FOURNIER,
J.:—This
is
an
appeal
from
the
income
tax
assessment
for
the
taxation
year
1955
of
Rolland
Paper
Company
Limited
of
the
City
of
Montreal,
in
the
Province
of
Quebec,
dated
April
26,
1957,
wherein
the
Minister
of
National
Revenue
disallowed
the
appellant’s
claim
for
deduction
of
certain
legal
costs
paid
in
1955.
The
facts
material
and
relevant
to
the
issues
involved
in
this
appeal
have
been
agreed
upon
by
the
parties
and
a
statement
to
that
effect
has
been
filed
and
now
forms
part
of
the
record
before
the
Court.
I
shall
summarize
the
statement.
The
appellant,
a
corporation
established
under
the
laws
of
Canada,
carries
on
business
in
Canada
of
manufacturing
and
selling
fine
paper.
In
1953,
the
appellant
and
others
engaged
in
the
above
business
were
charged
under
Section
498(1)
(d)
of
the
Criminal
Code
as
in
force
prior
to
November
1,
1952,
on
an
indictment
reading
in
part
as
follows:
“During
the
period
from
1933
to
the
31st
day
of
October
1952,
both
inclusive
.
.
.
did
unlawfully
conspire,
combine,
agree
or
arrange
together
and
with
one
another
and
with
.
.
.
to
unduly
prevent
or
lessen
competition
in
the
production,
manufacture,
purchase,
barter,
sale,
transportation
or
supply
..
of
articles
or
commodities
which
may
be
the
subject
of
trade
or
commerce,
to
wit,
book
papers
including
general
printing
and
converting
papers,
fine
papers
including
rag
content
and
sulphit
writing
paper,
coated
papers,
miscellaneous
fine
papers
including
blotting
and
bristols,
groundwood
and
other
fine
papers
and
thereby
commit
an
indictable
offence
contrary
to
the
provisions
of
the
Criminal
Code,
section
498(1)
(d).”
On
June
4,
1954,
the
appellant
and
the
other
parties
named
in
the
indictment
were
found
guilty
as
charged
by
the
Ontario
High
Court
and
sentenced
to
pay
a
fine
of
$10,000.
The
Ontario
Court
of
Appeal
dismissed
the
appeals
of
the
appellant
and
the
other
parties
against
this
conviction
on
the
above
charges.
An
appeal
of
this
last
decision
to
the
Supreme
Court
of
Canada
by
the
appellant
and
one
of
the
other
parties
on
certain
specific
questions
of
law
was
dismissed
on
May
13,
1957.
During
its
1955
taxation
year,
the
appellant
paid
legal
fees
amounting
to
$5,948.27
as
its
share
of
the
legal
costs
of
appealing
against
the
judgment
of
the
Ontario
High
Court
finding
the
appellant
and
others
guilty
of
illegal
trade
practices.
In
its
tax
return
for
the
fiscal
year
ended
December
31,
1955,
the
appellant
claimed
these
legal
expenses
as
deductions
from
income.
By
notice
of
assessment
dated
April
26,
1957,
the
respondent
disallowed
the
appellant’s
claim
for
deduction
of
the
legal
costs
supra.
The
appellant
duly
objected
to
the
disallowance
but
the
Minister,
by
notification
dated
October
4,
1957,
confirmed
the
assessment
appealed
from,
on
the
ground
that
“Legal
fees
amounting
to
$5,948.27
claimed
as
deductions
from
income
were
not
outlays
or
expenses
incurred
by
the
taxpayer
for
the
purpose
of
gaining
or
producing
income
within
the
meaning
of
Section
12(1)
(a)
of
the
Act.”
Section
12(1)
(a)
reads
as
follows:
“12.
(1)
In
computing
income,
no
deduction
shall
be
made
in
respect
of
(a)
an
outlay
or
expense
except
to
the
extent
that
it
was
made
or
incurred
by
the
taxpayer
for
the
purpose
of
gaining
or
producing
income
from
property
or
a
business
of
the
taxpayer.”
This
subsection,
which
provides
for
an
exception
to
the
general
rule
that
in
computing
income
no
deduction
shall
be
made
in
respect
of
an
outlay
or
expense,
should
be
read
in
relation
to
Sections
3
and
4
of
the
Income
Tax
Act
:
“3.
The
income
of
a
taxpayer
for
a
taxation
year
for
the
purposes
of
this
Part
is
his
income
for
the
year
from
all
sources
inside
or
outside
Canada
and,
without
restricting
the
generality
of
the
foregoing,
includes
income
for
the
year
from
all
(a)
businesses,
(b)
property,
and
(c)
offices
and
employment.
4.
Subject
to
the
other
provisions
of
this
Part,
income
for
a
taxation
year
from
a
business
or
property
is
the
profit
therefrom
for
the
year.’’
