Archambault
T.C.J.:
Kruco
Inc.
(Kruco)
is
appealing
the
determinations
of
losses
and
the
income
tax
assessments
made
by
the
Minister
of
National
Revenue
(Minister)
under
the
Income
Tax
Act
(Act)
with
respect
to
the
taxation
years
1984
to
1989
inclusive.
The
Minister
disallowed
the
deduction
of
legal
and
other
professional
fees
incurred
by
Kruco
during
each
of
these
taxation
years.
The
aggregate
amount
disallowed
is
$9,649,291.
Of
this
amount,
the
Minister
now
concedes
that
$11,701
constitute
ordinary
corporate
expenses
that
are
deductible
by
Kruco
for
the
years
in
which
they
were
incurred.
The
Minister
claims
that
the
balance
of
the
legal
and
professional
fees
was
incurred
on
capital
account
and
that
the
deduction
thereof
is
prohibited
under
paragraph
18(
!)(/?)
of
the
Act.
Kruco
argues
that
these
expenses
were
incurred
for
the
purpose
of
gaining
or
producing
income
from
property,
namely
its
shares
in
Kruger
Inc.
(Kruger)
and
that
they
were
not
capital
outlays.
Alternatively,
it
argues
that
should
these
expenses
be
found
to
have
been
capital
outlays,
they
were
either
costs
to
be
added
to
the
adjusted
cost
base
or
expenses
of
disposition
of
its
Kruger
shares.
At
the
outset
of
the
hearing,
the
parties
filed
a
partial
agreed
statement
of
facts
and
supporting
documentation.
Following
are
the
last
25
paragraphs
of
this
statement:
2.
During
the
relevant
times,
the
Appellant
held
about
Thirty-two
Per
Cent
(32%)
of
the
outstanding
common
shares
of
Kruger
Inc.
(“Kruger”),
a
privately
owned
corporation
engaged
in
the
production
and
marketing
of
newsprint,
coated
paper,
paper
board,
and
corrugated
containers.
3.
These
shares
represented
the
Appellant’s
major
assets.
4.
During
the
years
in
question,
the
Appellant
was
controlled
by
the
late
Bernard
J.
Kruger,
one
of
the
two
sons
of
the
late
founder
of
Kruger.
Its
other
shareholders
were
his
four
children,
David
J.
Kruger,
Gene
T.
Kruger,
Robert
S.
Kruger,
and
Judith
M.
Kruger.
5.
During
the
years
in
question,
about
Sixty-one
Per
Cent
(61%)
of
the
common
shares
of
Kruger
were
owned
by
Hicliff
Corporation
(1978)
Limited,
which
was
controlled
by
Joseph
Kruger
II,
son
of
the
late
Gene
H.
Kruger,
who
was
the
brother
of
Bernard
J.
Kruger
and
the
other
son
of
the
late
founder
of
Kruger.
6.
During
the
years
in
question,
Joseph
Kruger
II
was
the
chairman
of
the
board
and
of
the
executive
committee
of
Kruger
and,
with
his
father,
dominated
the
board
of
directors
of
Kruger.
7.
During
the
years
in
question,
Bernard
J.
Kruger
and
David
J.
Kruger
were
directors
but
not
officers
of
Kruger.
8.
During
the
years
in
question,
dividends
paid
by
Kruger
on
its
common
shares
held
by
the
Appellant
were
the
Appellant’s
sole
significant
source
of
income
and
the
main
source
of
income
and
financial
support
for
the
Appellant’s
shareholders.
9.
Beginning
in
the
early
1980s,
bitter
disputes
arose
between
the
side
of
the
Kruger
family
referred
to
in
paragraph
4
and
the
side
of
the
Kruger
family
referred
to
in
paragraph
5.
These
disputes
led
to
acts
or
omissions
by
the
side
of
the
Kruger
family
referred
to
in
paragraph
5
that
the
Appellant’s
shareholders
regarded
as
being
designed
to
place
them
under
severe
economic
pressure,
particularly
by
way
of
payment
of
inadequate
dividends.
10.
During
the
years
in
question
Bernard
Kruger
and
David
Kruger
were
refused
access
to
significant
corporate
information
relating
to
Kruger
and
were
constantly
outvoted
at
directors’
meetings
of
Kruger
when
they
tried
to
have
the
amount
of
dividends
increased
or
tried
to
obtain
relevant
information.
11.
In
response
to
the
actions
and
refusals
of
the
other
side
of
the
Kruger
family,
the
Appellant
and
its
shareholders
commenced
a
variety
of
legal
and
other
adversary
proceedings
against
Kruger
and
its
controlling
shareholders.
12.
The
most
significant
such
proceeding
was
an
application
brought
in
1984
by
the
Appellant
in
the
Quebec
Superior
court
(500-05-013521-
842)
against
Kruger
and
its
controlling
shareholders
alleging
“oppression”
within
the
meaning
of
section
234
(now
section
241)
of
the
Canada
Business
Corporations
Act,
which
was
the
legislation
governing
Kruger.
The
text
of
section
241
of
that
Act
is
reproduced
in
tab
3.
13.
This
application
alleged,
among
other
things,
that
the
defendants
had
oppressed
the
Appellant,
commencing
in
1982,
by
reason
of
the
payment
by
Kruger
of
no
dividends
or
inadequate
dividends
on
its
common
shares.
As
originally
framed,
the
application
sought
primarily:
(a)
A
declaration
that
Kruger’s
dividend
policy
was
oppressive;
(b)
An
order
that
Kruger
now
pay
a
special
dividend
of
Two
Dollars
($2.00)
per
common
share',
and
(c)
An
order
that
Kruger
pay
in
the
future
an
annual
dividend
equal
to
at
least
Forty
Per
Cent
(40%)
of
its
net
profits,
subject
to
a
right
to
Kruger
to
apply
to
the
Court
for
a
variation
of
this
requirement
if
its
business
conditions
"vary
materially”.
The
“remedies”
portion
of
the
original
version
of
the
“oppression”
application
is
attached
as
tab
4.
14.
The
litigation
relating
to
the
“oppression”
application
extended
over
several
years,
during
which
the
application
was
amended
six
times.
Among
other
things,
the
amendments
added
a
request
for
alternative
remedies,
including
a
“shotgun”
bid
for
all
the
shares
of
Kruger,
an
order
that
Kruger
or
its
shareholders
purchase
the
Appellant’s
shares
of
Kruger,
or
an
order
that
Kruger
assist
the
Appellant
in
making
a
secondary
offer
to
the
public
of
some
of
the
Appellant’s
shares
of
Kruger.
The
sixth
amended
version
of
the
main
“oppression”
application
is
attached
as
tab
5.
15.
