SHEPPARD, J.:—This appeal is against a re-assessment (dated January 30, 1968) of the Minister of National Revenue for the taxation year 1966 by the appellant alleging that the assessment erred as follows:
1. by the Minister assessing as income moneys alleged by the appellant to be capital, being United States dollars applied by the appellant during the year 1962 to 1966 inclusive in the paying of principal of debentures payable in the United States of America, and
2. in the Minister of National Revenue disallowing as a capital loss the sum of $358,828.12 being an exchange loss incurred in 1961 in borrowing moneys in the United States of America and converting from the United States dollars to Canada dollars.
Transactions in years previous to 1966 are relevant in that the appellant claimed to carry forward business losses under Section 27(1) (e) of the Income Tax Act and alleged that error arose through the Minister increasing the income for the years 1962 to 1966 and treating as a capital loss an exchange loss in 1961, thereby reducing the loss remaining to be carried forward into 1966.
The facts follow: In 1954 the appellant was incorporated by a special act of the Alberta Legislature (Exhibit 7) with power to act as a common carrier of gas (Section 13, Exhibit 7). Under a contract bearing date June 14, 1960, the appellant agreed to transport gas for two other companies respectively, the Alberta and Southern Gas Company Limited (herein referred to as Alberta Company) and Westcoast Transmission Company Limited (herein referred to as Westcoast) (Exhibit 1) to transport gas purchased by the Alberta Company to be delivered near the Alberta-Montana border and to transport gas purchased by Westcoast to a point near the Alberta-British Columbia border.
The payments from: Alberta Company and Westcoast pursuant to the contract gives rise to the issues, and on those. issues the following paragraphs in the eontract are relevant : _'
2.2 Trunk Line agrees to maintain and operate, in accordance with best pipeline practice, the said pipeline system existing from time to time and necessary for the performance of Trunk Line’ S obligations under this Contract.
2.3 Each shipper agrees to pay Trunk Line in accordance with the monthly cost of service basis as provided for in paramgraph 13. ..
12. Billing and Payment
12.1 Billing: On or before the twentieth (20th) day of each month, Trunk Line shall render an itemized bill to each shipper showing the monthly cost of service charge calculated for that shipper in accordance with paragraph 13 for the preceding month (hereinbefore defined as the “billing month”) and the number of United States dollars, if any, which shall be substituted for Canadian dollars pursuant to paragraph 12.2.
12.2 Part payment in United States dollars: If Trunk Line shall cause the construction of the said pipeline system to be financed in whole or in part by the sale prior to. December 31, 1964, of securities of Trunk Line requiring repayment of principal and/or payment of interest in United States dollars (such securities being hereinafter referred to as “U.S. pay securities”), ‘then each shipper shall in its payment of its said monthly cost of service charge substitute for the same number of Canadian dollars, and Trunk Line shall accept in substitution, the number of United States dollars determined as hereinafter set forth, but not to exceed sixty-six percent (66%) of the said monthly cost of service: charge.
Trunk line shall, not later than thirty (30) days. after each sale of any .U.S. pay securities, giving notice to each shipper setting forth the following:
(i) The total outstanding amount of U.S. pay securities;
(ii) A schedule of the total amounts of such repayments and/or payments unconditionally required by the terms of such U.S. pay securities to be made in United States dollars; and
(iii) The place where Trunk Line desires to receive that part of the said monthly cost of service charge which is to be paid in United States dollars . . .
12.3 Payment: On or before the last day of the month following the billing month each shipper shall pay Trunk Line at Trunk Line’s office, Calgary, Alberta for so much of the bill as shall be payable in Canadian dollars and at the place designated by Trunk Line pursuant to paragraph 12.2 for so much. of the bill as shall be payable in United States dollars.
12.4 Payment after Termination as to One Shipper: In the event that this Contract shall terminate with respect to Westcoast but shall continue with respect to the other parties as in paragraph 3 provided, Trunk Line shall bill Alberta and Southern shall pay to Trunk Line the total monthly cost of service.
12.5 Interest on Unpaid Amounts: Should a shipper fail to pay the amount of any bill rendered by Trunk Line as herein provided when such amount is due, interest thereon shall accrue at the rate of six percent (6%) per annum from the date due until the date of payment.
