Lewis Eric Reford v. Minister of National Revenue, [1971] CTC 76, 71 DTC 5053

WALSH, J.:—This is an appeal from the assessment made by the respondent with respect to the appellant’s 1962 taxation year, notice of which was given by a notice of re-assessment dated January 30, 1968. The facts giving rise to the notice of re-assessment and appeal therefrom can be summarized as follows. In 1947 the Robert Reford Company Limited (hereinafter referred to as the Company ’ ’ ) owned lands and buildings, the original cost of which had been $433,433 on which the Company had been allowed prior to 1947 a depreciation allowance of $208,289.73 pursuant to Section 6(1) (n) of the Income War Tax Act. These lands and buildings were sold in 1947 for $285,000. In 1948 the Company took out a number of insurance policies on the life of appellant of which it was the beneficiary and paid the premiums and the cash surrender value of these policies as of December 31, 1962 was $61,697.38.

In 1962 the Company paid a stock dividend of $1,160,000 at which time appellant owned 6,500 of the 10,000 issued shares of the Company. Respondent’s re-assessment of income tax in respect of appellant’s 1962 taxation year is based on the assumption that immediately prior to the payment of the stock dividend, the Company had undistributed income on hand in the amount of $127,605.72 of which appellant’s proportion would be $82,943.71. The figure of $127,605.72 was arrived at by respondent by adding the aforementioned sum of $61,697.38, being the cash surrender ‘value of the insurance policies, an amount of $6,051.61 on account of miscellaneous items, predominantly disallowed capital cost allowance, and an amount of $59,856.73 capital profit arising out of the sale of the land and buildings which appeared in the earned surplus account of the Company for the year ending December 31, 1947, and was calculated by deducting from the $285,000 sale price of the land and buildings the sum of $225,143.27 being the depreciated value of same after deducting from the initial cost of $433,433 the depreciation allowance of $208,289.73.

At the opening of the hearing appellant’s counsel indicated that appellant was abandoning its argument with respect to the cash surrender value of the insurance policies. Appellant contends, however, that instead of having realized a capital profit from the sale of the real estate, the Company for the purposes of computing the undistributed income on hand, actually incurred a loss of $148,433 calculated by deducting the sale price of $285,000 from the cost of the property of $433,433 and that immediately before the payment of the stock dividend the Company therefore had no undistributed income on hand and therefore no amount was to be included in its income under Section 81 of the Income Tax Act.

The amount of income tax and interest in dispute is $40,647. The other shareholders of the Company also received a portion of the stock dividend and were assessed thereon in the same manner and it has been agreed that their cases will follow the decision in this appeal.

The only witness called was Herbert Oscar Spindler who was called by respondent as an expert witness whose affidavit had already been filed and same was read into the record. He is a partner in the firm of McDonald Currie and Company, Chartered Accountants, has been a Governor of the Canadian Tax Foundation and Chairman of the Taxation Committee of the Canadian Institute of Chartered Accountants, one of the coauthors of a book entitled “Canadian Estate Planning’’ and has lectured at MeGill University on accounting. His conclusion. on the basis of the facts set out herein, is that the Company realized a capital gain of $59,856.73 from the sale of the property rather than a capital loss of $148,433. He based his opinion on the fact that it was a principle of accounting to write off the cost of a depreciable asset less estimated salvage against income over its estimated useful life. Depreciation is charged annually against income and an accumulated depreciation account is credited with the same amount so that at the end of any given period the net book value of a depreciable asset will ordinarily be the original cost of the asset less accumulated depreciation in respect thereof and if the asset is disposed of, the gain or loss on disposal will be the difference between the proceeds of disposition and the book value of the asset. Accordingly, the gain or loss on the disposition of an asset can only be computed as the difference between the original cost and the proceeds of disposition if no depreciation has been provided. There will then be a loss at the end of the useful life of the asset if it does depreciate in value and the profits in previous years will have been overstated and financial statements distorted accordingly. He supported his view by quotations from a number of recognized accounting authorities. During the course of his testimony, he stated that accountants now use the ‘clean surplus theory’’ whereby all receipts are shown on the income statement but capital gains appear under a separate heading. This was not done in the case of the Company at that time; nevertheless, his firm, which is associated with Cooper Brothers, the auditors of the Company at the time, would have treated this sum as a capital gain. Although there was no section in the Income War Tax Act in effect at the time similar to Section 82(7) of the present Income Tax Act, he would nevertheless have considered this sum as a capital gain at that time by the application of general accounting principles.