The
addition,
in
amendments
to
the
main
“oppression”
application,
of
subsidiary
alternative
remedies
to
those
originally
sought
was
for
tactical
reasons
to
increase
the
dividends
paid
by
Kruger
to
a
level
that
better
reflected
its
high
earnings.
16.
In
the
course
of
the
litigation,
there
were
several
court
appearances
and
a
number
of
court
decisions
on
preliminary
issues.
17.
An
action
was
commenced
in
1982
in
the
Supreme
Court
of
the
Commonwealth
of
The
Bahamas
(number
378)
by
the
four
children
of
Bernard
Kruger
and
their
mother,
Grace
Kruger,
against
Joseph
Kruger
II
and
Peter
Evans,
who
were
then
the
trustees
of
The
Bernard
J.
Kruger
Family
Trust,
which
had
been
settled
in
The
Bahamas
in
1966.
The
action
sought
removal
of
the
trustees,
alleging
breach
of
trust,
mismanagement,
and
misconduct
or
negligence,
particularly
by
Joseph
Kruger
II.
This
action
was
consolidated
with
an
action
brought
in
The
Bahamas
in
1983
(number
924)
by
Bernard
Kruger
against
Joseph
Kruger
II
as
trustee
seeking
repayment
of
an
amount
alleged
to
be
owing
to
Bernard
Kruger
on
a
promissory
note.
An
offshoot
of
this
litigation
was
an
“exhibitory
action”
brought
by
Bernard
J.
Kruger
in
1982
in
the
Republic
of
Panama
against
Blue
Ocean
Inc.,
a
Panama
corporation
in
which
The
Bernard
J.
Kruger
Family
Trust
had
a
substantial
investment,
seeking
detailed
information
concerning
the
directors,
officers,
and
shareholders
and
the
finances
and
current
value
of
Blue
Ocean
Inc.
and
its
subsidiaries.
18.
During
this
period
there
were
significant
other
court
and
administrative
proceedings
brought
by
the
Appellant
or
its
shareholders
in
Canada
and
the
United
States,
all
of
which
arose
out
of
the
disputes
between
the
parties
and
all
of
which
were
designed
to
put
pressure
on
the
defendants
in
the
main
“oppression”
application.
These
included,
among
other
proceedings:
(a)
An
application
brought
in
1984
by
the
Appellant
in
the
Quebec
Superior
Court
(500-05-007446-840)
against
Kruger
and
the
partners
of
Coopers
&
Lybrand,
chartered
accountants,
alleging
“oppression”
under
then
section
234
of
the
Canada
Business
Corporations
Act
and
seeking
the
removal
of
Coopers
&
Lybrand
as
auditor
of
Kruger
under
then
subsection
155(4)
of
that
Act;
(b)
An
application
made
in
1984
in
the
Quebec
Superior
Court
(500-05-006109-845)
against
Kruger
by
Bernard
Kruger
and
David
Kruger,
in
their
capacity
as
directors
of
Kruger,
alleging
“oppression”
under
then
section
234
of
the
Canada
Business
Corporations
Act
because,
among
other
things,
the
same
corporate
lawyers
acted
for
Kruger
as
acted
for
its
controlling
shareholders
in
a
number
of
matters
in
which
their
respective
interests
conflicted,
and
seeking,
among
several
remedies,
a
recovery
of
certain
legal
fees
and
a
prohibition
against
the
continued
use
by
Kruger
of
those
lawyers;
(c)
An
action
brought
by
Bernard
Kruger
in
1984
in
the
Quebec
Superior
Court
(500-05-001327-848)
against
Kruger,
Joseph
Kruger
II,
and
Gene
H.
Kruger
seeking
damages
for
alleged
wrongful
termination
of
the
employment,
and
of
certain
fringe
benefits,
of
Bernard
Kruger;
(d)
Proceedings
before
the
Securities
and
Exchange
Commission
in
Washington,
D.C.
in
opposition
to
proposed
sales
in
the
United
States
by
Kruger
of
subordinated
debentures;
(e)
An
application
by
Lévesque,
Beaubien
Inc.
in
1985
to
the
Quebec
Securities
Commission
for
an
order
that
Kruger
provide
the
documents
and
information
necessary
to
permit
the
Appellant
to
make
a
secondary
distribution
of
some
of
its
shares
of
Kruger.
19.
On
August
30
and
31,
1989
the
“oppression”
applications
and
other
related
litigation
were
terminated
by
reason
of
a
settlement
between
the
parties
reached
on
August
30,
1989.
Under
the
terms
of
the
settlement,
Kruger
redeemed
its
One
Hundred
(100)
first
preferred
shares
held
by
the
Appellant
for
their
redemption
price
of
One
Hundred
($100)
and
redeemed
the
Three
Million
Six
Hundred
Twenty-seven
Thousand
One
Hundred
(3,627,100)
common
shares
held
by
the
Appellant
for
a
price
of
Ninety-nine
Million
Dollars
($99,000,000).
Of
the
total
redemption
price
of
Ninety-nine
Million
One
Hundred
Thousand
Dollars
($99,100,000),
Forty-nine
Million
Dollars
($49,000,000)
was
paid
in
cash
on
August
31,
1989
(initially
in
escrow),
and
the
remainder
was
paid
by
the
issue
to
the
Appellant
of
Two
Hundred
Seventy
Thousand
(270,000)
Series
B
floating
rate
first
preferred
shares
and
Two
Hundred
Thirty
Thousand
(230,000)
Series
C
floating
rate
first
preferred
shares
of
Kruger,
redeemable
at
a
total
price
of
Fifty
Million
Dollars
($50,000,000).
All
these
Series
B
and
Series
C
preferred
shares
were
redeemed
by
Kruger
over
a
period
between
1991
and
1996.
The
settlement
arrangements
also
addressed
the
many
other
outstanding
issues
between
the
parties
and
resulted
in
a
termination
of
all
litigation
between
them,
including
a
payment
of
Two
Million
Dollars
($2,000,000)
to
the
Appellant
on
August
31,
1989
in
discharge
of
the
portion
of
the
promissory
note
from
The
Bernard
J.
Kruger
Family
Trust
that
Bernard
Kruger
had
assigned
to
the
Appellant
in
1985.
20.
The
Appellant
reported
for
tax
purposes
in
1989
certain
deemed
dividends
and
a
capital
gain
resulting
from
the
disposition
of
its
shares
of
Kruger
pursuant
to
the
settlement
agreement.
21.
The
main
“oppression”
application,
as
well
as
the
other
legal
and
administrative
proceedings
referred
to
in
paragraph
18,
involved
substantial
legal
and
consulting
fees
that
were
paid
by
the
Appellant
during
the
years
in
question,
the
deduction
of
which
is
here
in
issue.
22.
