Muldoon, J.:—The plaintiff, Border Chemical, brings this appeal from a decision of the Tax Court of Canada, by way of trial de novo. The matter at issue is whether the plaintiff's former subsidiary corporation is entitled to deduct from income in its 1980 taxation year the full amount of counsel fee and expenses, quantified here at $21,068, incurred by its president in his successful defence against charges of offering secret commissions in a share promotion venture, contrary to subparagraph 383(1)(a)(i) of the Criminal Code. The learned Tax Court judge held that the corporation was not entitled to make that deduction. The matter will come to be determined principally pursuant to paragraphs 18(1)(a) and (b) of the Income Tax Act as it applied to the 1980 income tax year.
The plaintiff was formed by the amalgamation of two predecessor corporations, one also known as Border Chemical Company Limited (the parent company) and its wholly owned subsidiary, Border Fertilizer (1972) Ltd. (the subsidiary company) which, had it continued in being, would have been the plaintiff herein. The amalgamation was effected on December 30, 1980, pursuant to the laws of Manitoba, under which both parent and subsidiary companies had been incorporated.
So it is that the plaintiff responds to the notice of reassessment issued by the Minister of National Revenue on February 14, 1984, which had been issued to, and in the name of the subsidiary company, also called hereinafter simply, border Fertilizer (1972).
That subsidiary company had, in turn, been formed by the amalgamation of two predecessors, Border Fertilizer Ltd. and Aerofoam Chemicals Ltd. as shown by a copy of Letters Patent of Amalgamation exhibited in the defendant's document received at trial as Exhibit 2. The document is Exhibit 2(7), and is dated April 5, 1972.
The subsidiary company at all relevant times carried on the business inter alia of manufacturing and selling chemical products, as is admitted in the pleadings and further particularized in Exhibit 2(7).
The shares of the parent company were, at all material times, traded on the Toronto Stock Exchange, or T.S.E. Mark Gerald Smerchanski was, throughout the relevant times, the president and a director of both the parent company, Border Chemical and the subsidiary company, Border Fertilizer (1972). The plaintiff alleges, but the defendant denies that, "at no time did Smerchanski or individuals or corporations related to him own sufficient shares in the parent company to control [it]". The plaintiff's allegation appears to be true (Exhibit 1(B)), but it says nothing of Mr. Smerchanski's personal influence, over the conduct of the various corporations mentioned herein, and with their directors. Numerous among the latter were his family members. The evidence here generates a firm inference that Mr. Smerchanski, a former Member of Parliament and well-known businessman in Manitoba, if not throughout Canada and abroad, was truly the leader, planner and vivacious spirit of the various corporations mentioned herein. There is, of course, nothing pejorative, sinister or unlawful about that.
In direct examination by the plaintiff's counsel, Mr. Smerchanski explained:
Border Chemical [the parent company] was just a holding company, and all the activity took place in Border Fertilizer, but on instructions from the board of directors of Border Chemical.
(Transcript I, pp. 8 & 9.)
He testified further in relation to the late seventies and early eighties, at least:
Eldorado Gold Mines are owned 50 per cent by Border Chemical and 50 per cent by my two daughters, Rhonda and Patricia Smerchanski.
(Transcript I, p. 12)
Mr. Smerchanski swore that he did not control Eldorado Mines.
Now is the point at which to introduce reference to Asta Securities Ltd., and its president, Alfred Lewis. It, he or they were engaged by the parent company, as is stated in paragraph 7 of the statement of claim “... to undertake a stock promotion effort in and about 1969”. Herein lies the origin of the matter in issue.
Mr. Smerchanski testified that he was introduced to Mr. Lewis by a director of Border Chemical, who served as its solicitor in Toronto. According to the testimony "Mr. Lewis had a small brokerage public relations operation in Toronto" and Mr. Smerchanski first met him there, as he said, "acting in my capacity as president and director of Border Chemical on instructions from our board of directors" (Transcript I, p. 14). It was a private tête-à-tête with no one else present. It was the first of several similar meetings which "subsequently culminated in Mr. Lewis attending at a board of directors' meeting in Toronto".
After Mr. Lewis explained to the board the type of work he did, "he requested that a certain amount of shares of Border Chemical [be] made available to him on an option basis so that he [could] undertake to do something in the way of publicizing, looking around for other acquisitions for Border Chemical". After Lewis' departure, and after his further meeting with Border Chemical's board in Pittsburgh (U.S.A.), and after the directors' discussion of what they had heard "they decided that they would give him an option on the shares that the board of directors owned themselves personally to about 50,000 shares". They also “felt by allowing an option arrangement to Mr. Lewis, he would be more interested in Border Chemical" and “if we were making an expansion or an acquisition that we would then consider giving Mr. Lewis an option on treasury stock in order to raise funds for the company and for this purpose" (Transcript I, p. 15). Mr. Smerchanski opined that Mr. Lewis could not just buy those shares in the stock market, because "there weren't too many shares trading on the market". Border Chemical was then a thinly-traded company.
