October 07, 2011

International Nickel Company of Canada Limited (Plaintiff) v. Her Majesty The Queen (Defendant)

74 DTC 6096
Federal Court-Trial Division
January 7, 1974

Deductions — Mining company — Computation of depletion base — Effect of deduction for scientific research on base — Scientific research expenses as capital expenditures — Income Tax Act, R.S.C. 1952, ss. 11(1)(b), 11(1)(j), 12(1)(a) and (b) and 72(1)(a) [see ss. 18(1)(a) and 18(1)(b), 20(1)(t), 37(1)(a) and 65(1) of the new Act] — Income Tax Regulations, ss. 1200, 1201(2) and 1205.

The plaintiff mining company maintained that it was entitled to a greater depletion allowance for the years 1967 and 1968 than that granted by the Minister. During these years, the company claimed and was allowed deductions under section 72(1)(a) for the amount it had spent on scientific research. The company contended that, in computing its depletion base under section 1201 of the Regulations, the scientific research expenses were not deductible in determining its profits for the year since such expenses were not current business expenditures deductible in the ordinary course in the computation of profits but were expenditures of a capital nature. As an alternative, the company argued that, if it should be found that its scientific research expenses were properly deductible in computing its profits for the purposes of regulation 1201, then such expenses were expenses laid out for the purpose of earning income. When the Minister did not agree with these arguments, the plaintiff appealed to the Court.

Held: The appeals were allowed. The amounts spent by the company on scientific research were expenditures of a capital nature and, consequently, were not deductible in determining the company’s depletion base for the purposes of regulation 1201. In general terms, the purpose of a capital expenditure is to provide, enlarge or alter the facilities or machinery for profit-earning, as distinguished from the expense of operating those facilities or that machinery. It has been established by the jurisprudence that an expenditure is of a capital nature when it is made with a view to securing an asset or advantage for the enduring benefit of the trade. The plaintiff company’s scientific research expenses met these tests. The intention of the company in embarking upon and continuing its program of scientific research was to acquire for itself a fund of scientific knowledge upon which it could draw when necessity might arise. Just as expenditures to obtain a patent (a capital asset) are capital expenditures, so expenditures on research to acquire new knowledge, to devise and develop new processes and to improve existing processes are also capital expenditures. Having so concluded, it was unnecessary to consider the plaintiff company’s alternative argument.