Among
the
expenses
incurred
by
the
Appellant,
and
in
issue
here,
were
the
fees
of
Richard
Wise
&
Associates
and
its
predecessor,
who,
as
experts
on
the
valuation
of
shares,
provided
expert
opinions
for
the
Appellant
on
the
inadequacy
of
the
level
of
the
dividends
that
were
being
paid
by
Kruger.
23.
Included
in
the
fees
that
are
in
issue
here
were
amounts
paid
to
the
Washington,
D.C.
law
firms
of
Steptoe
&
Johnson
and
Melrod,
Redman
&
Gartlan
to
oppose
certain
applications
of
Kruger
to
the
Securities
and
Exchange
Commission
in
connection
with
proposed
debenture
issues,
as
referred
to
in
subparagraph
18(d).
24.
The
fees
paid
by
the
Appellant
to
Lévesque,
Beaubien
Inc.,
investment
advisers,
are
also
in
issue
here.
They
involved
assistance
to
the
Appellants[sic]
in
unsuccessfully
seeking
the
right
to
make
a
secondary
offering
to
the
public
of
some
of
its
shares
of
Kruger,
as
referred
to
in
subparagraph
18(e).
25.
Also
included
in
the
fees
that
are
in
issue
here
were
amounts
paid
to
the
Montreal
law
firm
of
Lapointe,
Schachter,
Champagne
&
Talbot
in
connection
with
an
application
by
the
Appellant
before
the
Quebec
Superior
Court
to
have
Coopers
&
Lybrand
declared
disqualified
as
auditors
of
Kruger
because
of
lack
of
independence,
as
referred
to
in
subparagraph
18(a).
26.
Also
included
in
the
fees
that
are
in
issue
here
are
a
total
of
One
Hundred
Fourteen
Thousand
Seven
Hundred
Seventy-three
Dollars
($114,773)
in
professional
fees
incurred
by
the
Appellant
in
the
years
1985
to
1989
inclusive
in
connection
with
the
litigation
relating
to
The
Bernard
J.
Kruger
Family
Trust
and
its
holding
of
half
the
shares
of
Blue
Ocean
Inc.,
a
Panamanian
corporation
that
had
subsidiaries
in,
inter
alia,
Venezuela,
Colombia,
and
Italy,
as
referred
to
in
paragraph
17.
A
list
of
those
expenses,
which
form
part
of
the
expenses
listed
in
tab
2,
is
attached
as
tab
6.
[Emphasis
added.]
The
following
provides
a
summary
of
the
professional
fees
incurred
by
Kruco
during
the
relevant
period:
1984
|
$
72,627
|
1985
|
$
202,284
|
1986
|
$
473,530{1}
|
1987
|
$417,014
|
1988
|
$
392,851
{1}
|
1989
|
$
8,053,877
|
|
$
9,612,183{
1}
|
Notes:
1
There
were
adding
errors
in
Tab
2
of
Exhibit
A-l.
The
original
numbers
were
$473,440,
$430,049
and
$9,649,291.
Mr.
David
Kruger
and
Mr.
Claude-Armand
Sheppard
testified
at
the
hearing.
Mr.
Kruger
stated
that
Kruco
had
only
two
employees:
Mr.
Richard
Kaufman,
an
accountant
by
training,
who
looked
after
the
affairs
of
Kruco,
and
a
secretary.
It
was
mainly
Mr.
Kaufman
and
Kruco’s
lead
lawyer,
Mr.
Claude-Armand
Sheppard,
who
were
responsible
for
developing
the
strategy
in
the
legal
battle
that
took
place
from
1982
to
1989.
Obviously
Messrs.
Bernard
and
David
Kruger
were
consulted,
were
kept
informed
of
developments
and
were
involved
in
decision-making.
Mr.
David
Kruger
confirmed
that
the
main
objective
in
all
the
proceedings
taken
against
Kruger,
its
controlling
shareholder
and
its
auditors
was
to
get
Kruger
to
pay
a
realistic
dividend.
This
is
also
corroborated
by
Mr.
Sheppard
who
added
that
the
family
of
Bernard
Kruger
was
satisfied
with
the
management
and
profitability
of
Kruger.
Kruco’s
only
aim
was
to
receive
a
reasonable
return
by
way
of
dividend
on
its
investment
in
Kruger.
Mr.
Sheppard
indicated
that
their
aim
was
to
force
Kruger
to
pay
a
dividend
equal
to
40
per
cent
of
the
net
profits
of
Kruger,
which
was
in
line
with
what
was
being
paid
by
other
companies
in
the
pulp
and
paper
industry
in
eastern
Canada.
Mr.
Sheppard
acknowledged
that
Canadian
law
and
jurisprudence
respecting
remedies
for
oppression
were
in
their
infancy.
In
his
opinion,
a
Court
could
issue
an
order
requiring
Kruger
to
pay
the
catch-up
dividend
and,
thereafter,
a
reasonable
dividend
for
a
short
period
such
as
two
or
three
years.
In
Mr.
Sheppard’s
view,
the
family
of
Bernard
Kruger
would
have
accepted
a
lower
dividend
yield
if
such
offer
had
been
made
by
Kruger
and
its
controlling
shareholders.
Mr.
Sheppard
hoped
that
Kruger
would
pay
a
more
reasonable
dividend
without
being
compelled
to
do
so
by
a
judgment
of
the
Quebec
Superior
Court.
In
his
view,
Mr.
Bernard
Kruger
was
a
reasonable
man
who
did
not
enjoy
this
legal
battle.
He
was
not
a
vindictive
nor
a
bellicose
person.
Had
Kruco
been
successful
in
its
court
proceedings
to
obtain
an
order
from
the
Superior
Court
requiring
Kruger
to
pay
the
special
dividend
of
$2
per
common
share
and
a
dividend
for
three
years
equal
to
40%
of
its
net
profits,
Kruco
would
have
received,
by
my
estimate,
a
dividend
of
approximately
$23,681,900.
This
amount
is
determined
as
follows.
It
represents
the
total
of
$7,254,200
and
$16,427,671.
The
first
amount
represents
the
special
dividend
that
would
have
been
received
by
Kruco
on
its
3,627,100
shares
.
The
second
amount
represents
the
aggregate
dividends
that
would
have
been
paid
to
Kruco
for
1985,
1986
and
1987
as
determined
from
the
allegations
found
in
the
amended
application
on
the
ground
of
oppression,
No.
6,
dated
July
29,
1988,
at
page
41
(Tab
5
of
Exhibit
A-1).