Mr. Smerchanski then was asked in direct examination what was Mr. Lewis' side of the bargain. "He publicized the potential of Border Chemical . . . through periodicals, journals, things like Financial Times, Financial Post. . . [etc.] . . ., and this was more of a P.R. relation, both in drawing attention to what the potential growth of Border was and also as to the possibility of acquiring other operating companies, or Border Chemical expanding in its own right” was the answer (Transcript I, p. 16). No contract or other written record was ever made of this bargain. Although Mr. Lewis regularly sent bills for his services, said initially to be satisfactory, and was paid for them by Border Fertilizer, no example of his handiwork was exhibited to the Court. Some written reports were said to have been prepared, but they cannot be found. "But", said Mr. Smerchanski, "he got himself involved with other matters with the regulatory authorities, and then we cancelled our arrangement”.
Over and above the payments to Mr. Lewis, by Border Fertilizer, be it noted, he also got most of those shares, at market value, under the option. The share transaction, the witness acknowledged, could be called "a sweetener". However, Mr. Lewis’ acquisition of most of the 50,000 shares did not affect the control of Border Chemical, according to Mr. Smerchanski.
In corroboration of Mr. Smerchanski's vague allusion to Lewis' having "got himself involved ... with the regulatory authorities" is the reference in Exhibit 2(9) Appendix "B" at p. 50. It indicates that Mr. Lewis and another were charged in 1975 at Toronto with an offence alleged to be conspiracy to defraud the public and conspiracy to possess money obtained by the commission of an offence. However "on June 18, 1976, Alfred Joseph Lewis plead[ed] guilty to common law conspiracy and received [sic] a $50,000.00 fine". The two charges above mentioned were dropped after he pleaded guilty, and the other person, one Lifshitz was not then dealt with. If Mr. Smerchanski knew of the charges while they were still only impending, he would have been quite right to cancel the arrangement, notwithstanding the legal presumption of Lewis' innocence, subsequently rebutted by his conviction. Had Lewis been acquitted, such an arrangement could easily have been revived.
The question of what Mr. Lewis and Asta Securities Ltd. were really engaged to do for Border Chemical in regard to the "stock promotion effort" pleaded by the plaintiff in paragraph 7 of the statement of claim not unnaturally arose again upon Mr. Smerchanski's cross-examination. Not unnaturally, because it was such a bizarre manner of concluding an agreement. There is absolutely no written contract, document, minute or written note of the agreement, and there never was any such according to Mr. Smerchanski. Equally there is absolutely nothing in writing whereby Border Chemical's board of directors is alleged to have authorized Mr. Smerchanski alone to deal with Lewis and Asta Securities. The conclusion is that Mr. Smerchanski took complete freedom in this, and that all direct contact and dealings with Lewis and Asta Securities were conducted wholly and solely by Smerchanski. But on such an ethereal basis, at least from Border Chemical's point of view, Lewis (and/or Asta Securities) was paid nevertheless in tangible "coin of the Realm”, not by Border Chemical, the parent company, but by Border Fertilizer.
Mr. Smerchanski tried to explain the tenuous "stock promotion" relationship between Lewis and the parent company, Border Chemical, and his explanations on cross-examination are recorded on pages 76 to 90 of Transcript I. One passage will serve as an example to illustrate what Mr. Smerchanski was trying to explain:
Q. If we come back to paragraph 7 . . . of the statement of claim . . . Can you tell us what was the stock promotion effort that he was supposed to do?
A. As I said, he wanted a position in Border Chemical and wanted to acquire Border Chemical shares.
Q. How is that a stock promotion?
A. Pardon?
Q. How is that a stock promotion effort?
A. Well, he was a broker, and we would assume that that was a promotion effort on his part.
Q. In what respect?
A. Well, he was in the business of promoting securities.
Q. How was he supposed to promote shares of Border Chemical in getting an option to buy shares?
A. Well, that's entirely up to him. He requested an option from the board of directors, and after due consideration they decided to grant it to him.
Q. . . .What was the stock promotion effort he was retained for by Border Chemical and/or Border Fertilizer?
A. He was retained by us for the purpose I have outlined, and as far as the stock promotion was concerned, he wanted an option on the shares which the board of directors gave him.
