Improvements v. Repairs or Running Expense

In 2006, the taxpayer acquired a rental property in run-down condition for $275,000 and then, between 2008 and 2010 incurred $290,074 in expenditures in order to restore the building to its original state. The taxpayer’s counsel conceded at trial that $34,900 of this amount spent on constructing a new exterior stairwell was a capital expenditure.

In finding that the balance of the expenditure was a currently deductible expense, Vaillant JCQ stated (at paras. 27-29, TaxInterpretations translation):

[T]he work carried out on the building consisted of correcting defects or deficiencies in the building created over time by a lack of maintenance. The problems were serious because the lack of maintenance dated back a number of years.

…What needed to be replaced was done, and without extravagance, only the minimum.

… [T]he work done in 2009, 2010 and 2011 on the building was in the nature of repairs.

Two Australian trusts that were to be the franchisees for seven McDonald’s restaurants agreed, at the same time as they agreed to enter into leases (“FLLs”) of the premises for base rents plus sales-based percentage rents, to make a lump sum “prepayment of rent” so as to reduce the percentage rent payable. With one exception, the leases did not provide for any refund of the prepaid rent in the event of early lease termination.

The trusts deducted the rent prepayments over a 10-year period. In finding that the rent prepayments were capital expenditures, so that such deduction was not permitted, Mckerracher and Stewart JJ stated (at paras 74-75, 79):

There is no principle that a payment that substitutes for future revenue outgoings or which compensates for them, or which more accurately in this case obviates or removes the need for them, must itself be revenue. …

[I]f the term … of the lease was irrelevant to the method of calculation of the payment [as was the case here], then any argument that the payment was in truth … a computation of prepayment of rent is extremely difficult to mount. …

The taxpayer has, in effect, purchased the right to have the better lease with the lower rent. …

A unit, in a 56-unit Vancouver condo complex, which the taxpayer had been renting-out for many years, was vacated by the current tenant and ceased to be rentable at a reasonable rent as a result of extensive remediation to the exterior of the building (“the entire housing complex became an active construction site” (para. 5)) that was commissioned by the condominium board. The taxpayer used this as an opportunity to attend (at the beginning of 2012) to long overdue repairs to recondition the unit’s interior, (“replacing some bathroom fixtures, sinks, vanities, toilet, kitchen cabinetry, countertops, appliances, fireplace insert, doors, hardware, door handles, railings, carpets/flooring, some millwork in terms of baseboards and painting” (para. 9)), spending $24,000, which was estimated to be 5% of the FMV of the unit. After the repairs, the unit was rented (at the end of 2012) for $2,200 per month, an increase of $700 per month.

The Minister denied the taxpayer’s deduction of the expenditures on the grounds that there were capital expenditures. In confirming their deductibility, Masse DJ stated (at para. 50):

… The repairs effected by the Appellant did not result in the creation of a different capital asset than what was there before. … They were meant to bring the property to the state that it previously was. There was no material changes to the physical structure, the layout or functionality of the unit. The expenditures were modest compared to the value of the property.

Two Australian trusts that were to be the franchisees for seven McDonald’s restaurants agreed, at the same time as they agreed to enter into leases of the premises for base rents plus sales-based percentage rents, to make a lump sum “prepayment of rent” so as to reduce the percentage rent payable. With one exception, the leases did not provide for any refund of the prepaid rent in the event of early lease termination.

The trusts deducted the rent prepayments over a 10-year period. In finding that the rent prepayments were capital expenditures, so that such deduction was not permitted, Jagot J stated (at paras 115, 119 and 125):

[T]he payments … were … a one off, lump sum, non-refundable payment made to secure an enduring advantage (the right to pay the lesser percentage rent) for the term of the [leases] and most likely the term of any renewal of the [leases]. The payments negated or extinguished any obligation to pay the higher percentage rent and did not thereby relate to any future obligation to pay rent. As a matter of substance the payments, although called the prepayment of rent, did not involve the payment of rent at all. …

… What [the trust] acquired through the payments was a business with a different structure, a business in which the percentage rent payable was permanently reduced … .

