A-272-76
The Queen (Appellant) (Defendant)
V.
Canadian Pacific Limited (Respondent) (Plain-
tiff)
Court of Appeal, Pratte and Ryan JJ. and
MacKay D.J.—Toronto, October 13; Ottawa,
November 3, 1977.
Income tax — Income calculation — (1) Whether income
received by respondent on bonds of non-resident companies
which it controlled is dividend income under s. 8(3) or interest
income — (2) Capital cost allowance — Expenditures made
after agreement for reimbursement by third parties — Trans
actions re expenditures made on own account and expenditures
made for account of third party who ultimately would pay
Whether or not capital cost of assets should be diminished by
amount equal to reimbursement from third parties — Income
Tax Act, R.S.C. 1952, c. 148, ss. 8(3), 20(5)(e), 28(1), 84,4(3).
This is an appeal from a decision of the Trial Division
allowing the respondent's appeal from assessment of its income
tax for 1965. The appeal raises problems related to two differ
ent questions: the characterization of certain payments received
by respondent, as interests or dividends, and the calculation of
capital cost allowance to which respondent is entitled.
(1) Interest or Dividend: In calculating its 1965 income,
respondent assumed that a sum received from an American
subsidiary was deemed to have been received as a dividend
pursuant to section 8(3) of the Income Tax Act, thereby
entitling respondent to claim the deduction allowed by section
28(1). The Trial Judge rejected appellant's contention that the
sum was not deemed to have been received as a dividend. The
sole issue is whether section 8(3) applies to dividend paid by a
corporation not subject to the provisions of Part I of the Act.
(2) The Capital Cost Allowance: Respondent, acting at the
request of third parties, made capital expenditures or expendi
tures deemed to be so, after it had been agreed that the third
party would pay respondent an amount not exceeding that
expenditure. Respondent calculated the capital cost allowance
in respect of those assets, but the amounts received from the
third parties were not taken into consideration in determining
their capital cost. Appellant contends that the capital cost of
those assets must be diminished by an amount equal to that
received from the third parties. Appellant divided the eight
transactions under consideration into two categories: (1)
instances in which the respondent made expenditure on its own
account and (2) cases in which respondent made the expendi
ture for the account of a third party who ultimately paid for it.
Those cases in the second category were considered
individually.
(a) The Athabaska Valley Industrial Park: Respondent
received partial reimbursement for its expenditures incurred in
extending its railway. Appellant contends that the reimburse
ments received must be deducted from the amount actually
expended in determining capital cost.
(b) The St. Lawrence Seaway Authority: The St. Lawrence
Seaway Authority, in a transaction to relocate respondent's
tracks, reimbursed respondent for expenses arising from a
minor portion of work done by respondent vis-Ã -vis the whole
relocation project.
(c) The Private Sidings: Respondent, who owned metal
aspects of private sidings, bought perishable portions for a
nominal amount, and claimed entitlement to capital cost allow
ance based on building cost of the siding less the cost of the
track material. Appellant challenges the Trial Judge's support
for that claim.
Held, (1) with respect to the issue of interest or dividend, the
Trial Judge's decision was correct. The word "corporation" is
not used in a restricted sense in the last part of section 8(3).
The words "unless the corporation is entitled to deduct the
amount so paid in computing its income" refer only to corpora
tions which are subject to Part I of the Income Tax Act. This,
however, is not because the word "corporation" is used there in
a narrow sense, but simply because only those corporations
which are subject to Part I can meet the condition expressed in
that part of the section.