Q. We will come back, Mr. Smerchanski, to my first question; how was that supposed to promote the shares of Border Chemical? How was he going to promote the shares?
A. That was his prerogative. The thing was he presented to us that Border Chemical was a good growth company.
Q. Mr. Smerchanski, when you retain the service of somebody to do some kind of work, you must have known what work he intended to do? It wasn't up to him. You pay for that supposedly?
A. He is in the brokerage business. How he was going to do it, or why he was going to do it was none of our concern.
Q. It wasn't one of your concerns?
A. No.
[Here the Court posed a question to which Mr. Smerchanski made answer (Transcript I, p. 88) which essentially consisted of these final lines:]
. . .90, therefore, the board of directors said let us work out an option arrangement for him and we will see his performance, and after he gives us a performance, then we would give consideration to have him underwrite treasury shares. Because at that point it became important that if we allowed him an underwriting to a large extent, he could take control of the company, and we wouldn't be in it.
THE COURT: But what performance were you going to see? I don't understand that. You were going to give him an option so you could see his performance in what?
THE WITNESS: The performance in making the company and the shares more valuable.
BY MR. COTE:
Q. Is there anything in writing from the board of directors which will talk about this stock promotion effort?
A. No there is not.
Q. Nothing in writing. And we are talking about the shares of Border Chemical?
A. Shares of Border Chemical, yes.
Q. And can you tell the court from whom those option or shares were acquired?
A. Those were acquired from the board of directors.
Q. Okay. Did Mr. Lewis acquire any shares directly from Border Chemical?
A. No, he did not.
Q. He did not. I will try again; in retrospect was Border Chemical involved in that stock option promotion?
A. I have explained to you the best I can.
Q. That's your answer?
A. Yes.
Q. Did Mr. Lewis and/or Asta Securities underwrite treasury shares of Border Chemical?
A. We had made provisions for that, but that was never finalized.
(Transcript I, pp. 86 to 89.)
Counsel re-examined Mr. Smerchanski on these matters but he led the witness so completely (transcript I, pp. 112 to 117), that it is wrong to accord weight to that testimony. This is not trivial, for, when he had completed that re-examination, the plaintiff’s counsel observed:
I believe I did as best I could to summarize his position from our perspective.
(Transcript I, p. 117)
Indeed he did.
The inferences to be drawn from the evidence thus far are that Mr. Smerchanski, having met privately with Mr. Lewis on several occasions, introduced him (with some warmth and confidence, for it could hardly have been otherwise), first to Border Chemical's directors present at the wholly unrecorded Toronto meeting and later to the directors present at the similarly unrecorded Pittsburgh meeting, if true directors' meetings they were, and the most which the directors would accord Mr. Lewis, after having heard from him, was a composite block of their own personal shares in Border Chemical. Since corporations act, formulate policies and take decisions through resolutions and decisions mainly of their boards of directors, which by law are to be recorded in the board's minutes, and since there are, and never were, any such minutes of either company, the Court finds that neither Border Chemical nor Border Fertilizer (1972) was ever involved in these transactions, dealings or arrangements with Mr. Lewis and/or Asta Securities.
Mr. Smerchanski was, however, personally involved with Mr. Lewis and Asta Securities, Mr. Lewis'company. On May 26, 1972, Mark G. Smerchanski, now Member of Parliament for Provencher, wrote a letter on House of Commons stationery, a copy of which is Exhibit 2(9) at pages 62 and 63. His letter is addressed to Asta Securities Corporation Limited in Frankfurt, Germany, with a copy directed to Asta Securities Corporation Limited, Toronto. Although this photocopied letter is included in Exhibit 2, tendered upon consent of counsel, and although Mr. Smerchanski's signature is thereby also photocopied, there is no viva voce testimony to indicate whether it was ever sent to Asta Securities. Nevertheless, the Court finds by inference that it was sent, and received, because of the photocopied trace of what appears to be a rubber-stamped rectangle enclosing the words "Eingegangen — 5 JUNI 1972” which appear on the first page (p. 62 of Ex. 1(9).)
In that letter, the M.P. for Provencher boldly writes that, "as a member of the Canadian government" he has no knowledge of any rumoured impending legislation “prohibiting foreign investments in the form of share purchases into Canadian companies". He hastens to assure Asta (and its clients) “that Canada is not discouraging” European investment but “in fact welcomes European investment in Canada. Should any of your clients in Europe care to write me or contact me in any way”, Mr. Smerchanski “would be more than pleased to outline in complete detail the policy of the Canadian Parliament in dealing with foreign investment." He concludes by hastening once more to assure the addressee that there is no intention of restricting "the purchase of shares of public companies by foreigners.”
