T-223-76
The Queen (Plaintiff)
v.
Sylvio Marchand (Defendant)
Trial Division, Addy J.—Quebec, November 14;
Ottawa, December 9, 1977.
Income tax — Income calculation — Deductions — Defend
ant paying 4 1 / 2 % of amount subscribed for purchase of shares
in order to enjoy right of purchasing shares — Whether or not
this sum represents capital outlay or an expense incurred for
purpose of earning income and hence deductible — Income
Tax Act, S.C. 1970-71-72, c. 63, s. 18(1)(b).
In 1972, defendant purchased 400 shares at $5 each in a
Caisse d'entraide économique. The by-laws of each of the
Caisses d'entraide in Quebec provide that a sum equal to 4 1 / 2 %
of each amount subscribed for the purchase of shares must be
paid to the Caisse in addition to the purchase price. In accord
ance with these provisions, defendant paid the sum of $90, in
addition to the purchase price of $2,000. The issue is whether,
under section 18(1)(b) of the Income Tax Act, this sum
constitutes an expenditure in the nature of a capital outlay and
is not deductible, as plaintiff maintains, or whether, as defend
ant claims, the outlay was made for the purpose of earning
income in the form of taxable interest, and is in the nature of
an income outlay and therefore deductible from gross income.
Held, the appeal is allowed. A taxpayer can now deduct an
amount from income only on two conditions: first, that it would
be normal practice according to generally accepted accounting
principles to deduct this sum from an income account, and
secondly, that the prohibitory provisions of section 18(1) do not
prevent such a deduction. It is recognized that the burden of
proof is always on the taxpayer when an assessment for tax
purposes is being challenged. On the evidence presented,
defendant has not discharged this burden, since he has not
established that the outlay was of the type which, according to
generally accepted accounting principles, would be chargeable
to income account.
INCOME tax appeal.
COUNSEL:
W. Lefebvre and J. Halpin for plaintiff.
J. Marier for defendant.
SOLICITORS:
Deputy Attorney General of Canada for
plaintiff.
Létourneau, Stein, Marseille, Delisle &
LaRue, Quebec, for defendant.
The following are the reasons for judgment
rendered in English by
ADDY J.: In 1972 the defendant purchased 400
shares at $5 each in the Caisse d'entraide économi-
que de Grand'Mère (hereinafter referred to as
"the Caisse de Grand'Mère").
The by-laws of each of the Caisses d'entraide in
Quebec provide that a sum equal to 4 1 / 2 per cent of
each amount subscribed for the purchase of shares
must be paid to the Caisse in addition to the
purchase price. In accordance with these provi
sions the defendant paid the sum of $90, in addi
tion to the purchase price of $2,000.
The issue in the case at bar is whether, under
section 18(1)(b) of the Income Tax Act, this sum
constitutes an expenditure in the nature of a capi
tal outlay and is not deductible, as the plaintiff
maintains, or whether, as the defendant claims, the
outlay was made for the purpose of earning income
in the form of taxable interest, and is in the nature
of an income outlay, and therefore by this very
fact deductible from gross income.
Counsel for both parties stated that despite the
small amount in dispute, the case is of consider
able importance for the numerous Caisses d'en-
traide in the Province of Quebec and their sub
scribers, and will constitute a test case.
The Caisses d'entraide in Quebec belong to a
federation known as the "Fédération des caisses
d'entraide économique du Québec" (hereinafter
referred to as "the Federation"). They are estab
lished and operate under the Savings and Credit
Unions Act'. It is interesting to note that in 1974
the Caisses d'entraide économique Act 2 was
passed. This Act adopts several of the by-laws
under which the Caisses d'entraide and the Feder
ation were operating and provides that, except as
otherwise provided by the Act, the Caisses d'en-
traide économique and the Federation will contin
ue to be governed by the Savings and Credit
Unions Act. The 1974 Act does not of course apply
to the case at bar since here we are concerned with
R.S.Q. 1964, c. 293.
2 S.Q. 1974, c. 68.
an assessment for the 1972 taxation year, but
counsel for the parties both seemed to be of the
view that this Act would in no way affect the
dispute even if it were applicable.
The findings that follow are based in part on the
internal management provisions governing the co
operative caisses found in the Savings and Credit
Unions Act and in part on the by-laws of the
Caisse de Grand'Mère and on the other facts
admitted by counsel for the parties or established
in evidence at the trial. The facts themselves are
not in dispute and the plaintiff did not lead any
evidence but merely cross-examined the defend
ant's only witness.