(2) With respect to those transactions where respondent
made expenditures of its own account, the Trial Judge rightly
rejected appellant's contention. It has been established in Bir-
mingham Corp. v. Barnes that "the actual cost to" a taxpayer
of depreciable property is equal to the amount paid by the
taxpayer. With respect to the transactions where respondent
purportedly made expenditure for the account of a third party
who ultimately paid for it, the respondent's claims cannot
stand. (a) There is no basis for appellant's contentions concern
ing the Athabaska Valley Industrial Park, for it was not an
expenditure not made by respondent for its own account. (b)
Respondent cannot claim capital cost allowance with respect to
its expenditure in the Seaway Authority transaction because
that expenditure was neither the cost to the respondent of the
acquisition of depreciable property nor an expenditure deemed
to be of a capital nature by virtue of section 84A(3). Although
respondent did acquire a depreciable asset through its dealings
with the Authority, the capital cost to respondent for that line
was the value of the old line. (c) Respondent is not entitled to a
capital cost allowance, in respect of the private sidings, on the
basis calculated. The sum expended by respondent to build the
siding is not, for it, a capital expenditure. That sum merely
represents, for respondent, the cost of carrying out a building
contract for the benefit of a customer. That expenditure is not
deemed to be a capital outlay pursuant to section 84A(3) since
that section relates only to expenditures made in respect of
property owned by the taxpayer.
Birmingham Corp. v. Barnes [1935] A.C. 292, applied.
INCOME tax appeal.
COUNSEL:
G. W. Ainslie, Q.C., and C. M. Fien for
appellant.
M. S. Bistrisky for respondent.
SOLICITORS:
Deputy Attorney General of Canada for
appellant.
Legal Department, Canadian Pacific Limited,
Montreal, for respondent.
The following are the reasons for judgment
rendered in English by
PRATTE J.: This is an appeal from a decision of
the Trial Division' allowing the respondent's
appeal from the assessment of its income tax for
the year 1965. The appeal raises problems related
to two different questions: the characterization, as
interests or dividends, of certain payments received
by the respondent and the calculation of the capi
tal cost allowance to which the respondent is
entitled.
I—Interest or Dividend
In 1965, the respondent received $841,871 from
Soo Line Railroad Company, an American corpo
ration in which it held a controlling interest. That
amount represented interest owed by the Soo Line
Railroad Company under income bonds held by
the respondent. In computing its income, the
respondent assumed that the sum of $841,871 was
deemed to have been received as a dividend by
virtue of section 8(3) of the Income Tax Act and
that, as a consequence, the respondent was entitled
to claim, in respect of that sum, the deduction
allowed by section 28(1). It is the appellant's
contention, which was rejected by the learned
Trial Judge, that, under section 8(3), the sum of
$841,871 is not deemed to have been received as a
dividend.
Section 8(3) reads as follows:
1 [1976] 2 F.C. 563.
8....
(3) [Interest on income bonds.] An annual or other periodic
amount paid by a corporation to a taxpayer in respect of an
income bond or income debenture shall be deemed to have been
received by the taxpayer as a dividend unless the corporation is
entitled to deduct the amount so paid in computing its income.
It is common ground
(a) that the interest payments here in question
were "annual or other periodic amount[s] ... in
respect of ... income bond[si" within the mean
ing of section 8(3); and
(b) that, in 1965, Soo Line Railroad Company
was a corporation incorporated under the laws
of the United States, was not a resident of
Canada, did not carry on business in Canada
and was not subject to the provisions of Part I of
the Income Tax Act.
The sole issue between the parties is whether
section 8(3) applies to interest paid by a corpora
tion which, like Soo Line Railroad Company, is
not subject to the provisions of Part I of the
Income Tax Act.
According to the appellant, the word "corpora-
tion" in section 8(3) refers exclusively to corpora
tions which are subject to Part I of the Income
Tax Act. In support of that contention, counsel, in
effect, put forward only one argument. It is clear,
he said, that the last part of section 8(3)—"unless
the corporation is entitled to deduct the amount so
paid in computing its income"—applies only to
corporations which are subject to Part I of the
Income Tax Act since other corporations do not
have to compute their income under Part I of the
Act. He added that if the expression "corporation"
is thus used in that restricted meaning in the last
part of section 8(3), it is reasonable to believe that
it is used in the same sense in the opening part of
the same paragraph.
That argument, in my view, rests on a fallacy.
