The Assistant Chairman:—This is an appeal from an income tax assessment dated May 28, 1971 pertaining to the appellant’s 1969 taxation year.
The facts which gave rise to this appeal are as follows: Cara Operations Limited (hereinafter referred to as “Cara”) was incorporated as a private corporation under the laws of Ontario in 1961. Its business included the operation of licensed restaurants and comprised in 1969 the operation of five licensed premises in Ontario. From the prospectus (Exhibit A-2) it appears that by supplementary letters patent dated July 19, 1968 Cara was converted from a private company with 500,000 preferred shares, of which 300,000 shares were issued and 60,000 common shares of which 1,009 were issued at $1 each, to a public company without preferred shares but 3,050,000 common shares without par value of which 1,833,230 shares were issued at a total price of $4,278,009. In effectuating the conversion from a private to a public company and the accompanying change in the company’s capital structure, its directors subdivided the 1,009 issued and 58,991 unissued common shares into 1,483,230 issued and 1,516,770 unissued common shares respectively, and issued 350,000 common shares of new stock. These 350,000 shares plus 181,650 common shares held by certain registered shareholders were offered to the public by the underwriters, Wood Gundy Securities Limited.
Because of this transfer of shares, and pursuant to the provisions of The Liquor Licence Act of Ontario and the regulations based thereon, the Liquor Licence Board of Ontario required the appellant to pay a transfer fee of $24,489—which amount was duly paid by the appellant and charged to its income for its 1969 taxation year. It is the deductibility of this amount for income tax purposes which is at issue in the present appeal. In reassessing the appellant for its 1969 taxation year the respondent disallowed the expense, contending that it was a capital outlay within the meaning of paragraph 12(1)(b) of the income Tax Act. The appellant objected, and in support of the appeal counsel for the appellant contends that the liquor licence transfer fees of $24,489 paid by the appellant in 1969 were deductible pursuant to paragraph 12(1 )(a) of the Income Tax Act as expenses in connection with the carrying on of its business. Alternatively, counsel submits that if it is found that the appellant’s liquor licences were in the nature of capital assets, the liquor licence transfer fees were properly deductible as expenses incurred in the course of issuing shares pursuant to subparagraph 11 (1 )(cb)(i) of the Act.
Counsel for the respondent, on the other hand, holds that the liquor licence transfer fee of $24,489 was an expenditure of a capital nature and not deductible. Furthermore, counsel holds that subparagraph 11 (1)(cb)(i) of the Income Tax Act was not applicable to the facts of this case because the transfer fee expenditures were not made “in the course of issuing or selling shares”. Counsel for the respondent raised a third point to the effect that if the transfer fees were held deductible pursuant to paragraph 12(1)(a) of the Income Tax Act as being expenditures on account of revenue, approximately only 2/3 of the $24,489 would be deductible by the company because 1/3 of the total issue of shares sold to the public was held by the shareholders of the company.
In considering the nature of the payments made by the appellant in respect of liquor licences, it is interesting to note the uncontradicted evidence that was adduced at the hearing to the effect that fees and other amounts including licence renewal fees previously paid by the appellant in respect of liquor licences were considered by the appellant as current and deductible expense items in its tax returns and were al- lowed by the Minister. If in fact liquor licences were uncontestably capital assets, as claimed by the respondent, then it seems to me that such expenditures made in respect thereof would not have been deductible.
The nature of a liquor licence from a statutory point of view is essentially temporary. Subsection 21(2) of The Liquor Licence Act of Ontario states:
21. (2) Subject to the provisions of this Act relating to the renewal, suspension and cancellation of licences, every licence expires at midnight on the 31st day of March next following its issue.
Section 32 of that Act provides that:
32. No person shall enjoy a vested right in the continuance of a licence and upon issue, renewal, transfer, cancellation or suspension thereof the value of a licence shall not be capitalized and becomes the property of the Crown in the Right of Ontario.
Regardless of what the policy or practice of the Liquor Licence Board of Ontario may be with reference to the issue, renewal or cancellation of liquor licences, the nature and viability of a licence is determined by The Liquor Licence Act of Ontario, and subsection 21(2) and section 32 of that Act cannot be easily ignored.