These
sections
deal
with
the
income
from
a
business
or
property
and
not
with
taxable
income
which
is
the
taxpayer’s
income
for
the
year
minus
the
deductions
permitted
by
the
Act
among
which
are
the
outlays
or
expenses
contemplated
in
Section
12(1)
(a).
The
principle
laid
down
in
Section
4
of
the
Act
is
that
income
from
a
business
is
the
profit
therefrom;
and
it
has
been
repeatedly
held
by
the
courts
that
this
profit
is
the
surplus
by
which
the
receipts
from
the
business
exceed
the
expenditure
made
for
the
purpose
of
earning
these
receipts.
This
rule
is
in
conformity
with
the
commercial
and
accounting
practices
followed
by
trading
and
business
enterprises
in
establishing
their
balance
sheet
of
operations.
The
question
to
be
determined
is
whether
the
legal
expenses
paid
by
the
appellant
in
the
amount
of
$5,948.27
in
the
year
1955
were
made
and
incurred
for
the
purpose
of
gaining
income
from
its
business
and
deductible
in
computing
income
within
the
meaning
of
Section
12(1)
(a).
The
appellant
submits
that
these
legal
expenses
were
made
in
accordance
with
the
ordinary
principles
of
commercial
trading
and
well
accepted
principles
of
business
practice.
It
urged
that
they
were
made
in
the
course
of
its
business
and
incurred
for
the
purpose
of
defending
its
day-to-day
trade
practices
which
gave
rise
to
income
and
were
directly
related
to
the
earning
of
its
Income.
On
the
other
hand,
the
respondent
contends
that
the
amount
sought
to
be
deducted
was
the
amount
of
the
legal
costs
incurred
for
the
purpose
of
defending
against
an
accusation
made
under
the
provisions
of
the
Criminal
Code
and
that
in
such
cases
these
expenses,
from
the
point
of
view
of
the
law,
are
not
to
be
deemed
to
have
been
made
or
incurred
for
the
purpose
of
earning
income.
They
relate
to
the
cost
of
unsuccessfully
defending
a
criminal
action
and
from
the
point
of
view
of
strict
business
practices
and
within
the
framework
of
the
law
such
expenses
could
not
be
admitted
as
deductions.
At
the
opening
of
the
trial
the
parties
filed
a
Supplementary
Statement
of
Facts
dealing
with
the
activities
of
the
appellant
which
led
to
its
conviction
under
Section
498(1)
(d)
of
the
Criminal
Code.
It
is
in
evidence
before
the
Court.
Here
are
some
extracts
from
this
document:
“2.
The
appellant
together
with
the
other
accused
supplied
at
least
90%
of
the
fine
paper
manufactured
in
Canada.
‘It
will
be
seen,
therefore,
that
the
accused
mills
did
supply
by
far
the
greatest
bulk
of
the
fine
paper
manufactured
in
Canada
and
also
supplied
by
far
the
greatest
bulk
of
the
fine
paper
used
in
Canada
and
the
figure
of
90%
is
a
conservative
average
to
use
in
each
case.’
3.
From
the
year
1933
at
least
the
appellant
and
the
other
accused
mills
together
with
the
fine
paper
merchants
entered
into
agreement
covering
their
trade.
1
find
as
a
fact
that
well
before
the
year
1933
these
seven
accused
companies
and
the
J.
R.
Booth
Company
had
entered
into
a
firm
agreement
to
control
and
fix
prices
and
deal
with
the
many
other
elements,
to
which
I
shall
refer
particularly,
and
that
agreement
has
continued
from
then
until
the
end
of
the
period
charged
in
the
indictment,
October
31,
1952.’
4,
The
agreements
referred
to
above
included
the
controlling
and
fixing
of
prices;
various
services
connected
with
the
trade;
classification
of
customers;
loyalty
and
quantity
discounts;
tenders;
disposal
of
odd
lots;
sectional
division
of
Canada
;
miscellaneous.
’
’
These
extracts
contain
the
findings
of
the
trial
judge
relating
to
the
agreements
entered
into
by
the
appellant
and
others
and
the
merchants
covering
their
trade
and
the
various
services
connected
with
the
trade.
The
series
of
findings
concern
the
practices
agreed
to
and
followed
by
the
appellant
in
its
business
operations.
These
practices
were
found
to
be
illegal
in
that
they
unduly
prevented
or
lessened
competition
in
the
production,
manufacture,
purchase
and
sale
of
their
product.
These
activities
being
part
of
their
trade,
it
may
be
said
that
they
applied
to
the
day
to
day
operations
of
the
appellant’s
business.
Though
the
appellant
and
others
were
found
guilty
as
charged
in
the
indictment,
and
remembering
certain
arguments
made
before
me,
I
believe
it
to
be
of
interest
to
quote
the
remarks
of
the
trial
judge
in
R.
v.
Howard
Smith
Paper
Mills
Lid.,
[1954]
4
D.L.R.
517.
