T-5370-79
The Consumers' Gas Company Ltd. (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Walsh J.—Toronto, September 14;
Ottawa, September 24, 1982.
Income tax Income calculation Capital cost allowance
— Plaintiff company appealing 1971 to 1974 income tax
assessments — Plaintiff continuously forced to run new gas
lines for benefit of third parties' construction — Old lines
abandoned — Reimbursements made to company for new lines
— Whether amounts paid by plaintiff and amounts received as
reimbursements on capital or income account — If on capital
account, method of calculating capital cost in issue — Proper
accounting methods — Assessments referred back to Minister
for reassessment Income Tax Act, R.S.C. 1952, c. 148, ss.
6(j), 20(6)(h), 139(1)(e), as amended by S.C. 1970-71-72, c. 63,
ss. 12(1)(g), 13(7)(e), 248(1) — Public Service Works on High
ways Act, R.S.O. 1980, c. 420 — Public Service Works on
Highways Act, R.S.O. 1970, c. 388.
This is an appeal from income tax assessments for the 1971,
1972, 1973 and 1974 taxation years. The plaintiff, a public
company primarily engaged in processing and distributing
natural gas, is attempting to include reimbursements received
in its Class 2 capital costs, instead of having those amounts
deducted from the capital cost. Due to frequent requests of
third parties pursuing construction endeavours, the plaintiff is
often required to run new pipelines. The old ones are left in the
ground as salvage is not worthwhile, and the plaintiff retains
ownership of them. The plaintiff is reimbursed fully except
where prevented by statute. None of the amounts the plaintiff
received during the four years in question as reimbursements
were included in undepreciated capital cost prior to 1971, and
no capital cost allowance was claimed on the amounts before
1971. The plaintiff's rates and accounting methods are subject
to the approval of the Ontario Energy Board. The Board
accepts two methods of accounting both of which result in the
contributions made being netted for rate-making purposes. The
plaintiff uses one of these methods. The new pipelines installed
by the plaintiff are of no greater use than the old ones, as the
latter would last eighty years. The remaining undepreciated
value of the abandoned pipeline remains in the company's
capital account and the capital cost allowance continues to be
claimed on it together with the new pipelines. The company
depreciates its pipelines over a period of seventy years. As a
result of crediting contributions against the cost of the new
pipeline, as required by the Ontario Energy Board for rate-
making purposes, the books of the company show a value for
the pipeline of less than its true value.
The defendant's expert witness stated that the total cost of
the work should be recorded as a capital asset with the reim
bursement as a reduction to the cost of acquiring it, and that
the annual charge for depreciation should be the resultant
balance in the fixed asset account after each such transaction is
recorded. In addition, while alternative methods of disclosing
the transaction exist, all such transactions must be reflected in
the income statement to reinvested earnings and not to con
tributed surplus. The question is therefore, whether the
amounts paid and reimbursements received by contracts with
third parties were on capital or income account. If on capital
account, the defendant argues that the capital cost to the
plaintiff of each relocated pipeline is the amount disbursed by it
minus the reimbursement received, or, a pipeline is disposed of
for proceeds of disposition equal to the amount the plaintiff was
reimbursed under the agreement with the third party. The
plaintiff contends that the reimbursement received did not
reduce its capital cost of the Class 2 properties.
Held, the 1971-1974 assessments are referred back to the
Minister for reassessment. The cost of the relocated pipeline is
the cost to the taxpayer regardless of reimbursements made.
The words "grant, subsidy" etc. in paragraph 13(7)(e) are not
applicable here, as ordinary business contracts with third par
ties are not grants or subsidies. Furthermore, the pipelines were
moved to accommodate the public and were therefore not for
the purpose of "advancing or sustaining [its] technological
capability". Therefore paragraph 13(7)(e) does not apply and
the reimbursement does not have to be deducted from capital
cost. Defendant cannot seriously contend that both the amounts
paid and reimbursements received by the plaintiff should be
considered on income account, as expenses of relocation are not
expenses laid out on account of income but are merely for the
relocation of pipelines, which are capitalized assets. Moreover,
the reimbursement represented in the majority of cases less
than 40% of the total cost and it would be difficult to conceive
of the plaintiff disbursing the difference as income-producing
expense when no change of income was involved. If contribu
tions for moving lines were to be netted in plaintiff's capital
account, as defendant suggests, there would be no need for
paragraph 1 3(7)(e). Nor can the argument, that in each reloca
tion the original pipeline must be deemed to have been disposed
of for proceeds of disposition equal to the amount the plaintiff
was reimbursed for the construction of the new line, prevail.
The word "disposition" requires a bilateral action and such is
not the case here where the plaintiff retains ownership of the
abandoned lines. The plaintiff entered the contributions in its
books as contributions to capital for income tax purposes.
"Business" is defined in the Act as including a concern in the
nature of trade and "income" includes "any amount received
by the taxpayer in the year that was dependent upon the use of
or production from property", but these are inapplicable to the
plaintiffs pipeline relocation activities. The relocations were
not adventures in the nature of trade calculated to result in a
profit, nor were the amounts received dependant upon the use
of or production from the plaintiffs property. The relocations
were not done to expand distribution or gain revenue. Fre
quency of relocation does not necessarily render the transac
tions subject to entry in the plaintiffs revenue account, nor is it
a more important factor than the absence of profit. Defendant
also argues that the contributions are not contributions to
surplus. However, each payment must be considered separately
on its own facts to determine its nature in the hands of the
recipient. The plaintiff in this case was justified in considering
that contributions received towards the relocation of its pipe
lines done for the benefit of the parties making the contribu
tions can be carried to a contributed capital account without
passing through income. Any tax advantage this may confer on
the plaintiff is irrelevant to the issue.