Counsel for the appellant, in support of his argument that the liquor licence transfer fee was an expense made in connection with carrying on its business and deductible under paragraph 12(1)(a) of the Income Tax Act made a distinction between the initial cost of obtaining a licence, which was regarded as a capital expenditure, and the costs of maintaining or renewing a licence which, as I have already pointed out, were accepted by the Minister as expense items. The distinction points to the existence of a fundamental problem in dealing with licences, but in my opinion it does not solve it because, if the licence is a capital asset, how can subsequent expenditures made directly in relation to the licences be accepted as expense items? Moreover, how can a licence which by statute is essentially temporary in nature, and the property of the Crown to boot, be considered as an enduring advantage in the nature of a capital asset to licence holders?
Liquor licences, because of their special nature, are legally-required government permits necessary to earn certain business revenues which must be renewed annually and as such cannot in my opinion be capital assets.
In reaching this conclusion I have not lost sight of the fact that there does exist in connection with the holding of licences an intangible enduring advantage to licence holders which arises, not from the licence itself, but from the reasonable expectation or hope that the licence will be renewed for an economically reasonable period of time. I am also of the opinion that there is more than an academic distinction to be made between the licence itself and the intangible enduring advantage of a capital nature enjoyed by licence holders.
Having come to the conclusion that a liquor licence is not a capital asset but a permit necessary to earn certain business revenues, it follows, it seems to me, that expenses incurred in obtaining or renewing a licence must be considered as expense items and deductible under paragraph 12(1)(a) of the Income Tax Act. This is made more evident by subsection 55(5) of the Regulations under The Liquor Licence Act which provides that a filing fee of $10 be paid in respect of the application for each licence or permit or the annual renewal thereof. Subsection 56(1) of the same Regulations requires, in addition to these $10 fees, which are annually recurring expenses and should be considered operational expenditures, the licensee to pay another fee based on the amount of liquor, wine and beer sold by the licensee in his establishment. Subsection 55(1) of the Regulations under The Liquor Licence Act prescribes the amount payable and subsection 56(2) establishes that these additional fees are payable strictly on a monthly basis. These fees are in fact a kind of excise tax levied by the Liquor Control Board based on the amount of alcoholic beverages purchased by the licensee from his suppliers in the year. From an accounting point of view, one may consider such fees part of the cost of goods sold or of the laid- down cost of merchandise inventory on hand. In this way, the licence fees are matched with the revenue which the business has generated during a given period and should therefore in my opinion for income tax purposes be considered expenditures on revenue account.
However, the specific issue in this appeal deals not with the filing, renewal or monthly fees described above, but with the liquor licence transfer fee which is covered by subsection 48(2) of The Liquor Licence Act which states:
48. (2) Upon transfer of a licence, this transferor shall pay to the Liquor Control Board of Ontario at the time of transfer, such fee as the Regulations prescribe.
Section 57 of Regulation 563 under The Liquor Licence Act defines how such transfer fees should be calculated, eg 100% of net value of beer purchased in the preceding 12 months where the purchases range from 100,001 to 110,000 gallons, and 90% of the value of spirits and wine purchased in the preceding 12 months where the purchases range from 130,001 to 140,000 gallons. This transfer fee is no longer a form of excise tax nor part of the cost of goods sold, nor is it an annually recurring expenditure which can be charged against current revenue.
The nature and the purpose of a liquor licence transfer fee differs essentially from that of the initial licence or annual renewal fees and from the monthly payable fees based on the beer and liquor purchased during the previous month. The transfer fee, on the other hand, is clearly based on the earning potential of a licensed establishment and is a “once and for all” payment levied by the Liquor Control Board only from the licensee when the latter wants to have his licence transferred to someone else, as a rule the one who takes over or has bought the licensee’s business. Unlike the ordinary liquor licence fees, the transfer fee takes into account the advantageous monopolistic position that was enjoyed by the licensee who now intends to convey that position to a third party, the new owner of the business, under the conditions and with the reasonable expectation of the buyer that such a licence will be renewed for an economically advantageous period of time. Here it seems to me we are dealing with an intangible but enduring asset of a capital nature which is distinct from, but related to, the holding of an annual liquor licence. Regardless of whether an accountant would charge the cost of the transfer fee to current revenue or to a capital account to be written off at a later date, such fees paid in respect of what ! consider a capital asset are for income tax purposes Clearly capital expenses and non-deductible.