Spence,
J.,
in
rendering
sentence,
said
at
page
519
:
“It
is
true
that
this
Court,
although
it
has
found
the
guilt
of
the
accused,
prefers
to
use
the
words
of
Masten,
J.A.,
in
R.
v.
Container
Materials
Ltd.,
[1941]
3
D.L.R.
145
at
p.
183;
76
Can.
C.C.
18
at
p.
61,
rather
than
the
much
harsher
language
used
by
other
Judges
in
registering
convictions
in
other
cases
which
I
need
not
read
here
but
which
we
have
dealt
with
during
the
course
of
the
trial.
Masten,
J.A.,
said:
‘In
considering
whether
his
finding
was
or
was
not
warranted,
I
think
it
would
be
a
mistake
for
this
Court
to
look
upon
the
appellants
as
guilty
of
moral
turpitude
or
a
wicked
intention.
Their
directors
are
honourable
men
desirous
of
conducting
successfully
the
affairs
of
their
respective
companies,
and
if
in
their
efforts
they
have
by
mistake
over-stepped
the
line
set
by
Parliament
and
have
unduly
lessened
competition
they
are
responsible
for
their
unlawful
act
.
..
Breach
of
the
statute
is
one
thing,
moral
turpitude
is
quite
another.’
”’
So,
the
trial
judge
who
had
found
the
appellant
guilty
thought
that
he
should
not
look
upon
it
as
guilty
of
moral
turpitude
or
of
wicked
intention.
There
had
been
a
breach
of
a
statute
and
the
appellant
was
responsible
for
its
unlawful
act.
That
being
the
case,
it
becomes
necessary
to
determine
if
unlawful
acts
committed
in
earning
income
from
the
operations
of
a
business
or
trade
are
to
be
considered
in
computing
the
income
of
a
taxpayer.
The
Act
clearly
states
that
the
income
of
a
taxpayer
is
his
income
from
all
sources.
It
is
a
sweeping
and
positive
statement
and
it
has
been
constantly
held
that
income
tax
is
a
tax
upon
the
person
measured
by
his
income
and
that
the
source
of
his
income
should
not
be
looked
at
when
computing
a
taxpayer’s
taxable
income.
In
the
case
of
Minister
of
Finance
v.
Smith,
[1927]
A.C.
193:
[1917-27]
C.T.C.
251,
wherein
it
was
held
that
upon
a
literal
construction
of
the
Act
the
profits
in
question,
though
by
law
of
the
particular
province
they
are
illicit,
come
within
the
words
employed
in
Section
3(1),
Lord
Haldane
in
his
remarks
said
at
page
197,
in
fine
[[1917-27]
C.T.C.
254]:
.
There
is
nothing
in
the
act
which
points
to
any
intention
to
curtail
the
statutory
definition
of
income,
and
it
does
not
appear
appropriate
under
the
circumstances
to
impart
any
assumed
moral
or
ethical
standard
as
controlling
in
a
case
such
as
this
the
literal
interpretation
of
the
language
employed.
.
.
.”
Then
referring
to
C.I.R.
v.
Von
Glehn,
[1920]
2
K.B.
553
at
pages
072-573,
he
added:
“Their
Lordships
have
no
reason
to
differ
from
the
conclusion
reached
in
that
case,
but
they
must
not
be
taken
to
assent
to
any
suggestion
sought
to
be
based
on
the
words
used
by
the
learned
Lord
Justice,
that
Income
Tax
Acts
are
necessarily
restricted
in
their
application
to
lawful
businesses
only.
.
.
.’’
According
to
the
above
remarks,
it
would
seem
that
the
income
tax
provisions
are
applicable
to
taxpayers
carrying
on
business
by
means
of
unlawful
practices
as
to
unduly
prevent
or
lessen
competition
in
the
production,
manufacture,
purchase,
barter,
sale
.
.
.
of
articles
or
commodities
which
may
be
the
subject
of
trade
or
commerce,
unless
specifically
prohibited
by
the
Income
Tax
Act.
Were
it
to
be
otherwise,
it
would
be
most
difficult
to
bring
within
the
ambit
of
the
taxation
statute
taxpayers
responsible
for
such
unlawful
practices.
In
the
present
instance,
the
appellant,
though
charged
and
later
found
guilty
of
the
unlawful
business
practice
supra,
did
report
in
its
income
tax
return
for
its
taxation
year
its
income
from
its
business
in
that
year,
in
compliance
with
Section
3(a)
of
the
Act.
But
in
reporting
its
income,
to
arrive
at
the
amount
of
its
taxable
income—
Section
2(3)—it
sought
to
deduct
legal
costs
incurred
and
paid
in
defending
its
business
practices.
The
only
change
to
the
appellant’s
income
tax
return
made
by
the
respondent
was
his
refusal
to
allow
the
above
sought
deduction.