… The non-refundable nature of the payments suggests that they were not made to secure the right to occupy the premises under the lease and, rather, were capital in nature.

The taxpayer entered into lease agreements with two retailers, Pier 1 lmports and Bureau en Gros providing for the construction of buildings that would house stores for each of these enterprises in Sherbrooke and Candiac, Quebec, respectively. ln its tax returns for 2004, 2005 and 2007, the taxpayer capitalized half of the construction cost of such stores while deducting the other half as current expanses.

Schrager JA found no reversible error in the judge’s finding that the taxpayer had not clearly proved that all of the construction expenses were dictated by the tenants' requests (and, therefore, had not demonstrated that they were deductible in full).

The taxpayer, who carried on a business of constructing and renting commercial real estate, entered into a lease agreement with Téléglobe respecting a building which the taxpayer was to construct on the subject property in Montreal. The lease agreement provided that the lessor (the taxpayer) was to provide the lessee (Téléglobe) with “an initial Improvement Allowance” of $25.00 per square foot. Téléglobe retained the taxpayer to construct leasehold improvements. Upon their completion, the taxpayer invoiced Téléglobe for $2.7 million (which he included in the computation of his income) but issued Téléglobe a credit note for the $2 million amount of the improvement allowance.

After noting that in Canderel and Toronto College Park, the landlords made tenant inducement payments respecting already-constructed buildings in a market where there was a high vacancy rate, and in finding that the leasehold improvement payment of the taxpayer was a capital expenditure rather than deductible in computing his income, Lareau JCQ stated (at paras. 39-41, TaxInterpretations translation):

According to a tenant a budget of $25 per square foot for the construction of tenant improvements does not make that amount a TIP [tenant inducement payment] by virtue of the sole fact that it is paid in the first year of the lease. With respect, other elements must be put in evidence particularly where the lease provides that the budgeted amount must be devoted to the construction of the tenant improvements and consequently be assimilated to the building.

…No special circumstance respecting the market suggests that the amount procured an immediate benefit to Motter in avoiding a hole in his income or relieving a difficulty in satisfying financing conditions. There is no evidence that this amount was intended to deal with competition in a particularly difficult market or that Motter was required to obtain a tenant for the short term of this type in order to preserve his position and reputation in the market.

In sum, there is no proof that links this expense to anything other than the construction of the building with a view to a future benefit arising from the collection of rents over the term of the lease.

The taxpayer (“Aon”) built a large apartment complex (“Citi Centre”) in Peterborough in 1973 and 1974 and subsequently rented and operated it. As a result of significant water and salt damage to over half of the roof of the underground parking facility (which also served as a platform for traffic at ground level), Aon contracted for major work to replace the damaged roof in 2010-2011. The work did not increase any of the following: number of parking spots, parking rates, garage revenue, or apartment unit rates for Citi Centre tenants. The Minister treated Aon’s repair costs of over $4 million as the cost of a depreciable asset rather than as a currently deductible expense.

In finding that this amount was fully deductible, Jorré J first noted (at paras 83, 85):

Here we have significant work that will be enduring in the sense that the replaced area of the roof will likely be worry free for 20 to 30 years and will last longer than the worry free period. …

However, the new replaced area of the roof, half the roof, is inseparable from the floor of the garage below it and from the entire garage. There is no structural separation between the garage and the buildings that sit on top of the garage; in addition there is a legal requirement for the buildings to have the parking spaces.

He then concluded (at paras 90 and 91):

…[G]iven that it is quite clear that there is no improvement in the functionality or profitability of the garage and given that there is no reason to conclude that the work has had any significant effect in terms of increasing the value of Citi Centre compared to its value with the garage in a good state of repairs, this is not a situation where the work has created something new.

…[W]hile the expected duration of the work, the significance of the work and the fact that the roof uses better construction techniques make this a close case, the scale of the work in relation to the complex, the expected duration of the new portion of the roof and the technical improvements, technical improvements that do not increase the functionality of the garage, are not such as to tip the balance… .