CASES JUDICIALLY CONSIDERED
APPLIED:
Corporation of Birmingham v. Barnes (H.M. Inspector of
Taxes) (1933), 19 T.C. 195; Harman v. Gray-Campbell
Limited, [1925] 2 D.L.R. 1134 (Sask. C.A.); Her Majes
ty the Queen v. Malloney's Studio Limited, [1979] 2
S.C.R. 326; 79 DTC 5124 (S.C.C.); Murray (Inspector
of Taxes) v. Goodhews, [1978] 1 W.L.R. 499.
DISTINGUISHED:
Commissioners of Inland Revenue v. Fleming & Co.
(Machinery), Ltd. (1951), 33 T.C. 57; Okalta Oils Lim
ited v. Minister of National Revenue, [1955] CTC 39
(F.C.T.D.); Radio Engineering Products Limited v. Min
ister of National Revenue, [1970] Tax A.B.C. 650, on
appeal [1973] CTC 29 (F.C.T.D.); Nuclear Enterprises
Ltd. v. Minister of National Revenue, [1971] CTC 449
(F.C.T.D.).
CONSIDERED:
Canadian Pacific Limited v. The Queen, [1976] 2 F.C.
563; [1976] CTC 221 (T.D.); Ottawa Valley Power
Company v. Minister of National Revenue, [1969] 2 Ex.
C.R. 64; [1969] CTC 242; 69 DTC 5166; J. L. Guay Ltée
v. Minister of National Revenue, [1971] F.C. 237;
[1971] CTC 686 (T.D.); The Queen v. Canadian Pacific
Limited, [1978] 2 F.C. 439; [1977] CTC 606; 77 DTC
5383 (C.A.).
REFERRED TO:
Detroit Edison Co. v. Commissioner of Internal Revenue,
319 US 98 (1943); Brown Shoe Co., Inc. v. Commission
er of Internal Revenue, 339 US 583 (1950); G.T.E.
Sylvania Canada Limited v. The Queen, [1974] 1 F.C.
726; [1974] CTC 408; 74 DTC 6315 (T.D.); St. John
Dry Dock and Shipbuilding Company Limited v. Minis
ter of National Revenue, [1944] Ex.C.R. 186; [1944]
CTC 106.
APPEAL.
COUNSEL:
M. S. Bistrisky for plaintiff.
G. Jorré for defendant.
SOLICITORS:
Aird & Berlis, Toronto, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
WALSH J.: This action concerns plaintiff's claim
for maximum capital cost allowance under Class 2
in its 1971, 1972, 1973 and 1974 taxation years of
additional amounts of $4,073,751, $5,163,174,
$5,958,696 and $6,907,912 for each of the said
years respectively. At the opening of the hearing it
was agreed that as a result of further auditing and
verification these figures should now read
$3,923,093.83, $4,900,149.89, $5,749,511.45, and
$6,629,456.19 for each of the four years in ques
tion and the conclusion of the amended statement
of claim should be amended accordingly. These
figures appear from the partial agreed statement
of facts produced at the opening of the hearing
which also sets out that the agreed additional
capital cost allowance which could be claimed for
the years in question should judgment be rendered
wholly in favour of the plaintiff would amount to
$235,385.63, $294,008.99, $344,970.69, and
$397,767.37 respectively for each of the said years.
A table forming part of the partial agreed state
ment of facts shows that total reimbursement for
the alteration, modification or replacement of its
Class 2 depreciable properties for which the plain
tiff was reimbursed by other parties for the years
in question amounted to $731,032.33 for 1971 of
which $456,169.29 was reimbursed by a govern
ment, municipality or other public authority and
$274,863.04 from other sources, $1,212,441.69 for
1972 of which $1,121,261.43 was reimbursed by a
government, municipality or other public authority
and $91,180.26 from other sources, $1,143,370.55
for 1973 of which $1,051,896.75 was reimbursed
by a government, municipality or other public
authority and $91,473.80 from other sources, and
$1,224,915.43 in 1974 of which $1,054,280.60 was
reimbursed by a government, municipality or other
public authority and $170,634.83 from other
sources.
The plaintiff is a public company primarily
engaged in processing and distributing natural gas
to residential, commercial and industrial users in
Ontario, operating in various operating districts.
The reason for the breakdown of figures into
those received from government, municipality or
other public authorities and those received from
other sources results from paragraph 13(7)(e) of
the Income Tax Act, R.S.C. 1952, c. 148, as
amended by S.C. 1970-71-72, c. 63, s. 1, which for
the years in question read as follows, being para
graph 20(6)(h) in the 1952 Act applicable for the
1971 year.
13....
(7) For the purpose of this section and any regulations made
under paragraph 20(1)(a) the following rules apply:
(e) where a taxpayer has received or is entitled to receive
from a government, municipality or other public authority, in
respect of or for the acquisition of property, a grant, subsidy
or other assistance other than an amount authorized to be
paid under an Appropriation Act and on terms and condi
tions approved by the Treasury Board for the purpose of
advancing or sustaining the technological capability of
Canadian manufacturing or other industry, the capital cost
of the property shall be deemed to be the capital cost thereof
to the taxpayer minus the amount of the grant, subsidy or
other assistance.