12.6 Late Billing: If presentation of a bill by Trunk’ Line is delayed after the twentieth (20th) day of the month, then the time for payment shall be extended "correspondingly unless the shipper billed as responsible for such delay ... . f ,
13.1 Calculation of Cost of Service: Such monthly cost of service for each section shall equal the sum of the amounts properly chargeable to that section under the following subdivisions of this paragraph 13.1.
(a) Operating Expenses . . ;(b) Depreciation . .. (c) Amortisation . . . (d) Taxes . ? (e) Return: Return at an annual rate of seven and one half percent (742%) computed for each billing month by the application of one-twelfth (1/12) of such annual rate to the net investment base determined as follows : . . .
There. are later. amendments to: this contract which appear in items two to eleven inclusive of Exhibit 1.
Before entering into that contract of June 14, 1960 (Exhibit 1), the appellant became aware that to perform the contract it would be necessary to construct the pipeline referred to and to finance the construction thereof in United: States of America moneys repayable as to principal and interest 111 United States dollars.
The appellant borrowed on the security of First Mortgage Sinking Fund Bonds the amount of $67,000 000 repayable as to principal and interest thereon at 5%% per annum payable in United States dollars at New York. City.
To guard against the United States dollars, then at a discount, later becoming at a premium, the Alberta Company and West- coast by the contract ( Exhibit 1 ) agreed to pay in United States dollars the sum to be paid in the United States of America. The rate of exchange on United States dollars is shown in Exhibit 3. When the $67,000,000 U.S. dollars was converted into Canada dollars the Canada dollar was at a premium and the appellant suffered a loss of $358,828.18, which loss, the appellant alleges, was wrongly charged in the re-assessment to capital and was not allowed as a business loss within Section 27(1)(e) of the Income Tax Act and therefore in error reduced the credit to be allowed under Section 27(1)(e) in 1966 assessment.
The pipeline was completed and delivery of gas for the shippers (Alberta Company and Westcoast) began in December 1961 and the first billing was for the month of January: 1962. Thereafter the notices required annually and monthly were given and specimen notices of the annual amounts appear in Exhibits 4, 5 and 6.
The issue over the amount of the taxable income for the year 1966 arose in this manner. The appellant carried forward into the year 1966 the remainder of a previous business loss within Section 27(1)(e) of the Income Tax Act and the re-assessment complained of reduced this loss to be deducted from the 1966 taxable income by increasing the income for the years 1962 to 1966 by adding thereto the United States dollars received by the appellant. It therefore follows that the accuracy of the re-assessment of the 1966 taxable income must depend upon whether the United States dollars paid to the appellant by the Alberta Company by Westcoast were income as alleged by the respondent or capital as alleged by the appellant.
In considering the accuracy of the assessment for the taxation year 1966, there was no right of rectification of the contract (Exhibit 1). There is no evidence of a mutual mistake of the parties in setting down a previously concluded oral contract within United States v. Motor Trucks Limited, [1924] A.C. 196 at page 200, nor were the parties Alberta Company and Westcoast parties to this appeal within Whiteside v. Whiteside, [1950] Ch. 65 at pages 66 and 67. There is, therefore, no case for rectification and the issue depends upon the construction of the contract in question, that is, whether the United States dollars which are paid to the appellant by Alberta Company and Westcoast pursuant to the said contract (Exhibit 1) in respect of principal repayable in the United States are income or capital for the years 1962 to 1966. The appellant contends that the cost of service being the payments for the transportation of gas consists exclusively of the items appearing in Section 13.1 of the agreement (Exhibit 1) and does not include the amount of the United States dollars which are then paid to the appellant. The respondent contends that the payments for the transportation of gas include not only those items in Section 13.1 but also the United States dollars payable pursuant to 12.2.
The initial problem is the construction of the contract. The construction of the written instrument is for the court as a question of law. Bowes v. Shand (1877), 2 App. Cas. 455, Lord Cairns, L.C. at page 462. Turner v. Sawdon and Company, [1901] 2 K.B. 653, per A. L. Smith, M.R. at page 656 and the words thereof are to be construed according to ‘‘strict, plain meaning of the words themselves’’. Tsang Chuen v. Li Po Kwai, [1932] A.C. 715.
