T-533-93
BETWEEN:
URBANDALE REALTY CORPORATION LIMITED,
Plaintiff,
- and -
HER MAJESTY THE QUEEN,
Defendant.
REASONS FOR JUDGMENT
DUBÉ J:
This income tax appeal is from a decision of the Tax Court of Canada, dated December 29, 1992, dismissing the plaintiff's ("Urbandale") appeal on the ground that the redevelopment charges in issue are not deductible expenditures under section 9 of the Income Tax Act ("the Act") and were not property tax deductible pursuant to subsection 18(2) of the Act.
| 1- Background |
The essential facts are as follows. Urbandale paid the Regional Municipality of Ottawa-Carleton "redevelopment" charges of $2,908,100 on December 31, 1986 and sought to deduct that amount from income earned in its 1986 taxation year. These redevelopment charges were imposed pursuant to the authority conferred upon the Regional Municipality of Ottawa-Carleton by subsection 50(6) of the Planning Act, R.S.O. 1983, and by subsections 31(1) and section 33 of the Regional Municipality of Ottawa-Carleton, R.S.O. 1980. These charges are imposed for a public purpose, namely the financing costs of various municipal services and are not earmarked for the installation and upgrading of services in respect of the land for which the charges are levied.
Urbandale carries on business as a land developer. It buys raw land, subdivides it into building lots, services the lots and sells them to construction companies. The stage of development of Urbandale's lands in question in 1986 was limited to a draft plan of subdivision filed with the region. No physical construction had yet been built on the lands. The charges were only payable on the issuance of a building permit but Urbandale decided to pay the charges on the last day of 1986 anticipating an increase of the charges in 1987. In the 1986 taxation year, Urbandale had land sales of $7,410,489 but the development charges in question were not related to those sales.
| 2- Legal issues |
Urbandale claims that the redevelopment charges constituted a property tax and were therefore deductible pursuant to subsection 18(2) of the Act. In the alternative, it alleges that these charges were expenditures under section 9 of the Act. On the other hand, the Minister submits that these charges cannot be treated as a current expense for the purpose of computing Urbandale's income under section 9 of the Act and that these charges do not constitute a property tax within the meaning of subsection 18(2) and, in any event, that subsection 18(2) does not authorize the current deduction of property taxes. In the alternative, the Minister alleges that the amount paid by Urbandale was in respect of a period posterior to 1986 with the consequence that it would be deductible only in the years after 1986, as prescribed by subsection 18(9) of the Act. The relevant provisions of the Act read as follows:
| 9. (1) Income from business or property.-Subject to this Part, a taxpayer's income for a taxation year from a business or property is his profit therefrom for the year. |
| ... |
| 18. (1) General limitations.-In computing the income of a taxpayer from a business or property no deduction shall be made in respect of |
| (a) general limitation.-an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property; |
| ... |
| 18. (2) Limitation re certain interest and property taxes in land.-Notwithstanding paragraph 20(1)(c), in computing the taxpayer's income for a taxation year from a business or property, no deduction shall be made in respect of any amount paid or payable by the taxpayer in the year and after 1971 as, on account or in lieu of payment of, or in satisfaction of, |
| (a) interest on borrowed money used to acquire land, or on an amount payable by him for land, or |
| (b) property taxes (not including income or profits taxes or taxes computed by reference to the transfer of property) paid or payable by him in respect of land to a province or a Canadian municipality, |
| if, having regard to all the circumstances, including the cost to the taxpayer of the land in relation to his gross revenue, if any, therefrom for that or any previous year, the land cannot reasonably be considered to have been, in that year, |
| (c) used in, or held in the course of, a business carried on in the year by the taxpayer, or |
| (d) [Repealed.] |
| (e) held primarily for the purpose of gaining or producing income of the taxpayer from the land for that year, |
| except to the extent that the taxpayer's gross revenue, if any, from the land for that year exceeds the aggregate of all other amounts deducted in computing his income from the land for that year. |
| ... |
| 18. (9) Limitation respecting prepaid expenses.-Notwithstanding any other provision of this Act, |
| (a) in computing a taxpayer's income for a taxation year from a business or property (other than income from a business computed in accordance with the method authorized by subsection 28(1)), no deduction shall be made in respect of an outlay or expense to the extent that it can reasonably be regarded as having been made or incurred |
| ... |
| (ii) as, on account or in lieu of payment of, or in satisfaction of, interest, taxes (other than taxes imposed on insurance premiums), rent or royalty in respect of a period after the end of the year, or |
| ... |
| 3- Expert evidence |
Both parties agreed that the instant appeal would be heard solely on the basis of evidence adduced before the Tax Court and that no other witnesses would be called.
