Brook, and for the purpose of its works and operations the
Company shall have the right to divert, stop or dam up any
stream, lake or water course within the drainage area of the
Humber River, and to make, construct or maintain any dam,
water course, culverts, drains and reservoirs in said area for
any of its said works of operations ...
and then lower down:
... such water power or water powers shall be taken to
be held under this Agreement: and the provisions of this
Agreement, except clause 10 hereof in respect of the rights
and privileges granted to the Company, shall apply to all
works and business, ...
then paragraph 17:
17.—If this demise shall not have been determined other
than by effluxion of time, the Government will, at the
request and cost of the Company, at the expiration of the
term hereby granted, and again at the expiration of every
further term of ninety-nine years, which may hereafter be
granted under this covenant, grant to the Company, subject
to the like covenants, provisions and agreements as are in
and by. these presents reserved and contained by way of
renewal for the further term of ninety-nine years, to be
computed from the expiration of the term hereby granted, a
new lease of the said rights.
(This paragraph is relevant to the question of
whether it is a lease and, if not, whether it is a
franchise for a limited period).
And then paragraph 20:
20.—Notwithstanding the grant of the water powers
herein, all persons shall have the right to the temporary use
of the said waters for the purpose of passing to and fro in
small boats, and for the purpose of floating logs and lumber
belonging to such persons to their mills; provided that such
use shall not interfere with or prejudice the business or
operations of the Company.
(This paragraph is important because it goes to
the question of exclusive possession over use
by the grantee).
And, lastly, paragraph 22 provides that:
22.—This Agreement is subject to approval and confirma
tion by the Legislature of the Colony.
And this leads us directly into Ex. ASF-2 which
is the Act which confirms and approves the
Agreement ASF-1. The important part of Ex.
ASF-2 is the first paragraph which after identi
fying Agreement ASF-1 states that it:
... is hereby approved and confirmed, subject to the
conditions and exceptions hereinafter contained, and all and
singular the several clauses and provisions thereof are
hereby declared to be valid and binding upon the said
parties thereto, and each of them respectively, and all and
singular the several acts, matters and things therein provid
ed to be done or performed by or on the part of the parties
respectively are hereby declared to be proper and lawful,
and in so far as not by this Act expressly provided for, the
parties and each of them shall have full power and authority
to do and perform all and singular the several acts, matters
and things, and in and by the said Agreement provided to be
done...
The appellant, as we have seen, submits that
the grant of the Humber River rights amounted
to a leasehold interest within the meaning of
class 13 of Schedule B of the Income Tax
Regulations' and, alternatively, that the grant
was a patent, franchise, concession or licence,
for a limited period within the meaning of class
14 in Schedule B of the Regulations. Counsel
for the appellant submits that paragraph 1 of
Ex. ASF-1 provides three things, namely, that
(1) the water power or powers in and upon
Humber River and Junction Brook are demised;
(2) the company has the right to divert, stop or
dam up any stream, lake or water course and (3)
the company has the right to construct and
maintain dams, reservoirs, etc. The grants can,
therefore, be summarized as follows: The right
to the demised water powers, the right to divert
and the right to dam.
The appellant does not suggest that the
Humber River grant is a leasehold interest of
the type which would arise and be recognized if
the transaction had been between private par
ties. It is admitted, he said, that there is a
wealth of old common law jurisprudence that
an emphytéotique lease, such as exists under the
civil law when there is an alienation of the
property does not exist in the common law.
The appellant merely suggests that the grant
was an agreement between the appropriate
legislative body of the Parliament of Newfound-
land and the company and that it comes down
to a question of deciding the true nature of the
grant from the plain meaning of the words used
in the agreement (ASF-1) and the Act (ASF-2).
The consideration for the grant was a small
amount of $20 but comprised also the obliga
tion to do some construction work and supply
electricity. The obligations of the company can
be found in paragraph 3 of Ex. ASF-1 on page
31 (page 7):
3.—The Company agrees that it will furnish at any of its
power houses in Labrador to any person or company
engaged in any industry or employment not concerned with
the manufacture of phosphate of ammonia such electrical
power ...
(The Newfoundland Power Corporation was
incorporated as a chemical company and did
not want any competitors. It later turned to the
manufacture of pulp and paper.)