The contract (Exhibit 1) provides that Trunk Line is to maintain and operate the pipeline in question and, while Section 2.3 provides that the shippers (Alberta Company and Westcoast) will severally pay ‘‘The monthly cost of services basis as provided for in paragraph 13’’ (Paragraph 2.3), the contract does not necessarily exclude the moneys provided for in paragraph 12 being also payable for the cost of service and therefore being income.
Paragraph 12.1 provides the monthly billing by the appellant of the shippers (Alberta Gas and Westcoast) is to be “calculated for that shipper in accordance with paragraph 13 for the preceding month (hereinbefore defined as the ‘billing month’) and the number of United States dollars, if any, which shall be substituted for Canadian dollars pursuant to paragraph 12.2’’ (12.1, Exhibit 1) and under Paragraph 12.2, each company as shipper is to pay the amount of the billing, ‘‘then each shipper shall in its payment of its said monthly cost of service charge substitute for the same number of Canadian dollars, and Trunk Line shall accept in substitution, the number of United States Dollars determined as hereinafter set forth, but not to exceed sixty-six percent (66%) of the said monthly cost of service charge.’’ (See 12.2, Exhibit 1.) Literally, ‘‘the monthly cost of service charge’’ is to include those United States dollars which the appellant required for ‘‘repayment of principal and/or payment of interest in United States Dollars’’ (12.2, Exhibit 1).
Paragraph 12.4 provides that after the contract has been terminated as to Westcoast then Alberta Company shall “pay to Trunk Line the total monthly cost of service’’. That is the total sum of United States dollars is declared to be “part of the total monthly cost of service’’.
Again whether the United States dollars required to be paid by the appellant are part of the cost of service, must depend upon the intention of the parties.
‘‘The question whether a particular stipulation is a condition or a warranty depends upon the intention of the parties to be ascertained in the case of a written contract from the document or documents’’, Halsbury’s Laws of England (3rd ed.), vol. 8, p. 194, para. 328.
In the later amending agreements the same parties refer to this principal agreement (Exhibit 1) as the ‘‘Gas Transportation Contract’’. See Exhibit 1, item 4, agreement of June 16, 1960, item 5, August 23, 1960, item 6, January 31, 1961, item 7, agreement, June 16, 1960, item 8, agreement of March 1, 1961, item 9! January 1, 1966; item 10, dated Deceniber 29, 1967, item 11, dated August 12,‘ 1969. ‘Also many of the amending agreements contain références to the payment in ‘United States dollars as being' part of. the cost of service charge and implying thereby that the obligation to pay is ‘conditional upon the transportation of gas ‘as agreed.
Item 7, paragraph 4. provides :
Upon such notice being given as aforesaid . . . Pacific Transémission shall pay to Trunk Line” (the ‘Appellant herein) “the -; monies hereby assigned to the extent of the amount of default as shown o the said notice and the amount of the cost of service charges thereafter accruing due and payable. by Alberta and Southern to Trunk Line under and as provided in the Gas Transportation Contract.
The item 11, the. amending agreement of August. 1, 969, second recital states :
Whereas subdivision (e) of paragraph 13. 1 of the Gas Transportation Contract provides for the payment of a return as part of the cost of service and the parties are desirous of amending the provisions dealing with return; î
Therefore, the declared intention of the parties is that the payments of United States dollars provided for in the notice of billing shall be part of the cost of service charge.