The tax claimed in the present case arises out. of the capitalization of what the Minister claims was undistributed income by means of a stock dividend. Section 81(3) of the Income Tax Act reads as follows:

81. (3) Where the whole or any part of a corporation’s undistributed income on hand has been capitalized, a dividend shall be deemed to have been received by each of the persons who held any of its shares immediately before the capitalization equal to the shareholder’s portion of the undistributed income that was capitalized.

Section 81(6) provides:

81. (6) Where a corporation has paid a stock dividend, the corporation shall, for the purpose of subsection (3), be deemed to have capitalized immediately before the payment undistributed income on hand equal to the lesser of

(a) the undistributed income then on hand, or

(b) the amount of the stock dividend.

The issue arises out of the computation of the undistributed income on hand. Section 82(1) of the Act defines “undistributed income’’ by totalling the income of the Company for each of its taxation years commencing with 1917. The section then allows from this aggregate amount a number of deductions such as business losses, expenses not allowed as deductions in computing income, dividends, ete. The amount which results from totalling the incomes and then subtracting the statutory deductions is the undistributed income on hand. Appellant claims that the Company sustained a capital loss on the sale of the land and buildings in 1947 and that the deduction in question was allowed by Section 82(1) (a) (iii) which provides as follows:

82. (1) In this Act,

(a) “undistributed income on hand” of a corporation at the end of, or at any time in, a specified taxation year means the aggregate of the incomes of the corporation for the taxation years beginning with the taxation year that ended in 1917 and ending with the specified taxation year minus the aggregate of the following amounts for each of those years:

(iii) the amount by which all capital losses sustained by the corporation in those years before the 1950 taxation year exceeds all capital profits or gains made by the corporation in those years before the 1950 taxation year,

It is in the calculation of capital losses sustained prior to 1950 that the appellant and the Minister disagree. The appellant concedes that if the depreciation allowance is to be taken into account in computing the capital loss for the purpose of the undistributed income calculation then the appeal is to be dismissed.

The depreciation allowance in issue arose under the /ncome War Tax Act which was first enacted in 1917 and was replaced by The 1948 Income Tax Act which was applicable to the 1949 and subsequent taxation years. Appellant’s counsel argued that depreciation allowance does not reduce the loss on realization of an asset but merely prevents the imposition of income tax on that portion of the asset which is used up each year. In support of this contention he quoted the case of F. J. A. Davidson v. The King, [1945] C.T.C. 189, where at page 195 Thorson, P. stated :

. . . The depreciation allowance is purely a statutory allowance authorized as a deduction or exemption from what would otherwise be taxable income. Without the statutory authority for its deduction or exemption it would be taxable income. In that sense it is income that is exempt from tax but the true reason for such exemption is that, while it is included in what would otherwise be taxable income arrived at by deducting expenses from receipts, it is in reality an item of capital rather than one of income. . . . The principle underlying. the depreciation allowance is that an asset used in the production of income will in time be used up in the course of such production and that it would be unfair to tax the taxpayer on the full amount of the income produced from the use of his asset, since to do so would mean taxing him not only on the income from use of the asset but also on that portion of the asset itself that has been used up in the production of such income. The allowance for depreciation is, therefore, in this sense an item of capital representing the diminution in value of the asset for use in income production and is granted in order to enable the taxpayer to keep his tax producing position intact— he will still have his asset with its diminished tax producing _. value but he will also have the depreciation allowance to make up for such diminished value.

In further support of his argument that the depreciation allowance is restricted to the computation of profits, appellant’s counsel cited Section 6(1) (n) of the Income War Tax Act reading as follows:

6. (1) In computing the amount of the profits or gains to be assessed, a deduction shall not be allowed in respect of

(n) depreciation, except such amount as the Minister in his discretion may allow, including . ..

He. pointed out that some provision was made in the Income War Tax Act for the calculation of undistributed income and that the deduction of capital losses was dealt with by Section 94(l)(c)(iv) which provided for the deduction of

(iv) the amount by which all capital losses sustained in the said periods by the company exceeds all capital profits of the company in the said periods,

He then made the distinction between the current Income Tax Act which contains in Section 82(7)* [1] a specific provision which provides for the reduction of capital losses by the amount of capital cost allowance taken whereas the Income War Tax Act did not contain such a provision with respect to depreciation allowances and argued that therefore, in the absence of such a provision, the depreciation allowances granted under the Income War Tax Act are not to be taken into consideration in computing capital gains or losses for the purposes of a 1962 undistributed income calculation.