No
doubt
was
ever
raised
as
to
the
respondent’s
right
to
impose
and
levy
income
tax
on
the
appellant’s
taxable
income
from
its
business
whether
or
not
the
income
flowed
from
unlawful
practices.
But
the
tax
to
be
levied
is
not
on
the
taxpayer’s
income;
it
is
on
his
income
minus
the
deductions
permitted
by
the
Act.
There
are
two
general
principles
laid
out
in
the
Act
itself.
In
Cox
v.
Rabbits
(1877-78),
3
App.
Cas.
478,
at
page
478
of
the
volume
it
is
said:
“A
Taxing
Act
must
be
construed
strictly;
you
must
find
words
to
impose
the
tax,
and
if
words
are
not
found
which
impose
the
tax,
it
is
not
to
be
imposed.
.
.
.”
Duff,
J.,
in
Versailles
Sweets
Lid.
v.
A.-G.
Canada,
[1924]
S.C.R.
466,
said
(p.
468)
:
‘
‘
The
rule
for
the
construction
of
a
taxing
statute
is
most
satisfactorily
stated,
I
think,
by
Lord
Cairns
in
Partington
v.
Attorney-General.
Lord
Cairns,
of
course,
does
not
mean
to
say
that
in
ascertaining
‘the
letter
of
the
law’,
you
can
ignore
the
context
in
which
the
words
to
be
construed
stand.
What
is
meant
is,
that
you
are
to
give
effect
to
the
meaning
of
the
language;
you
are
not
to
assume:
‘any
governing
purpose
in
the
Act
except
to
take
such
tax
as
the
statute
imposes’
as
Lord
Halsbury
said
in
Tennant
v.
Smith,
[1892]
A.C.
154.”
I
take
these
references
to
mean
that
when
the
statute
says
that
taxable
income
is
the
income
of
the
taxpayer
minus
the
deductions
permitted
by
the
Act,
the
words
cannot
be
construed
as
meaning
that
the
taxable
income
is
restricted
to
the
income
of
a
taxpayer
from
a
lawful
business
nor
that
he
is
deprived
of
the
benefit
of
the
deductions
permitted
by
the
Act.
Therefore
income
from
a
business,
if
taxable,
has
to
be
computed
with
the
deductions
when
the
claim
comes
within
the
exempting
provision.
Thorson,
P.,
in
Lumbers
v.
M.N.R.,
[1943]
Ex.
C.R.
202;
[1943]
C.T.C.
281,
held
(inter
alia)
:
‘6
.;
he
must
show
that
every
constituent
element
to
the
exemption
is
present
in
his
case
and
that
every
condition
required
by
the
exempting
section
has
been
complied
with.”
In
the
present
instance,
were
the
legal
costs
of
defending
a
prosecution
under
the
Combines
Investigation
Act
claimed
as
a
deduction
from
income,
deductible
in
the
computation
of
the
appellant’s
taxable
income
as
outlays
or
expenses
incurred
by
it
for
the
purpose
of
gaining
or
producing
income
from
its
business?
The
respondent
disallowed
the
appellant’s
claim
for
deduction
and
relied
on
Section
12(1)
(a)
of
the
Act.
This
section
applies
to
income
from
a
business
or
property
which
Section
4
states
to
be
the
profit
therefrom
for
the
year.
There
is
no
doubt
that
the
profit
to
be
assessed,
though
not
defined
in
the
Act,
is
the
net
profit
contemplated
by
Section
2(3)
and
described
as
taxable
income.
‘‘
Profits
and
gains’’,
according
to
Lord
Halsbury
in
The
Gresham
Life
Assurance
Society
v.
Styles,
[1892]
A.C.
309,
316,
must
be
ascertained
on
ordinary
principles
of
commercial
trading.
When
an
expenditure
is
not
expressly
deductible
under
Section
11,
the
proper
way
to
determine
the
deductibility
of
such
an
expenditure
is
to
see
if
it
is
deductible
according
to
ordinary
principles
of
commercial
trading
and
accepted
business
practice.
The
President
of
this
Court,
discussing
the
meaning
of
Section
12(1)
(a)
in
Royal
Trust
Co.
v.
M.N.R.,
[1957]
C.T.C.
32,
at
page
42
said:
.
.
Thus,
it
may
be
stated
categorically
that
in
a
case
under
the
Income
Tax
Act
the
first
matter
to
be
determined
in
deciding
whether
an
outlay
or
expense
is
outside
the
prohibition
of
Section
12(1)
(a)
of
the
Act
is
whether
it
was
made
or
incurred
by
the
taxpayer
in
accordance
with
the
ordinary
principles
of
commercial
trading
or
well
accepted
principles
of
business
practice.
If
it
was
not,
that
is
the
end
of
the
matter.
But
if
it
was,
then
the
outlay
or
expense
is
properly
deductible
unless
it
falls
outside
the
expressed
exception
of
Section
12(1)
(a)
and,
therefore,
within
its
prohibition.’’