Again it is an implied intention that the performance of the promise to transport gas would be a condition precedent of the promise to pay the billing within Paragraph 12.1, which billing would include the United States dollars, to be paid to the appellant. That implied intention’ arises for the following reasons:
1. The values to be exchanged are the transportation of gas and the payment of the amount of the monthly billing. The principal covenants are the undertakings t() perform those acts, and while in the contract there are other covenants, they are merely incidental to or definitive of the covenants to transport gas and to pay the amount of the monthly billing. ,
, 2. By the succession of events under the contract the transportation of gas is to precede the payment. The acts intended would be (a) the transportation of gas, (b) the monthly billing pursuant to 12.1 and (c) the payment of the: amount of the billing. By reason of the transportation of gas preceding the payment therefore it is impliedly a condition precedent of the obligation to pay. Mr. Serjeant Williams, Pordage V. Cole (1607), 85 E.R. 449, footnote at page 452 states:
But 2 when a day is appointed for the payment of money and the day is to happen after the thing which is the consideration of ‘the money, etc., is to be performed,i no; action can ‘be maintained #•••:for the money, etc., before. performance.*
3. The transportation of gas is a “substantive part’’ of the contract as appears by the principal contract and by the amending agreements. Therefore the performance to transport gas is a condition precedent of the obligation to pay. Behn v. Burness (1863), 3 B. & S. 751 at page 754. Benten v. Taylor Sons and Co., [1893] 2 Q.B. '274. By any of these tests the performance of the promise of the appellant to transport gas is a condition recedent to and the consideration for the obligation to pay the amount of the 'monthly billing which includes not only that portion of the cost of service contained in Paragraph 13:1 but also the United States dollars required to be paid by the appellant under Paragraph 12.2.
Thé appellant has contended that the consideration for the promise to pay ‘United States dollars (Paragraph 122, Exhibit
1) is the appellant’s borrowing’ such monies in the United States. That contention should not succeed for the following reasons :
1. The contention is inconsistent with the contract. On the contention there would be two considerations, namely, the borrowing in the United States as a consideration for the payment of the United States dollars and the transportation: of gas as the consideration for paying the amount stipulated: in: Paragraph 13.1. In fact, there is only one promise to pay contained in the contract, namely to pay the amount of the monthly billing. Also Paragraph 12.2 is literally declared to be a condition by the word “if” in the phrase ‘‘if Trunk: Line shall cause the construction of the said pipeline system to be financed”, ete. The billing under Paragraph 12.1 is a condition of the type in Worsley v. Wood (1796), 6 Term Rep. 710, and is not a consideration. Equally so the financing in the United States is a condition and not a consideration.
.The ' The covenant to pay United States dollars for such consideration, namely, the appellant’s borrowing in the United States, would be ultra vires of the Alberta Company and the Westcoast Company. Upon borrowing in the United States, according to such contention, then would vest the liability of the Alberta Company and of Westcoast to pay the equivalent United States dollars, and that obligation to pay United States dollars would vest as an absolute obligation irrespective of any transportation of gas for either the Alberta Company or Westcoast. That is not what the parties intended, as appears from the amending agreements, and particularly from item 11 to the amending agreement of August 1, 1961.
Also such obligation to pay would be ultra vires of Alberta Company and of Westcoast, as the powers of each company would be limited to applying its moneys to the objects for which the company was formed, and as a result neither could make a gift of its moneys to another person or corporation, Re Lee Behrens & Co. Ltd., 2 Ch. D. 40, Hutton v. West Cork Railway Co. (1882-83), 23 Ch. D. 654, Henderson v. Bank of Australasia (1889), 40 Ch. D. 170, and could disburse its moneys only to procure some benefit intended to recur to the company. No benefit could be intended to recur to Alberta Company or Westcoast from the appellant borrowing in the United States of America if that were as contended the consideration of the promise to pay United States dollars.
On the other hand, if the payment of United States dollars by Alberta Company and Westcoast is intended as a payment in part of the cost of transportation by the appellant, then the Alberta Company and Westcoast would have obtained the benefit for their payment intended by the contract. On the proper construction of the contract the payment in United States dollars iS a payment in part of the transportation of gas by the appellant for Alberta Company and for Westcoast.