In the present Act Section 82(1) (a) (iii) allows the deduction of the amount by which pre-1950 capital losses exceed pre-1950 capital gains and Section 82(7) (a) requires that where depreciable property has been disposed of in 1949 or subsequently, the capital loss is not to be more than the actual capital cost of the property minus the capital cost as determined for the purpose of Section 20 of the Act. The capital cost as determined by Section 20 is the actual capital cost minus depreciation granted or capital cost allowance taken.* [2] Section 144(1) of the Act dealing with transitional provisions brings this pre-1950 depreciation into Section 20. Section 82(7) still provides, however, only for the case where the sale has taken place in 1949 or in a subsequent taxation year, and the Act nowhere deals with the application of depreciation allowance to the determination of capital gain or loss for the purposes of an undistributed income calculation where the depreciable property in question was disposed of prior to 1949. He argued that since the Act does not contain any provision to take into account, in

(iii) an amount payable under a policy of insurance in respect of loss or destruction of property,

(iv) an amount payable under a policy of insurance in respect of damage to property except to the extent that the amount has, within a reasonable time after the damage, been expended on repairing the damage,

and

(v) an amount by which the liability of a taxpayer to a mortgagee is reduced as a result of foreclosure of his interest in property that is mortgaged or as a result of the sale of that property under a provision of the mortgage, plus any amount received by the taxpayer out of the proceeds of such sale;

the case of a 1947 disposition, the depreciation allowances granted in computing undistributed income, it must be concluded that the depreciation allowance is not to be so taken into account, as clear words are necessary to tax and the Crown must bring the taxpayer within the letter of the law. In this connection he cited the case of Versailles Sweets Limited v. Attorney General of Canada, [1924] S.C.R. 466, in which Duff, J. at page 468 referred to the judgment of Lord Cairns in Partington v. Attorney General (L.R. 4 H.L. 100 at p. 122) as follows :

I am not at all sure that, in a case of this kind—a fiscal case— form is not amply sufficient; because, as I understand the principle of all fiscal legislation, it is this: if the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible, in any statute, what is called an equitable construction, certainly such a construction is not admissible in a taxing statute, where you can simply adhere to the words of the statute.

Against this, respondent’s counsel argued that the purpose of Section 82(1) (a) (iii) and (iv) is to permit the taxpayer to deduct all capital losses to the extent that they exceed capital gains, but it would obviously be unfair and unreasonable if he were allowed to deduct capital losses and ignore capital gains. As there is no capital gains tax, capital gains are relevant only up to the point where they match the capital losses and their only effect is as a set-off against capital losses. Neither capital gain nor capital loss is defined in the Act but the word “loss” is defined under Section 139(1) (x) as follows:

139. (1) In this Act,

(x) “loss” means a loss computed by applying the provisions of this Act respecting computation of income from a business mutatis mutandis (but not including in the computation a dividend or part of a dividend the amount whereof would be deductible under section 28 or subsection (6) of section 68A in computing taxable income) minus any amount by which a loss operated to reduce the taxpayer’s income from other sources for purpose of income tax for the year in which it was sustained;

He conceded that this section does not appear to have any application to capital losses as the provisions of the Act respecting computation of income could not be applicable to the computation of a capital loss. A specific definition of ‘‘loss’’, however, is given in Section 82(4)* [3] with respect to the interpretation to be given to the word ‘‘loss’’ in Section 82(l)(a)(i).t [4] He argued further that whereas under the Income War Tax Act what the taxpayer deducted was depreciation the amount of which was, for income tax purposes, in the discretion of the Minister, under the Income Tax Act the taxpayer does not deduct depreciation but rather a statutory allowance governed by regulations. There was therefore no necessity in the Income War Tax Act for any such provision as is found in Section 82(7) of the Income Tax Act. Where a statutory allowance is deducted it is conceivable that it might be argued that this deduction was not relevant nor could it be taken into account in determining capital gains or losses since accounting depreciation and capital cost allowance are two separate things and hence this section was necessary in the present Act. Under the Income War Tax Act depreciation was deducted, there was no recapture, but neither was there any claim for terminal loss, whereas under the Income Tax Act statutory capital cost allowance is deducted, recapture is provided for under Section 20, and terminal loss is provided for under Section 1100(2) of the Regulations. The mere fact that provision is made for the deduction of the statutory cost allowance in the present Act therefore does not. lead to the inference that depreciation allowed under the Income War Tax Act should not be deducted in determining capital gain or loss in a pre-1949 sale.