And
he
continues
at
page
44
:
“The
essential
limitation
in
the
exception
expressed
in
Section
12(1)
(a)
is
that
the
outlay
or
expense
should
have
been
made
by
the
taxpayer
for
the
purpose’
of
gaining
or
producing
income
‘from
the
business’.
It
is
the
purpose
of
the
outlay
or
expense
that
is
emphasized
but
the
purpose
must
be
that
of
gaining
or
producing
income
‘from
the
business’
in
which
the
taxpayer
is
engaged.
If
these
conditions
are
met
the
fact
that
there
may
be
no
resulting
income
does
not
prevent
the
deductibility
of
the
amount
of
the
outlay
or
expense.
Thus,
in
a
case
under
the
Income
Tax
Act
if
an
outlay
or
expense
is
made
or
incurred
by
a
taxpayer
in
accordance
with
the
principles
of
commercial
trading
or
accepted
business
practice
and
it
is
made
or
incurred
for
the
purpose
of
gaining
or
producing
income
from
his
business
its
amount
is
deductible
for
income
tax
purposes.”
To
establish
that
the
legal
fees
that
were
incurred
and
paid
by
the
appellant
in
1955
to
defend
itself
in
an
action
taken
against
it
under
the
Combines
Investigation
Act
were
incurred
and
made
in
accordance
with
ordinary
commercial
and
accounting
practice,
an
expert
witness
was
heard.
He
had
twenty-seven
years’
experience
as
a
chartered
accountant
and
had
dealt
with
the
auditing
of
accounts
of
companies
manufacturing
paper,
but
had
nothing
to
do
with
the
auditing
of
books
of
companies
involved
in
the
above
litigation.
He
expressed
the
opinion
that
in
computing
the
revenue
of
the
company
the
legal
fees
expended
by
the
appellant
and
the
others
were
properly
entered
in
the
loss
side
of
a
Profit
and
Loss
Statement.
He
considered
they
were
ordinary
business
expenses
which
under
sound
accounting
and
commercial
practice
would
be
deducted
in
the
statement
of
profit
and
loss
as
an
expenditure
for
the
year.
In
the
commercial
context
of
carrying
on
the
business
of
a
paper
industry
there
would
be
no
material
difference
in
the
accounting
theory
which
would
prevail
in
the
make
up
of
financial
statements
of
other
industries.
In
general
accounting,
one
endeavours
to
accept
principles
which
are
universal
in
application.
The
qualifications
and
experience
of
the
witness
have
convinced
me
that
his
evidence,
as
an
expert
in
such
matters,
should
be
accepted.
In
my
view
the
payments
of
the
legal
fees,
claimed
as
deduction
by
the
appellant,
were
made
in
accordance
with
principles
of
good
business
practice
for
a
company
in
the
fine
paper
industry.
Now,
were
the
payments
made
by
the
appellant
for
the
purpose
of
gaining
or
producing
income
from
its
business?
Having
dealt
with
the
nature
of
the
charge
against
the
appellant
and
others
and
the
findings
of
the
trial
judge
and
his
remarks
in
rendering
sentence,
I
shall
simply
add
that
all
the
findings
relate
to
business
practices
agreed
to
and
followed
by
the
parties
in
their
daily
operations
and
activities.
They
were
found
to
be
contrary
to
the
provisions
of
the
Combines
Investigation
Act
and
unlawful
under
Section
498(1)
(d)
of
the
Criminal
Code
of
Canada.
The
claim
for
the
deduction
is
for
the
legal
costs
of
appealing
against
the
judgment
of
the
High
Court
of
Ontario
which
found
the
appellant
guilty
of
the
charge
as
laid
in
the
indictment.
There
are
not
many
decisions
of
our
courts
on
the
question
of
the
deductibility
of
legal
costs
in
computing
taxable
income
under
our
Income
Tax
Act
in
matters
similar
to
those
which
are
the
subject
of
this
litigation.
However,
the
Exchequer
Court
and
the
Supreme
Court
of
Canada,
in
a
case
wherein
a
charge
laid
under
the
same
section
of
the
Criminal
Code
in
respect
of
violations
of
the
Combines
regulations,
dealt
with
this
problem.
In
the
case
of
M.N.R.
v.
L.
D.
Caulk
Co.
of
Canada
Ltd.,
[1952]
Ex.
C.R.
49;
[1952]
C.T.C.
1,
in
1947,
the
respondent,
a
manufacturer
of
dental
supplies,
at
the
invitation
of
the
Commissioner
under
the
Combines
Investigation
Act
who
was
conducting
an
investigation
into
an
alleged
combine
in
the
manufacture
and
sale
of
dental
supplies
in
Canada,
made
representations
before
him,
employing
for
the
purpose
solicitors
to
whom
he
paid
a
fee
for
their
services.