As indicated above, the transfer of the appellant’s licence was not effected by an outright sale, but resulted from the transfer of the company’s and directors’ shares in the course of an issue to the public. Strictly speaking, no transfer of the licence actually took place in the appeal before me because the corporate entity remained outwardly unchanged. However, section 49 of The Liquor Licence Act provides that:
49. The Board may require the directors of an incorporated company that is the holder of a licence to present to the Board for approval any issue or transfer of shares of its capital stock and where, in the opinion of the Board, a substantial interest is issued or transferred, subsection (2) of Section 48 applies mutatis mutandis.
In the circumstances of this appeal, the transfer of the licence was deemed to have taken place and pursuant to subsection 48(2) of The Liquor Licence Act a liquor licence transfer fee was based on the percentage of shares transferred and thus levied against the appellant.
My conclusion therefore which is generally in keeping with the Exchequer Court decision, Metropolitan Taxi Limited v MNR, [1967] Ex CR 32; [1967] CTC 88; 67 DTC 5073, cited by both counsel, is that a liquor licence is not in itself a capital asset and fees paid for the obtaining, maintaining or renewal of liquor licences are current expenditures. However, a liquor licence transfer fee, which is directly related to the commercial benefit enjoyed by the licensee mainly as a result of the fact that he has had a special right to sell beer and liquor and which is, in fact, based on the reasonable expectation that such a licence will be renewed on a long-term basis which constitutes an intangible enduring asset of a capital nature is, in my opinion, a non- deductible capital expenditure.
Having reached the conclusion that the licence transfer fee of $24,489 paid by the appellant is not a deductible expense, counsel for the respondent’s alternative argument on the deductibility of roughly only 2/3 of the fee paid by the appellant has become irrelevant and I do not propose to deal with it.
However, counsel for the appellant contends that if the Board finds that the transfer fee is a non-deductible capital expenditure, then pursuant to subparagraph 11(1)(cb)(i) of the Income Tax Act the liquor licence transfer fee is properly deductible as an expense incurred in the course of issuing shares.
As described in the first paragraph of these reasons for judgment, there is no doubt that the appellant company issued and transferred shares. Nor is there any question, pursuant to section 49 of The Liquor Licence Act, that a liquor licence transfer fee was levied against the appellant because it was deemed by the Liquor Control Board that a substantial amount of shares were issued and/or transferred to the public. However, can it reasonably be held that the liquor licence transfer fees were incurred in the course of issuing these shares?
Counsel for the appellant contends that expenses incurred “in the course of issuing shares” is a flexible expression and includes expenses which are a necessary incident to the issuance of shares. In this case, since the transfer fee would not have been levied had there not been an issue or transfer of the appellant company’s shares, counsel concludes that the fee was a necessary incident to the transfer of shares and deductible under subparagraph 11(1)(cb)(i) of the Act.
I am not at all certain that the expression “‘in the course of issuing shares” is as flexible as counsel contends. Subparagraph 11(1)(cb)(i) is a clear exception to the general rule of the non-deductibility of capital expenditures and must be treated as such. In the strict interpretation that must be placed on the wording of the exception, it seems to me that “expenses incurred in the course of issuing shares” can only mean expenses which are inherent and essential to the actual issue of the shares and this would not include expenses which are only consequential or resulting from the issue.
Although the liquor licence transfer fee was in fact levied as a result or a consequence of the transfer of shares by the appellant, it cannot be considered as an expense which was inherent as essential to the issue of shares and for that reason does not, in my opinion, fall within the provisions of subparagraph 11 (1)(cb)(i) of the Act and is therefore not deductible.
I hold therefore that the liquor licence transfer fee of $24,489 paid by the appellant in the 1969 taxation year was a non-deductible capital outlay within the meaning of paragraph 12(1 )(b) of the Income Tax Act. I further hold that the liquor licence transfer fee was not an expense incurred in the course of issuing shares, and that the provisions of subparagraph 11 (1)(cb)(i) of the Income Tax Act are not applicable to the facts of this case.
For these reasons the appeal is dismissed.
Appeal dismissed.