The agreement did not provide for the pay
ment of rent which, however, can be replaced
by an obligation such as here to do development
work and provide power. Houses indeed are
frequently leased as a result of conventional
arrangements between private parties on the
lessee's undertaking to do maintenance work
and look after the property and, of course, this
is a consideration that can be the equivalent to
rent. The appellant also submits that even if an
emphytéotique lease does not exist under the
common law and although there may be some
doubt as to whether a lease may, under the
common law, be made renewable in perpetuity
between private parties 2 , Parliament can, how
ever, create such an interest in a common law
province even if such an interest is unknown to
the common law and relies on Sevenoaks v.
London and Dover Rly. Co. (1879) 11 Ch. D.
625, where Jessel M. R. stated at p. 635:
... An Act of Parliament has power to create interests
which were unknown to the common law, and which could
not be created between individuals by contract.
Now we have not by law any such thing as a lease in
perpetuity. We have a fee simple subject to a rent-charge,
and we have a lease for years, but we have no such thing as
a lease in perpetuity; and therefore,- when we find a per
petuity of this kind, if it carries, as I think it does carry, the
right to possession, that could not be properly described as
a lease or as a fee simple, because it was not intended to
vest in the Dover Company any of the soil, only the right of
possession or occupation. Therefore I can well understand
why the term "lease", or some similar term, was not used.
But it is to my mind equivalent to a lease, so far as regards
the possession of the surface and adjuncts necessary for the
working of the line.
Newfoundland achieved responsible govern
ment in 1855 and Dominion status in 1917.
Counsel for the appellant submits that statutes
of the Governor, the Legislative Council and
the House of Assembly, in legislative session,
are acts of Parliament. It follows, he says, that
the Government of Newfoundland had the
authority and competence to create leasehold
interests in respect of waters and water power
which might otherwise be unknown, and I must
say that I agree with this submission if such is
the nature of the agreement entered into
between the parties. The question of whether
the agreement is a lease or a licence is not,
however, an easy matter to determine from the
present state of the authorities. The problem,
basically, involves a determination of the sig
nificance of the exclusive possession of a non-
owner occupier who is not a trespasser. The
difficulty resides in the ambiguity of the term
"exclusive possession" which may be used in
the sense of sole possession or dominant con
trol in fact as in Westminster v. Southern Rly.
Co. [1936] A.C. 511, or as meaning a right to
sole possession such as in Addiscombe Garden
Estates Ltd. v. Crabbe [1958] 1 Q.B. 513. The
matter is also due to the fact that certain deci
sions have emphasized, as a determining factor,
the intention of the parties. In Errington v.
Errington and Woods [1952] 1 K.B. 290, how
ever, Lord Denning stated at p. 298:
... although a person who is let into exclusive possession
is prima facie to be considered to be a tenant, nevertheless
he will not be held to be so if the circumstances negative
any intention to create a tenancy ...
According to this decision, the test can be
said to be in the case of a licence, whether the
parties' actual intention was to create a mere
permissive privilege of exclusive possession
whereas in the case of a lease, the intention was
to create an interest in land. A licence? as a
matter of fact, confers no rights and is merely a
dispensation. Cf. Thomas v. Sorrell (1674)
Vaughan 330. It merely prevents a licensee
from being treated as a wrongdoer, without the
right to exclude the licensor. The licensee
whose possession is exclusive would, therefore,
have factual exclusive possession 4 but without
any right to it. If such a situation can exist, it
would appear that there could be little differ
ence in practice between a licensee and a tenant
at will. The tenant would, of course, have exclu
sive possession as of right and the licensee
would possess a mere privilege 9 of doing acts of
control subject to the power of the licensor to
revoke them. There, therefore, appears to be
very little to distinguish a lease from a licence if
the criterion of exclusive possession is
considered.
The second factor is, as suggested by Lord
Denning, in the above caser to examine the
intention of the parties and this is always rather
difficult as the only way to do so is to consider
the circumstances in which the agreement was
drawn and infer therefrom what the parties
intended, whether there was an intention to
confer a right of exclusive possession s or merely
a privilege. In Facchini v. Bryson [1952] 1
T.L.R. 1386, it was said that usually where a
non-owner non-trespasser has exclusive posses
sion, the presumption will be that a tenancy had
been granted. It was also therein stated at p.
