Date: 20001206
Docket: 1999-3427-IT-I
BETWEEN:
MATT HARRIS & SON LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Rip, J.T.C.C.
[1]
The issue in these appeals by Matt Harris & Son Ltd.
("Corporation") is whether or not advertising
expenses deducted by the Corporation in computing its net income
for its 1995 and 1996 taxation years were incurred for the
purpose of gaining or producing income from its business within
the meaning of paragraph 18(1)(a) of the Income
Tax Act ("Act").
[2]
Mr. Harris is president and sole shareholder of the Corporation.
The Corporation operates a wood contracting and construction
business in New Brunswick. The business includes logging,
small construction, clearing lots, hauling gravel, among other
things. The principal portion of the Corporation's business
appears to be from wood contracting. The Corporation has
customers in the United States, New Brunswick and Quebec. It
employs as many as 40 people during its high season. In order to
maintain its level of business from wood contracting, the
appellant continuously is required to purchase stumpage and
timberland.
[3]
The appellant does not use Crown land for its needs. Mr. Harris
testified that the appellant "tries to buy stumpage on
private property and will also buy the property from private
people".
[4]
It is helpful in acquiring stumpage rights, according to Mr.
Harris, that the Corporation's name be well known. The
Corporation does not advertise in newspapers. It has sponsored a
women's baseball team and has participated in community
events. However, the bulk of its advertising is in stock car and
snowmobile racing. During the years in issue the Corporation
owned (and still owns) a stock car and snowmobile.
[5]
Mr. Harris enjoys racing stock cars and snowmobiles. He races
from the beginning of May to the end of September. From soon
after the New Year to March he races snowmobiles. The races are
weekend events.
[6]
The races attract a lot of people, Mr. Harris declared. The
"worst attendance" for a stock car race is about
2,500 people but is usually "up to 5,000 people". The
average snowmobile race is watched by 1,000 to 1,500 people but a
"big race" could have "about 10,000
people" attending, but Mr. Harris was "not too
sure" of the exact number.
[7]
The races are reported on television and in the newspapers.
Interviews of drivers are in both media. Races are held
throughout New Brunswick. Mr. Harris drives the car and
snowmobile; he is well known in the province as a result of
racing. In Mr. Harris' view, the Corporation
"gets more advertising" when he drives than from
advertisements painted on the vehicle. According to Mr. Harris
"people go for the driver and not the car". He drives
the car "primarily because [it is of] more benefit"
to him. The Corporation "gets more bang for the buck if
[he] drives the car". As a successful driver, Mr. Harris is
a celebrity at the racetracks. People request his autograph and
he is sought out for interviews.
[8]
The Corporation's stock car and snowmobile are sponsored by
other businesses as well. A car dealership pays the Corporation
$5,000 a year and "one or two others" pay "a
couple of thousand dollars". These sponsors have their
names on the car and snowmobile. Sponsorship money and prize
money are included in the Corporation's revenue. In 1996
the prize money was $4,365, according to the Minister.
[9]
As a result of racing, the Corporation also has become well
known, Mr. Harris testified. "People", he said,
"know your name and if they see you they feel they know
you". As a result of the racing activities sponsored by the
Corporation, the Corporation has been able to secure at least one
advantageous situation from a person it might not otherwise
obtain. Mr. Harris referred specifically to a person who
knew him through racing activities who permitted the Corporation
to store logs on his property during an early thaw; thus, I would
infer, the Corporation reduced expenses and increased
profits.
[10]
Mr. Harris stated that some of his competitors pay to place
advertising on racing cars but the owners of the competitors do
not race themselves; they simply sponsor the car and driver.
[11]
Approximately 99 per cent of the appellant's advertising
expenses during the relevant years were for racing. According to
Mr. Harris stock car and snowmobile racing represented 0.58 per
cent and 0.61 per cent of annual gross income, respectively, in
1995 and 1996.
[12] Under
cross-examination Mr. Harris described the history of the
appellant. He started the business 15 years ago with $3,000 and
one used truck worth $17,000. He had a good credit rating and his
father guaranteed loans during the first year of the business.
After the first year, he "got [his father] off the
note". He worked hard and business improved "leaps
and bounds". By 1995 revenue was mainly from forestry.