Later
the
respondent
and
others
were
charged
under
Section
498
of
the
Criminal
Code
that
they
did
in
fact
constitute
a
combine
in
the
manufacture
and
sale
of
dental
supplies
in
Canada.
At
the
trial
the
respondent
was
acquitted
and
an
appeal
taken
by
the
Crown
from
such
acquittal
was
dismissed.
The
respondent
in
1948
paid
legal
fees
to
its
solicitors
and
counsel
who
acted
at
the
trial
and
appeal.
Although
the
facts
dealt
with
in
the
dental
trade
as
opposed
to
those
dealt
with
in
the
fine
paper
trade
were
identical
in
terms
of
the
indictment
and
charge,
the
results
in
the
two
instances
were
different.
In
the
Caulk
case
(supra)
the
charge
was
dismissed
and
the
company
was
not
found
guilty
and
was
not
fined.
In
the
Rolland
Paper
Co.
Ltd.
case,
the
company
was
found
guilty
and
fined.
So
the
only
difference
material
to
this
appeal
between
this
case
and
the
Caulk
case
is
the
difference
between
condemnation
and
acquittal.
Cameron,
J.,
held
[[1952]
Ex.
C.R.
49;
[1952]
C.T.C.
12]
:
‘The
payments
[to
its
solicitors
and
counsel
by
respondent]
were
made
in
the
usual
course
of
business
and
were
made
with
reference
to
a
particular
difficulty
which
arose
in
the
course
of
the
year,
namely,
the
investigation
by
the
Commissioner,
the
charge
laid
against
the
respondent
and
the
unfavourable
and
damaging
publicity
which
resulted
therefrom,
and
which
would
have
been
greatly
enhanced
had
the
charge
been
sustained:
the
disbursements
had
nothing
to
do
with
the
assets
or
capital
of
the
company
but
were
made
in
an
effort
..
.
to
establish
that
its
trading
practices
were
not
illegal,
and
to
enable
it
to
carry
on
as
it
had
in
the
past,
unimperilled
by
charges
that
such
practices
were
illegal.”
The
learned
judge
affirmed
the
decision
of
the
Income
Tax
Appeal
Board
and
held
that
certain
legal
expenses
incurred
by
the
respondent
were
deductible
under
the
Income
War
Tax
Act
in
ascertaining
this
taxable
income.
On
appeal
from
this
decision
to
the
Supreme
Court
of
Canada,
[1954]
S.C.R.
55;
[1954]
C.T.C.
28,
Rand,
J.,
who
delivered
the
judgment
said
at
p.
56
[[1954]
C.T.C.
30]
:
“The
question
here
is
whether
expenses
incurred
by
the
respondent
company
in
defending
itself
against
charges
of
violating
the
criminal
law
by
combining
with
others
to
prevent
or
lessen
unduly
competition
in
the
commercial
distribution
of
dental
supplies,
are
deductible
in
ascertaining
taxable
income.
The
agreement
or
arrangement
alleged
to
have
been
unlawful
purported
to
regulate
day
to
day
practices
in
the
conduct
of
the
respondent’s
business.
It
formed
no
part
of
the
permanent
establishment
of
the
business;
it
was
a
scheme
to
govern
operations
rather
than
to
create
a
capital
asset;
and
the
payment
to
defend
the
usages
under
it
was
a
beneficial
outlay
to
preserve
what
helped
to
produce
the
income.
These
expenses
included
legal
fees
both
for
appearing
before
the
Commissioner
under
the
Combines
Investigation
Act
and
at
the
trial
which
resulted
in
acquittal.’’
After
reading
carefully
the
judgments
of
both
Courts
from
which
I
have
cited
extracts,
I
have
come
to
the
conclusion
that
the
facts
therein
stated
are
identical
to
those
contained
in
the
Supplementary
Statement
of
Facts
which
is
part
of
the
record
in
the
present
case.
In
each
ease,
the
parties’
claim
is
for
the
deduction
of
legal
expenses
in
the
computation
of
their
taxable
income.
Both
claimants
had
been
charged
and
prosecuted
under
the
same
section
of
the
Criminal
Code
for
having
illegally
conspired
and
combined
to
prevent
or
lessen
competition
in
their
respective
trades
of
manufacturing,
selling
and
distributing
their
commodities.
The
agreement
or
arrangements
made
or
arrived
at
were
to
regulate
their
day
to
day
practices
in
the
conduct
of
their
business
activities.
Their
scheme
was
one
to
govern
their
operations
from
which
they
derived
their
income.
The
legal
expenses
were
paid
to
defend
their
way
of
doing
business
and
preserve
the
system
under
which
they
operated.
Certain
remarks
of
Cameron,
J.,
of
the
Exchequer
Court
in
his
notes
and
which
were
concurred
in
by
Kellock,
J.,
of
the
Supreme
Court
were
discussed
at
length
by
counsel
for
both
parties.