1389 that where "a family arrangement, an act
of friendship or generosity or such like" was
found, it would negative any intention to create
a tenancy. The term "permissive occupation"
has been used in some cases to describe such a
situation. In Cobb v. Lane [1952] 1 A» E.R.
1199, a tenancy and not a licence was a found
although there was a clause in the agreement
that nothing in it was to be construed so as to
create a tenancy. It was said therein that the
label chosen by the parties was not conclusive.
The importance of the right of the occupier to
keep the landlord out'was also stressed and, of
course, such a right is the usual indication of a
right of exclusive possession. In Addiscombe
Garden Estates Ltd. v. Crabbe (supra) at p. 528,
Jenkins L.J. stated that:
... the law remains that the fact of exclusive possession,
if not decisive against the view that there is a mere licence,
as distinct from a tenancy, is at all events a consideration of
the first importance. In the present case there is not only
the indication afforded by the provision which shows that
exclusive occupation was intended, but there are all the
various other matters which I have mentioned, which
appear to me to show that the actual interest taken by the
grantees under the document was the interest of tenants,
and not the interest of mere licensees.
The Court in that case felt that provisions in the
agreement which imposed obligations on the
occupier to repair, not to cut down trees, not to
remove clay, to make monthly payments to the
owners were more appropriate to the grant of a
tenancy than of a licence. I must' say that
although the Court, in the above case, felt that
such obligations were helpful in determining
whether the agreement was a lease or a licence,
I fail to see how such matters can be of any
great assistance. There is, as a matter of fact in
the authorities, not'one test which can enable
one to determine such matters with any amount
of certainty. In Bracey v. Read [1962] 3 All
E.R. 472, Cross J. stressed the importance of
business arrangements when, at p. 475, he held
that a tenancy had been created. He said:
... In the case of a business transaction like this I think
that the question whether a man ought to be considered as a
licensee or a tenant depends principally, if not entirely, on
whether he has exclusive possession of the property in
question. Under arrangements which are not of an ordinary
business character, one very often has a man in exclusive
possession of the property in question who is yet not a
tenant but only a licensee; but no case was cited to me, and
I do not know of any case, where a man who is in exclusive
possession under an ordinary business agreement has been
held not to be a tenant but only a licensee.
Although the above decisions are, in some
small measure, of assistance, there is still con
siderable obscurity and, therefore, uncertainty
in that it is still not clear as to what extent an
intention must be a real one and if it is a real
intention, precisely what has to be intended.
Some decisions are to the effect that a right to
exclusive possession was not necessarily deci-
sive of the question. Others held that a right to
exclusive possession was decisive. In Radaich
v. Smith (1959) 101 C.L.R. 209, Windeyer J. (at
p. 223) stated that:
... persons who are allowed to enjoy sole occupation in
fact are not necessarily to be taken to have been given a
right of exclusive possession in law. If there be any decision
which goes further and states positively that a person legal
ly entitled to exclusive possession for a term is a licensee
and not a tenant, it should be disregarded, for it is self-con
tradictory and meaningless.
It appears to me that the very concept of
"interest in land" is ambiguous and obscure.
There is, as a matter of fact, no answer given in
any of the authorities I read as to what are the
circumstances which would normally involve
the existence of "an interest in land" and the
further question may also be asked whether the
existence or non-existence of an "interest in
land" is a matter of law or merely a matter of
fact.
Lord Davey in Glenwood Lumber Co. v. Phil-
lips [1904] A.C. 405, even held that the agree
ment was a lease despite the fact that there
were certain restrictions or reservations of the
purposes for which the property could be used.
He said at p. 408:
... In the so-called licence itself it is called indifferently a
licence and a demise, but in the Act it is spoken of as a
lease, and the holder of it is described as the lessee. It is
not, however, a question of words but of substance. If the
effect of the instrument is to give the holder an exclusive
right of occupation of the land, though subject to certain
reservations or to a restriction of the purposes for which it
may be used, it is in law a demise of the land itself ...
Although the determination of the nature of
the agreement here is fraught with difficulties,
an examination of the terms or language of the
agreement and of the statute which sanctioned
it in the light of the above decisions may assist
in reaching a conclusion herein.
The water power or powers on the Humber
River were demised to the Newfoundland Prod
ucts Corporation on April 16, 1915 for a term
of 99 years and I must say that it would appear
from the language of the agreement that the
intention of the parties was to create a lease.