On behalf of the plaintiff, Alan Cohen, a lawyer specializing in municipal development and planning law, identified the policies and practices of the various levels of municipal government involved in the development of land process. He testified that the regional development charges were a one-time payment designed to reduce the impact on the existing tax base of the indirect capital costs of new development. Thus, the purpose of the charges was to raise funds to finance capital expenditures related to general urban expansion and was not linked directly to a single newly developed subdivision. Urbandale paid the development charges well before the building permit deadline so as to avoid anticipated increases in the rate. In its audited statements for 1986 Urbandale treated the charges as part of its "administrative-overhead" costs in computing its income for the year.
Leonard Cogan, C.A., a member of the firm of accountants which audited Urbandale's financial statements for the year 1986 stated that in accordance with generally accepted accounting principles, Urbandale deducted interests, taxes and other carrying costs on land held for development as an expense on its financial statement. He felt this was a conservative approach. In his view, the development charges amount to nothing more than a tax on developers calculated by reference to the number of lots for which building permits are to be issued. The payment of the charges does nothing to enhance the value of the land: thus capitalizing of such charges would overstate the profit from land development.
On behalf of the Minister, D. Neil McFadgen, C.A., a partner in charge of national auditing services with the firm of Price, Waterhouse, expressed the view that Urbandale's treatment of the development charge was not in accordance with generally accepted accounting principles. He described the charge as a one-time fee which does not have the normal characteristic of an overhead cost:
| ...Overhead cost in the real estate industry usually consists of salaries and benefits including development personnel and executives, travel and automotive costs, stationery and office expenses, directors' fees, insurance costs, computer facility costs, subscriptions, capital and business taxes and donations. |
He concluded that "generally accepted accounting principles in Canada require development costs to be capitalized".
| 4- Analysis |
The starting point and the basic rule to determine income from business or property is section 9 of the Act which provides that a taxpayer's income for a taxation year is "his profit therefrom for the year". However, "profit" is not defined in the Act. The second step is the application of subsection 18(1) which stipulates that no deduction is to be made for an expense except to the extent that it was made by the taxpayer "for the purpose of gaining or producing income".
The jurisprudence has determined that, for taxing purposes, it is not sufficient that the deduction of expense from revenue be consistent with ordinary principles of commercial trading: at the bottom line, the determination of profit under subsection 9(1) is a question of law. In other words, generally accepted accounting principles are to be considered, but, at the end, the Court must determine the deductibility of a disbursement and therefore the profit under subsection 9(1). That concept was expanded by Iacobucci, J., of the Supreme Court of Canada, in Symes v. Canada1, as follows:
| This is a test which has been variously phrased. As the trial judge rightly noted, the determination of profit under s. 9(1) is a question of law: Neonex International Ltd. v. The Queen, [1978] C.T.C. 485 (F.C.A.). Perhaps for this reason, and as Neonex itself impliedly suggests, courts have been reluctant to posit a s. 9(1) test based upon "generally accepted accounting principles" (G.A.A.P.): see also "Business Income and Taxable Income" (1953 Conference Report: Canadian Tax Foundation) cited in B.J. Arnold and T.W. Edgar, eds., Materials on Canadian Income Tax (9th ed. 1990), at p. 336. Any reference to G.A.A.P. connotes a degree of control by professional accountants which is inconsistent with a legal test for "profit" under s. 9(1). Further, whereas an accountant questioning the propriety of a deduction may be motivated by a desire to present an appropriately conservative picture of current profitability, the Act is motivated by a different purpose: the raising of public revenues. For these reasons, it is more appropriate in considering the s. 9(1) business test to speak of "well accepted principles of business (or accounting) practice" or "well accepted principles of commercial trading". |
As stated by MacGuigan, J.A. of the Federal Court of Appeal in West Kootenay Power and Light Company Limited v. The Queen2, it is not desirable that the tax returns always be in conformity with the financial statements prepared by the accountant. The key "matching principle" calls for annual profits from a business to be determined by setting the expenses incurred in earning the revenues from the business of the year against those revenues:
| ...The approved principle is that whichever method presents the "truer picture" of a taxpayer's revenue, which more fairly and accurately portrays income, and which "matches" revenue and expenditure, if one method does, is the one that must be followed. |
Mr. Justice Stone of the Federal Court of Appeal in Canada v. Canderel Ltd.3 referred to the matching principle and said that, in his view, "the matching principle of accounting has, at least in this Court, been elevated to the status of a legal principle". In a more recent decision, The Queen v. Toronto College Park Limited4, Robertson, J.A., referred to the Canderel case and to three generally accepted accounting practice options and said that the issue was not "which of the three GAAP options gives the truer picture of the taxpayer's profit or net income. Rather the question is whether an expense in question can be matched with a specific source of revenue".