It is further admitted that none of the amounts
shown as total reimbursement for the four years in
question were included in the plaintiff's unde-
preciated capital cost for taxation years prior to
1971 and that no capital cost allowance was
claimed in respect of those amounts prior to 1971.
The reimbursements were received pursuant to
certain contracts between the plaintiff and other
parties, resulting from 198 contracts in 1971, 209
in 1972, 252 in 1973 and 245 in 1974 or an
average of 226 contracts per year.
Finally it is agreed that if the Court should find
wholly in favour of the plaintiff that the plaintiff is
entitled to include the amounts referred to as total
reimbursements received in its Class 2 capital cost
and if those amounts do not result in any other
offsetting effect on taxable income then, as com
pared with the reassessments, the plaintiff's unde-
preciated capital cost at the end of each taxation
year prior to any capital cost allowance being
taken should be increased by the amounts set out
above and plaintiff's capital cost allowance for
each year should similarly be increased by the
amounts indicated.
The plaintiff's statement of claim sets out that
the assessment practice of the defendant was not
to permit the depreciation for tax purposes of the
amounts of such contributions but to require the
reduction of the plaintiff's capital cost of Class 2
depreciable properties by the amount of donations,
grants and other contributions received by the
plaintiff pursuant to contractual obligations of
third parties to reimburse the plaintiff for its
expenditures in making certain replacements,
alterations or modifications to its Class 2 depre-
ciable properties at the request of such third par
ties. The plaintiff filed formal notice of objection
to assessments received in 1977 for its 1971, 1972
and 1973 taxation years and filed an amended tax
return for the 1974 taxation year on the basis that
the donations, grants, and other contributions did
not reduce its capital cost of Class 2 depreciable
properties, placing reliance upon the judgment in
the case of Canadian Pacific Limited v. The
Queen'. Defendant contends that both the
amounts paid and reimbursements received by the
plaintiff pursuant to its agreement with third par
ties were on income account, but if the disburse
ments were on capital account, which it denies,
[1976] 2 F.C. 563; [1976] CTC 221 (T.D.).
either the capital cost to the plaintiff of each of its
said relocated pipelines built pursuant to said
agreements is the amount disbursed by it less the
reimbursement received from the third party, or
alternatively in each case, a pipeline is disposed of
for proceeds of disposition equal to the amount the
plaintiff was reimbursed under its respective
agreement with the third party. In the latter alter
native, although the amount disbursed by the
plaintiff pursuant to the agreement could properly
be added to its undepreciated capital cost of pipe
lines, that undepreciated capital cost would be
reduced by the proceeds of disposition. Agreed
books of documents were filed and the plaintiff
called only one witness, Ronald Carter, who has
been an accountant with the plaintiff since 1968.
While not testifying as an expert witness he has
undoubtedly had a very wide experience, being
Director of Financial Accounting and Statistics for
the company in charge of preparing exhibits for
hearings before the Ontario Energy Board before
which he also testifies as an expert witness. Previ
ously he served as taxation supervisor for the
plaintiff. He gave background information about
the plaintiff's extensive business of natural gas
production and distribution. It serves some five
million people and has approximately 17,000
kilometres of mains, and $1.1 billion of property,
plant, and equipment in its distribution system. Its
rates and accounting methods and practices are
subject to approval of the Ontario Energy Board,
the rates being based on a fair return on its rate
base.
He testified that the Ontario Energy Board
accepts two methods of accounting, the first being
to credit contributions against the cost of construc
tion, with the net amount appearing on the balance
sheet, and in the second method the cost of con
struction is carried on the balance sheet and con
tributions against it are credited as a liability or a
long term debt with deferred income tax. The
company uses the first method for accounting
purposes but the end result of either method would
be that the amounts are netted for rate-making
purposes. Originally the method adopted for rate-
making purposes was also used for tax purposes
but this was changed after the finding in the
Canadian Pacific case which will be examined
later in detail.
By far the greater part of the contributions
result from the provisions of the Public Service
Works on Highways Act 2 . This statute requires
companies such as the plaintiff to agree to road
changes in return for a subsidy from the public
authority requiring the change of 50% of the
labour costs as defined in the Act, which do not
include such items as supervision or overhead, nor
is material included, so that in practice the actual
subsidy received is somewhat less than 50% of the
total cost. In the event that the Act does not apply
then a municipality or other party requiring the
building or construction of the pipeline will have to
pay 100% of the costs.
The witness directed attention to exhibits show
ing how this is worked out with respect to various
types of contracts with Toronto Hydro, the
Ontario Ministry of Transport and Communica
tions, the St. Lawrence Seaway Authority (a 100%
contribution resulting from pipeline relocation in
connection with the Welland Canal), Markbor-
ough Properties, a developer (100% contribution)
and Bell Canada (also 100% contribution).
Another example of a private 100% contribution
was Ford Motor of Canada which required a
relocation of the entry main to its plant as a result
of building expansion alterations.