Thus it is clear that if, as Mr. Smerchanski testified, the directors of the parent and subsidiary companies had no concern about how Lewis and Asta Securities were going to promote Border Chemical's shares, Mr. Smerchanski personally (and surely not on behalf of the electors of Provencher) was concerned about their promotion of "share purchases into Canadian companies" or "the purchase of shares of public companies by foreigners". It is abundantly clear that Mr. Smerchanski's dealings with Lewis and the latter's company were on Smerchanski's behalf and not on behalf of the parent and subsidiary companies through their directors as such.
It was, in part, because of those dealings and that relationship with Mr. Lewis and company, among others, that Mr. Smerchanski was believed by certain peace officers to have committed the indictable offence of possessing money obtained by fraud between January 1, 1970 and January 1, 1978. (Exhibit 2(9), pp. 39 and 41.) Those peace officers, in January and February, 1978, applied to Chief Provincial Judge Harold ff. Gyles, of Manitoba, for search warrants and persuaded him of their reasonable grounds for believing that evidence of that alleged indictable offence could be found in the business premises then frequented by Mr. Smerchanski, his residence, the companies' automobiles driven by him, and various other business and production premises. The warrants were issued, executed and a vast harvest of documents was yielded.
Among the places and premises from which account books, bank and financial records, minute books, correspondence and an array of other documents were seized, were the premises of Border Chemical, (the parent company), Border Fertilizer (1972), (the subsidiary company), Eldorado Gold Mines Inc., the companies' bank, the companies' auditors both in Winnipeg and Toronto, the companies' solicitors in Toronto, and Mr. Smerchanski's residence. (Exhibit 2(9).) He, and the parent and subsidiary companies, among others, applied in July 1978, and in January 1979, to the Manitoba Court of Queen's Bench for restoration of their documents, but their success was meagre. (Exhibit 1(F) & (H), and Exhibit 2(10) & (12).)
The seizures and the judicial proceedings were attended with considerable media and trade publicity. The publicity generated some misunderstanding of the situation. Exhibited to the Court were notes to Border Chemical’s consolidated financial statements for the years ending Decern- ber 31, of 1977, 1978 and 1979. (Exhibit 2(18), pp. 168 through 173.) In each instance under the heading of "Legal Matters", the auditors duly noted that pursuant to a search warrant, certain of the company's records were seized by the Royal Canadian Mounted Police, the warrant referring to "a conspiracy to commit an indictable offence, namely to possess money obtained by fraud between January 1, 1970 and January 1, 1978.” It was further noted that: "No charges have been brought against the company".
Despite the auditor's factual statement, or perhaps because of it, the companies' suppliers became restive, seeking payment on delivery. That, had it happened, would have had an adverse effect on cash flow, so the two Border companies increased efforts to keep their suppliers, their bank and their customers calm. After all, it was not the companies which were being investigated as potential accuseds. The companies had enjoyed good reputations and the bank, the suppliers and customers were restored to calm.
An application by Border Fertilizer (1972) to the federal Department of Regional Economic Expansion (DREE) on February 10, 1978, (Exhibit 2(16), pp. 142-148) was delayed pending resolution of the “investigation . . . into alleged fraudulent share transactions involving a number of companies, including Border Fertilizer (1972) Ltd." (Exhibit 2(16), pp. 158, 161 and 164.) The reason for the delay on DREE's part, indicated above, was not the final and formal reason for rejecting the application. DREE cited non-compliance with paragraph 7(1)(a) of its statute, the Regional Development Incentives Act, R.S.C. 1970, c. R-3. Presumably the applicant began its project prematurely in terms of needing the incentive grant to permit it to begin the undertaking, according to Mr. Smerchanski.
Undeniably the investigation delayed the progress of the application, but it is not certain what caused the ultimate rejection. One can surmise as the plaintiff and Mr. Smerchanski do; but because DREE advanced a plausible reason, one cannot draw the inference that the application was withdrawn wholly because of the odour of pending accusations. The delay probably could not be tolerated by the subsidiary company and it probably caused the company to move ahead on some minor plant expansion, without waiting, as Mr. Smerchanski testified. (Transcript 1, pp. 51 to 54, and 105-106.) However, whether one places the moment of loss of the DREE grant at September 24, 1982, (Exhibit 2(16), p. 165) or at October 27, 1983 (Exhibit 2(17)), those letters were composed long after the disputed lawyers' fees were claimed as a deduction from income in Border Fertilizer’s 1980 tax return. The "reasonable businessmen”, as plaintiff's counsel characterized the company's directors, would have had to be endowed with clairvoyance if they considered the loss of the DREE grant as a reason for making the subsidiary company pay Mr. Smerchanski's lawyers' bill, if indeed it really did pay. This latter question will be addressed further along in these reasons.