The word "corporation" is not used in a restricted
sense in the last part of section 8(3). True, the
words "unless the corporation is entitled to deduct
the amount so paid in computing its income" refer
only to corporations which are subject to Part I of
the Income Tax Act. But, this is not because the
word "corporation" is there used in a narrow
sense; it is simply because only those corporations
which are subject to Part I of the Income Tax Act
can meet the condition expressed in that part of
the section.
I am therefore of the view that the Trial Judge
was right in rejecting the appellant's contention on
this point.
II The Capital Cost Allowance
The capital cost allowance to which a taxpayer
is entitled under the regulations adopted pursuant
to section 11(1)(a) is calculated by reference to
the "capital cost to the taxpayer" of the asset in
question. 2 Moreover, in the cases provided for in
section 84A(3), that capital cost is deemed to be
the amount of the expenditure incurred by the
taxpayer. 3
In many instances before the end of 1965, the
respondent, acting at the request of a third party,
made capital expenditures, or expenditures which
are deemed to be capital expenditures, after it had
been agreed that the third party would pay the
respondent an amount not exceeding that of the
2 See sections 11(1)(a) and 20(5)(e) and Regulation
1100(8).
3 Section 84A(3) sets forth a special rule applicable to rail
way companies. It provides that, on certain conditions, expendi
tures incurred in respect of the repair, replacement, alteration
or renovation of the taxpayer's railway system are deemed to be
capital expenditures. It reads as follows:
84A... .
(3) [Repairs, replacements, etc.] Where any amount in
respect of an expenditure incurred by a taxpayer on or in
respect of the repair, replacement, alteration or renovation of
depreciable property of the taxpayer of a class prescribed by
regulations of the Governor in Council made for the purposes
of this section is, under any uniform classification and system
of accounts and returns prescribed by the Canadian Transport
Commission pursuant to the Railway Act, required to be
entered in the books of the taxpayer otherwise than as an
expense,
(a) no deduction may be made in respect of that expenditure
in computing the income of the taxpayer for a taxation year;
and
(b) for the purposes of section 20 and regulations made
under paragraph (a) of subsection (1) of section 11, the
taxpayer shall be deemed to have acquired, at the time the
expenditure was incurred, depreciable property of that class
at a capital cost equal to that amount.
expenditure. In the computation of its income for
1965, the respondent calculated the capital cost
allowance to which it was entitled in respect of the
assets it had thus acquired (or was deemed to have
acquired) on the basis that, in determining their
capital cost, the amounts received from the third
parties were not to be taken into consideration.
The appellant challenges this method of calcula
tion and contends that the capital cost of those
assets, as established by the respondent, must be
diminished by an amount equal to the sums
received from the third parties. This is, put in
general terms, the issue raised by this branch of
the case.
As the respondent had entered into many trans
actions giving rise to that kind of a problem, the
parties agreed before trial to adduce evidence in
respect of only certain of those transactions, it
being understood that the decision of the Court
concerning them would be applied by the parties to
the solution of the difficulties raised by the others.
Evidence was thus adduced in respect of nine
typical transactions. The Trial Judge agreed with
the contention of the appellant (defendant in the
Court below) in respect of one of those transac
tions, but, in the eight other cases, decided in
favour of the respondent. This appeal is directed
against that part of the judgment relating to those
eight cases; the respondent does not challenge the
decision relating to the other transaction.
In the appellant's memorandum, the eight trans
actions here in question are divided into two
categories: (1) the instances in which, according to
the appellant, the respondent itself made the ex
penditure on its own account, and (2) the cases in
which, according to the appellant, the respondent
made the expenditure for the account of the third
party who ultimately paid it.
In the first category, the appellant classifies five
transactions which may be referred to compendi-
ously as the CANSO CAUSE WAY transaction, the
BELL TELEPHONE transaction, the 25 CYCLE CON
VERSION transaction, the UNITED GRAIN GROW
ERS transaction, and the FEDERAL GRAIN transac
tion. In all these five cases the appellant concedes
that the respondent itself, at the request of a third
party, incurred expenditures for the purpose of
improving its property after it had been agreed
that the third party would pay the respondent an
amount not exceeding the amount of the
expenditure.