The
following
table
summarizes
the
computation:
1985
1986
1987
(1)
$
3,906,983
5,581,418
5,023,276
Divi
dend
paid
by
Kruger
(2)
Net
$63,715,486
50,745,297
$48,213,742
after
tax
earnings
Kruco’s
$
8,281,137
6,595,394
6,266,367
share{3}
of
a
“40%
dividend”^}
Divi-
(
1,269,482)
(
1,813,550)
(
1,632,195)
dends
received
by
Kruco{5}
Total
$7,011,655
$
4,781,844
$
4,634,172
of
$16,427,612
Notes:
3
.324926
that
is
:
3,627,100/11,162,836.
The
total
number
of
common
shares
issued
by
Kruger
was
estimated
at
11,162,836
by
dividing
the
dividend
of
$5,581,418
declared
in
1986
by
$0.50,
the
dividend
per
share.
4
[.324926
*
.40
*(2)]
5
[.324926
*(!)]
In
developing
his
strategy,
Mr.
Sheppard
was
aware
that
the
family
of
Gene
Kruger
wanted
to
keep
tight
control
over
Kruger
and
would
not
allow
it
to
become
a
public
company.
So,
for
instance,
the
request
to
have
Kruco’s
shares
sold
by
a
secondary
offering
was
only
a
tactic
to
put
pressure
on
Kruger
to
declare
a
reasonable
dividend.
This
is
what
Mr.
Sheppard’s
instructions
were
and
this
is
what
he
tried
to
obtain.
He
mentioned
that
Kruger
made,
during
the
relevant
period,
some
very
low
offers
to
purchase
the
shares
held
by
Kruco
but
he
never
made
any
counter-offer.
He
thought
that
such
low
offers
were
all
part
of
psychological
warfare
aimed
at
testing
Kruco’s
determination.
Mr.
Sheppard
stated
that
Richard
Wise
was
hired
to
do
a
study
of
the
dividend
policy
of
companies
in
the
pulp
and
paper
industry
and
to
determine
whether
Kruger
had
the
means
to
pay
an
increased
dividend.
Mr.
Sheppard
indicated
that
Mr.
Wise
never
made
any
evaluation
of
the
Kruger
shares.
This
testimony
of
Mr.
Sheppard
was
not
contested
by
the
Minister’s
counsel.
However,
in
reviewing
Mr.
Wise’s
statement
of
account,
I
noted
references
to
a
determination
of
the
fair
value
of
the
shares
for
the
purposes
of
the
Canada
Business
Corporations
Act
(CBCA).
There
is
however
no
testimony
to
explain
the
context
in
which
these
services
would
have
been
rendered
and
for
what
purposes.
Mr.
Sheppard
stated
that
he
was
advised
by
Mr.
Kaufman
in
mid-August
1989
that
the
latter
had
worked
out
a
settlement
with
the
Chief
Financial
Officer
of
Kruger.
Mr.
Sheppard
did
not
know
that
negotiations
had
taken
place
between
those
two
persons.
He
was
presented
with
a
“fait
accompli”.
His
main
role
was
to
obtain
approval
from
the
Superior
Court
judge
who
presided
at
the
hearing
of
the
application
for
the
remedy
for
oppression.
The
whole
deal
was
completed
by
the
end
of
August
1989.
Both
Mr.
Kruger
and
Mr.
Sheppard
confirmed
that
the
family
of
Bernard
Kruger
accepted
the
offer
of
$101,000,000
because
the
family
had
incurred
a
lot
of
debt
in
financing
this
long
drawn-out
legal
battle
and
the
price
offered
for
the
shares
in
Kruco
was
attractive
to
them.
Mr.
Sheppard
described
the
family
of
Bernard
Kruger
as
being
battle
weary
and
financially
fragile.
Bernard
Kruger
was,
at
the
time,
a
man
in
his
seventies.
He
actually
passed
away
sometime
in
1993.
Also,
the
legal
battle
before
the
Quebec
Superior
Court
over
the
remedy
for
oppression
was
not
yet
over
after
more
than
four
and
a
half
years.
Even
if
Kruco
had
obtained
a
favourable
judgment,
the
battle,
in
all
likelihood,
would
have
been
continued
before
the
Quebec
Court
of
Appeal.
Mr.
Sheppard
confirmed
that
the
family
of
Bernard
Kruger
did
not
receive
anything
from
the
Bernard
J.
Kruger
Family
Trust
controlled
by
his
nephew,
Joseph
Kruger
II
except
the
payment
of
the
$2,000,000
promissory
note
owing
to
Mr.
Bernard
Kruger.
The
control
of
this
trust
and
of
its
assets,
mainly
shares
in
Blue
Ocean
Inc.,
seemed
to
Mr.
Sheppard
to
be
a
very
elusive
target.
Among
his
reasons
for
thinking
so,
was
the
fact
that
Mr.
Sheppard
did
not
have
much
faith
in
the
legal
system
of
countries
such
as
Panama,
where
Blue
Ocean
Inc.
had
been
incorporated.
Several
weeks
after
hearing
Kruco’s
appeal,
I
asked
that
the
case
be
reopened
to
clarify
the
circumstances
surrounding
the
determination
of
the
legal
fees
by
the
firm
of
Mr.
Sheppard.
New
testimony
by
Mr.
Sheppard
revealed
that
his
firm
agreed
to
postpone
the
billing
of
a
great
portion
of
the
professional
fees
until
successful
completion
of
the
legal
proceedings.
According
to.
the
accounting
records
of
Mr.
Sheppard’s
firm,
a
total
of
$2,417,844
in
fees
accumulated
from
November
1982
to
August
1989.
This
amount
was
determined
by
multiplying
the
hourly
rate
of
each
lawyer
by
the
amount
of
time
spent
by
each
on
the
case.
Kruco
did
not
have
sufficient
financial
resources
to
pay
for
all
such
services
on
a
current
basis.
In
fact,
between
1984
and
1989,
it
paid
$1,641,856
by
instalments,
one
million
of
which
was
paid
in
two
instalments
in
May
and
June
of
1989.
However,
disbursements
were
billed
on
a
current
basis.
In
a
letter
addressed
by
Mr.
Sheppard’s
firm
to
Mr.
Kaufman
on
January
12,
1989,
we
find
the
following
statement
with
respect
to
the
determination
of
the
legal
fees
to
be
paid
to
Mr.
Sheppard’s
firm
by
Kruco:
3.
It
is
our
understanding
that
the
final
account
in
this
matter
will
not
be
limited
to
computation
of
time
multiplied
by
hourly
rate
but
that
an
appropriate
and
fair
fee
will
be
worked
out
on
the
basis
of
the
usual
factors
applicable
to
such
fee
and
on
the
understanding
that
the
Bernard
J.
Kruger
Family
and
ourselves
will
resolve
the
matter
as
gentlemen
trying
to
be
fair.
Indeed,
our
relationship
in
this
context
has
always
been
based
on
trust
and
frankness.