This intention can be drawn from a number of
sources and especially from the use of the word
"demised" in paragraph 1 and paragraph 17 of
Ex. ASF-1 where the word "demised" is used
twice in the first line, "The Government hereby
demises" and in the fifth line again a reference
to a demise of the same, and then in paragraph
17, the first line "If this demise" and the word
"demise" when used in its ordinary sense
means to grant a lease. Cf. Jowitt, Dictionary of
English Law, p. 607 3 .
The use of the word "held" in paragraph 1 of
Ex. ASF-1 "such water power or water powers
shall be taken to be held" also would seem to
indicate that a lease is intended as Jowitt, at p.
915, says the word "hold" means "to have as a
tenant" and, lastly, at paragraph 17 of Ex.
ASF-1:
If this demise shall not have been determined other than
by effluxion of time, the Government will ... grant ... a
new lease ...
where the use of the word lease clearly shows
that such a grant was intended.
Paragraph 17, the renewal of the lease clause,
would indeed imply that if what is going to be
given as a renewal is a lease, what the conces-
sionnaire held was also one.
There are, however, as already mentioned,
many decisions to the effect that the mere use
of the word lease or demise is not sufficient to
transform an agreement into a lease if in fact it
is not such an instrument. An examination of
the rights granted here and the use made, or to
be made, of the land and territory covered by
the agreement should, however, in my view,
enable the determination of the nature of the
grant made by the Government of Newfound-
land to the appellant. It was, of course, given as
mentioned in the third and fourth "WHERE-
AS" of the indenture, "certain rights and
privileges" and "water power and waters upon
the Humber River and Junction Brook" and in
section 1 of the indenture
The Government ... demised ... to the Company ... the
water power or powers in and upon the Humber River, and
in and upon Junction Brook, and for the purpose of its
works and operations the Company shall have the right to
divert, stop or dam up any stream, lake or water course
within the drainage area of the Humber River, and to make,
construct or maintain any dam, water course, culverts,
drains and reservoirs in said area for any of its said works
or operations ... (The italics are mine).
It therefore appears that the appellant, or its
predecessors in title, was given the right to
erect whatever works necessary to produce
electricity and from clause 3 of the agreement,
agreed that it would
... furnish at any of its power houses in Labrador to any
person or company engaged in any industry or employment
... within one hundred miles of any such power house,
such electrical power as may be required for the operation
of any such industry or employment at a price to be agreed
upon and failing such agreement to be settled by
arbitration ...
Clause 9 of the agreement also contemplates
the possibility of the grantee
... acquiring lands incident to flowage rights or rights of
way for telegraphs, telephones, power transmission lines,
railways, tramways, roads or sites for mills, works, facto
ries, warehouses or for wharves, piers or docks, or other
shipping facilities in connection with the Company's opera
tions for the purposes aforesaid, and within a distance of
fifty miles therefrom, up to and not exceeding in the whole
ten thousand acres, on lands belonging to and in the posses
sion of the Crown, the Governor in Council shall, upon the
request in writing of the Company, convey such lands to the
Company at the price of thirty cents per acre. (The italics
are mine).
As for the acquiring of lands incident to flow-
age rights not belonging to or not in the posses
sion of the Crown clause 10 provides for their
acquisition by arbitration. Clauses 15 and 16
also provide for a method of indemnification by
arbitration in the event the exercise of any of
the company's rights "submerge, destroy,
damage or injuriously affect any private rights,
interests, lands or property" or any Crown
rights.
Now although clause 20 of the agreement
provides for the right of persons to the tempo
rary use of the said waters for the purpose of
passing to and fro in small boats and for the
purpose of floating logs and lumber belonging
to such persons to their mills "provided that
such use shall not interfere with or prejudice
the business or operations of the Company", I
do not think that it can be said that the grantee
was not given exclusive possession or, at least,
a quasi-exclusive possession of the water sheds
where it could exploit the water power and the
flowage rights of the property it was granted as
it may be inferred from the agreement as well
as from the statute that one does not build dams
or power developments without causing a cer
tain surface of land to be submerged either
permanently or intermittently for the purpose of
developing the electricity to be supplied to cer
tain industries in Newfoundland. Furthermore, I
cannot see how the erection of dams or of
hydro-electrical plants or other similar works on
the soil of another can fail to create at least
some sort of an interest in the land. It has
indeed been held for centuries, at least since the
Middle Ages, in the common law that anyone
who is in exclusive possession of land had
necessarily an interest in that land however
exiguous that interest may be.