The contention of the appellant in respect of
these transactions is that the "capital cost to the
taxpayer of depreciable property", within the
meaning of section 20(5)(e), is the net cost to the
taxpayer and that the expenditure to which section
84A(3) refers is what the taxpayer "has actually
expended in net". Therefore, in the five cases
under consideration, the "capital cost to" the
respondent, or the expenditure incurred by it, is,
according to the appellant, the amount of the
respondent's outlay less the contribution of the
third party.
The learned Trial Judge, in my opinion, rightly
rejected that contention which appears to me to be
inconsistent with the decision of the House of
Lords in Birmingham Corp. v. Barnes 4 where it
was held that "the actual cost to" a taxpayer of
depreciable property is equal to the amount paid
by the taxpayer. As Lord Atkin said in that case
(at page 298):
What a man pays for construction or for the purchase of a work
seems to me to be the cost to him: and that whether someone
has given him the money to construct or purchase for himself;
or, before the event, has promised to give him the money after
he has paid for the work; or, after the event, has promised or
given the money which recoups him what he has spent.
Counsel for the appellant has argued that the
decision in the Birmingham case is distinguishable
on two grounds. In that case, said he, the capital
expenditure had not been incurred at the request
of the third party and the amount contributed by
the third party was not earmarked for any special
purpose.
As to the first proposed distinction, I will merely
say that it appears to me entirely irrelevant; as to
the second one, I do not understand it. In the five
cases here in question, the respondent entered into
contracts with third parties under which the
respondent agreed to make certain capital expendi
tures and the third parties agreed, in return, to pay
the respondent sums not exceeding the amount of
the expenditures made or to be made by it. I do
not understand how it can be said that, in those
circumstances, the sums paid by the third parties
4 [1935] A.C. 292.
were "earmarked" and were not at the respond
ent's free disposal.
I am therefore of the view that the Trial Judge
was right in rejecting the appellant's contention in
respect of this first group of five transactions.
The three remaining transactions are those
where, according to the appellant, the capital ex
penditure was not made by the respondent on its
own account but was, in effect, made by a third
party. I will consider them separately under the
headings used in the appellant's memorandum.
(a) The Athabaska Valley Industrial Park
In 1959, in order to facilitate the development of
an Industrial Park established by Alberta Mining
Corporation, the respondent agreed with that com
pany to extend its railway so as to serve the Park,
it being understood that part of the cost of that
extension would be paid by the Alberta Mining
Corporation to the respondent. From 1959 to
1962, the respondent spent some $119,000 to con
struct the extension and it received, in partial
reimbursement of that expenditure, sums of
$24,793 and $15,949 from Athabaska Valley De
velopment Corporation, which was the successor of
Alberta Mining Corporation. It is the appellant's
contention that, in determining the capital cost
allowance to which the respondent was entitled,
these sums of $24,793 and $15,949 must be
deducted from the amount actually expended by
the respondent to extend its railway.
I do not see any basis for the appellant's conten
tion that, in this case, the expenditure was not
made by the respondent for its own account. In
that respect, I cannot distinguish this transaction
from the other five which I have already con
sidered. I am therefore of the view that the learned
Trial Judge was right in rejecting the appellant's
contention with respect to that transaction.
(b) The St. Lawrence Seaway Authority
In order to build the St. Lawrence Water Way,
the St. Lawrence Seaway Authority had to acquire
part of the respondent's railroad which had, there
fore, to be deviated. For that purpose, on October
30, 1959, the Authority and the respondent
entered into an agreement providing, in effect,
that:
(a) the Authority was to construct the deviation
at its own expense on land to be acquired by it;
(b) the Authority had the right to arrange with
the respondent that part of the work involved in
the construction of the deviation to be done by
the respondent, in which case the Author
ity was to reimburse the respondent the cost of
the work done by it; and
(c) upon completion of the railway on the new
location, the Authority was to convey it to the
respondent which, in return, would convey to the
Authority the land it wanted to acquire.