On
the
other
hand,
we
must
reiterate
that
we
cannot
continue
to
carry
the
increasing
burden
of
unbilled
time.
This
situation
has
put
unbearable
financial
pressures
on
this
firm.
Out
of
the
$9,612,183
in
professional
fees
incurred
by
Kruco
during
the
relevant
period,
the
sum
of
$7,658,938
was
billed
by
Mr.
Sheppard’s
firm.
Although
the
fees
billed
by
this
firm
exceeded
by
$5,241,094
($7,658,938
-
$2,417,844)
the
value
of
the
time
spent
on
the
case
during
the
relevant
period,
Mr.
Sheppard
stated
that
when
he
sat
down
with
Mr.
Kruger
and
Mr.
Kaufman
to
work
out
the
final
fee
as
gentlemen,
no
bonus
as
such
was
taken
into
account
in
the
settlement.
He
stated:
There
really
was
no
bonus
as
such
since
the
settlement
was
not
viewed
as
a
great
financial
success
and
was
the
result
of
Kruco’s
inability
to
pursue
the
battle
further.
Furthermore,
the
settlement
itself
did
not
involve
a
very
substantial
amount
of
work.
A
little
over
$66,000
worth
of
time
was
spent
in
total
in
the
month
of
August
1989.
An
average
of
over
$70,000
worth
of
time
had
been
accumulated
from
September
1988
to
July
1989.
In
Exhibit
A-2,
Tab
2,
at
paragraph
11,
Mr.
Sheppard
explained
the
way
in
which
the
fees
were
determined
as
follows:
...all
the
foregoing
factors
were
taken
into
consideration
(including
loss
by
RSS
of
anticipated
extra-judicial
fees
of
$1,500,000,
notional
interest
of
$500,000,
etc.)
and
it
was
decided
that
in
addition
to
these
sums,
a
multiple
of
the
hourly
rates
would
be
appropriate.
Then
the
figures
tentatively
arrived
at
were
rounded
off.
This
was
done
in
a
matter
of
hours.
The
notion
of
bonus
never
entered
into
the
discussion.
[Emphasis
added.]
Among
the
usual
factors
applicable
are
those
listed
in
section
3.08.02
of
the
Code
of
Ethics
governing
the
Quebec
Bar,
which
include
the
time
devoted
to
the
matter,
the
difficulty
of
the
issues,
the
importance
of
the
matter,
the
liabilities
and
responsibilities
incurred
or
assumed,
unusual
factors
in
the
case,
the
results
obtained,
and
judicial
and
extra-judicial
fees
provided
for
in
the
official
tariff.
Analysis
It
is
common
ground
that
the
legal
and
other
professional
fees
incurred
by
Kruco
from
1984
to
1989
in
connection
with
litigation
and
administrative
proceedings
brought
by
Kruco
against
Kruger
would
be
deductible
expenses
pursuant
to
subsection
9(1)
and
would
not
be
subject
to
the
prohibition
in
paragraph
18(1
)(<?)
of
the
Act.
The
main
reason
for
the
Minister
to
disallow
the
disputed
fees
is
the
prohibition
under
paragraph
18(1
)(£?)
of
the
Act,
which
in
the
relevant
years
read
as
follows:
(b)
Capital
outlay
or
loss
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.
The
main
contention
of
the
Minister
in
this
case
is
that
the
fees
were
incurred
for
the
purpose
of
creating
a
right
for
Kruco
or
at
least
of
preserving
a
capital
asset
of
Kruco’s.
Counsel
for
the
Minister
argued
that
Kruco
was
not
entitled
to
any
dividend
until
one
was
declared
by
Kruger’s
board
of
directors.
Therefore,
Kruco’s
aim
of
obtaining
a
judgment
from
the
Superior
Court
ordering
Kruger
to
pay
a
dividend
to
Kruco
and
its
other
shareholders
would
have
resulted
in
the
creation
of
a
right
in
favour
of
Kruco.
In
support
of
this
position,
counsel
for
the
Minister
relied
on
the
decision
in
R.
v.
Burgess
(1981),
81
D.T.C.
5192
(Fed.
T.D.).
In
that
case,
Cattanach
J.
of
the
Federal
Court
of
Canada,
Trial
Division,
decided
that
legal
fees
incurred
to
obtain
a
maintenance
order
as
part
of
a
divorce
were
of
a
capital
nature.
His
reasoning
appears
at
p.
5197:
In
the
present
case
the
defendant’s
right
to
maintenance
which
arose
on
marriage
ended
with
the
divorce
and
her
right
to
subsequent
maintenance
arose
from
the
Court
order.
The
suit
was
for
divorce
and
corollary
thereto
an
award
of
maintenance.
In
addition,
counsel
for
the
Minister
contended
that
the
application
for
the
remedy
against
oppression
was
tantamount
to
preserving
Kruco’s
right
to
be
treated
fairly.
He
indentified
this
aim
with
that
pursued
by
the
taxpayer
in
Minister
of
National
Revenue
v.
Dominion
Natural
Gas
Co.
(1940),
[1920-1940]
1
D.T.C.
499-133
(S.C.C.).
There,
the
taxpayer’s
franchise
was
being
challenged
by
a
rival
gas
company
which
sought
an
injunction
restraining
the
taxpayer
from
carrying
on
a
business
in
Hamilton,
Ontario.
In
Dominion
Natural
Gas
Co.,
the
legal
fees
incurred
for
preserving
the
company’s
right
to
carry
on
its
business
were
treated
as
a
payment
on
capital
account
because
they
were
so
incurred
with
a
view
to
preserving
an
asset
or
an
advantage
for
the
enduring
benefit
of
a
trade
(see
page
499-
137).
Counsel
for
the
Minister
also
cited
several
cases
in
which
the
same
approach
was
followed,
including
Farmers
Mutual
Petroleums
Ltd.
v.
Minister
of
National
Revenue
(1967),
67
D.T.C.
5277
(S.C.C.),
British
Columbia
Power
Corp.
v.
Minister
of
National
Revenue
(1968),
67
D.T.C.
5258
(S.C.C.)
and
Muggli
v.
R.,
[1994]
1
C.T.C.
2705
(T.C.C.).
Before
embarking
on
an
analysis
of
what
constitutes
a
capital
expenditure,
it
is
useful
to
review
the
law
governing
the
right
of
shareholders
to
receive
dividends
from
their
company.
As
Dickson
C.J.
wrote
in
McClurg
v.
Minister
of
National
Revenue
(1990),
91
D.T.C.
5001
(S.C.C.),
at
page
5006,
it
is
to
state
the
obvious
to
say
that
the
decision
to
declare
a
dividend
lies
within
the
discretion
of
the
directors
of
a
company,
subject
to
any
re-
strictions
which
may
have
been
included
in
the
articles
of
incorporation.