The taxpayer (“Trustpower”), which was a New Zealand company engaged in the generation and sale of electricity, incurred costs totalling approximately NZ$17.7M in its 2006, 2007 and 2008 tax years in applying for and obtaining “resource consents” (i.e., land use consents, water permits and discharge permits) in relation to four proposed electricity generation projects (two wind, and two hydro-electric). The projects had not been further proceeded with excepting the first stage of one of the wind farms, nor had any of them been abandoned.

In finding that the expenditures were capital expenditures (so that their current deduction was prohibited by the relevant statutory “capital limitation”), Young J (speaking for the bench of five) stated (at paras. 48, 51):

The possibility that some, or all, of the expenditure may in the end turn out to be wasted does not displace the operation of the capital limitation. …

There is some Canadian authority [citing Bowater and Wacky Wheatley's] to the effect that expenditure on a capital project which does not result in the acquisition of a capital asset is deductible. The preponderance of authority, however, is to the effect that expenditure on a capital project is on capital account even though the project is never completed.

He then concluded (at paras. 71-72):

The expenditure on obtaining resource consents… was directly related to specific projects that would be on capital account if they came to fruition. The projects could not proceed without resource consents. Obtaining the consents thus represented tangible progress towards their completion.

… [H]owever...expenditure associated with early stage feasibility assessments may be deductible. Such assessments can be seen as a normal incident of business. … Expenditure which is not directed towards a specific project or which is so preliminary as not to be directed towards the advancement of such a project is likely to be seen as being on revenue account.

In 1987, the taxpayers acquired a three-unit rental property which, they were informed in 1993, was not zoned to permit three rental units. They applied for rezoning approval in 1993, and were required to re-apply in 2010, with their application then being granted. In finding that their related 2010 expenditures (approximately $21,000 in application and consulting fees) were deductible running expense rather than capital expenditures, Woods J noted (at para. 14) that "it is the nature of the expenditures from a practical perspective that should govern," and stated (at paras. 16-18):

Zoning compliance was an ongoing matter from the time the property was acquired in 1987, until the zoning amendment was finally approved in 2010.

Throughout this whole period, the use of the property did not change.

…[T]he expenditures should be viewed as ordinary expenditures incurred in connection with the day-to-day management of the rental property. It is true that the expenditures would likely have a long term benefit ... . However, I do not think that this should tip the balance to result in the expenditures being non-deductible capital expenditures.

In denying current deductions for $30,939 of the $36,939 costs of renovating two rental suites, Jorré J stated (at para. 23):

Although the quantum of expenses in itself does not prove anything, it could, for example, in comparison with a recent purchase price, be an indication that it was an improvement. ...

[That the taxpayer] spent almost $37,000 in addition to having worked between 30 and 40 hours a week for four months, a very large investment when compared with the purchase price of $75,000, is also an indication of improvements rather than mere repairs.

Considering repair expenses on a rental property, Favreau J. stated (at paras. 12-13):

In fact, it was a complete rehabilitation of the building that was in total disrepair and dangerous for the tenants.

The expenditures in question were significant, close to $175,000 in total, in comparison with the purchase price of the building, which was $98,500, that is, 1.75 times higher than the acquisition cost. Such expenditures cannot in any way be considered as being for minor repairs or regular maintenance.

The taxpayers were partners in a fishing business. Webb J. found that the taxpayers' costs to acquire new lobster traps and nets were a repair expense to the extent that they were acquired to replace worn or lost cages, and a capital expenditure to the extent that they replaced sold equipment or increased the taxpayers' equipment amounts above prior levels.

The taxpayer rented out several houses. One of them was severely damaged by a storm - it was lifted off its foundation, the mean floor beam cracked, and the most of the floor fell in. Boyle J. held that the taxpayer's repairs to restore the house to its original condition were income expenses. The facts were dissimilar to other cases where house repair deductions were capital expenses, because in those cases the property had been acquired, or rented out, only after the damage had occurred.