The Caisse de Grand'Mère is a co-operative that
has been affiliated with the Federation since 1968.
Like all caisses d'entraide, it has a well-defined
territorial jurisdiction and all members must reside
within the limits of its territory. If a member
changes his place of residence he ceases to be a
member of that caisse and can join only the Caisse
d'entraide in the territory in which his new resi
dence is located, by purchasing shares in it.
One of the chief characteristics that distinguish
the Caisses d'entraide from the Caisses populaires
is that the members of the Caisses populaires
d'épargne can buy only one share each, whereas
the members of the Caisses d'entraide can pur
chase an indefinite number. In addition the Cais-
ses d'entraide, unlike the Caisses populaires, do
not operate savings accounts. The Caisse de
Grand'Mère thus did not provide any banking
service in 1972. The 4 1 / 2 per cent of the amount
paid for each share purchase is never reimbursed
unless the member claims a refund for his shares
within thirty days after he purchased them. The
amount is therefore paid only once, each time
shares are purchased. The defendant's application
for membership form (Exhibit D-1) dated Novem-
ber 1, 1972 contains the words, and I quote: "I
agree to pay in addition 4 1 / 2 per cent of my sub
scription in non-refundable admission fees." A
member can claim a refund for his shares at any
time. These are not subject to any appreciation of
capital or, except in the event of bankruptcy, any
capital depreciation. Of the 4 1 / 2 per cent of the
total amount, 2 per cent is paid into the general
revenue fund of the Caisse and the other 2 1 / 2 per
cent is used for recruitment, administration, estab
lishment of a stabilization fund and other objec
tives of the Caisse and the Federation.
The annual rate of interest payable on the
shares is determined each year by resolution of the
general meeting of the members of the Caisse
d'entraide. Each member has only one vote at the
meeting, regardless of the number of shares he
owns. When a member of a caisse leaves its terri
tory and moves to an area under the jurisdiction of
another caisse, he may purchase the same number
of shares in this caisse without again paying the
41 per cent in question. These shares are not
transferable without the consent of the Board of
Directors of the Caisse and are not negotiable. In
the event of death the amount paid by the member
for his shares is reimbursable to his heirs. There is
no income guaranteed to the member but the
amount of interest payable on the shares out of the
revenue has in fact always exceeded 10 per cent
per annum.
As Thorson P. of the former Exchequer Court
said in Daley v. M.N.R. 3 , where he altered some
what his earlier interpretation of the Act as set out
in Imperial Oil Limited v. M.N.R. 4 , sections 6(a)
and 6(b) of the 1927 Act 5 are sections worded in a
negative or prohibitory manner, and the fact that
deduction of an amount from income is not prohib
ited under these sections does not in itself mean
that it can be deducted for tax purposes. Although
the wording of sections 18(1)(a) and 18(1)(b) is
not identical to that of section 6(a) and 6(b) of the
1927 Act, I am of the opinion that a taxpayer can
now deduct an amount from income only on two
conditions: first, that it would be normal practice
according to generally accepted accounting princi
ples to deduct this sum from an income account,
and secondly, that the prohibitory provisions of
section 18 (1) do not prevent such a deduction.
3 [ 1950] C.T.C. 254.
4 [1947] C.T.C. 353.
5 R.S.C. 1927, c. 97 (now sections 18(1a)(0) and 18(1)(b) of
the present Act).
It is recognized that the burden of proof is
always on the taxpayer (in this case the defendant)
when an assessment for tax purposes is being
challenged. I find that on the evidence presented,
the defendant has not discharged this burden,
since he has not established that the outlay was of
the type which, according to generally accepted
accounting principles, would be chargeable to
income account, and in particular, that it would be
chargeable to this account as an expenditure
attributable to income for 1972.
In case this first finding should be incorrect or
erroneous, it might be useful to consider the scope
of the prohibitory provisions of section 18 having
regard to the particular circumstances of this case.
The two main prohibitions in this section may be
summarized as follows: an outlay is not deductible
from income for tax purposes (1) when it is not for
the purpose of gaining income (section 18(1)(a)),
or (2) when it represents a payment of capital
nature (section 18(1)(b)).
I will pass over the first of these two proposi
tions for the moment, and consider only the
second, namely a payment on account of capital.