The witness explained that the abandoned mains
are left in the ground as it is not worthwhile to
recover them and that the new main is of no
greater use to the plaintiff than the abandoned
main. The changes in question here do not result
from any expansion of the company's distribution
system for its own purposes since the old mains
can remain in service for at least 80 years, nor is
there any revenue gain for the plaintiff resulting
from the changes which are done to accommodate
2 R.S.O. 1980, c. 420 (R.S.O. 1970, c. 388 for the years in
question).
customers. The remaining undepreciated value of
the abandoned pipeline remains in the company's
capital account and the capital cost allowance
continues to be claimed on it together with the new
pipeline. The company depreciates its pipelines
over a 70-year period. As a result of crediting the
contributions against the cost of the new pipeline,
in the company's books, as the Ontario Energy
Board requires for rate-making purposes, the
books always show a value for the pipeline of less
than its true value.
David Bonham, F.C.A., a chartered accountant
and lawyer, testified as an expert witness for the
defendant. He has high qualifications both as an
accountant, writer of accounting text books and
university teacher, and served as Vice-President of
Finance for Queen's University from 1971 to 1977.
His expert report, taken as read, assumes that as
an ongoing part of its business the plaintiff fre
quently has to relocate its pipelines pursuant to
contracts made at the request of other parties
which takes place some 200 times a year, normally
resulting from planned construction by the other
party which would create a physical conflict with
the plaintiff's pipeline or other facility, that in a
vast majority of cases such work does not increase
the capacity of the pipeline or other facility on
which the plaintiff retains ownership, that any
salvage is incidental, that the plaintiff makes full
recovery of its costs except where prevented by
statute, and that this work is a normal and neces
sary part of carrying on the plaintiff's business. On
the basis of these assumed facts he gives his opin
ion, which is to the effect that the total cost of the
work should be recorded as a capital asset with the
reimbursement as a reduction to the cost of acquir
ing it, and that the annual charge for depreciation
should be on the resultant balance in the fixed
asset account after each such transaction has been
so recorded. He considers this to be appropriate as
the relocation of facilities and related work cannot
reasonably be avoided, so the resultant net cost can
properly be considered as an inherent part of the
cost of acquiring the fixed assets of the
corporation.
He concludes that although alternative methods
of disclosing such transactions may exist, it is his
opinion that regardless of the alternative selected,
all such transactions must be reflected in the
income statement and then through reinvested
earnings as a regular ongoing commercial activity
of the corporation, and that it would be unaccept
able to record any part of these transactions as
contributed surplus or in any manner other than
through the income statement to reinvested
earnings.
In testifying, he outlined different types of sur
plus, distinguishing contributed surplus from
earned surplus, contributed surplus being in the
nature of windfalls, shareholders' investments, and
so forth, and he does not believe that the contribu
tions to relocation fall into any such categories. He
discussed the second accounting method allowed
by the Ontario Energy Board which results in the
deferred credit gradually being brought into
income, and provided it is brought in each year in
the same amount as that claimed for capital cost
allowance the end result would be the same. He
would preferably have adopted the other method,
which was actually adopted by the plaintiff for
accounting purposes, and merely include the net
cost in the capital account as a Class 2 asset on
which capital cost allowance could be claimed.
In argument extensive reference was made by
the plaintiff to the Canadian Pacific case (supra).
This dealt with various aspects of the taxation of
Canadian Pacific Limited for its 1965, 1966 and
1967 taxation years, inter alia, how it would deal
with, for capital cost allowance purposes, dona
tions and grants received for construction or
modifications on its own property of rail lines,
made at the request of another party to enable that
party to carry out a project of its own, similar
requests made by a government, municipality or
other public authority allegedly within the mean
ing of paragraph 20(6)(h) of the Income Tax Act
for the years in question (supra), and other ques
tions relating to private sidings and improvements
on properties leased by the plaintiff which do not
concern us in the present case. The costs were
recorded in the company's accounting records in
accordance with the Uniform Classification of
Accounts as required by section 328 of the Rail
way Act, R.S.C. 1970, c. R-2, and the Regulations
of the Canadian Transport Commission, but as
was pointed out at page 604 [Federal Court
Reports] of the trial judgment, this does not bind
the Minister of National Revenue with respect to
the tax treatment of same. The same applies in the
present case. After careful study of the principal
jurisprudence, both Canadian, British and Ameri-
can, the Canadian Pacific case rejected for tax
purposes the accounting method of carrying the
net cost only to capital account for purposes of
capital cost allowance. Reference was made at
page 610 [Federal Court Reports] to the British
case of Corporation of Birmingham v. Barnes
(H.M. Inspector of Taxes) 3 "in which the appel
lant corporation had entered into an agreement
with the company to lay a tramway track to the
company's works in return for which they received
a specific sum and also received a grant under the
Unemployment Grants Committee for sums it had
expended on the renewal of its tramway tracks". It
was held that the payment by the company and the
grant from the Unemployment Grants Committee
could not be taken into account in ascertaining the
actual cost to the corporation of the tramway
tracks in question for the purposes of computing
the allowance due for wear and tear of such tracks,
i.e. depreciation. At page 217 of his judgment
Lord Atkin states:
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.
This case was also referred to by Jackett P., as he
then was, in the case of Ottawa Valley Power
3 (1933), 19 T.C. 195.