The publicity rolled on. In Exhibit 1(K) the plaintiff has amassed photocopies of items appearing in Toronto's The Globe and Mail, the Winnipeg Free Press, the now-defunct Winnipeg Tribune, the Toronto Star, a Dow Jones Release, the Financial Post and the Dun & Bradstreet Business Information Report. There was of course an upsurge of publicity just after the warrants were executed, and again, at the time Mr. Smerchanski was formally charged with the offences. Trading in Border Chemical's shares on the TSE was halted at 11:00 a.m. on Wednesday, February 8, 1978, for news that the R.C.M. Police were “investigating a group of companies to which Winnipeg-based Border Chemical belongs" said the Tribune in a Canadian Press story, giving a false impression about the companies. Trading in Border Chemical's shares resumed the next morning, but they slipped seven or ten cents, depending on the source, to $2.35 each upon resumption of trading. There is no evidence of either recovery or further decline.
There is also no evidence to support the allegations in paragraph 10 of the statement of claim. There was no public threat by the R.C.M. Police to lay charges against the companies, or even Smerchanski, for that matter. The Police here always appear to say that they expected charges to be laid within a certain time, but not against whom. That would be expected, but everyone in such a plight suffers more than need be, because of imprecise journalists, and careless readers.
Finally, on December 12,1979, Mr. Smerchanski was charged (Exhibits 1(G) and 2(13)) on two counts with corruptly giving, offering or agreeing to give Asta Securities and Alfred Lewis a reward or advantage or benefit by making (i) Border Chemical's and (ii) Fundy Chemical Corporation's shares available to Asta Securities or Lewis at prices less than the value at which the shares were being sold to the public, contrary to subparagraph 383(1)(a)(i) of the Criminal Code. There were no other charges laid, and notably none against the parent or subsidiary companies. It was just Smerchanski, Asta Securities and Lewis who were implicated.
The proceedings opened in the form of a preliminary enquiry before a Provincial Court judge in Toronto. There were several adjournments during the course of the hearing. Mr. Smerchanski engaged a leading counsel of Winnipeg, who conducted the defence with a counsel of Toronto. Later, during the course of the proceedings, the first mentioned leading counsel sought and received an occasional call to the Ontario bar. In due course there was a re-election, the preliminary enquiry was converted into a trial and ultimately, on February 18, 1981, Mr. Smerchanski was acquitted by the Provincial Court judge. (Exhibit 1(1).) The Crown appealed to the Ontario Court of Appeal, and still represented by the counsel whose fees and disbursements are the subject of this litigation, Mr. Smerchanski succeeded in having his acquittal confirmed, on October 28, 1981. (Exhibit 1(J).) The Crown sought leave to appeal to the Supreme Court of Canada, but leave was denied ([1981] 2 S.C.R. xi.)
The quantum of lawyers' fees and disbursements, $21,068, is not in issue here. The sum was billed by Mr. Smerchanski's counsel's firm progressively, included in eight statements of account (Exhibit 2(19)) whose gross total is $38,981.91. The solicitors themselves in counsel's letter of November 20, 1982, (Exhibit 2(21)), sort out the fees and disbursement relating to Mr. Smerchanski's defence at $21,068.15, but from total billings of only $31,968.15, producing a seeming discrepancy in gross billings of $7,013.76. No matter: the billing sum of $21,068 is the quantum of fees and disbursements which is contested here, as the parties agree.
A resolution contained in the now amalgamated Border Chemical's directors' minutes of March 5, 1981, provides that "the payment of all fees and expenses incurred in relation to the R.C.M.P. matter be approved". (Exhibit 2(20).) Then on March 22, 1983, the directors of Border Chemical, Mark G. Smerchanski, K. E. Gray and T. Smerchanski, being a quorum, recorded their discussion about “legal fees and expenses which had been paid by the Company [sic] in connection with the R.C.M.P. matter", and again approved the directors' resolution of March 5, 1981. Exhibit 2(20), pp. 196 to 199, reveals a long, self-serving production of Border Chemical’s directors' minutes which recites the events of the police investigation, and still believing that their company paid the lawyers' bills, “ratified, approved, confirmed and sanctioned” such payment.