The
opinions
expressed
related
to
the
fact
that
a
convie-
tion
on
the
charge
might
have
made
a
difference
on
the
decision
which
was
arrived
at.
I
quote
the
remarks
of
Cameron,
J.,
[1952]
Ex.
C.R.
58
[[1952]
C.T.C.
10]
:
‘.
.
In
view
of
the
fact
that
the
respondent
was
acquitted,
I
do
not
think
that
in
this
case
the
mere
fact
that
the
charge
against
the
respondent
was
made
under
the
Criminal
Code
has
any
bearing
on
the
deductibility
or
otherwise
of
the
expenses
incurred
in
defence
of
that
charge.
The
result
might
have
been
different
had
the
respondent
been
found
guilty
of
the
charge,
but
as
to
that
I
need
say
nothing.’’
Kellock,
J.,
made
these
observations,
[1954]
S.C.R.
60
[[1954]
C.T.C.
33]:
“It
must
be
assumed
in
the
case
at
bar,
by
reason
of
the
acquittal,
that
the
trade
practices
involved
were
not
illegal,
and,
as
pointed
out
by
Cameron,
J.,
it
is
not
necessary
to
consider
the
situation
had
the
contrary
been
the
case.
The
difference
for
the
present
purposes
is
substantial.’’
I
do
not
believe
that
Cameron,
J.,
meant
to
express
the
opinion
that
his
decision
would
have
been
different
had
the
respondent
been
found
guilty.
He
might
have
had
doubts,
but
he
did
not
choose
to
give
the
reasons
for
any
doubts
he
may
have
had
because
the
fact
was
not
an
issue
in
the
case
submitted
to
his
judgment.
As
to
Kellock,
J.,
there
is
no
doubt
that
he
thought
the
difference
would
have
been
substantial
had
the
trade
practices
been
illegal.
He
also
refrained
from
expanding
on
this
matter
because
the
issue
did
not
call
for
a
decision
on
that
point.
I
fail
to
see,
in
the
remarks
referred
to,
the
expression
of
an
opinion
which
could
be
binding
in
a
case
where
the
trade
practices
were
illegal.
In
one
instance,
there
was
doubt;
in
the
other,
there
was
a
statement
which,
in
my
view,
was
made
to
mean
that
illegal
trade
practices
would
have
been
considered
in
a
different
way
than
legal
trade
practices
in
the
computation
of
the
taxpayer’s
income
under
the
Income
Tax
Act.
In
the
present
case,
I
am
not
called
upon
to
decide
if
the
appellant’s
trade
practices
were
legal
or
illegal.
My
duty
is
to
determine
whether
the
legal
fees
incurred
and
paid
for
by
the
appellant
in
defending
itself
on
a
charge
alleging
that
its
trade
practices
were
illegal
are
deductible
as
having
been
incurred
and
made
for
the
purpose
of
gaining
or
producing
income
from
its
business.
Legal
expenses
in
the
course
of
a
taxpayer’s
business
have
been
considered
by
the
Supreme
Court
as
being
deductible.
It
is
the
purpose
of
the
legal
expenses
which
is
material
in
this
issue.
It
appears
from
the
record
that
the
income
tax
law,
as
a
fact,
applied
to
the
appellant
taxpayer.
The
tax
was
imposed
and
levied
upon
the
taxpayer
measured
by
his
income.
The
income
was
derived
from
its
business
operations.
Its
expenditures
were
deducted
to
ascertain
its
profit.
The
income
and
the
expenditures
were
for
the
taxation
year
1955.
Among
the
expenses
deducted
under
the
heading
‘‘General
Expense’’
were
legal
and
audit,
$23,198.27.
This
amount
comprises
a
sum
of
$5,948.27,
for
legal
fees
and
costs
involved
in
this
litigation,
the
deduction
of
which
was
disallowed
by
the
respondent
in
his
re-assessment.
The
other
legal
and
audit
costs
were
allowed.
On
the
evidence
adduced,
I
have
found
that
the
legal
fees
and
costs
claimed
as
deductions
had
been
properly
entered
in
the
profit
and
loss
statement
in
computing
the
taxpayer’s
revenue;
that
according
to
sound
accounting
and
commercial
practice
they
were
to
be
considered
as
business
expenses;
that
in
the
carrying
on
of
a
fine
paper
business
there
would
be
no
material
difference
in
the
accounting
theory
which
would
prevail
in
the
make
up
of
financial
statements
of
other
industries.
I
find
that
the
indictments
and
charges
in
this
case
and
the
Caulk
case
were
identical
in
terms
and
based
on
the
same
section
of
the
Criminal
Code
and
that
the
facts
stated
in
the
judgments
of
the
Exchequer
and
Supreme
Courts
are
identical
to
the
facts
related
in
the
Supplementary
Statement
of
Facts
which
was
filed
in
the
present
instance.
In
my
view,
there
is
no
material
difference
between
the
facts
relevant
to
the
appellant
in
this
case
and
those
upon
which
the
Supreme
Court
of
Canada
made
its
decision.