Dickson
C.J.
added,
at
p.
5007:
Of
course,
the
power
to
declare
dividends
is
further
qualified
by
the
fact
that
the
law
has
for
many
years
recognized
that
the
general
managerial
power
which
rests
in
the
directors
of
a
company
is
fiduciary
in
nature.
The
declaration
of
dividends,
which
is
subsumed
within
that
power,
therefore
is
limited
legally
in
that
it
must
be
exercised
in
good
faith
and
in
the
best
interests
of
the
company.
This
statement
was
made
in
connection
with
the
entitlement
of
shareholders
under
The
Business
Corporations
Act
of
Saskatchewan.
Here,
we
are
dealing
with
a
company
subject
to
the
CBCA.
Under
former
section
234
of
the
CBCA
(now
section
241),
shareholders
are
entitled
to
a
remedy
when
an
act
or
an
omission
of
a
corporation
is
“oppressive
or
unfairly
prejudicial
to
or
.
unfairly
disregards
the
interests
of
any
security
holder.”
Subsections
234(1),
(2)
and
(3)
read
as
follows:
234.(1)
A
complainant
may
apply
to
a
court
for
an
order
under
this
section.
(2)
If,
upon
an
application
under
subsection
(1),
the
court
is
satisfied
that
in
respect
of
a
corporation
or
any
of
its
affiliates
(a)
any
act
or
omission
of
the
corporation
or
any
of
its
affiliates
effects
a
result,
(b)
the
business
or
affairs
of
the
corporation
or
any
of
its
affiliates
are
or
have
been
carried
on
or
conducted
in
a
manner,
or
(c)
the
powers
of
the
directors
of
the
corporation
or
any
of
its
affiliates
are
or
have
been
exercised
in
a
manner
that
is
oppressive
or
unfairly
prejudicial
to
or
that
unfairly
disregards
the
interests
of
any
security
holder,
creditor,
director
or
officer,
the
court
may
make
an
order
to
rectify
the
matters
complained
of.
(3)
In
connection
with
an
application
under
this
section,
the
court
may
make
any
interim
or
final
order
it
thinks
fit
including,
without
limiting
the
generality
of
the
foregoing,
(a)
an
order
restraining
the
conduct
complained
of;
(b)
an
order
appointing
a
receiver
or
receiver-manager;
(c)
an
order
to
regulate
a
corporation’s
affairs
by
amending
the
articles
or
by-laws
or
creating
or
amending
a
unanimous
shareholder
agreement;
(d)
an
order
directing
an
issue
or
exchange
of
securities;
(e)
an
order
appointing
directors
in
place
of
or
in
addition
to
all
or
any
of
the
directors
then
in
office;
(f)
an
order
directing
a
corporation,
subject
to
subsection
(6),
or
any
other
person,
to
purchase
securities
of
a
security
holder;
(g)
an
order
directing
a
corporation,
subject
to
subsection
(6),
or
any
other
person,
to
pay
to
a
security
holder
any
part
of
the
moneys
paid
by
him
for
securities;
(h)
an
order
varying
or
setting
aside
a
transaction
or
contract
to
which
a
corporation
is
a
party
and
compensating
the
corporation
or
any
other
party
to
the
transaction
or
contract;
(i)
an
order
requiring
a
corporation,
within
a
time
specified
by
the
court,
to
produce
to
the
court
or
an
interested
person
financial
statements
in
the
form
required
by
section
149
or
an
accounting
in
such
other
form
as
the
court
may
determine;
(j)
an
order
compensating
an
aggrieved
person;
(k)
an
order
directing
rectification
of
the
registers
or
other
records
of
a
corporation
under
section
236;
(l)
an
order
liquidating
and
dissolving
the
corporation;
(m)
an
order
directing
an
investigation
under
Part
XVIII
to
be
made;
(n)
an
order
requiring
the
trial
of
any
issue.
Although
the
right
to
force
a
corporation
to
declare
a
dividend
is
not
specifically
mentioned,
one
has
to
realize
that
former
section
234
did
not
provide
an
exhaustive
list
of
the
remedies.
Furthermore,
counsel
for
the
Minister
brought
to
my
attention
that
there
exists
a
precedent
for
an
order
to
declare
dividends.
See
Hess
v.
Proudfoot
Motels
Ltd.
(March
16,
1992),
Callaghan,
McMurtry,
Campbell
(Ont.
Div.
Ct.)
and
(April
25,
1992),
Rosenberg
J.
(Ont.
Gen.
Div.).
The
remedy
given
to
shareholders
for
oppression
does
not
change
the
common
law
principle
that
shareholders
are
only
entitled
to
a
dividend
when
one
is
declared
by
the
board
of
directors.
Should
the
conduct
of
the
board
of
directors
be
unfairly
prejudicial
to
the
interests
of
minority
shareholders,
those
shareholders
are
entitled
to
an
equitable
remedy
which
could
include
an
order
to
pay
a
dividend.
However,
the
courts
have
stated
that
they
will
act
cautiously
as
is
illustrated
in
Brant
Investments
Ltd.
v.
Keep-
Rite
Inc.
(1987),
60
O.R.
(2d)
737,
42
D.L.R.
(4th)
15
(Ont.
H.C.),
at
p.
759
O.R.
and
p.
37
D.L.R.:
The
jurisdiction
is
one
which
must
be
exercised
with
care.
On
the
one
hand
the
minority
shareholder
must
be
protected
from
unfair
treatment;
that
is
the
clearly
expressed
intent
of
the
section.
On
the
other
hand
the
court
ought
not
to
usurp
the
function
of
the
board
of
directors
in
managing
the
company,
nor
should
it
eliminate
or
supplant
the
legitimate
exercise
of
control
by
the
majority.
In
dealing
with
the
approach
that
I
should
follow
in
determining
whether
the
legal
and
other
professional
fees
incurred
by
Kruco
were
of
a
capital
nature,
a
useful
guide
can
be
found
in
British
Insulated
&
Helsby
Cables
Ltd.
v.
Atherton
(1925),
10
T.C.
155
(U.K.
H.L.),
wherein
Viscount
Cave
said
at
p.
192:
...when
an
expenditure
is
made,
not
only
once
and
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
Minister
of
National
Revenue
v.
Algoma
Central
Railway
(1967),
67
D.T.C.
5091
(Can.
Ex.
Ct.)
,
Jackett
P.
stated
at
p.
5093:
The
“usual
test”
applied
to
determine
whether
such
a
payment
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’”?...
The
question
is
therefore
whether
what
the
appellant
in
this
appeal
had
in
“view”
when
it
made
the
expenditures
in
dispute
was
“an
advantage
for
the
enduring
benefit”
of
its
business
within
the
meaning
of
the
test
as
it
has
been
developed
by
the
decisions.