Company v. Minister of National Revenue, [1969]
2 Ex.C.R. 64; [1969] CTC 242; 69 DTC 5166, in
which at pages 76-77 [Exchequer Court Reports]
he stated:
The next question is whether, assuming that I am right in
concluding that the appellant would have been entitled to
capital cost allowance if it had received the cash from Hydro
and expended it on the capital additions and improvements
itself, it is in any different position because the bargain took the
form of Hydro undertaking to make the expenditures in such a
way that the additions and improvements would be made to the
appellant's assets and belong to the appellant.
He eventually found against the appellant since it
itself had not incurred the expenditure on capital
account, the work being done for it by Hydro, but
referred to the Corporation of Birmingham v.
Barnes case (supra) as authority for the proposi
tion that had the company made the expenditures
itself, it could have carried the total amount to
capital account for depreciation purposes. This
decision of Chief Justice Jackett, as he later
became, distinguished in a footnote the American
case of Detroit Edison Co. v. Commissioner of
Internal Revenue 4 , stating that the decision seems
to have been based on the fact that the payments
received were not taken into revenue, and conclud
ing that if the payments had been taken into
revenue, it would seem that the Court might have
reached the opposite result. In the Detroit Edison
case it was stated at page 102:
But we think the statutory provision that the "basis of
property shall be the cost of such property" ... normally
means, and that in this case the Commissioner was justified in
applying it to mean, cost to the taxpayer.
and again at page 103:
But it does not follow that the Company must be permitted
to recoup through untaxed depreciation accruals on investment
it has refused to make. The Commissioner was warranted in
adjusting the depreciation base to represent the taxpayer's net
investment.
The Detroit Edison case was itself distinguished in
the United States Federal Court of Appeal in the
case of Brown Shoe Co., Inc. v. Commissioner of
4 319 US 98 (1943).
Internal Revenues, which held that the petitioner
was entitled to deductions on account of deprecia
tion on property acquired from community groups
or acquired with cash received from such groups,
and might also include the value of such contribu
tions from community groups in equity invested
capital. The Detroit Edison case had denied inclu
sion in its base for depreciation of electric power
lines of the amount of payments received by the
electric company for construction of the line exten
sions to the premises of applicants for service. It
was held that to the extent of such payments the
electric lines did not have cost to the taxpayer and
that such payments were neither gifts nor contri
butions to the taxpayer's capital. In the Brown
Shoe case the Court stated at page 591:
We do not consider that case controlling on the issue whether
contributions to capital are involved here. Because in the
Detroit Edison case "The payments were to the customer the
price of the service," the Court concluded that "it overtaxes
imagination to regard the farmers and other customers who
furnished these funds as makers either of donations or contribu
tions to the Company." Since in this case there are neither
customers nor payments for service, we may infer a different
purpose in the transactions between petitioner and the commu
nity groups. The contributions to petitioner were provided by
citizens of the respective communities who neither sought nor
could have anticipated any direct service or recompense what
ever, their only expectation being that such contributions might
prove advantageous to the community at large. Under these
circumstances the transfers manifested a definite purpose to
enlarge the working capital of the company.
We are not in the present case of course dealing
with contributions from community groups. In
1954 the Internal Revenue Code of the United
States was amended, section 362 being somewhat
similar to paragraph 20(6)(h) of the Canadian
statute (supra) but broader so as to cover all
contributions and not merely those from public
authorities. It was necessary in the Canadian
Pacific case to consider the applicability of para
graph 20(6)(h), the question being whether
Canadian Pacific received or was entitled to
receive "from a government, municipality or other
public authority, in respect of or for the acquisition
of property, a grant, subsidy or other assistance ..
for the purpose of advancing or sustaining the
5 339 US 583 (1950).
technological capability of Canadian manufactur
ing or other industry ...." At pages 607-608
[Federal Court Reports], the Trial Judge stated:
Although the argument was not raised before me I would
seriously doubt whether the sums which Canadian Pacific
received from public authorities for the relocation of railway
tracks or telecommunication lines were "for the purpose of
advancing or sustaining [its] technological capability" since in
each case the evidence indicated that it was satisfied with the
lines as they were and merely moved them to accommodate the
public authority in question. In any event, I do not find that
these payments can be considered as "a grant, subsidy, or other
assistance".
Reference was made to the case of G.T.E. Syl-
vania Canada Limited v. The Queen, [1974] 1
F.C. 726; [1974] CTC 408; 74 DTC 6315 (T.D.),
in which Justice Cattanach considered the ques
tion and stated at page 737 [Federal Court
Reports] :
As I have said before the constant and dominating feature in
the words "grant" and "subsidy" is that each contemplates the
gift of money from a fund by government to a person for the
public weal. Something concrete and tangible is to be bestowed.
For the reasons I have expressed the general words "or other
assistance" must be coloured by the meaning of those words.
Reference was also made to the Ottawa Valley
Power Company case (supra) where Jackett P.
stated at pages 71-72 [Exchequer Court Reports]:
I do not think that the words in paragraph (h)—"grant, subsidy
or other assistance from a ... public authority"—have any
application to an ordinary business contract negotiated by both
parties to the contract for business reasons. If Ontario Hydro
were used by the legislature to carry out some legislative
scheme of distributing grants to encourage those engaged in
business to embark on certain classes of enterprise, then I
would have no difficulty in applying the words of paragraph (h)
to grants so made.