The first three of the lawyers’ eight exhibited accounts are addressed to Mr. Mark Smerchanski "re: Border and Fundy” or "re: Border, Fundy and Asta" referring to the text of the criminal accusations of December 12, 1979. That is perfectly normal, but those photocopied interim statements of account show handwritten notations of payment by Eldorado cheques. The last five statements of account in Exhibit 1(19) are addressed to Eldorado Gold Mines "re: Smerchanski, Border" and "Fundy" or "and Lewis". All are paid by cheque drawn on Eldorado's bank account.
This is strange. Border Chemical is the plaintiff here, claiming that Border Fertilizer (1972) paid the lawyers’ account for defending Mr. Smerchanski. But after sending three bills to Mr. Smerchanski for defending him, they compliantly begin to bill Eldorado for defending him. But Mr. Smerchanski's explanation of bill paying and accounting among Border Chemical, Border Fertilizer (1972) and Eldorado Gold Mines is even more bizarre. First he said Mr. Lewis was paid, at regular intervals, by Border Fertilizer, (transcript I, p. 18), even though he was to be promoting Border Chemical's stock. Then, he made this remarkable statement, recorded in transcript I at page 107:
A. Eldorado Gold Mines have their head office at 2147 Portage Avenue and . . . and we have banking privileges and an account at 2147, but we do not have any bank accounts for Border Fertilizer. And any bills that have to be paid out of 2147 Portage are usually paid and cleared by Eldorado on behalf of Border Fertilizer, and then at the end of the year our auditors, Thorne Riddell, make the proper charges to Border Fertilizer. In a like manner, if Eldorado Gold Mines has any material that is delivered or ordered on its behalf and delivered to the plant office of Border
Fertilizer, Border Fertilizer pays for those invoices on behalf of Eldorado Gold Mines, and again the same auditors, Thorne Riddell, offset these accounts at the end of the year, and then whoever owes each other excess monies pays for it, and that is how Eldorado paid for it, but it was paid on account of Border Fertilizer.
Q. Normally when Border Chemical, or Border Fertilizer or Eldorado buys a product, are they billed to their own name?
A. Sometimes.
[Emphasis added.]
And further:
Q. I understand that Eldorado pays the bills that comes to them, but would the invoices show Eldorado, or would it be under Border Fertilizer or Border Chemical?
A. I don't recall exactly, but the main thrust is that anything that Eldorado would pay on behalf of Border Fertilizer would be documented and entered, and then that would be audited and substantiated by the auditors, and there would be offsetting charges at the end of the year.
Q. I have no problem with that. Just to give a full picture of Eldorado, could you tell the court who are the shareholders of that company?
A. The shareholders are 50 percent Border Chemical, 25 percent by my daughter Rhonda Smerchanski and 25 percent by another daughter Trisha Smerchanski.
Q. And who are the officers of that company?
A. I am president, and the two daughters I believe vice president and secretary.
Q. And I assume that you were also one of the directors?
A. No, I am not a director of Eldorado, I am just an officer.
(Transcript I, p. 108.)
It is apparent that at all material times Mr. Smerchanski simply manipulated the parent and subsidiary companies, and Eldorado to suit his purposes. Despite his disclaimer of influence, he utilized the companies as if they were his pawns, and to the extent that he cannot remember at all times which company’s bank accounts, if any, are to be utilized. There may be nothing unlawful in this, but it leads the Court to conclude that Eldorado did not pay that which Border Fertilizer (1972) claimed so much if at all for honour of the parent and subsidiary companies, but rather Eldorado paid that which Border Fertilizer (1972) claimed for the savings and convenience of Mr. Smerchanski.
Firstly, in disposition of the matter here in issue, the Court holds that in its 1980 return Border Fertilizer (1972) was not entitled to claim as a deduction, any sum which was paid by Eldorado Gold Mines Inc.
If the above finding be incorrect because of the relationship of the two corporations or because Eldorado was paid a refund or refunds of all those eight interim payments by the taxpayer, or for whatever reason, then paragraphs 18(1)(a) and (b) of the Income Tax Act must be considered.
18. (1) In computing the income of a taxpayer from a business or property 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 the business or property;
(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part [i.e., Part I].
The Minister of National Revenue relied in the premises on the following assumptions set out in paragraph 8 of the statement of defence. The criminal charges were laid against Mark G. Smerchanski. Correct. The then subsidiary company, Border Fertilizer (1972), has never been a party to the criminal proceedings. Correct. The said $21,068.15 is not an outlay or expense made or incurred by the then subsidiary company for the purpose of gaining or producing income from the business or property. Equally correct.
