Duhaime's Law Dictionary

Capital Expenditure Definition:

A once and for all expense to provide an enduring benefit to a capital asset.

Also called a capital expense or a capital outlay and distinguished from a business expense which is not necessarily deductible from a capital asset.

A term of tax law.

In British Insulated and Helsby Cable Ltd. v Atherton, Justice Cave wrote:

"[W]hen an expenditure is made, not only once 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."

In BP Australia, Justice Pearce commented on thew words of Justice Cave as follows:

"Those words are useful as an expression of general principle on prima facie indications, but the benefit in the particular case was the foundation of a fund that would endure for the whole life of the company and provides no analogy to the present case.

"The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer. Although the categories of capital and income expenditure are distinct and easily ascertainable in obvious cases that lie far from the boundary, the line of distinction is often hard to draw in border line cases; and conflicting considerations may produce a situation where the answer turns on questions of emphasis and degree."

In Chhabra, Justice Cullen reviewed the development of the law in this regard:

"The distinction between a capital outlay and an income expense is not easy to define. A test, often quoted, to ascertain whether an item of expense is capital or not is: did it bring into being an asset of a permanent and enduring advantage or was it a once-and-for-all expenditure? If it brought into being an asset of a permanent and enduring advantage the expense would be attributable to capital, not revenue.

However, in Algoma Central Railway, (Justice) Jackett held that the Minister of National Revenue was wrong to skip to the final prospective step of the program and point to an advantage for the enduring benefit of the business. The Minister only looked at the expenditure itself and failed to find that the outlay produced an advantage. The Supreme Court of Canada approved Jackett's judgment and held that each question of this sort is to be decided on the basis of a commonsense appreciation of its own particular facts.

There is a distinction to be made between an expenditure which brings into existence an asset of enduring benefit to the trade, and an expenditure which preserves or protects an existing asset of the business. Expenses incurred in the preservation of a capital asset were held to be deductible in B.W. Noble Ltd.: The object of the expenditure was that of preserving the status and reputation of the company which the directors felt might be imperilled to avoid that and to preserve the status and dividend-earning power of the company seems to me a purpose which is well within the ordinary purposes of the trade.

The House of Lords took a similar view in Morgan v. Tate. Expenses of a campaign to oppose nationalization of the sugar industry were held to be deductible because the object of the expenditure was to preserve the assets of the company from seizure."

Justice Jackett of the Exchequer Court of Canada wrote, in Canada Steamship Lines:

"Things used in a business to earn the income — land, buildings, plant, machinery, motor vehicles, ships — are capital assets.

"Money laid out to acquire such assets constitutes an outlay of capital. By the same token, money laid out to upgrade such an asset — to make it something different in kind from what it was — is an outlay of capital.

"On the other hand, an expenditure for the purpose of repairing the physical effects of use of such an asset in the business — whether resulting from wear and tear or accident — is not an outlay of capital. It is a current expense."

As an example of the application of the law, in Danskin, the United States Court of Appeals allowed legal fees to be categorized as capital expenditures as they were incurred in the protection of intellectual property.


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