There is, it is true, no rent provided for in the
agreement but there is, as pointed out above,
certain undertakings of the grantee including
investments of considerable funds which, in my
view, are of such a nature that it cannot be said
that this grant was given gratuitously and such a
consideration, I believe, can be equated to a
rental even if the agreement provides for pay
ment by the grantee of a token amount of $20
only.
On the balance of the conflicting considera
tions which apply to the present situation, I
have come to the conclusion that the real effect
of this agreement, which is strictly of a business
character, is to give the appellant an exclusive
right of occupation for the purpose of the grant
and on the proper construction of the agree
ment as well as the statute, I must hold that it
creates a tenancy.
Having thus determined that the agreement is
a lease, there would be no need to go any
further as this would be sufficient to allow the
appellant to succeed in applying capital cost
allowances to its lease. As the matter may,
however, be appealed, I must deal also with the
second issue which is whether the grant of the
Humber River rights, which the parties agree
was (if not a lease) a franchise, was for a
limited period as required by clause 14 of
Schedule B of the Regulations. If the grant was
for a limited period, capital cost allowance may
also be applied to it and, if not, it may not. The
reasons for this is that if the grant is for an
unlimited period, it is in effect like land, i.e., an
asset which is not going to disappear, as it goes
on forever.
The Income Tax Act and Regulations contain
no express rules to determine when and under
what circumstances a franchise or a concession
is for a limited period and, therefore, the words
used must be given their normal every day
meaning. The cases in the Exchequer Court
appear to me to have gone no further than to
say that if a franchise or concession may be
terminated during the period of the term, then it
is not for a limited period. Cf. Armand Plouffe
v. M.N.R. [1964] C.T.C. 500, and M.N.R. v.
Kirby-Maurice Co. [1958] C.T.C. 41.
The Humber River grant (Ex. ASF-1) was for
a period of 99 years. There was no provision
for termination during the term by either party.
However, in Crystal Spring Beverage Co. v.
M.N.R. [1964] C.T.C. 408, Gibson J. at p. 410
stated:
The franchise agreement . .. is for five years plus a five-
year option, which for the purpose of the Income Tax Act
would result in an apportionment for capital cost allowance
over a ten-year period.
This statement is, however, clearly obiter
dictum as it was not relevant to the issue which
was whether $18,000 paid to induce a third
party to give up a franchise was part of the
capital cost of the franchise.
Clause 17 of Ex. ASF-1 says that:
17.—If this demise shall not have been determined other
than by effluxion of time, the Government will, at the
request and cost of the Company, at the expiration of the
term hereby granted, and again at the expiration of every
further term of ninety-nine years, which may hereafter be
granted under this covenant, grant to the Company, subject
to the like covenants, provisions and agreements as are in
and by these presents reserved and contained by way of
renewal for the further term of ninety-nine years, to be
computed from the expiration of the term hereby granted, a
new lease of the said rights. (The italics are mine).
It appears here that the renewal is at the
request of the franchise holder and does not
automatically take place. Furthermore, it is
clear that clause 17 provides, not for the exten
sion of the existing Humber River grant but for
a "new lease of the said rights" even if it is
"subject to the like covenants, provisions and
agreements as are in and by these presents
reserved". This new lease could, and in my
view, would have to be the subject of fresh
negotiations and could include a number of new
provisions and a number of the old provisions
would be deleted or amended. For example,
paragraphs 7, 8 and 13 4 could not remain the
same as they would now be ultra vires the
Province of Newfoundland. This, of course,
would necessarily mean that a new grant would
be substantially different from the first one.
The test here is simply whether the grant per se
was for a limited period which, of course, as
already mentioned, is for the practical purpose
of enabling the taxpayer to compute the annual
capital cost deduction. There is, on the other
hand, nothing in the Act which requires that
renewal rights be taken into consideration in
determining the term of a franchise or a conces
sion (see section 3(b) of Schedule H of the
Income Tax Regulations 5 ).