The
Supreme
Court
of
Canada,
in
Minister
of
National
Revenue
v.
Algoma
Central
Railway
(1968),
68
D.T.C.
5096
(S.C.C.),
confirmed
this
decision
and,
at
p.
5097,
approved
the
following
excerpt
from
the
judgment
of
the
Privy
Council
in
B.P.
Australia
Ltd.
v.
Commissioner
of
Taxation
of
Australia
(1965),
[1966]
A.C.
224
(Australia
P.C.),
at
p.
264:
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.
/t
is
a
commonsense
appreciation
of
all
the
guiding
features
which
must
provide
the
ultimate
answer.
[Emphasis
added.]
Let
us
now
apply
these
guidelines
and
principles
to
the
facts
of
this
case.
Here,
Kruco’s
main
objective
was
to
force
Kruger
to
pay
a
reasonable
dividend
and
to
stop
the
alleged
oppression
carried
out
by
Kruger
and
its
controlling
shareholders.
Kruco
did
not
intend
to
dispose
of
its
shares.
It
was
satisfied
with
the
management
and
profitability
of
Kruger.
Kruger
realized
important
net
profits
during
the
relevant
period.
Kruco’s
objective
was
not
to
protect
its
interest
in
its
shares.
There
was
no
dispute
as
to
whether
Kruco
was
the
true
owner
of
those
shares.
I
do
not
think,
therefore,
that
Kruco
was
trying
to
preserve
a
capital
asset
in
a
capital
aspect.
In
Minister
of
National
Revenue
v.
L.D.
Caulk
Co.
(1954),
54
D.T.C.
1011
(S.C.C.)
at
1012
-13,
Rand
J.
of
the
Supreme
Court
of
Canada
stated
that
legal
fees
incurred
in
a
successful
defence
against
combines
charges
were
deductible
and
that
the
Dominion
Natural
Gas
case
(supra)
was
distinguishable
as
having
been
a
case
of
an
expense
to
preserve
a
capital
asset
in
a
capital
aspect.
Here,
as
alleged
in
the
re-amended
application
on
the
ground
of
oppression,
No.
6,
Kruger
had
maintained
until
the
end
of
1981
a
moderately
reasonable
dividend
policy.
Because
of
a
dispute
that
arose
in
1982
which
culminated
in
legal
proceedings
being
taken
in
the
Bahamas
with
respect
to
an
alleged
breach
of
fiduciary
duty
in
managing
the
Bernard
J.
Kruger
Family
Trust,
Kruger
decided
not
to
pay
any
dividend
in
1982.
It
cited
worldwide
economic
difficulties
and
uncertainties
in
the
Canadian
pulp
and
paper
industry.
However
in
that
year,
Kruger
realized
a
profit
of
$12,800,000.
In
1983,
the
company
resumed
paying
dividends
but,
in
Kruco’s
opinion,
only
very
low
ones.
In
Mr.
Sheppard’s
opinion,
there
was
a
legitimate
expectation
that
Kruco
could
obtain
an
order
from
the
Quebec
Superior
Court
that
a
special
dividend
of
$2
per
share
be
declared
and
that
Kruger
pay
dividends
in
the
future.
However,
he
did
not
expect
that
the
Quebec
Superior
Court
would
order
the
payment
of
such
dividends
for
a
period
exceeding
two
or
three
years.
As
we
can
see,
had
Kruco
been
successful
in
its
application
for
a
remedy
under
section
234
of
the
CBCA,
the
benefit
would
have
only
been
for
the
short
term.
There
is
no
evidence
here
of
any
lasting
benefit.
I
do
not
believe
that
Kruco
was
trying
to
establish
a
right
that
it
did
not
previously
have.
As
a
shareholder,
Kruco
was
entitled
to
dividends
when
declared
by
the
board
of
directors.
Under
the
CBCA,
shareholders
are
protected
against
an
act
or
omission
of
a
corporation
which
is
oppressive
or
unfairly
prejudicial
to
them.
In
its
application
for
a
remedy
against
oppression,
Kruco
was
only
exercising
its
right
created
by
statute,
namely
the
right
to
be
treated
fairly
by
the
corporation
of
which
it
is
a
shareholder.
I
do
not
believe
that
any
order
of
the
Court
would
have
created
a
right
for
Kruco
that
it
did
not
already
enjoy.
Therefore,
I
conclude
that
the
legal
and
other
professional
expenses
incurred
for
the
purpose
of
receiving
a
special
dividend
of
$2
per
share
and
having
the
company
ordered
to
pay
a
dividend
equal
to
40%
net
of
profits
for
two
or
three
years
did
not
constitute
capital
expenditures.
Although
the
facts
are
slightly
different,
I
believe
that
this
conclusion
is
in
line
with
the.
decision
rendered
by
the
Supreme
Court
of
Canada
in
Evans
v.
Minister
of
National
Revenue
(1960),
60
D.T.C.
1047
(S.C.C.).
In
that
case,
the
Supreme
Court
of
Canada
ruled
that
a
taxpayer
was
entitled
to
deduct
legal
fees
incurred
in
order
to
confirm
her
entitlement
to
annual
income
for
life
from
her
late
father-in-law’s
estate.
Here,
had
Kruger
been
successful,
the
order
of
the
Superior
Court
would
not
have
created
a
new
right
for
Kruco
and
the
benefit
would
not
have
been
a
lasting
one.
Had
Kruco
been
successful,
it
would
have
received
more
income.
Therefore,
this
procedure
is
more
in
the
nature
of
a
procedure
to
collect
income
than
of
a
procedure
to
establish
a
new
right
to
receive
such
income.
I
do
not
believe
that
the
fact
that
the
result
obtained
was
different
from
the
one
sought
makes
any
difference
in
this
particular
case.
It
was
only
at
the
very
last
minute
that
Kruco
accepted
having
its
shares
redeemed
by
Kruger.
Because
a
large
premium
—
$5,241,094
—
was
billed
to
Kruco,
my
first
reaction
was
to
allocate
a
portion
of
those
fees
to
the
disposition
of
the
shares.
I
suspected
that
this
premium
took
into
account
the
result
obtained,
that
is,
the
payment
of
$99,000,000
for
shares
held
by
Kruco.
However,
after
reconsideration,
I
believe
that
it
would
not
be
appropriate,
at
least
in
this
particular
case,
to
conclude
that
a
portion
of
the
legal
fees
billed
by
Mr.
Sheppard’s
firm
should
be
treated
as
a
capital
expenditure
incurred
for
the
purpose
of
disposing
of
the
common
shares
held
by
Kruco.
In
the
agreed
statement
of
facts,
both
parties
agreed
that
the
main
purpose
of
the
application
by
Kruco
was
to
obtain
payment
of
a
dividend
and
not
to
dispose
of
the
shares.