The taxpayer incurred an expense of $89,799 for the rezoning of a parking lot so that the construction of a condominium building would be permitted. The condominium project later was cancelled. The taxpayer sought to deduct the expenditure on the basis that this was equivalent to having added the expenditure to the cost of its parking lot, viewed as land inventory, and then deducting this amount in light of a decline in the value of the property. Hogan, J. dismissed the taxpayer's appeal with respect to this issue because no evidence or submissions were provided by it, and noted that in light of the jurisprudence "it could be argued that the cost incurred for the rezoning should be added to the land" (para. 124).

The complete replacement of old walls of a purchased triplex with new ones gave rise to capital expenditures, as did the replacement of fuse panels by circuit breaker panels, the addition of soundproofing and of insulation. The leveling of the floors of the triplex gave rise to deductible expenditures.

In finding that expenditures incurred in three taxation years of approximately $27,000, $40,000 and $46,000 to renovate a rental property that was "worn out" and had substantial deficiencies were on capital account, Angers, J. stated (at para. 10) that once the repairs were completed "a totally different house was created that now could satisfy the requirements of the insurer, a house that according to the evidence, was more secure and habitable".

An expenditure to replace a deck on a rental residential property of the taxpayer was fully deductible notwithstanding that there were some changes in the materials used compared to those used in the previous deck.

Expenditures incurred by the taxpayers in redoing the lower unit of a duplex including pouring a new foundation in cement only (whereas the previous foundation had been stone and cement), and completely redoing the walls, bathroom and kitchen and adding beams to the ceiling, were on capital account.

Costs of repairing the garage floor and replacing brick on the exterior wall of a building were currently deductible expenditures, whereas transfer tax paid on the purchase of the building was a capital expenditure.

Expenditures on a rental condominium apartment that included such items as kitchenware, small appliances, decorations, sheets, and cookware were deductible expenditures. Beaubier J. stated (at para. 4) that "these are allowed because they appear to be portable unattached items which are easily broken, stolen or lost by tenants and need constant replacing". However, renovation expenses including new countertops, a toilet and custom draperies, and the cost of removing asbestos, were capital expenditures.

$622,990 which the taxpayer spent in the taxation year in question in replacing 709 of its smaller transformers was a fully deductible expense incurred on income account given that in the context of the size of the taxpayer's electrical distribution system the replacement of small transformers was analogous to replacing a spark plug in an engine, that their replacement did not enhance its system but merely restored it to the state required to keep it functioning as intended, and that while any given transformer might remain useful for 33 years, at any given moment there would always be another, somewhere in the system, that needed to be replaced.

Work on a property that the taxpayer had purchased from a shareholder with a view to making it suitable for use as its offices, including converting the existing garage into office space, replacing garage doors with windows, converting the former office space into a storage room, putting a second storey containing a bedroom above the former garage, installing a new sloped roof, installing a new staff washroom and replacing the septic system all were expenditures on capital account. Although some of the work eliminated the need to address deficiencies in the existing building, this was not a basis for regarding a portion of the work as a cluster of disparate repairs.

Work done on another property that the taxpayer leased, consisting of upgrading the existing electrical wiring (including resulting required repairs to drywall) and replacing worn carpets, gave rise to fully deductible expenditures.

Various expenditures incurred by the taxpayers in repairing or modifying a building they had purchased for use in providing storage units to the public, including replacing the heating system (which broke down suddenly 18 months after purchase) with a differently designed system, installing various divisions among new storage units, and replacing doors, were incurred on income account given that these expenditures were of a recurring nature or did not give rise to an enduring benefit in light of the limited useful life and future of the building.

Monthly fees that the taxpayer (a public company operating several chains of clothing stores in Canada) paid to an independent lease company for its services in negotiating and renegotiating leases for the taxpayer's stores and shopping centres were paid on capital account given that the overriding purpose of the expenditures was to expand the taxpayer's business by entering into new leases and by extending expiring ones, the leases were part of the structure of the taxpayer's business and they represented an enduring benefit given that they had terms ranging from five to seven years.

Maintenance and repairs expenses incurred with respect to a house of the taxpayer were on capital account given that there was no expectation of rental revenue from the property and the expenses were instead incurred in order to maintain the value of the property as collateral and for possible resale purposes.