The taxpayer's interjection into Mr. Smerchanski's affairs, even though he exerted a great influence in its policies and operations, is too remote, too long a reach, for the purpose of the Income Tax Act. That is to say, given the cozy relationship between Mr. Smerchanski, the taxpayer subsidiary corporation, and the sibling companies, had the directors and shareholders of Eldorado Mines or Border Fertilizer (1972) wished generously to give him a taxable benefit by paying his lawyers' fees — in a sense legal aid, but not borne by other taxpayers — they were free to do so. In that sense Mr. Smerchanski's legal aid would be borne by the shareholders of Eldorado or Border Fertilizer (1972), with pleasure, and would be of no such concern to the Minister as it is here.
The fact that Mr. Smerchanski was engaged in a business relationship of his own with Lewis, which he swore was of no concern to the taxpayer's parent company, which he manifested in his letter on House of Commons letterhead, and which led to a defence lawyer's bill, does not engage "the purpose of gaining or producing income from" Border Fertilizer (1972), in 1980. It is too remote. Neither Eldorado nor the subsidiary company was implicated, except to the extent that their premises and vehicles were places frequented by Mr. Smerchanski, who was the target of the investigation. Had any of the companies been directly charged with an offence, it is abundantly obvious on the evidence herein that it or they would have had to engage separate counsel, independent of Mr. Smerchanski's counsel because of divergent, if not conflicting interests.
Not every outlay of cash by a corporation — especially for its president's criminal or other legal defence —— is an expense contemplated by paragraph 18(1)(a) of the Act. The defendant here submitted the most relevant jurisprudence. Thus, in The Car Strip Ltd. v. M.N.R., [1967] Tax A.B.C. 361; 67 D.T.C. 259 (T.A.B.) at 364 (D.T.C. 261), one reads:
Moreover, the expenses made were personal to the president of the appeallant and should not have been incurred by said appellant. It was not the appellant which was charged in the criminal court but its president, Belzberg. The charge made against Belzberg and a friend of his reads as follows: "That they . . . did fraudulently and without colour of right convert to their own use or the use of another person, 18 automobiles, . . . to the value of $32,850.” ... His company had nothing to do with his criminal or at least dangerous action.
In the Car Strip case it was stated that the appellant's president had also been acquitted of the charge.
In regard to the costs of the carriage of a civil action, the results were the same in D. I. MacDonald Sales Limited v. M.N.R., 29 Tax A.B.C. 94; 62 D.T.C. 208 (T.A.B.). The case is encapsulated at page 95 (D.T.C. 209):
There is no doubt that the outcome of all this litigation was beneficial to the appellant herein as well as to the plaintiff, Donald J. MacDonald, as there was a contract between the appellant and Amerwood whereunder the former had the valuable right to sell the products of the latter on a commission basis. If the control of Amerwood had changed hands as planned by the defendants, the appellant’s position under the said contract would have been jeopardized.
Nevertheless and despite the evident necessity and usefulness of the proceedings had in the several courts, I must find that the appellant in the instant matter cannot succeed. In none of the proceedings in the Supreme Court of Ontario was the appellant a party. Mr. D. J. MacDonald was always a plaintiff, but the company now appealing was never a co-plaintiff with him. Consequently, the expense incurred in successfully prosecuting the two actions and opposing the ensuing appeals was always that of Mr. MacDonald and the other plaintiffs. The present appellant's name does not even appear in the style of cause of either of the two actions.
and at page 96 (D.T.C. 210):
. . .The established rule is that legal expenses, to be deductible, must be those of the taxpayer seeking to deduct them and not of some other individual or entity, even if, as here, a close relationship prevails. In the instant matter, the expenses were incurred personally by Mr. MacDonald, who would have been liable for costs as between party and party if the judgments had gone against him. The present appellant would not have been liable for a single dollar in such an event. By the same token, no part of the expense incurred initially was ever payable by the appellant, but by Mr. MacDonald and his co-plaintiffs named in the pleadings.
Making allowance for the difference in nature of the other proceedings, the MacDonald Sales case is very closely analogous to the circumstances here. To the same effect is the decision in Rigmil Limited v. M.N.R., 36 Tax A.B.C. 321; 64 D.T.C. 652 (T.A.B.). So, also in Wm. F. Koch Laboratories v. M.N.R., 16 Tax A.B.C. 39; 56 D.T.C. 489 (T.A.B.).
Concerned as Mr. Smerchanski and his fellow directors (and perhaps the shareholders, too) were about the companies acquiring a bad name, they have not shown how payment of the lawyers’ bill was made or incurred by the taxpayer for the purpose of gaining or producing income from the business. Unless they mean to say that any payment made remotely in the interests of the good name of the company’s president and from which the company's reputation might stand to benefit, is an expense in contemplation of paragraph 18(1)(a), which it clearly is not, the plaintiff cannot suceed. One might suppose metaphysically that any remote benefit could be diffusely said to produce income, even if not truly an expense of the taxpayer.
