When is Land Purchase a Current Expense?

Aug 1, 2017

In the leading case of Johns-Manville Canada Inc. v. The Queen , [1985] 2 SCR 46, the Supreme Court of Canada set the standard for whether tangible expenditure is a current or capital expense.

What can we learn from this key decision? Our Tax Foresight analysis of the case follows.

In Johns-Manville, the taxpayer operated an open pit asbestos mine. As part of its operations, the taxpayer regularly acquired land adjacent to the mine in order to maintain the slope of the mine and prevent landslides. The taxpayer treated these land purchases as a current expense and the CRA challenged this characterization.

The acquisition of land may be considered a capital expenditure because it is often (i) an enduring asset, (ii) purchased as a one-time transaction, and (iii) leads to an increase in output capacity.

However, the Court in Johns-Mansville found that the acquisition of land did not have these characteristics. First, the acquired land was not an enduring asset because the mine wall was changed to maintain the slope with each new acquisition. Second, the practice of regularly buying land had gone on for nearly four decades. Third, the income of the company came from the mining activity and the acquired land did not directly lead to an increase in ore extraction. These facts led the Court to conclude the expenditure was current.

Tax Foresight Case Analysis

  • Tax Foresight correctly predicts the outcome of Johns-Manville with 95% confidence.
  • If the land acquisition had been a one-time expenditure that was not expected to be made repeatedly, Tax Foresight predicts that the expenditure would have been current with 83% confidence.
  • If the expenditure was made only to acquire a new asset expected to last more than 10 years and the expenditure would lead to significant additional revenue, Tax Foresight predicts a capital outcome with 76% confidence.

Tangible Expenditure Insights

  • 65% of cases on the issue of tangible expenditures have resulted in a finding of capital expenditure.
  • Only 10% of cases dealing with tangible expenditure involve property acquired as an investment. Of these, 33% had a current expenditure outcome.
  • Of the seven cases where the benefit of the expenditure was intended to last less than one year, the outcome was capital expenditure in only one.
  • Each time you run our Tangible Expenditure Classifier you apply the entire body of case law to your client’s situation.