The taxpayer purchased for $285,000 a building with a leaky roof. After evaluating the possibility of repairing the old roof, the taxpayer determined to construct a new roof, with a different slope, on top of the old roof, so that the old roof would then serve as a partition. The $57,304 expense incurred in performing this work was a capital expenditure.

The installation of a system on aircraft of the taxpayer in order for them to comply with new regulations that required the aircraft to be quieter on takeoff, approach and landing, merely allowed the aircraft to maintain their normal values and to continue operating under the new noise regulations in the same way as they had done in the past. Accordingly, the costs of purchase and installation were fully deductible on income account.

The taxpayer used the overburden and tailings produced or extracted by it in the process of extracting bitumen from oil sands deposits to construct dykes separating disposal areas from active mining areas, and deposited the balance of the tailings in the disposal areas. Bell T.C.J. found that the expenditures made in this operation (primarily on payroll) were not capital expenditures given that similar expenditures would have to be made in each of the subsequent taxation years and that the tailings had to be disposed of as part and parcel of the production process, and stated (at p. 668) that:

"No asset of enduring benefiting was created, the tailings ponds and dykes in each year having been limited in capacity and usefulness by the expenditures made on them in that year for that year only."

The formula for ascertaining the cash consideration paid by the taxpayer on the purchase of the assets of a business involved calculating the value of the assets transferred to it and deducting an estimated sum in respect of accrued staff liabilities. The total consideration given by the taxpayer was expressed to be that cash consideration together with the assumption of liabilities, including all liabilities of the vendor in respect of the transferred employees. Because the accrued staff liabilities had been assumed by the taxpayer as part of the consideration for the purchase of the assets, the discharge of that liability was a capital expenditure. Lord Hoffmann noted (at p. 247) that "there can be no doubt that the discharge of the vendor's liability to a third party, whether vested or contingent, can be part of the purchase price".

The taxpayer, which distributed natural gas through a low pressure network of underground cast iron pipes ("mains") and smaller steel spurs running from the mains to individual premises ("services"), inserted polyethylene pipes into a significant portion of its mains and services in the taxation years in question. After accepting that the relevant asset was the entirety of the system, Lord Nicholls indicated that because, after this change, gas was no longer distributed through the mains and services but, rather, through polyethylene pipes (with the mains and services serving only to help protect the polyethylene pipes) and because this change effected a significant improvement (given that the new pipes were virtually leak free, were better suited to the passage of natural gas and carried the gas at a higher pressure), the related expenditures were on capital account. "Far from restoring the gas distribution system to its original state, the work changed the character of the existing gas distribution system ... ." (at p. 255).

Before finding that the corporate taxpayer was entitled to currently deduct substantial expenditures incurred by it in restoring various apartment buildings, Brulé TCJ. stated (at p. 1421):

"A pitched roof performs the same function as a flat roof ... . It is the question of whether an improvement or upgrade has been made to the building that impacts substantially on the original structure not whether the same function is being performed."

The cost incurred by the taxpayer in replacing approximated 5.7% of the total length of its main trunk line was a capital expenditure. (Mogan TCJ. indicated that although replacing parts of a complicated machine representing from 5% to 10% of the physical size of the machine likely would be a current expense, a different approach applied where the "whole is composition of homogeneous parts like a railway running from Vancouver to Calgary" (p. 1092). On the other hand, expenditures incurred in replacing part or all of a pipe joint, applying sleeves to an existing length of pipe or removing a defect by sanding the surface represented current expenses given that these repairs would probably occur to some degree each year (or every fifth year as part of a survey for corrosion) and no single site or location would represent a major repair.

In finding that the costs of substantial repairs incurred to remedy extensive fire damage were capital expenditures, Hamlyn TCJ. stated (at p. 1000) that "the effect of the expenditures brought the rental property back into existence. The house was virtually rebuilt and resulted in a new capital asset".

The taxpayer was unable to deduct the cost of replacing the roof of premises that were rented to it because such repair was the responsibility of the landlord (its shareholder).