Indeed, even payment of a fine imposed because of a corporate official’s misconduct could not meet the test. In M.N.R. v. E.H. Pooler & Co. Ltd., [1963] Ex. C.R. 16; [1962] C.T.C. 527, Mr. Justice Thurlow (as he then was) is reported at pages 21-22 (C.T.C. 531-32) thus:
Viewing the fine as "an outlay or expense . . . made . . . the question that arises on s. 12(1)(a) is whether or to what extent the outlay or expense was made for the purpose of gaining or producing income from the respondent's business. As I see it there is no conceivable way in which the payment of this fine could lead to the gaining or production of income from the respondent's business. Non-payment of it might possibly have led to suspension of the respondent's privileges as a member of the Exchange and thus to interference with the normal conduct of the business but I do not regard that as the reason for making the payment nor was it argued that that was the reason. In my opinion the respondent was liable to make the payment whether it continued to carry on its business or not and the making of it had no relation to the carrying on of the business. Viewed as an “outlay or expense ... made" the payment thus does not meet the requirement of the exception to the prohibition of s. 12(1)(a).
Turning now to examine the fine as an “outlay or expense ... incurred" the question that arises first is how the liability to pay it arose. The liability arose of course because the Board of Governors of the Exchange imposed the fine but that answer leads one immediately to inquire why the Exchange imposed it. The answer to this is that the Board had found that Mr. Ramsay while a vice president and director of the respondent was guilty of conduct detrimental to the interest of the Exchange in inducing other members of the Exchange to open margin accounts for Messrs. Butler, Beaudry and Fauquier. This then is the conduct which incurred the fine. It was not, as I view it, the employing of Mr. Ramsay which, even if regarded as something done in the course of the respondent's business and as involving a risk that he might by his conduct cause the respondent to be fined, was at most a remote circumstance having no real bearing on the question what it was that incurred the fine. In this view, apart from any broader principle which may or may not be applicable in the particular circumstances to exclude its deduction, the fine could not in my opinion escape the prohibition of s. 12(1)(a) unless the inducing by Mr. Ramsay of other members of the Exchange to open such accounts was an act done in the course of or for the purposes of the respondent's business.
Now Mr. Smerchanski's connections with Mr. Lewis and Asta Securities were not effected in the course of or for the purpose of the subsidiary company's business. The stock promotion, about which Mr. Smerchanski wrote his soothing letter to the Europeans, was of "no concern” to the directors of Border Chemical and a fortiori of no concern to Border Fertilizer (1972). It was that business relationship with Lewis and company which caused him to come under suspicion and investigation and to be ultimately charged, as Mr. Smerchanski admitted. (Transcript I, p. 92.) The plaintiff fails to clear the hurdle erected by paragraph 18(1)(a) of the Act.
The plaintiff submitted a volume of jurisprudence on the above paragraph of the Act, but those decisions do not appear to be relevant to the case at bar. All, for example, provide direct involvement of the corporation itself in the relevant activity, and not the provision of legal aid for a person whose activities were of "no concern" to, and beyond the responsibility of, the corporation which allegedly paid the alleged expenses. So, for example, Berman & Co. Ltd. v. M.N.R., [1961] C.T.C. 237; 61 D.T.C. 1150 (Ex. Ct.), among the jurisprudence urged by the plaintiff, is distinguishable, where, at page 244 (D.T.C. 1154), Thorson, P. is reported:
As I view the evidence as a whole my opinion is that the appellant made the payments as an item of expenditure in its unsuccessful venture into the eastern field by its operation of United as its Toronto branch or agent. It is conceded, of course, that United was a separate legal entity and, consequently, for income tax purposes, it was a separate taxpayer, but that did not prevent it from being a branch of the appellant in the sense of being its agent in such a way as to make the appellant responsible for it.
The plaintiff's appeal is to be dismissed on this ground of failing to come within the exemption in paragraph 18(1)(a) of the Income Tax Act.
In the event that the above conclusion be not correct, then the conclusion of the learned Tax Court judge is adopted and ratified. The sum spent, if the directors of Border Fertilizer (1972) had any business at all in paying it to Eldorado Gold Mines for Mr. Smerchanski's lawyers' bill, must have been spent for preventing damage to the company's (but which company's?) “goodwill” or preserving its adequate condition. It would therefore have been spent on capital account and so runs afoul of paragraph 18(1 )(b) of the Income Tax Act.
On all counts then the plaintiff's action, and the appeal which it carries, must be dismissed.
Appeal dismissed.