Automatic Toll Systems (Canada) Ltd. v. MNR, 74 DTC 6060, [1974] CTC 30 (FCTD)

Pratte, J:—This is an appeal from a reassessment of the appellant’s income tax for the 1967 taxation year. That reassessment was made on the basis that the appellant had improperly deducted from its income capital expenditures totalling $60,000.

The appellant is a Canadian company which carries on the business of leasing automatic toll collection equipment.* [1] For a while, it was not very successful in the Province of Quebec. The Quebec Autoroute Authority would not do business with it. The president of the appellant heard that this situation might change if the appellant hired one Mr Bastien, an accountant from Montreal, as its representative in Quebec. Mr Bastien was contacted and, eventually, it was agreed that Mr Bastien, or, rather, a company of his called “Les Signaux Electroniques de Québec Inc” (hereinafter referred to as “Les Signaux”), would act as the appellant’s representative in its dealings with the Quebec Autoroute Authority. The conditions of this agreement were stated in a letter, dated April 9, 1962, from the appellant to “Les Signaux”, Mr Bastien’s company. Only two paragraphs of this letter are relevant to this appeal; they read as follows:

It is agreed that you will act as our representative in connection with business undertaken with the Quebec Autoroute Authority for which a commission of 10% will be paid to you for performing the services ordinarily performed by a manufacturer’s representative. The 10% paid to you will be based on the net price paid to and received by us on all installations whether by sale or rental for equipment or for maintenance for the period commencing September 1, 1961 and ending September 1, 1967, hereinafter called the “Term”, with regard to the Quebec Autoroute Authority. The compensation paid shall be in Canadian currency.

Your right to earn compensation shall cease with the end of the Term, and any provisions for renewal, extensions, options, or elections to renew or to extend any contract made during the Term shall not be deemed to entitle you to compensation if any of such events occur after the Term. However, nothing herein shall be construed to prevent the payment to you of compensation on such renewals or extensions pursuant to options or elections for the entire period thereof if made during the Term.

From 1961 to 1966, Mr Bastien proved that his influence had not been overestimated. He succeeded in obtaining many contracts from the Quebec Autoroute Authority. In 1966 two of these contracts were still in force. Both were leases of equipment. The first one, dated December 1,1961, was to expire on December 2,1966; the other one, dated August 6, 1963, was to expire on December 31, 1968.* [2] In 1966 Mr Bastien was in the process of negotiating a new long-term lease which was to replace these two contracts. Towards the end of the year, though, the president of the appellant realized that these negotiations had come to a stop. He then learned that a provincial election had been held in Quebec and that, as a result, Mr Bastien had lost his influence. The Officials of the Quebec Autoroute Authority would no longer negotiate with Mr Bastien. From then on it is the president of the appellant who conducted the negotiations which resulted in the signature, on June 7, 1967, of a new 6-year lease which replaced the two leases that I have already mentioned. Before this new lease was signed, however, the president of the appellant contacted Mr Bastien: he wanted to know under what conditions the appellant could terminate its relationship with “Les Signaux”. If, as was then anticipated, the appellant succeeded in its negotiations with the Authority and was awarded a new contract before September 1, 1967, the appellant, under the terms of the agreement it had made with “Les Signaux”, would then have to pay to that company a commission on all rentals to be paid by the Quebec Autoroute Authority under the new contract. As the new contract would not be the result of Mr Bastien’s efforts, the president of the appellant felt that “Les Signaux” should not profit by it. At the end of 1966, Mr Bastien agreed to the cancellation of the agreement that the appellant had made with “Les Signaux” provided that the appellant would pay the sum of $60,000. It was left to Mr Bastien to determine how, in fact, this result would be arrived at. All that the appellant was interested in was to obtain the cancellation of its agreement with “Les Signaux” for a price of not more than $60,000.

Mr Bastien thereafter proposed, and the appellant accepted, that the following contracts be made:

1. By an agreement dated December 21, 1966, “Les Signaux” transferred to a company named Montrose Industries Inc all its rights under the agreement it had with the appellant. This transfer was made for the price of $29,000, which was paid by the issuance to “‘Les Signaux” of 29,000 preferred shares of Montrose. Montrose Industries Inc was a mere corporate shell. It had been incorporated a few years earlier at the instigation of Mr Bastien who owned its common stock. Apparently, it had always been a dormant company.

2. By an agreement signed on January 12, 1967, the appellant acquired from “Les Signaux”, for the price of $29,000, the 29,000 preferred shares of Montrose Industries Inc. By an agreement signed on the same day, the appellant purchased from Mr Bastien, for $1,000, the common shares of Montrose Industries Inc.

3. By an agreement signed on January 3, 1967, “Les Signaux” sold to the appellant, for the price of $30,000, all its rights and interests in the two leases, dated respectively December 1, 1961 and August 6, 1963, that had been entered into with the Quebec Autoroute Authority.

it is the deduction of the amounts paid by the appellant under those contracts which has been denied by the respondent.

The first submission of counsel for the respondent was that these amounts were not paid by the appellant to obtain the cancellation of the agreement it had entered into with “Les Signaux”. According to counsel, these amounts were spent for the purpose of acquiring capital assets, namely: the shares of Montrose Industries Inc and the rights of “Les Signaux” in the two leases of equipment. In my view, this contention is untenable. The evidence shows clearly that the payments here in question were made by the appellant for the sole purpose of being released of its obligation to pay a commission to “Les Signaux’’. The appellant never wanted to acquire any asset from Mr Bastien or his companies. The various arrangements under which the sum of $60,000 was paid by the appellant were, as submitted by counsel for the appellant, a mere machinery created for the purpose of cancelling the contract under which the appellant was bound to pay a commission to “Les Signaux”.

Counsel for the respondent also submitted that the payments were not revenue expenditures even if the appellant had made them for the purpose of obtaining the cancellation of its contract with “Les Signaux”. He said that the appellant could not have continued to do business with the Quebec Autoroute Authority if it had not severed its relationship with “Les Signaux”. The $60,000 here in question should therefore be considered as being the price that the appellant had to pay to obtain a new long-term contract from the Quebec Autoroute Authority. This submission is not supported by the evidence which, as I have already said, shows that the sum of $60,000 was paid by the appellant for the sole purpose of getting rid of an onerous contract under which it was obliged to pay a commission to “Les Signaux”.

In my view the facts in this case cannot be distinguished from those in Anglo-Persian Oil Co Ltd v Dale, 16 TC 253.

For these reasons, the appeal is allowed with costs.