I agree with Bonner, T.C.J., of the Tax Court, that the generally accepted accounting principles espoused by Mr. McFadgen are more closely in accord with ordinary commercial principles than those espoused by Mr. Cogan. Moreover, these principles are in accordance with the matching principles expanded by the Federal Court of Appeal. The development charges in question are not related to the 1986 revenues of Urbandale. They do not constitute an overhead or a running expense. Clearly, those development charges paid on the last day of the year 1986, with reference to lands not yet developed, cannot be matched against revenues from those lands. The 1986 income was earned from other lands already developed and sold earlier in the year. In subsequent taxation years, the lands in question will be - or have already been - developed and will be - or have already been - sold. Urbandale may then deduct these charges against the revenues from the sales of these units located on the lands for which the charges were paid.
| 5- Property taxes under subsection 18(2) |
The plaintiff claims that these development charges are a property tax. Tax is a rate or duty laid by government on the incomes or properties of individuals, or on the product consumed by them; the produce of such duty or rate being placed at the disposal of government, for the public good. Tax is a term of general import, including almost every species of imposition on persons or property for supplying the public treasury, as tolls, tribute, subsidy, excise, impost or customs5.
Dickson, C.J. of the Supreme Court of Canada, in Re Agricultural Products Marketing Act6, said that the indicia of a tax is that the levy must be (1) enforceable by law; (2) imposed under the authority of a legislature; (3) imposed by a public body and (4) for a public purpose. The terms "property tax" must be given their plain meaning which encompasses taxes of all sorts. A property tax is a tax levied against property and cannot logically be limited only to annual taxes7.
Consequently, I would agree with counsel for Urbandale that these development charges are in the nature of a property tax. This is not to say, however, that they may be deducted in the instant case under subsection 18(2) of the Act. Subsection 18(2) is not a deductibility provision but a limitation provision. At the outset, the subsection refers to subsection 20(1)(c) which provides for deductions of interests. Subsection 18(2) stipulates that, notwithstanding the deductions permitted under paragraph 20(1)(c), no deduction shall be made in respect of any amount paid...on account of...property taxes...paid or payable by him in respect of land.
Bonner, T.C.J., deals with the plaintiff's argument based on property tax in one single paragraph, the last paragraph of his decision, which reads as follows:
| I turn next to Mr. Weinstein's argument that the development charge is a property tax within the meaning of subsection 18(2) of the Act and is deductible under that provision even if it is not deductible under section 9 of the Act. Section 9 provides "... a taxpayer's income for a taxation year from a business ... is his profit therefrom ...". The plain language of subsection 18(2) makes it clear that it operates to restrict the deduction of amounts which might otherwise be deductible in the computation of income or profit. That conclusion is made inescapable by the statutory language "... in computing the taxpayer's income ... from a business ... no deduction shall be made ...". Thus the Appellant, having failed in relation to section 9, cannot look to section 18 for relief. For the foregoing reasons the appeal will be dismissed. |
It seems clear to me that if an expense does not meet the first test of section 9 and is not an expense incurred by the taxpayer for the purpose of producing income from the property under paragraph 18(1)(a) it cannot be transformed into a valid deduction with the assistance of a limitation provision. The plain reading of these provisions is that no deduction shall be made in respect of any expense (property tax or other expenses) unless it was incurred by the taxpayer for the purpose of producing income from the business or property. If the expense in question is of a capital nature, it does not become deductible from revenue because of further limitations stipulated under subsection 18(2).
The plaintiff argues that there is ambiguity in subsection 18(2) and that the interpretation must be the one more favourable to the taxpayer8. However, there is no ambiguity if subsection 18(2) is considered for what it is, namely a limitation provision and not a provision opening a further deductibility not contemplated under subsections 9(1) and 18(1). Consequently, the interpretation bulletins issued by the Department of National Revenue are of no assistance to the plaintiff in this matter.
| 6- Prepaid expenses under subsection 19(9) of the Act |
In view of my conclusions that the development charges cannot be treated as a current expense for the purpose of computing the plaintiff's income under section 9 of the Act and that subsection 18(2) does not authorize the current deduction of property taxes, it is not necessary to deal with the defendant's alternative to the effect that the development charges are prescribed by subsection 18(9) of the Act.
| 7- Disposition |
The appeal is dismissed with costs.
O T T A W A
May 23, 1997
Judge
__________________1 [1993] 4 S.C.R. 695, at p. 723.
2 92 DTC 6023, at p. 6028.
3 [1995] 2 F.C. 232, at p. 236 (Leave to appeal to the Supreme Court of Canada has been granted.).
4 96 DTC 6407, at p. 6411 (Leave to appeal also granted.).
5 See F.E. West and Company (1921), 50 O.L.R. 631 at p. 640.
6 [1978] 2 S.C.R. 1198, at p. 1237.
7 Petrofina Canada Ltd. v. Markland Developments Ltd., [1977] 3 R.P.R. (N.S.S.C.) 33, at p. 37.
8 Partington v. Attorney General, (1869) L.R. 4 H.L. 100; referred to in The Corporation of the City of Ottawa v. Royal Trust Company et al., S.C.R. 526 at p. 541.