$150,000 paid for the acquisition of fishing licences by a company in the business of catching and selling fish was a capital expenditure. First, the licences were "a necessary foundation of a fishing business in the same way as a boat and nets or other tackle". Second, although the licences were only for a short term and had to be renewed annually, the "expectation of a long series of renewals in the future" represented an asset of an enduring nature (p. 2037).

An expenditure of $4,360 made by the taxpayer to replace the motor of his "skidder" was found to be fully deductible given that the cost of the reconditioned motor was equal to what would have been the cost of repairing the existing motor.

Before finding that various expenditures made by the taxpayer in respect of a vessel, before the vessel sank and before the taxpayer acquired title to it, were either currently deductible expenditures or part of the cost of a depreciable asset that thereby gave rise to a terminal loss, Bowman TCJ. stated (p. 1952) that if the expenditures:

"did not result in the acquisition of an asset for the enduring benefit of the business they cannot ... be regarded as capital in nature."

The Crown's position, that the expenditures were non-deductible capital expenditures, was "inconsistent with ordinary fairness, common sense and commercial reality".

The $4,000,000 costs of installing a fiberglas liner in a subsea crude oil pipeline which had suffered unanticipated substantial corrosion from sea water were fully deductible given that the work did not add to the originally anticipated lifetime of the pipeline and that the liner did not constitute a separate structure (given that it could not function at all if it had not been situated and sealed within the pipeline).

The taxpayer, which was a co-owner of a shopping plaza, arranged for the parking facilities to be expanded by having the City of Montreal close off a street, convey the related lands to the co-owners, and re-open the street onto land further to the north that was conveyed to the City by the co-owners. A cash payment of $480,900 that reimbursed the City for related expenditures was a capital expenditure because it was made by the taxpayer in connection with expanding the parking capacity of the shopping centre, i.e., for the purpose of expanding the taxpayer's operating structure.

In finding that the cost of replacing a leaking flat roof by a pitched roof was not deductible, Rowe D.J. stated (p. 68):

"The new pitched roof created an improvement to the building of an enduring nature and was a differing kind from the old flat roof. The appearance of the building was not changed and the new roof did not cause any increase in value of the building ... The new roof did, however, comprise a substantially different integral part of the capital asset."

The taxpayer spent $60,836 on improving a dilapidated house which he had purchased for rental purposes. The deduction by the taxpayer of $19,420 of this amount was affirmed on the basis that it represented repairs to put the house back to its original state and not to effect a lasting permanent structural improvement, e.g., painting and wallpapering, repairs of floors, and replacement of drywall and fixtures.

A consultation fee of $20,000 which the taxpayer paid for several real property studies on various income-producing properties (three of which the taxpayer acquired in the year in question) was deductible on income account given that the studies were valid only for a limited time. $2,000 in notarial fees also were deductible.

The deductibility of soft costs incurred by the taxpayer in connection with the acquisition of condominium units from a developer was not affected by the fact that such soft costs exceeded the amount of current expenditures incurred by the developer in connection with the condominium units.

The cost of various repairs to a house such as new floor coverings, repairs to windows and window boxes, refacing fireplaces, replacing fire brick, fixing old plumbing, refacing interior walls of chimneys, replastering and repainting the interior were attributable to normal wear and tear and, therefore, were deductible. However, the replacement of the oil furnace with baseboard, the erection of a fire-rated partition, the insulation steel-enclosed doors, and the cost of new kitchen cabinets and the expansion of a bathroom in the basement were capital expenditures.

A winter storm blew off the asphalt layer on the taxpayer's apartment building. The cost of replacing the asphalt and repairing consequential damage to other parts of the building, was deductible.

summarized in Earl v. The Queen, 93 DTC 65 (TCC)

Expenditures to completely replace the wooden flooring to balconies in a duplex which had rotted through and to completely replace inadequate plumbing were fully deductible given that they did not increase the "normal" value of the duplex, i.e., its value if such items had been kept in repair on a current basis.