The
decision
as
set
forth
in
the
head-
note
of
the
judgment
reads
thus:
The
legal
expenses
incurred
by
the
respondent
companies
in
connection
with
an
investigation
into
an
alleged
illegal
combine
and
in
successfully
defending
a
charge
under
s.
498
of
the
Criminal
Code
regarding
the
operation
of
such
alleged
illegal
combine,
were
deductible
in
ascertaining
taxable
income
as
they
were
‘wholly,
exclusively
and
necessarily
laid
out
or
expended
for
the
purpose
of
earning
the
income’
within
the
meaning
of
s.
6(1)(a)
of
the
Income
War
Tax
Act,
R.S.C.
1927,
c.
97
(Minister
of
National
Revenue
v.
The
Kellogg
Company
of
Canada
Ltd.,
[1943]
S.C.R.
58
followed).”
Rand,
J.,
commenting
on
the
proper
test
to
be
applied
in
determining
the
deduction
claimed
in
that
case,
said
at
page
56,
in
fine
[[1954]
C.T.C.
30]
:
‘‘The
provisions
of
the
Income
Tax
Act
are
imposed
on
the
settled
practices
of
commercial
accounting,
but
they
create
in
effect
a
statutory
mode
of
determining
taxable
income.
Deductions
from
revenue
must
have
been
‘wholly,
exclusively
and
necessarily
laid
out
or
expended
for
the
purpose
of
earning
the
income’.
Each
word
of
this
requirement
is
significant,
and
decisions
based
on
different
statutory
language
are
strictly
of
limited
assistance.”
The
provision
of
the
Income
Tax
Act
to
be
considered
in
this
instance
is
to
the
effect
that
deductions
from
revenue
must
have
been
made
for
the
purpose
of
gaining
or
producing
income
from
the
business,
whilst
the
provision
of
the
Income
War
Tax
Act
considered
in
the
Caulk
case
limits
the
disbursements
or
expenses
as
shown
to
have
been
laid
out
wholly,
exclusively
and
necessarily
for
the
purpose
of
earning
the
income.
These
terms
seem
to
me
to
be
more
restrictive
than
the
terms
of
Section
12(1)
(a)
which
exclude
deduction
of
outlays
or
expenses
that
are
not
made
or
incurred
for
the
purpose
of
gaining
or
producing
income
from
the
business.
Business
purpose
remains
the
test,
but
need
not
be
exclusive.
In
Bannerman
v.
M.N.R.,
[1959]
S.C.R.
562;
[1959]
C.T.C.
215,
Kerwin,
C.J.,
of
the
Supreme
Court
of
Canada
said
at
page
564,
in
fine
[[1959]
C.T.C.
217]
:
“.
.
.
Under
Section
12(1)
(a)
of
the
present
Act
it
is
sufficient
that
an
outlay
be
made
or
expense
incurred
with
the
object
or
intention
that
it
should
earn
income,
but
since
in
one
sense
it
might
be
said
that
almost
every
outlay
or
expense
was
made
or
incurred
for
that
purpose,
a
line
must
be
drawn
in
the
individual
case
depending
upon
the
circumstances
and
bearing
in
mind
the
provisions
of
Section
12(1)
(b).”
In
the
Caulk
case,
where
the
facts
were
identical
in
terms
of
the
indictment
and
charge
to
those
of
the
present
case,
both
the
Exchequer
Court
and
the
Supreme
Court
found
that
the
disbursements
of
legal
expenses
incurred
to
defend
its
right
to
use
certain
trade
practices
had
been
laid
out
for
the
purpose
of
its
business
and
for
the
purpose
of
earning
the
income
and
were
deductible
in
computing
the
taxpayer’s
taxable
income.
Believing
as
I
do
that
the
appellant’s
trade
practices
in
the
operations
of
its
business
were
used
and
followed
for
the
purpose
of
earning
income
from
the
business,
I
find
that
lawful
legal
fees
and
costs
incurred
or
made
in
defending
such
practices
till
a
final
decision
on
their
legality
or
illegality
was
reached
were
made
for
the
purposes
of
their
trade
and
for
the
purpose
of
earning
income
and
were
deductible
in
ascertaining
the
appellant’s
taxable
income
within
the
meaning
of
Section
12(1)
(a)
of
the
Income
Tax
Act,
R.S.C.
1952.
Therefore
there
will
be
judgment
allowing
the
appellant’s
claim
for
the
deduction
of
the
legal
costs
amounting
to
$5,948.27
paid
in
the
year
1955
and
disallowed
by
the
respondent
in
computing
the
appellant’s
taxable
income
for
the
taxation
year
1955
and
referring
the
assessment
back
to
the
Minister
for
reconsideration
and
re-assessment,
with
costs
to
be
taxed
in
the
usual
way.
Judgment
accordingly.