As the business of the appellant is the transportation of gas (Exhibit 7), and the payment in United States dollars is received pursuant to such business, therefore, it is income within Section 3 of the Income Tax Act. (Tip Top Tailors Ltd. v. M.N.R., [1957] S.C.R. 703 at page 707; [1957] C.T.C. 309.) To determine the amount of that income, the United States dollars must be translated into Canada dollars which is the measure of the receipt of income and such resulting sum must be credited to income. Therefore the assessment for the taxation year is proper in adding to the income for the years 1962 to 1966 inclusive the amounts of the United States dollars received by the appellant pursuant to Paragraph 12.2. Further, that the repayment of principal moneys borrowed under the trust deed is a capital outlay of the appellant as these moneys were used in constructing the pipeline. M.N.R. v. Dominion Natural Gas Co. Ltd., [1941] S.C.R. 19; [1940-41] C.T.C. 144. Montreal Light, Heat :0 Power Consolidated v. M.N.R., [1942] S.C.R. 89 at page 98; [1942] C.T.C. 1 at page 10, and being a capital outlay the moneys expended in payment of the principal of the moneys borrowed are not to be allowed as a credit on income.
It is contended by the appellant that the re-assessment was in error in adding the United States dollars to income for the reason that the appellant was not in the business of dealing in United States dollars. (Tip Top Tailors Ltd. v. M.N.R. (supra).) The question is whether these United States dollars were income as derived from a business of the appellant and that is settled by the fact that the moneys were received from the business of transporting gas, and hence irrespectively of whether the appellant was also in the business of dealing in United States dollars.
The appellant also contends that the alleged loss of $358,828.12 should have been allowed as a business loss within Section 27(1) (e). It is assumed that such loss was not necessarily initially ineurred from changing United States dollars into an equivalent of more valuable and therefore a lesser number of Canada dollars, then at a premium, but arose through the depreciation of the Canada dollar which increased the required number to repay the principal amount in United States dollars (Exhibit 3). The building of the pipeline was a capital outlay (M.N.R. v. Dominion Natural Gas Co. Ltd. (supra), Montreal Light, Heat Power Consolidated v. M.N.R. (supra)) and the borrowing for the purpose of that building was equally a capital outlay. As the pipeline was to be built in Canada, the United States dollars obtained to the extent of $67,000,000 were transferred into Canada dollars for the purpose of paying for such pipeline. The expenditure of these moneys on the pipeline was, therefore, a capital outlay and any loss was a loss of capital. In other words, the pipeline was a capital asset to be used in the business of the company which business was the transporting of gas. As the pipeline is a capital asset built by borrowed money, brought into Canada to finance the construction of the capital asset, therefore, the loss by reason of changing into Canada dollars is a loss incurred in a capital expense. That loss could not be a business loss within. Section 27(1) (e) of the Income Tax Act and, therefore, could not be carried forward in reduction of the taxable income for the year 1966.
As stated in Montreal Light, Heat and Power Consolidated v. M.N.R. (supra) by the Chief Justice at page 92 [6] :
The principle is illustrated in several cases, of which I mention two. In the Arizona Copper Company v. Smiles, 3 T.C. 149, a bonus which the taxpayer was obliged to pay on the repayment of borrowed capital before the maturity of the debt was described by the Lord President as "a lump payment as one of the considerations stipulated for a loan of capital” ; and was held to be "entirely heterogenous to those outlays, the deduction of which is permitted to be a necessarily incidental to the earning of profit”, and the bonus was held not to be deductible.
In Texas Land and Mortgage Co. v. Holtham, 3 T.C. 255, brokers’ charges and other expenses of raising debentures were held not to be deductible . . .
I think, moreover, that these disbursements were made for a purpose which falls within the principle enunciated by Lord Cave in The British Insulated and Helsby Cables v. Atherton, [1926] A.C. 205 at p. 212; that is to say, the expenditures were made with a view to securing an enduring benefit, the reduction of the cost of. borrowed capital over a period of at least fifteen years.
A reference is due to the argument of Mr. Geoffrion concerning the decision in Texas Land V. Holtham, just mentioned, That case, he argues, is of no value because it rests on the decision in The Anglo-Continental Guano Works v. Bell, 3 T.C. 239, and this last mentioned case is unfavourably criticized in Farmer v. Scottish North American Trust, Ltd., [1912] A.C. 118. Mathew, J. in his judgment in the Texas Land case says: "To increase its capital it (the taxpayer) raised money on debentures. The argument is that the cost of raising the money, ought to be deducted, from the profits in a particular year. We are clearly of opinion that that cannot be done.”