[13]
Ms. Nancy Lutes, an auditor at the Canadian Customs &
Revenue Agency ("Agency"), testified on behalf of the
respondent. She reviewed the expenses of the appellant and its
sources of income during the years in issue. Advertising costs
included two amounts of $600 for the purchase of softballs for a
ladies' softball team and $400 for the local Kinsmen.
Ms. Lutes stated the Corporation did not own the team, as it
does the stock car and snowmobiles, but provided the team with
shirts with the Corporation's name. All expenses were
verified and accepted, except for the expenses relating to
racing. Included among racing expenses were meals and babysitting
costs. (Mr. Harris has a son who was an infant in 1995 and
1996.)
[14] Racing
expenses, less prize money, claimed by the appellant in 1995 and
1996 were $17,507 and $13,663, respectively. The Minister assumed
that the expenditures consisted primarily of automobile and
snowmobile parts and repairs for racing. Ms. Lutes made
several tests to determine the purpose of the racing costs.
According to her, the "vicinity of $1,000 to $1,800"
of these expenses was from petty cash and several of the petty
cash vouchers, totalling $349.19 were for meals. There was no
indication who consumed the meals.
[15] There was
also at least one payment in the amount of $225 to a
babysitter.
[16] As a
result of Ms. Lutes' audit and after consulting with
her "technical advisors", discussions with
Mr. Harris and his representatives and upon reviewing
documents, the Agency (or its predecessor) concluded that the
racing expenses were personal expenses for Mr. Harris'
benefit and were too remote from the wood and gravel business.
The expenses were not incurred for the purpose of gaining or
producing income from the appellant's wood and gravel
business. The racing expenses were added to
Mr. Harris' income. (Ms. Lutes could not advise
whether Mr. Harris had objected to any tax assessment
against him.)
[17]
Respondent's counsel cited the decisions of Ace Salvage
Alberta Ltd. v. M.N.R.,[1] and Leffler v. M.N.R..[2] In Ace Salvage, the
taxpayer corporation carried on a scrap metal business in Calgary
and also owned racehorses. The taxpayer sought to deduct its
horse racing expenses against income from its scrap metal
business. The principal shareholder of the appellant testified he
regarded the horses as advertising and business promotion for the
salvage business. He claimed that a substantial portion of his
customers and suppliers were racetrack fans, and through his
contacts at the track the salvage business received a
benefit.
[18] The
Minister argued, as in the appeals at bar, that the racing was
too remote from the salvage business to have any bearing on the
salvage business' profits. Instead, the Minister assessed on
the basis that Ace Salvage Alberta Ltd. was in the business of
farming. The Court agreed with the Minister, stating at page 572
(para 14), that:
. . . if the clear and primary purpose for an expenditure can
be discerned, and that purpose, prima facie is markedly
different than the normal business purpose of the payor entity,
then the road to recognition that any subsidiary or ancillary
benefit to the payor entity (from an income tax viewpoint) should
be substituted for that reasonable, direct, and primary purpose
for the expenditure is difficult indeed. Accordingly the purpose
of the expenditures at issue in this matter was for purchasing,
boarding, training and racing horses, not for purposes
directly (perhaps not indirectly) associated with the salvage
business purpose of the appellant.
[19] The Tax
Appeal Board also dismissed the taxpayer's appeal in
Leffler, supra, on the basis that training and showing
horses was too remote from the taxpayer's life insurance
business to justify the expense of the horses, notwithstanding
that the taxpayer attributed an increased volume in his sales of
life insurance policies to contacts he made in the course of
showing his horses. The Board referred to the reasons in H. J.
O'Connell Ltd. v. M.N.R.,[3]in support of its position.
[20] The
decisions in O'Connell, Leffler and Ace
Salvage were based in no small degree on a finding that the
expense was too remote from the business. The concept of
remoteness is nowhere found in the Act. Any outlay or
expense, to qualify as a deduction in computing income, must be
made or incurred for the purpose of gaining or producing income
from the business.[4] The outlay or expense, of course, must be reasonable
in the circumstances.[5]
[21] The
concept of remoteness probably had its origin in the pre World
War II tax legislation of Canada and England. In Canada, for
example, paragraphs 6(1)(a) and (b) of the
Income War Tax Act[6] provided:
In computing the amount of the profits or gains to be
assessed, a deduction shall not be allowed in respect of
(a) disbursements or expenses not wholly, exclusively
and necessarily laid out or expended for the purpose of earning
the income;
(b) any outlay, loss or replacement of capital or any
payment on account of capital or any depreciation, depletion or
obsolescence, except as otherwise provided in this Act.