- He argued that even if the Act is silent with respect to taking depreciation into consideration in calculating the capital gain or loss in such a sale, this practice is consistent with accepted business principles and commercial accounting and, moreover, leads to a reasonable result, whereas appellant’s position would lead to an absurdity in that the Company had already deducted

the amount which it is now seeking to deduct: again by claiming that it suffered a substantial loss on the sale of the property (presumably as the result of its depreciation in value) when such depreciation had already been foreseen and provided for by the annual depreciation allowed. He further argued that while the expressions “capital loss’’ or ‘‘capital gain’’ are not defined in the statute, they are expressions well known and in current use in the commercial world, that they have a very precise meaning to accountants and that in the absence of some indication to the contrary this is obviously the meaning which Parliament intended to attribute to them. It was well established by the evidence of Mr. Spindler that capital gain or capital loss is determined by finding the difference between the book value arrived at after deducting depreciation and the selling price and that in the present case the Company’s treatment of this sale in its 1947 balance sheet is consistent with the accepted accounting procedure. The term ‘‘capital loss” has been considered by the United States courts and their interpretation is consistent with this argument. (See: United States v. Ludey, 274 U.S. 295; 47 S. Crt. 608; U.S. Tax Cases, Vol. 1, 1573; State v. Nygaard, 217 N.W. 685, 195 Wis. 192; and Lapham v. Tax Commissioner, 138 N.E. 708, 244 Mass. 40.) He argued that if the interpretation to be given to a statute leads to an absurdity when there is another interpretation that can be put upon it then the interpretation that conforms to the apparent scheme of the legislation is that which should be adopted, referring in this connection to the cases cited in Cree Enterprises Ltd. v. M.N.R., [1966] C.T.C. 166 at 178-9. In that judgment Gibson, J. referred to the case of Shannon Realties v. St. Michel ([1924] A.C. 192) in which it was stated that if the words used are ambiguous, the court should choose an interpretation which will be consistent with the smooth working of the system which the statute purports to be regulating. He also referred to the case of Highway Sawmills Limited v. M.N.R. ([1966] C.T.C. 150) in which Cartwright, J. stated:

The answer to the question (as to) what tax is payable in any given circumstances depends, of course, upon the words of the legislation imposing it. Where the meaning of those words is difficult to ascertain it may be of assistance to consider which of two constructions contended for brings about a result which conforms to the apparent scheme of the legislation . . .

In the Highway Sawmills case the question of double deduction also arose and Cartwright, J. had this to say at page 158 :

. . .' The scheme of the legislation is to allow the taxpayer to deduct the whole of the net cost of such capital asset in arriving at its trading profit. The judgment of the Exchequer Court in this case brings about this result. If, on the other hand, the contention of the appellant was upheld the result would be that it would have been permitted to deduct the total original cost of the capital asset although it had already recovered $22,620 of that cost.

In support of his contention that the ordinary principles of accounting should be adopted, counsel for respondent referred to the case of M.N.R. v. Joseph 8S. Irwin, [1964] S.C.R. 662; [1964] C.T.C. 362, where Abbott, J. had this to say (p. 664 [364] ) :

The basic concept of “profit” for income tax purposes has long been settled. A recent statement of the principle is that of Viscount Simonds in M.N.R. v. Anaconda American Brass Ltd., [1956] A.C. 85 at page 100 [[1955] C.T.C. 311]:

“The income tax law of Canada, as of the United Kingdom, is built upon the foundations described by Lord Clyde in Whims ter & Co. v. Inland Revenue Commissioners (1925), 12 T.C. 813, 823, in a passage cited by the Chief Justice which may be repeated. ‘In the first place, the profits of any particular year or accounting period must be taken to consist of the difference between the receipts from the trade or business during such year or accounting period and the expenditure laid out to earn those receipts. In the second place, the account of profit and loss to be made up for the purpose of ascertaining that difference must be framed consistently with the ordinary principles of commercial accounting, so far as applicable, and in conformity with the rules of the Income Tax Act, or of that Act as modified by the provisions and schedules of the Acts regulating Excess Profits Duty, as the case may be. For example, the ordinary principles of commercial accounting require that in the profit and loss account of a merchant’s or manufacturer’s business the values of the stock-in-trade at the beginning and at the end of the period covered by the account should be entered at cost or market price, whichever is the lower; although there is nothing about this in the taxing statutes.’