Exhibit ASF-1, in my view, does not provide
for a continuation for a period of years but
merely gives the grantee the right to apply for a
new grant.
To suggest that a grant for a fixed term but
with successive rights of renewal would not
qualify for capital cost allowance is, in my
view, to give to the expression "for a limited
period" a construction which does not conform
to the apparent scheme of the Act. (Cf. High
way Sawmills Ltd. v. M.N.R. [1966] C.T.C.
150, per Cartwright J. at p. 151).
The apparent scheme of the Act is to allow
business expenses and deductions in the year
they are made or incurred whereas under sec
tions 4 and 12(1)(a) capital outlays relating to
the business are allowed as deductions over a
reasonable period.
I must, therefore, conclude that the phrase in
class 14 "for a limited period" simply means
"for a period capable of being ascertained"
which the Humber River grant obviously is as it
is a grant for 99 years (paragraph 1, Ex.
ASF-1).
It then follows that in the alternative, the
Humber River grant is for a limited period and,
therefore, is a concession, franchise or licence
within the meaning of class 14 of Schedule B of
the Income Tax Regulations.
I now come to the third issue, the survey
costs and engineering studies. The appellant's
submission here is that these expenditures
occurred in 1959 and 1960 and were properly
deductible as current business expenses. Mr.
Sansome explained why the above studies were
made as follows:
A. We are looking continually looking into the feasibility
of installing thermo power—power produced by
steam. We are looking at our own existing facilities
that we have now, the two stations, the Watson Brook
Station and the Deer Lake Station, to see what
changes can be made to increase the capacity of these
two stations ...
A. I might say that in the power business we have to do
these studies and we are always looking at our
resources in order to meet our customers' demand for
power. The demand for electrical power is ever
increasing and we always have to look to new sources
of generation and so on. As an example of some of the
things we have done, we have four transmission lines
from Deer Lake, or Deer Lake Station to Corner
Brook. In the '50's these were reconductors using a
new more efficient conductor and by doing this we
decreased the losses, the transmission losses on those
lines from approximately ten percent down to five
percent. Looking at our Deer Lake plant we have
carried out many studies on the plant itself with a
view to increasing the capacity and capability of this
plant—some of the things that we have finally done
have been in installing new runners, runners being
water wheels, in our seven smaller units and together
with new windings for these units, this increased their
capacity to further or by a further ten percent. These
units are capable of supplying or producing eleven
thousand kilowatts. We looked at the possibility of
diverting Perry's River, which is a river that flows into
St. George's Bay which now does not flow into our
water shed. This was found to be a possible diversion
that could be made. There was some problem with the
Department of Fisheries on this—if the diversion went
ahead they would want us to make provisions for the
salmon that run up that river. We looked at it but so
far we have not done this. We did look at, as I said,
Indian Brook, and did a diversion on that which div
erts about eight billion, or eight BCF of water from
that brook into our reservoir.
The job description of the Little Grand Lake
project, for which Shawinigan Engineering Co.
produced a report (Ex. A-4) reads as follows:
With the increasing demand on our system investigations
must be made to utilize to greater advantage the power
potential of our existing water shed. It is proposed to do a
report of Little Grand Lake, one of the tributaries to our
main storage basin. All field information presently available
for this work and it is the intention to retain a consultant
who will review the data available and make a report on the
potential of this site.
This report covers things like the availability
of construction materials at site, the geography
of the area, the geology of the area, the
hydrology, the run-off water, the water flows.
Shawinigan Engineering Co. then concluded
that:
Due to the high cost per horse power it is recommended
that other available power sites be studied in comparison to
ascertain if there is not a cheaper scheme.
The work order covering a field study to be
carried out on the Hinds Brook potential was
filed as Ex. A-6. The job description of the
Hinds Brook project reads as follows:
In consideration of maximum utilization of our existing
water shed it has been proposed to make a study to ascer
tain the most efficient means to derive the greatest potential
on Hinds Brook. This area is part of our existing attachment
basin but as yet it is not being used to its ultimate
advantage.
The basis of the above requirement was to
obtain a more efficient utilization of the appel
lant's existing water shed. A report was pre
pared by Montreal Engineering Co. (Ex. A-7)
who suggested three alternate methods of
developing Hinds Brook or the Hinds Brook
hydro potential.
