Judson, J (all concur):—The issue in this appeal is whether the appellant taxpayer, Stewart & Morrison Limited, in computing its income for the fiscal period ending June 30, 1966, is entitled to deduct as an expense an amount of $72,345. It had written off this amount as a bad debt in respect of loans which it had made to its wholly- owned American subsidiary. These loans were made during the period March 1964 to April 1966. The Tax Appeal Board decided in favour of the taxpayer ([1969] Tax ABC 65). This decision was reversed on appeal to the Exchequer Court ([1970] CTC 431).
The facts were dealt with in great detail in the reasons delivered in the Exchequer Court. I adopt the summary of the facts made at the conclusion of his reasons by the learned trial judge (pp 438-39). They are as follows:
The evidence adds up to this, as I appreciate it. The respondent decided that an American subsidiary, to be wholly owned by the respondent, would be incorporated and would carry on business in the United States and be a source of income and profit for the respondent. The subsidiary would carry on business as a separate American company in its own name and right, but it would, to use Stewart’s words, be “master-minded” by its parent company and their affairs would be closely related and managed. The subsidiary needed capital, but had none. The respondent would supply, or arrange to supply, the needed capital. It arranged and guaranteed -a bank loan direct to the subsidiary and also made direct advances of money to enable it to get started and continue to operate. The advances were treated by both companies and by their auditors, and in the respective books and accounts, as loans from the respondent. Book entries do not necessarily denote the true nature of transactions, but I think that the advances in question were correctly treated as loans. The fact that the money so provided was used by the subsidiary to pay its operating expenses, and was lost in a losing cause, does not determine or change its nature of money lent by the respondent to the subsidiary.
In my opinion, the advances were outlays by the respondent of a capital nature, so far as it is concerned, the deduction of which is prohibited by section 12(1)(b) of the Act and the appeal may be disposed of on that finding alone.
The learned trial judge has correctly characterized these dealings between the parent company and its American subsidiary. The parent company provided working capital to its subsidiary by way of loans. These loans were the only working capital the American subsidiary ever had with the exception of the sum of $1,000 invested by Stewart & Morrison Limited for the acquisition of all of the issued share capital of its subsidiary. The money was lost and the losses were capital losses to Stewart & Morrison Limited. The deduction of these losses has been rightly found to be prohibited by paragraph 12(1)(b) of the Income Tax Act.
We are not concerned in this appeal with what the result would have been if the appellant taxpayer had chosen to open its own branch office in New York. For reasons of its own, it did not choose to operate in this way. II: financed a subsidiary and lost its money.
The case of L Berman & Co Ltd v MNR, [1961] CTC 237, relied upon by the appellant in this case, is, in my opinion, not in point. In the Berman case the taxpayer made voluntary payments to strangers, ie the suppliers of its subsidiary, for the purpose of protecting its own goodwill from harm because the subsidiary had defaulted on its Obligations. The basis of the decision in the Exchequer Court was this (p 244):
It paid the amounts because it had been doing business with the suppliers and was going to continue to do business with them. The payments were made by it for its own purposes and their amounts never became debts of United to the appellant [Berman].
I would dismiss the appeal with costs.
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