He contended that the Versailles case (supra) referred to by appellant’s counsel has no bearing on the matter since the Minister is not seeking to collect tax by inference but merely to calculate the amount of a deduction claim using ordinary commercial accounting practices in interpreting the Act when it does not specifically cover the question in issue.

In answer to this, appellant’s counsel argued that the fact that the depreciation allowance is not to be taken into account in computing the capital loss or gain for the purposes of an undistributed income calculation, as he contends, is not necessarily contrary to the scheme of the Income Tax Act as there are other situations where capital allowances or income reductions based upon capital expenditure are not brought back into account for the purpose of calculating undistributed income. As an example he cited Section 71A of the Act which provides for the exclusion from income of amounts earned by a business in a designated area during the first 36 months of reasonable commercial production and yet for the purposes of computing undistributed income, these amounts are not included. In direct opposition to this is the situation of mining income derived during the first 36 months of reasonable commercial operations which is also exempt from tax but is included in computing undistributed income pursuant to Section 82(11). As a further example he cited Section 72 permitting the deduction of expenditures of a capital nature on scientific research. If the capital asset is then sold for less than its capital cost, he stated that according to Sections 81 and 82 there is no requirement for the purposes of an undistributed income calculation that the amount of the capital loss incurred on disposal must be reduced by the amount of the deduction permitted by Section 72. He also referred to the situation created when a direct capital grant is made under the Industrial Research and Development Incentives Act, S.C. 1966-67, c. 82, which provides for discretionary cash grants based, in part, on previous capital expenditures on research and development, which he contended is in many ways analogous in its effects to the allowance of discretionary depreciation, but this cash grant is not taxable (Section 9(1) of that Act). Furthermore, this grant is not included in computing undistributed income despite the fact that it has exactly the same effect on the amount of the Company’s after-tax profits or earnings available to the shareholders as did the depreciation allowance or as does the capital cost allowance. He concluded that for the purpose of computing undistributed income, the Income Tax Act follows no logical, coherent scheme or practice but is entirely arbitrary and technical and the computation bears no specific or exclusive relationship to the profits or retained earnings of the Company which are available for distribution to its shareholders, and that failing some express statutory requirement to the contrary, the depreciation allowance granted to the Company prior to 1947 should not be taken into account for the purpose of computing capital gains or losses as part of an undistributed income calculation.

While these examples do show that the Act does not always follow a consistent policy, I do not conclude, as appellant’s counsel contended, that no general scheme can be found in the Act. It appears to me rather that the fact that in Section 71A certain deductions from income which are allowed therein are not included for the purposes of computing undistributed in- come, that the same applies to deductions pursuant to Section 72 for expenditures of a capital nature on scientific research, and that discretionary grants given under the Industrial Research and Development Incentives Act are also not included, results from specific exceptions made to the general scheme of the Act. It is in my view consistent with the general scheme of the Act to take into account in the undistributed income calculation not only the capital cost allowances permitted to the Company after 1949 but also the depreciation allowances granted prior to 1949. The transitional provisions in Section 144 already referred to read in part as follows:

144. (1) Where a taxpayer has acquired depreciable property before the commencement of the 1949 taxation year, the following rules are applicable for the purpose of section 20 and regulations made under paragraph (a) of subsection (1) of section 11:

(a) except in a case to which paragraph (b) applies, all such property shall be deemed to have been acquired at the commencement of that year at a capital cost equal to

(i) the actual capital cost (or the capital cost as it is deemed to be by subsection (3) or (4)), of such of the said property as the taxpayer had at the commencement of that year,

minus the aggregate of

(ii) the total amount of depreciation for such of the said property as he had at the commencement of that year that, since the commencement of 1917, has been or should have been taken into account, in accordance with the practice of the Department of National Revenue, in ascertaining the taxpayer’s income for the purpose of the Income War Tax Act, or in ascertaining his loss for a year for which there was no income under that Act, . ..