Mr. Sansome explained that:
A. ... As I have stated before, we have to continually be
looking at the potential of the drainage areas of which
we have control. We have to look at the hydro poten
tial of all the sites that drain into our area, and also
streams that are more or less contiguous with our area
but do not at the present time drain into our area ...
We have also done the same thing—we have looked at
the feasibility of installing controlling dams on Shef-
field Lake as well.
No property resulted, however, to the appel
lant because of those expenditures. The sites
were not developed. With regard to the Little
Grand Lake project, it was not economically
feasible to proceed at that time with the report.
As for the Hinds Brook project, although it was
economically feasible to proceed with the
report and the appellant went so far as to
arrange the financing for the job, it did not
materialize. Just before it got off the ground,
the Provincial Power Commission came onto
the scene and wanted to develop a fairly large
hydro site at Bay Despair. They offered to sell
the appellant power from their Bay Despair
plant at a cheaper rate than the appellant could
produce at Hinds Brook at that time and the
plan was abandoned.
The above studies or surveys are, in a sense,
of a category similar to what the President of
this Court (as' he then was) said were expenses
on revenue account when in Canada Starch Co.
v. M.N.R. [1968] C.T.C. 466, he stated at p.
473:
... Huge sums must be spent on market surveys before a
decision can be made as to what product to market or as to
what trade mark or trade name to adopt. Industrial design
ers are employed at great expense to choose a colour and
design for a label. Lawyers, accountants and economists
find employment in the highly complicated process that has
replaced the decisions that an individual would have made
"by the seat of his pants". Nevertheless, from the point of
view of what are current business operations and what are
capital transactions, as it seems to me, the distinction fol
lows the same line.
And then referring to what he had said in
Algoma Central Rly. v. M.N.R. [1967] 2
Ex.C.R. 88 at p. 95 (a decision upheld on appeal
[1968] C.T.C. 161), he said at p. 474:
... According to my understanding of commercial princi
ples . .. advertising expenses paid out while a business is
operating, and directed to attracting customers to a business
are current expenses.
And then in Canada Starch Co. v. M.N.R.
(supra) he stated at page 474:
... Similarly, in my view, expenses of other measures taken
by a businessman with a view to introducing particular
products to the market—such as market surveys and indus
trial design studies—are also current expenses. They also
are expenses laid out while the business is operating as part
of the process of inducing the buying public to buy the
goods being sold.
The costs here of the engineering studies
conducted to examine the potential of appel
lant's drainage area or to determine the feasibil
ity of constructing power developments at cer
tain 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 t introducing particular prod
ucts to the market, they were laid out for the
purpose of determining whether a depreciable
asset should be constructed from which busi
ness 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. The law with
regard to the deduction of what might be called
border-line expenses or "nothings" has moved
considerably ahead in the last few years, as can
be seen from the above decisions. The Chief
Justice of the Supreme Court, in dismissing the q ,
appeal from the decision of the President in
M.N.R. v. Algoma Central Rly., (supra) at p.
162, referred with approval to the following
statement by Lord Pearce in B.P. Australia Ltd.
v. Comm'r of Taxation of Australia [1966] A.C.
224 at p. 264:
The solution to the problem is not to be found by any rigid
test or description. It has to be derived from many aspects
of the whole set of circumstances some of which may point
in one direction, some in the other. One consideration may
point so clearly that it dominates other and vaguer indica
tions in the contrary direction. It is a commonsense
appreciation of all the guiding features which must provide
the ultimate answer.
The solution, therefore, "depends on what
the expenditure is calculated to effect from a
practical and business point of view rather than
upon the juristic classification of the legal
rights, if any, secured, employed or exhausted
in the process" Hallstroms Pty. Ltd. v. F.T.C. 8
A.T.D. 190 at p. 196? The question of deducti-
bility of expenses must, therefore, be consid
ered from the standpoint of the company, or its
operations, as a practical matter. Having regard
to the facts and the circumstances of the work
conducted by the appellant who is in the busi
ness of developing and marketing electricity,
which businesstrequires, as stated by Mr. San-
some, its manager, a continuous evaluation and
appraisal of not only its power resources, but
also its methods of operations, it appears to me
that the expenditures of $18,195 in 1959 and
$15,801 in 1960, were from a practical point of
view, part of the current operations of the Com
pany. These expenditures, it is true, did not
materialize into any concrete assets for which
capital allowances could have been obtained 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 gain
ing income (in such a way that their deduction
is not prohibited by section 12(1)(a) cf. Canada
Safeway Ltd. v. M.N.R. [1957] S.C.R. 717) and,
as such, should be accepted as current
expenses. In Associated Investors of Canada v.