That was not the situation in the Canadian Pacific
case nor is it the situation in the present case. In
the case of St. John Dry Dock and Shipbuilding
Company Limited v. Minister of National
Revenue 6 Thorson P., as he then was, stated at
page 193 [Exchequer Court Reports]:
The fact that an amount is described as a Government
subsidy does not of itself determine its character in the hands of
the recipient for taxation purposes. In each case the true
character of the subsidy must be ascertained and in so doing
6 [1944] Ex.C.R. 186; [1944] CTC 106.
the purpose for which it was granted may properly be
considered.
The judgment in the Canadian Pacific case was
sustained on appeal,' save for two of the eight
items for which capital cost allowance had been
claimed. The first was a deviation of a track
carried out by contract with the St. Lawrence
Seaway Authority for which Canadian Pacific was
reimbursed for a relatively minor part of the work
done by it. This sum was not spent in order to
acquire property but rather for purposes of doing
some work for the Seaway Authority on the rail
way line then owned by the Authority, although
this line was later turned over by the Authority to
the company in exchange for the old one. It was
held that the capital cost to the respondent of the
new line was the value of the old line, not the sums
expended by the respondent to perform for the
benefit of the Authority some work related to the
construction of the new line. The other issue on
which the judgment was not sustained was with
respect to private sidings built by Canadian Pacific
by agreement to build a private siding for a cus
tomer to the customer's property at the customer's
expense save for the track material which it pro
vided and of which it retained ownership. Here
again it was held that the sum expended by
Canadian Pacific was not a capital expenditure
but merely a cost of carrying out a building con
tract for the benefit of a customer. On the princi
pal issue with which we are concerned however,
the judgment was fully upheld. In so doing the
Court of Appeal placed reliance on the House of
Lords decision in Corporation of Birmingham v.
Barnes (supra).
The defendant cannot seriously maintain its first
contention that both the amounts paid and reim
bursements received by the plaintiff should be
considered as on income account. Even the defend
ant's own expert witness disagrees with this and it
is evident that the expenses of relocation were not
' The Queen v. Canadian Pacific Limited, [1978] 2 F.C. 439;
[1977] CTC 606; 77 DTC 5383 (C.A.).
expenses laid out on account of income but were
merely for the relocation of certain of the plain
tiff's pipelines which were in themselves capital
ized assets. Moreover, the reimbursement repre
sented in the great majority of cases less than 40%
of total cost and it would be difficult to conceive of
the plaintiff disbursing the difference as income-
producing expense when no change of income is
involved. Actually such a treatment would be more
advantageous for the plaintiff in any given taxa
tion year as the amount thereby deductible would
be greater than what could be claimed as capital
cost allowance, although in the long run the
method of tax accounting which the plaintiff seeks
would be more advantageous in that the entire cost
of relocation could eventually be claimed by
annual capital cost allowance deduction without
any corresponding tax liability being incurred as a
result of the contribution. This argument must
therefore be rejected and the present case must
depend on one of the alternative arguments.
Further relying on the decision of the Canadian
Pacific case, the plaintiff contends that if contribu
tions for performing such work were to be netted
in the plaintiff's capital account, which is the
defendant's alternate argument supported by the
expert witness, there would have been no need for
paragraph 20(6)(h) in the Act (now 13(7)(e))
with reference to grants, subsidies or other assist
ance provided by a government, municipality or
other authority, as all such contributions would be
netted, whatever their origin. It might even be
contended that by virtue of the inclusio unius est
exclusio alterius principle, existence of this section
might imply that contributions other than those
from a government, municipality or other public
authority would not normally be netted.
With respect to the defendant's second alterna
tive argument that in each relocation the original
pipeline must be deemed to have been disposed of
for proceeds of disposition equal to the amount the
plaintiff was reimbursed for the construction of the
new line, the plaintiff referred to several cases as
to the proper meaning to be given to the word
"disposition". This was examined in the Saskatch-
ewan Court of Appeal in the case of Harman v.
Gray-Campbell Limited 8 where Lamont J. states:
I am therefore of opinion that the words "dispose of ** her
landed property," in the note before us, mean to make the
property over to another so that no interest therein remains in
the plaintiff.
To dispose of it required not only a willingness on the part of
the plaintiff to part with her interest, but a willingness on the
part of someone else to take that interest over.... That the
plaintiff abandoned the property is, I think, clear; but the
contract does not give a right of repossession upon the abandon
ment by the plaintiff of her interest. An abandonment of her
interest does not, in my opinion, constitute a disposal of it,
unless the abandonment is accepted by her vendor and her
interest taken over by him.
In the Supreme Court case of Her Majesty the
Queen v. Malloney's Studio Limited 9 Estey J. in
dealing with disposition of depreciable property
states at page 333 [Supreme Court Reports]:
Thus it seems abundantly clear that for the purposes of this
invocation of rule (g), the disposition in question must be
bilateral and include both a disposer and "the person to whom
the depreciable property was disposed of", whether or not such
person may thereupon become entitled to any capital cost
allowance under the Act. Here the demolition involved no
recipient....
In the present case there was certainly no disposi
tion by the plaintiff of the abandoned pipeline; in
fact the evidence indicated that it retained owner
ship of same. Moreover it follows that the remain
ing undepreciated capital cost of the abandoned
pipeline remained in the plaintiff's capital account.