"[E]xpenditure incurred for the benefit of the whole estate is a capital expense." Insurance policy premiums were paid "for the benefit of the whole of their respective trust funds because the capital of the trust will be augmented by the policy moneys which will be received if and when the policies mature", and accordingly were capital expenditures. Similarly, annual fees paid "to a firm of investment advisers to keep under review and to advise changes in investments comprised in the trust fund" were "incurred for the benefit of the estate as a whole because the advice of the investment advisers will affect the future value of the capital of the trust fund and the future level of income arising from that capital", and accordingly were capital expenditures.

Regular contributions that were made by the taxpayer of 5% of its annual profits to a trustee with a view to building up a trust fund that would supplement a state pension plan, were deductible.

In order to provide an alternate means of access by its customers to its warehouses, the taxpayer (which carried on the trade of providing warehouse space) made an agreement with the local authority where upon it conveyed to the local authority a strip of land for the purpose of depriving itself of access to the existing road, and it was permitted to construct at its own expense a new access road across land belonging to the authority, with a perpetual easement of way. In reversing a finding of the Special Commissioners (who had found "that no new capital asset has been created when the Company for the sake of its good name gave up one road and built another"), Megarry J. found that the expenditures of the taxpayer were capital expenditures and stated (at p. 645) that "the Company acquired an asset with enduring qualities, intended to be used indefinitely in the manner of a fixed asset of a capital nature, as appurtenant to certain existing fixed assets, consisting of its warehouses".

After finding that an expenditure made by the taxpayer in lengthening and heightening a building and constructing a new roof represented a capital outlay, the Court rejected an argument that the items of expenditure should be dissected so as to attribute so much to a hypothetical repair and the balance to hypothetical renewal or improvement.

In finding that £3,200 paid by the taxpayer (a carting contractor) in half-yearly instalments over an eight-year period for the right to deposit waste soil on the counterparty's land, were capital expenditures, Lord President Clyde stated (at p. 42) that "the provision of dumping accommodation, which was secured by means of the contract, was in the same position as the provision of premises, or any other capital asset of a relatively permanent character".

The taxpayer owned one ship only, which was seized by the Germans in 1914 and returned in 1918 in a condition which required extensive repairs. In finding that these expenditures were not deductible, Lord Sands noted (at p. 16) that if the taxpayer "had purchased another dilapidated ship and reconditioned her the expense of such reconditioning would have been held to be capital outlay, Law Shipping Co., Ltd, ..." and that here, it made no difference that the ship in question had previously been the taxpayer's ship. He also stated (at p. 14) that "broadly speaking, outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment".

In finding that a lump sum paid by the taxpayer to establish a pension fund for the benefit of its employees was a non-deductible capital expenditure, Viscount Cave L.C. stated (pp. 213-214):

"... When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital ... The object and effect of the payment of this large sum was to enable the company to establish the pension fund and to offer to all its existing and future employees a sure provision for their old age, and so to obtain for the company the substantial and lasting advantage of being in a position throughout its business life to secure and retain the services of a contented and efficient staff."

The terms of the underground lease entered into by a coal mining company required it to restore all grounds damaged by the taxpayer on the termination of the lease or to instead pay an amount in satisfaction of this obligation. An amount so paid by the taxpayer was a capital expenditure given that this obligation was part of the consideration for the acquisition by the taxpayer of the lease, which was a capital asset.

Because the Harbour Authority had been delinquent in doing any dredging work over a 15-year period, the channel to the taxpayer's ship-building works became silted up. Because the Authority did not have the necessary funds for complete restoration of the channel, dredging was performed to a lesser depth and the taxpayer was provided with a deep-water berth, with both the taxpayer and this Authority contributing funds to the scheme.

Rowlatt J. noted (at p. 675) that if the taxpayer, itself, had done dredging every, say, three years, such expenditures would have been deductible stating "the real test is between expenditure which is made to meet a continuous demand for expenditure, as opposed to an expenditure which is made once for all ...". Here, however, the expenditure was on capital account because, on a true view, it "was incurred in making what was in effect a new means of access from their works to the sea ..." (at p. 678).