Both
parties
agreed
that
the
“alternative
remedies”
against
the
oppression
of
Kruco
by
Kruger
were
added
for
tactical
reasons.
Kruco
and
its
shareholders
knew
very
well
that
the
controlling
shareholders
would
never
accept
that
the
shares
of
Kruco
be
distributed
to
the
public.
Therefore,
the
attempt,
for
instance,
to
have
Lévesque,
Beaubien
make
a
secondary
issue
was
doomed
to
failure,
at
least
as
far
as
achieving
this
public
distribution
was
concerned.
It
was
simply
meant
to
put
pressure
on
Kruger
to
pay
a
larger
dividend.
Given
that
both
parties
have
agreed
that
the
main
goal
of
Kruco
was
to
force
Kruger
to
pay
higher
dividends
and
given
that
almost
all
the
services
performed
by
Mr.
Sheppard’s
firm
were
provided
in
connection
with
that
goal,
I
cannot
conclude
that
Mr.
Sheppard’s
fees
and
disbursements
of
$7,658,938
related
to
anything
other
than
the
obtention
of
an
order
to
force
Kruger
to
declare
dividends.
Mr.
Sheppard
stated
that
his
firm
was
not
involved
in
the
negotiation
of
the
final
settlement
and
that
it
played
a
minor
role
in
implementing
the
agreement.
He
stated
that
his
role
was
mainly
to
obtain
the
approval
of
the
Superior
Court
judge
for
the
settlement
negoti
ated
by
the
parties
themselves
and
to
put
an
end
to
the
application
before
the
Superior
Court.
The
fact
that
the
final
amount
of
the
legal
fees
billed
by
Mr.
Sheppard’s
firm
might
have
taken
into
account
the
actual
result,
that
is,
the
sale
of
the
shares
to
Kruger
for
$99,000,000,
does
not
alter
the
fact
that
those
services
were
provided
and
the
legal
fees
for
those
services
were
incurred
for
the
purpose
of
obtaining
a
higher
dividend
for
Kruco.
There
is
no
indication
either
that
any
of
the
fees
billed
by
Mr.
Sheppard’s
firm
may
have
been
incurred
in
connection
with
legal
proceedings
taking
place
in
the
Bahamas
and
in
Panama.
Therefore,
after
having
carried
out
a
“commonsense
appreciation
of
all
the
guiding
features”
of
all
the
legal
fees
and
disbursements
paid
to
Mr.
Sheppard’s
firm,
I
come
to
the
conclusion
that
those
fees
and
disbursements
were
incurred
for
the
purpose
of
collecting
dividends,
that
they
are
not
of
a
capital
nature
and
that
they
are
fully
deductible.
The
parties
identified
fees
amounting
to
$114,773
as
having
been
incurred
in
connection
with
the
Bernard
J.
Kruger
Family
Trust.
Those
fees,
in
my
opinion,
were
not
incurred
by
Kruco
for
the
purpose
of
earning
income.
They
were
not
incurred
for
the
purpose
of
increasing
the
amount
of
dividend.
They
were
incurred
with
regard
to
proceedings
that
were
started
prior
to
the
alleged
oppression
by
Kruger
and
prior
to
its
decision
not
to
pay
any
dividend
in
1982
and
to
reduce
substantially
the
amount
of
dividend
thereafter.
Indeed,
it
would
seem
that
the
law
suit
in
the
Bahamas
may
have
triggered
the
decision
of
Kruger
and
its
controlling
shareholder
to
stop
paying
a
reasonable
dividend
to
its
shareholders.
Furthermore,
I
do
not
see
what
benefit
could
have
been
obtained
by
Kruco
from
pursuing
the
legal
action
in
the
Bahamas.
It
seems
to
me
that
it
was
more
for
the
benefit
of
Bernard
J.
Kruger
and
his
family
that
this
action
was
being
pursued.
The
members
of
Mr.
Bernard
J.
Kruger’s
family
were
the
beneficiaries
of
this
trust,
not
Kruco.
Therefore,
the
legal
fees
of
$114,773
are
not
deductible
by
Kruco.
Of
the
remaining
legal
and
professional
fees
and
disbursements
described
in
Tab
2
of
Exhibit
A-1,
most
represent
expenses
that
can
be
related
to
legal
actions
taken
by
Kruco
to
put
pressure
on
Kruger
as
described
in
paragraphs
18
and
21
to
25
of
the
agreed
statement
of
facts.
Hence,
these
expenses
are
similar
to
the
legal
fees
paid
to
Mr.
Sheppard’s
firm
and
would
be
similarly
deductible
in
computing
Kruco’s
income.
However,
some
of
these
remaining
expenses
are
fees
that
I
was
unable
to
relate
to
“other
legal
and
administrative
proceedings
referred
to
in
paragraph
18”.
They
include
expenses
with
regard
to
statements
from
D’Empaire
Reyna,
Azolay
&
Co.
respecting
“Kruger
Shipping
Affiliate,
Venezuela”,
from
Arosemena,
Noriega
&
Castro
“Re
Kruger
Affiliate,
Panama”,
from
Davidoff
&
Bagnouci
“Re
Krugers
Rogatory
Commission”,
from
Poulin,
Barbe,
Corbeil
et
Rado
with
no
description,
and
from
Lette
&
Associés
“Re
Krugers
Application
for
Rogatory
Commission”.
Given
that
I
do
not
know
what
those
legal
expenses
relate
to,
I
see
no
basis
for
allowing
them.
They
amount
to
a
total
of
$4,147
for
1984,
$2,854
for
1986,
$761
for
1988
and
$27,396
for
1989,
representing
$35,158
all
together.
The
total
amount
of
expenses
disallowed
for
the
reason
that
they
relate
to
the
Bernard
J.
Kruger
Family
Trust
and
to
unknown
purposes
comes
to
$149,931.
For
the
reasons
set
out
above,
the
appeals
of
Kruco
will
be
allowed
and
the
determinations
of
losses
and
the
assessments
will
be
referred
back
to
the
Minister
for
reconsideration,
redetermination
and
reassessment
on
the
basis
that
Kruco
is
entitled
to
deduct
in
computing
its
income
for
1984,
$68,480,
for
1985,
$188,657,
for
1986,
$467,576,
for
1987,
$359,159,
for
1988,
$387,660
and
for
1989,
$7,990,720.
The
amounts
which
are
to
be
disallowed
are:
for
1984,
$4,147,
for
1985,
$13,627,
for
1986,
$5,954,
for
1987,
$57,855,
for
1988,
$5,191,
and
for
1989,
$63,157.
The
whole
with
costs
to
Kruco.
Appeal
allowed.