It would appear that the decision of the Court of
Appeal in the Canadian Pacific case with respect
to the St. Lawrence Seaway Authority deviation
(supra) does not apply since in that case a new line
of railway was conveyed to it by the Seaway
Authority which had built it, in exchange for the
old one, while in the present case the plaintiff
never disposed of the old pipelines nor obtained the
new ones by way of conveyance from third parties,
but built them itself aided by contributions from
such third parties.
8 [1925] 2 D.L.R. 1134, at p. 1139 (Sask. C.A.).
9 [1979] 2 S.C.R. 326; 79 DTC 5124 (S.C.C.).
In the present case the contributions went into
the plaintiff's books as contributions to capital for
income tax purposes. The plaintiff points out that
by definition in subsection 248(1) of the Income
Tax Act (139(1)(e) of the 1952 Act) "business" is
defined as including a concern in the nature of
trade. Paragraph 12(1)(g) (6(j) of the 1952 Act)
includes in "income" "any amount received by the
taxpayer in the year that was dependent upon the
use of or production from property ...". Certainly
the relocations of the pipelines which the plaintiff
made were not adventures in the nature of trade
calculated to result in profit. It was obliged to
make the relocations by law in the greater number
of cases and even for those which it had made
voluntarily by contract with a private company,
these were not done in order to sell more gas or
acquire a new customer. At best they might be
said to be done as a matter of goodwill and good
business relations. Neither were the amounts
received dependent upon the use of or production
from the plaintiff's property. While the defendant
argues strongly that the frequency of the reloca-
tions indicates that they were current business
transactions, this does not necessarily make the
contributions subject to entry in the revenue
account, nor is it a more important factor than the
absence of any element of profit. In the Canadian
Pacific case at page 444 [Federal Court Reports],
Pratte J. in rendering the judgment of the Court of
Appeal points out:
As the respondent had entered into many transactions 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.
This is the situation in the present case and
indicates that the relocation of tracks by Canadian
Pacific was also a common occurrence in the
carrying out of its business, so the element of
frequency in the present case does not in itself
make that judgment inapplicable.
The defendant contends that the plaintiff's tax
position is not in accordance with either account
ing or economic reality, and now contends that
preferably the entire cost of relocation should be
included in the capital account for capital cost
allowance purposes, and does not suggest that the
whole contribution should be brought into income
in the year when it was received, provided that it
be brought in in such a way that it will be amor
tized in the current year and future years at a rate
equal to the amount claimed by the plaintiff as
capital cost allowance on the costs of relocation.
The end result will be the same.
It was contended that the Canadian Pacific case
does not apply since in it the Crown never argued
that the contributions received were income, the
whole argument relating to the amounts to be
taken into capital cost. In it reference was made at
pages 610-611 [Federal Court Reports] to the
comments of Jackett P. in the Ottawa Valley
Power case (supra) respecting the Detroit Edison
case (supra) in which he suggested, as I have
already indicated, that the ratio decidendi in the
Detroit Edison case was that the receipts were not
taken into revenue, from which he concludes that
"If the payments had been taken into revenue, it
would seem that the Court might have reached the
opposite result". Counsel also distinguishes the
Canadian Pacific case on the ground that it was
largely decided on the basis of subsection 84A(3)
of the Income Tax Act relating to railroads, which
is not pertinent to the present case. These distinc
tions have little weight however, since in the
Canadian Pacific case contributions received were
not taken into revenue but were capitalized, and
paragraph 20(6)(h) of the Act was examined fully
in reaching a conclusion that it was not applicable,
any more than it is in the present case.
The defendant contends that it is not possible to
consider the contributions as contributions to sur
plus. Jurisprudence does not so hold however, each
case depending on its own facts. In the Ottawa
Valley Power case for example (supra) Jackett P.
in a somewhat obiter portion of his judgment
states [at page 76 of the Exchequer Court
Reports] that in the event that the Ottawa Valley
Power itself had paid for the alterations instead of
Hydro paying for them on behalf of Ottawa Valley
Power, then "In my view, the explanation is that,
from a commercial point of view, if that had
happened, there would be two aspects of the
matter, viz,
(a) the appellant would have incurred capital
costs for which it should have capital cost
allowance, and
(b) the appellant would have received a payment
from the purchaser of its power which should
be taken into its revenues if it is part of the
payment for which it has sold in the course of
its business or should be regarded as a capital
receipt if, in the circumstances, it should be so
characterized." [Emphasis mine.]
That case was complicated by the fact that by the
terms of the agreement the appellant agreed to
continue to accept a lower price for more expen
sive power in consideration for being provided with
the capital additions and improvements. The case
of Commissioners of Inland Revenue v. Fleming &
Co. (Machinery), Ltd. 10 referred to by the defend
ant dealt with the treatment of a payment received
by a long term manufacturer's agency for termina
tion of a contract. At page 63 Lord Russell states:
On the other hand when the benefit surrendered on cancellation
does not represent the loss of an enduring asset in circum
stances such as those above mentioned—where for example the
structure of the recipient's business is so fashioned as to absorb
the shock as one of the normal incidents to be looked for and
where it appears that the compensation received is no more
than a surrogatum for the future profits surrendered—the
compensation received is in use to be treated as a revenue
receipt and not a capital receipt.