Before the Privy Council, [1944] A.C. 126, Lord Macmillan, at page 134, stated :
It was conceded in the Courts in Canada, and in any event it is clear, that the expenses incurred by the appellants in originally borrowing the money represented by the bonds. subsequently redeemed were properly chargeable to capital and so to maturity the premiums and expenses then payable on redemption would plainly also have been on capital account. Why then should the outlays in connexion with the present transactions, compendiously described as “refunding operations’’, not also fall within the same category? Their Lordships are unable to discern any tenable distinction.
In Tip Top Tailors Limited v. M.N.R. (supra), Rand, J. at page 710 [312] stated:
The proposition that the risk of a change in value of capital securities or investments is that of capital can be accepted. The capital machinery within and by means of which the business earning and the income is carried on is distinct from that business itself; and the fluctuations in its value have no bearing on profits or losses from the business.
That distinction was stated with clarity by Lord Macmillan in Montreal Coke and Manufacturing Company v. M.N.R.; Montreal Light, Heat and Power Consolidated v. M.N.R., [1944] A.C. 126. At p. 184; [1944] C.T.C. 94 at p. 100, he puts is thus:
“It is not the business of either of the appellants to engage in financial operations. The nature of their business is sufficiently indicated by their titles. It is to those businesses that they look for their earnings. Of course, like other business people, they must have capital to enable them to conduct their enterprises, but their financial arrangements are quite distinct from the activities in which they earn their income. No doubt, the way in which they finance their businesses will, or may, reflect . itself favourably or unfavourably in their annual accounts, . but expenditure incurred in relation to the, financing of their
businesses is not, in their Lordships’ opinion, expenditure incurred in the earning of their, income within the statutory meaning. The statute, in s. 5(b); significantly employs the expression, ‘capital used in the business to earn the income’, differentiating between the provision : f capital and the process of earning profits.”
Hence the loss through converting the United States dollars into Canada dollars cannot be a business loss within Section 27(1)(e).
Further the loss of $358,828,12 alleged, by the appellant is excluded.by Section’ 12(1) (a) and (b) of the Ineome: Tax: Act: See Farmers Mutual. Petroleums :Ltd. v. M.N.R., [1967] C.T.C. 396, British Columbia Electric Railway Company Limited v. M.N.R., [1958] S.C.R. 133; [1958] C.T.C. 21, Abbott, J. stated at page 1,37 [31] : i.
Since the main purpose of every business undertaking is presumably to make a profit, any expenditure made ‘for the purpose of gaining or producing income’ comes within the terms of Section 12(1) (a) whether it be classified as an income, expense or as a capital outlay.
Once it is determined that a particular expenditure is one made for the purpose of gaining or producing income, in order to compute income tax liability it. must next be ascertained whether such disbursement is an income expense or a capital outlay. The principle underlying such a distinction is, of course, that since for tax purposes income is determined on an annual basis, an income expense is one incurred to earn the income of, the particular year in which it is made and should be allowed as a deduction from gross income in that year. Most capital outlays on the other hand may be amortized or written off over a period of years depending upon whether or not the asset in respect of which the outlay is made is one coming within the capital cost allowance regulations made under Section 11(1) (a) of the Income Tax Act . ,
Further at page 137 [32] :
The general principles to be applied to determine whether an expenditure which would ‘be allowable under Section 1241) (a) is of a capital nature, are now fairly well established. As Kerwin '. J., as he then was,, painted out in Montreal Light, Heat and Power Consolidated V. M.N.R., applying the principle enunciated by Viscount Cave in British Insulated and Helsby Cables Limited v. Atherton, the usual test of whether an expenditure is one made on account of capital is; was it made “with a view of bringing into existence an advantage for the enduring benefit of the appellant’s business”. . , i: zoi : ; : t.:
In conclusion, the onus is on the appellant to establish: errors in the re-assessment (Tip Top Tailors Ltd: v. M.N.R. (supra) ) and no error has been established by the appellant. It would follow that the re-assessment is proper, both as to the taxable income to be included and as to the outlays to be permitted, and the appeal is dismissed with costs.