The problem here arises from the fact that, by Section 20, read in conjunction with Section 82(7), it is clear that if the property had been disposed of in 1949 or a subsequent taxation year, the depreciation allowed prior to 1949 would have to be taken into account. The fact that Section 82(7) makes no reference to sales that took place prior to the 1949 taxation year does not lead me to conclude, however, as appellant’s counsel does, that the depreciation allowed prior to the commencement of the 1949 year should therefore not be taken into consideration in connection with sales made prior to that date. It appears to me to be consistent with the scheme of the Act that this depreciation should be taken into consideration and a double deduction thereby avoided. In the instances appellant’s counsel referred to where double deduction is in effect permitted this results from specific sections of the Income Tax Act (or of the Indus trial Research and Development Incentives Act as the case may be), which I consider to be of an exceptional nature. It might be improper to make this inference as to the general scheme of the Act if, by so doing, a specific tax were being imposed, which would undoubtedly require a specific section in the Act in order to impose same. However, as I see it, the Minister is not attempting to impose a tax on property which would otherwise not be taxable, but rather he is refusing a deduction which the appellant is seeking to claim. Since this deduction is not specifically dealt with by any section of the Act, we have to look to the general scheme of the Act to determine whether it would be in accordance with this general scheme or not, and we therefore come back to the fundamental question of what is meant by “capital gain’’ and ‘‘capital loss’’ in the absence of specific definitions of same in the Act. In this connection I think we are entitled to look at fundamental commercial and accounting principles and jurisprudence where these terms have been defined (such as the United States decisions referred to supra). When we come down to this it is indisputable that depreciation must be taken into consideration from an accounting point of view. The evidence of Mr. Spindler was in no way contradicted on this point and the jurisprudence bears this out. In accounting practice the original cost of the property less the depreciation allowed determines the capital cost to the taxpayer at the end of any given period and the excess or deficiency of this figure over the selling price determines whether there has been a capital loss or a capital profit on the disposition of the property. The case of M.N.R. v. Consolidated Glass Company Limited, [1957] S.C.R. 78; [1957] C.T.C. 78, does not help appellant in that it merely dealt with the question of ‘‘when is a capital loss sustained?’’ and not with ‘‘how is a capital loss or gain computed?’’. Neither do I find that the case of Davidson v. The King (supra) helps appellant’s case. In that case, Thorson,

P. stated at page 196 :

. . . The allowance for depreciation is, therefore, in this sense an item of capital representing the diminution in value of the asset for use in income production and is granted in order to enable the taxpayer to keep his tax producing position intact—he will still have his asset with its diminished tax producing value but he will also have the depreciation allowance to make up for such diminished value. (Italics mine.)

I find this hard to reconcile with the argument of appellant’s counsel that since the Company sold its property for less than its initial cost a capital loss was sustained, since each year the amount of depreciation allowed was not only used to reduce the taxable income, which does not concern us here, but it was also put aside in an account to compensate for the diminishing value-of the property, so that at the end of a given period when the property was sold, the Company not only received the proceeds from the sale but also had the amount in the account put aside as a reserve for the depreciation of the property. It is difficult, in these circumstances, to see how it could be said to have suffered a loss when it sold the property for an amount in excess of its depreciated value. Appellant’s counsel also relied on Section 6(1) (n) of the Income War Tax Act which read as follows :

6. (1) In computing the amount of the profits or gains to be assessed, a deduction shall not be allowed in respect of:

(n) depreciation, except such amount as the Minister in his discretion may allow, including . . .

This section merely dealt with the taxation of annual profits and it would not be a reasonable inference that because it merely referred to the deduction of allowed depreciation in the computation of ‘‘the amount of the profits or gains to be assessed’’ this excludes the: deduction of this depreciation in the calculation of the undistributed income. In fact, Section 94(l)(c)(iv) of the Income. War Tax Act which provided for the deduction of

(iv) the amount by which all capital losses sustained in the said periods by the company exceeds all capital profits of the company in the said periods,

is the section dealing with the calculation of undistributed income under that Act and it merely referred to ‘‘capital losses’’ and ‘‘capital profits’’ without defining them, so again we have to look: to basic accounting and commercial principles to determine what is “capital loss’’ or “capital profit’’.

I find therefore that the Company did not incur a loss of $148,433 from the sale of the property in question in 1947 but rather realized a capital profit of $59,856.73 and that the assessment of appellant’s income for the 1962 taxation year as made in the notice of re-assessment dated January 30,-1968 is correct and appellant’s appeal against this assessment is therefore dismissed, with costs.