In accordance with that agreement, the Au
thority acquired the land and did the work neces
sary for the relocation of the railway line. A small
part of the work, however, was done by the
respondent at a cost of $314,852, which was reim
bursed by the Authority pursuant to the agree
ment.
The sole question to be answered is whether the
respondent is entitled to claim capital cost allow
ance in respect of that expenditure of $314,852.
That question, in my opinion, must be answered in
the negative because that expenditure was neither
the cost to the respondent of the acquisition of
depreciable property nor an expenditure deemed to
be of a capital nature by virtue of section 84A(3).
The respondent did not spend that sum of $314,-
852 in order to acquire property, but, rather, for
the purpose of doing some work for the St. Law-
rence Seaway Authority on a railway line then
owned by the Authority. True, as a result of its
dealings with the Authority, the respondent did
acquire a depreciable asset: the new line of railway
that was conveyed to it by the Author
ity in exchange for the old one. However, the
capital cost to the respondent of that new line was
the value of the old line; it was not the sums
expended by the respondent to do, for the benefit
of the Authority, some work related to the con
struction of the new line.
Moreover, in my view, the expenditure of $314,-
852 is not deemed to be of a capital nature by
virtue of section 84A(3). By its very words, that
section applies only to "an expenditure incurred by
a taxpayer on or in respect of the repair, replace
ment, alteration or renovation of depreciable prop
erty of the taxpayer". The sum of $314,852 was
spent by the respondent to do some construction
work for the St. Lawrence Seaway Author
ity on a railway line owned by it; it was not an
expenditure to which section 84A(3) may apply.
I would, therefore, modify the decision of the
Trial Division in respect of this transaction.
(c) The Private Sidings
It is a common practice for the respondent to
enter into an agreement under which it builds a
private siding for a customer. Under such an
agreement, the respondent builds the siding for its
customer at the customer's expense with that
exception, however, that the respondent supplies,
at its own expense, what is called the "track
material" (which is, apparently, the non perishable
components of the sidings like the rail, the steel
work, etc.), which track material remains the
property of the respondent and is rented to the
customer for the duration of the agreement. The
agreement also provides for the removal, by the
respondent, of its track material at the termination
of the agreement.
In the case with which we are concerned, the
respondent, instead of removing its track material
after the termination of the agreement, entered
into a new agreement with its customer under
which the latter, in consideration of the sum of one
dollar, assigned and surrendered its interest in the
siding to the respondent. As the respondent
already owned the track material, it thereby
acquired the perishable portion of the siding and,
in respect of that new asset, claimed to be entitled
to a capital cost allowance based on the building
cost of the siding less the cost of the track ma
terial. That contention was upheld by the Trial
Judge and is challenged by the appellant.
In my opinion, the respondent is not entitled to a
capital cost allowance calculated on that basis.
The sum expended by the respondent to build the
siding is not, for it, a capital expenditure. That
sum merely represents, for the respondent, the cost
of carrying out a building contract for the benefit
of a customer. Neither is the expenditure in ques
tion deemed to be a capital outlay by virtue of
section 84A(3) since that section relates only to
expenditures made in respect of property owned by
the taxpayer.
It follows that, in my view, the judgment of the
Trial Division should also be modified on this
point.
For those reasons, I would allow the appeal, set
aside the judgment of the Trial Division and refer
back the respondent's income tax assessment for
the year 1965 to the Minister of National Revenue
for re-assessment on the basis
(a) that the respondent is not entitled to the
capital cost allowance claimed in respect
(i) of the cost of the perishable portion of the
Private Sidings, and
(ii) of the expenditure of $314,852 made pur
suant to the arrangement with the St. Law-
rence Seaway Authority;
and
(b) that the judgment of the Trial Division is
otherwise well founded.
The respondent should, in my view, be entitled
to its costs in the Trial Division but should pay the
appellant's cost of the appeal.
* * *
RYAN J.: I concur.
* * *
MACKAY D.J.: I concur.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.