This can clearly be distinguished from the facts in
the present case where the plaintiff surrendered no
future profits for the contributions paid, the relo
cation of the pipelines not affecting the profits one
way or the other. The case of Okalta Oils Limited
10 (1951), 33 T.C. 57.
v. Minister of National Revenue" can similarly be
distinguished. It dealt with a subsidy under the
Income War Tax Act for drilling and exploration
costs for an oil well. The late Cameron J. after
pointing out that the section in question dealt with
legislation designed to encourage the production of
oil and oil products stated at pages 44-45:
I find it impossible to put upon the subsection such a construc
tion as would enable a corporation which is not out-of-pocket
on its operation, but on the contrary has had all its expenses
paid for by another party—in this case a Crown corporation—
to be repaid for such expenses out of taxes which would
otherwise accrue to the Crown. To do so would mean that the
legislation was intended to confer not only indemnity for such
losses, but also an additional bonus of a like amount, an
interpretation which I think Parliament did not contemplate.
The present case clearly does not deal with incen
tive subsidies. It is possible to similarly distinguish
the case of Radio Engineering Products Limited v.
Minister of National Revenue' 2 in which a $450,-
000 subsidy was paid to the appellant for outlays
in connection with the development of a certain
telephone system and it was held that the appel
lant was obliged to apply the subsidy for the
purpose for which the loan was granted and it
must therefore be deducted from the appellant's
expenditures. At page 663 of the Tax Appeal
Board judgment it is stated:
It is common ground that grants from the Crown must be
deducted from expenditures. In the case at bar the subsidy was
granted to carry out, under the scheme, work totally of a
revenue character.
In the present case there is no revenue advantage
for the plaintiff. In another case referred to by the
defendant, that of Nuclear Enterprises Ltd. v.
Minister of National Revenue 13 Kerr J. in dealing
with the taxability of grants from the National
Research Council and the Department of Defence
Production for financial assistance in research and
manufacturing stated at page 466:
" [1955] CTC 39 (F.C.T.D.).
12 [1970] Tax A.B.C. 650 and on appeal [1973] CTC 29
(F.C.T.D.).
13 [197l] CTC 449 (F.C.T.D.).
In the present case, I am unable to give the applicable
provisions of the Income Tax Act a construction that the
appellant should not only not be required to include the grants
as income but should also be allowed to deduct from its other
income the expenditures that in reality were paid for, not by the
appellant, but by N.R.C. and Department of Defence
Production.
Here again that case dealt with grants to promote
research which might eventually enure to the ben
efit of the taxpayer among others. It has already
been concluded that paragraph 20(6)(h) of the
Act dealing with grants, subsidies, or other such
assistance from a government, municipality or
other public authority, does not apply in the
present case.
Relying on the evidence of Mr. Bonham in
support of its principal argument that the subsidy
should have been deducted from the cost of the
relocations and only the resulting difference capi
talized, the defendant refers, inter alia, to the case
of J. L. Guay Ltée v. Minister of National
Revenue 14 in which Associate Chief Justice Noël,
as he then was, stated at page 243 [Federal Court
Reports]:
In determining the taxable profits of a taxpayer we can take as
a starting point the profit and loss statement prepared accord
ing to the rules of accounting practice. However, the profit
shown on this statement has always to be adjusted according to
the statutory rules used in determining taxable profits. This is
because a number of facts taken into consideration by account
ants are excluded by certain provisions of the Income Tax Act
in the determining of taxpayers' profits.
It was contended that there is no statutory provi
sion permitting the contributions in the present
case to be treated differently for tax purposes from
the manner in which they were treated for accoun-
tiing purposes establishing the proper rate base for
the company. While there may be no statutory
requirement necessitating a different treatment,
the weight of jurisprudence, and more specifically
the Canadian Pacific case, suggests the contrary.
Further support for the plaintiff's position can
be found in a relatively recent British case of
Murray (Inspector of Taxes) v. Goodhews' 5 in
which a voluntary payment was made as a good
will gesture for the termination of certain tenan
cies of public houses held by the taxpayer. The
14 [1971] F.C. 237; [1971] CTC 686 (T.D.).
15 [1978] 1 W.L.R. 499.
taxpayer was assessed corporation tax on the
voluntary payment on the basis that it represented
compensation for loss of profits from the loss of
the tenancies and were thus profits or gains of the
trade. This was reversed, the judgment holding
that the payments were capital receipts. The head-
note reads:
... every case of a voluntary payment must be considered on its
own facts to ascertain the nature of the receipt in the hands of
the recipient and as the payments to the taxpayer company
were not linked with future trading relations between the
parties and were not payments made to compensate for loss of
profits and were unrelated to any specific trading transaction,
they were not receipts arising from the taxpayer company's
trade....
I have concluded that the plaintiff in the present
case was justified in considering that contributions
received towards the relocation of its pipelines
done, not for its benefit, but for the benefit of the
parties making the contributions, can be carried to
a contributed capital account without passing
through income. While this undoubtedly has the
result, as the plaintiff readily concedes, of confer
ring an advantage on its shareholders which the
parties making the contributions had no intention
of doing, nevertheless this appears to be the correct
manner of dealing with these contributions in the
light of current jurisprudence. As the plaintiff's
counsel argues, if this results in unintended tax
advantages for the plaintiff the remedy is in the
hands of the defendant by way of amending
legislation.
The plaintiff's appeal therefore must be main
tained, and its tax assessments for its 1971, 1972,
1973 and 1974 taxation years are referred back to
the Minister for reassessment in accordance with
the terms of this judgment, with costs.
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.