Fauteux C.J., formerly of the Supreme Court of
Canada, stated in M.N.R. v. Algoma Central
Railway 6 [at page 449] that it was not possible to
resolve the issue of whether the expressions " 'out-
lay ... of capital' or `payment on account of
capital' " applied simply by using a formula or rule
of interpretation: it could only be resolved by
considering the particular circumstances and facts
of each case.
It seems clear that a particular sum may be
deductible against the income of the person who
paid it out while being attributable as capital to
the person to whom the payment was made. The
converse is also true.
In the case at bar, despite the fact that 40 per
cent of the membership fees (that is, 2 per cent of
the amount paid for the shares) is paid into the
general revenue fund of the Caisse, the defendant
has no right to claim in kind or otherwise reim
bursement of any part of this sum. He has no
6 [1968] S.C.R. 447.
enforceable right to any specific part of the latter.
It is the Caisse, at a general meeting of the
members, which alone determines annually the
amount of interest on the shares to be paid to the
members out of all the revenues of the Caisse. It
thus follows that, contrary to the allegations of
counsel for the defendant, what the Caisse d'en-
traide does with this sum is really of no help in
determining whether the payment by the defend
ant of membership fees is attributable to capital or
to income in calculating the latter's fiscal
operations.
One of the principal characteristics of receipts
or outlays on capital account is that, generally
speaking, they are of a more or less permanent
nature, whereas income accounts represent
receipts and disbursements of a more or less transi
tory and periodic nature. Capital receipts and
outlays on the other hand, generally speaking, all
possess an existence, an effect or a scope that, if
not permanent, is at least of long duration. Income
accounts, on the other hand, represent receipts and
outlays with an existence, effect or scope that is
more or less transitory and periodic. It is not
necessary that the capital asset be capable of
either depreciating or increasing in value, nor is it
essential that one be able to dispose of it for value,
despite the fact that one or other of these charac
teristics is usually found in a capital asset.
What the shareholder gains by paying the 4'
per cent to the Caisse d'entraide is the benefit of
investing his capital and deriving an income from
it for a good number of years. It would not make
any sense for him to pay 4 1 / 2 per cent for the
privilege of drawing only one year's gross interest
of approximately 10 per cent. Therefore, it would
equally not make sense to enter it on the books as
an expenditure against the income of only one
year. The expense cannot be considered to be
attributable against the income of any one year in
particular, since the 4' per cent can be used for
the rest of the member's life and for as long as he
wishes to leave his capital invested in the Caisse.
As the members of the Privy Council stated in
B.P. Australia Ltd. v. Commissioner of Taxation
of the Commonwealth of Australia', in citing with
7 [1966] A.C. 224 at 252.
approval Lord Reid's judgment in Hinton v.
Maden & Ireland Ltd. 8 :
... that expenses which relate to the earnings of the year are
revenue outgoings but that expenses which produce assets
which survive beyond the year are capital expenses because the
assets must show in the balance sheet as capital assets. The
rights in the present case were for three years or more, mostly
five years or more, and accordingly the value of the ties should
appear in the balance sheet as capital assets at the end of the
accounting period; [The underlining is mine.]
The 4' per cent outlay in the case at bar could
never be a periodic payment or one that was likely
to be repeated periodically. On the contrary, it was
clearly stipulated that the defendant would never
have to repeat it as long as he maintained his
investment in the Caisse de Grand'Mère. Even if
he were to move he could reinvest this money in
another Caisse d'entraide with territorial jurisdic
tion over his new place of residence. He could then
purchase the same number of shares without
paying further membership fees.
In the case at bar, as moreover, in many similar
cases, it seems evident that the outlay in question
was made by the taxpayer for the purpose of
gaining or producing income, but the deduction
must nevertheless be refused since this can only be
considered to be an outlay on account of capital or
of a capital nature in view of its scope and its
permanent as opposed to periodic effect, and in
view of the fact that it cannot logically be attribut
ed or charged to a definite accounting period.
Since in the case at bar the membership fees
have all these characteristics and fall under the
prohibition in section 18(1)(b), it is not necessary
for me to consider the effect of section 18(1)(a).
The appeal is therefore allowed. The decision of
the Tax Review Board is reversed and the defend
ant's assessment by the Minister of National Reve
nue in the amount of $90 for the membership fees
in question for the 1972 taxation year is restored.
The plaintiff will be entitled to her costs.
8 [1959] 1 W.L.R. 875 at p. 884.
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