M.N.R. [1967] C.T.C. 138, Jackett P. (as he'
then was) held that losses from advanced com
missions to salesmen of the company were
deductible as operating expenses as they were,
he said a part of the company's current business
operations. In Canada Starch Co. v. M.N.R.
[1968] C.T.C. 466, Jackett P. (as he then was)
allowed an amount 4 of $15,000 paid to a com
petitor of the taxpayer to induce it to withdraw
its opposition to the registration of a trade
mark. It was, I believe, felt in the two above
cases, that a business expenditure that is made
or incurred for the purpose of gaining orpro-
ducing r income is no less a cost of doing busi
ness because it is not attached to depreciable
property and the same should apply, I believe,
when the business expenditure is made in vain
and did not result in the creation of a deprecia-
ble asset such as we have here.
I do` not indeed feel that merely because the
expenditure was made for the purpose of deter
mining whether to bring into existence a capital
asset, it should always be considered as a capi
tal expenditure and, therefore, not deductible.
In distinguishing between a capital payment and
a payment on current account, regard must.
always be had to the business and commercial
realities of the matter. While the hydro-electric
development, once it becomes a business or
commercial reality is a capital asset of the busi
ness giving rise to it, whatever reasonable
means were taken to find out whether it should
be created or not may still result from the
current operations of the business as part of the
every day concern of its. officers in conducting
the operations of the company in a business-like
way. I can, indeed, see no difference in princi
ple between all of these cases.
The appeal is allowed. The 1958, 1959 and
1960 assessments are referred back to the
respondent for re-assessment on the basis that
(1) the Corner Brook rights are a franchise,
concession or licence for a limited period and
this asset has a capital cost of $104,665.46; (2)
the grant of the Humber Rive?rights constitutes
a leasehold interest within the meaning of class
13 of Schedule B of the Regulations and this
asset has a capital cost of $941,989.32; (3) that,
alternatively, if such grant does not constitute a
leasehold, it does constitute a franchise, conces-
sion or licence for a limited period within the
meaning of class 14 of Schedule B of the Regu
lations and (4) the amounts of $18,195 expend
ed in 1959 and $15,801 expended in 1960 for
certain engineering studies, are deductible as
ordinary business expenses pursuant to sections
4 and 12(1)(a) of the Act for the y 1959 and 1960
taxation years respectively.
The respondent is to pay the costs of the
appeal.
Class 13
Property that is a leasehold interest except
(a) an interest in minerals, petroleum, natural gas, other
related hydrocarbons or timber and property relating
thereto or in respect of a right to explore for, drill for,
take or remove minerals, petroleum, natural gas, other
related hydrocarbons or timber,
(b) that part of the leasehold interest that is included in
another class by reason of subsection (5) of section 1102,
and
(c) a property that is included in class 23.
2 In Walker v. The Queen [1969] 1 Ex.C.R. 419 at p. 431
Gibson J. however stated that "there is no reason in law
why a lease renewable in perpetuity cannot be granted if the
words of the clauses giving the right to such renewal are
clear and unequivocal . ; and secondly, that a covenant
for perpetual renewal is not bad under the perpetuity
rule . ".
3 I its ordinary sense, to demise is to grant a lease of
lands or other hereditaments.
Megarry & Wade, at p. 606:
Demise is a technical term for let or lease, thus a lease
may be referred to as a demise.
4 Paragraph 7 says that the stock, dividends and other
securities of the company shall be exempt from taxation.
Paragraph 8 says that all construction materials and machin
ery of the company shall be admitted free and paragraph 13
that all coal required by the company shall be admitted free
of duty.
5 3. . .
(b) where, under a lease, a tenant has a right to renew the
lease for an additional term, or for more than one addi
tional term, after the term that includes the end of the
particular taxation year in which the capital cost was
incurred, the lease shall be deemed to terminate on the
day on which the term next succeeding the term in which
the capital cost was incurred is to terminate;
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.