[22] The
English taxing statute prohibited deductions in respect of
". . . any disbursements or expenses not
being wholly and exclusively laid out or expended for the
purposes of the trade, profession, employment or
vocation".[7]
The British Courts resorted to an "income-earning
process" test to determine whether or not an expense was
permitted.
[23] An early
English case that set out this test is Strong & Co.,
Limited v. Woodifield, [1906] A.C. 448. The House of Lords
was concerned with the deductibility of damages paid by a brewery
to a guest injured at an inn owned by the brewery. Lord Loreburn
L.C., with whose views the majority of the House of Lords
concurred, summarized the English law on the subject of
deductibility:
In my opinion, however, it does not follow that if a loss is in
any sense connected with the trade, it must always be allowed as
a deduction; for it may be only remotely connected with the
trade, or it may be connected with something else quite as
much as or even more than with the trade. I think only such
losses can be deducted as are connected with in the sense that
they are really incidental to the trade itself. They cannot
be deducted if they are mainly incidental to some other vocation
or fall on the trader in some character other than that of
trader. The nature of the trade is to be considered. . . . In the
present case I think that the loss sustained by the appellants
was not really incidental to their trade as innkeepers, and fell
upon them in their character not of traders, but of
householders.[8]
[Emphasis added]
[24] The House
of Lords held that the payment made by the brewery company could
not be deducted, the loss not being connected with or arising out
of the trade and the moneys not having been wholly and
exclusively laid out and expended for the purposes of the
trade.
[25] The ratio
in Strong, supra, was based on the doctrine of
remoteness. A recent edition of Halsbury's Laws of England
explains that to be deductible an expense must be incurred for
reasons connected with the trade:
The Income Tax Acts do not necessarily allow as expenses or
deductions all the deductions the prudent trader would make in
ascertaining his profit. . . . only such expenses are allowable
as are incidental to the trade, . . . Counter and indirect
advantages are usually too remote to permit of the deduction of
an expense connected with such advantages, and money so expended
is not wholly and exclusively laid out or expended for the
purpose of the trade.[9]
[26] Also in
Strong, supra, Lord Davey laid down the principle
that for an expenditure to be deductible
. . ."It is not enough that the disbursement is made in
the course of, or arises out of, or is connected with, the trade,
. . . It must be made for the purpose of earning the
profits".[10]
[27] The
principle laid down by Lord Davey was obviously different than
the test formulated by the majority of the House of Lords as to
whether the expenditure was "really incidental to the
trade". It is significant to note that Lord Davey's
statement, although followed in subsequent English and Canadian
decisions, was in fact obiter dicta.[11]
[28] In
Robert Addie & Sons' Collieries Ltd. v. Commissioners
of Inland Revenue,[12] the Lord President Clyde, at page 235, asked:
. . . What is "money wholly and exclusively laid out for
the purposes of the trade" is a question which must be
determined upon the principles of ordinary commercial trading. It
is necessary accordingly to attend to the true nature of the
expenditure, and to ask one's self the question, is it a part
of the Company's working expenses? -- is it expenditure laid
out as part of the process of profit-earning? . . .
[29] Later on
in Tata Hydro-Electric Agencies, Bombay v. Income Tax
Commissioner,[13] the court quoted with approval the Lord President
Clyde's extract in Addie, supra, set out
above.
[30] In
Canada, Duff C.J., cited the Lord President Clyde in Addie,
supra and the reason for judgment in Tata, supra when
delivering his reasons for judgment in M.N.R. v. Dominion
Natural Gas Co. Ltd..[14] The Supreme Court held that a taxpayer's
legal expenses incurred to defend itself in an application by a
rival gas company to restrain the taxpayer from carrying on
business was on capital account and not laid out to earn
income.
[31] In his
reasons for judgment in Dominion Natural Gas,
Crocket J. acknowledged at page 499-137 that if he
. . . were free to decide this appeal on considerations of
practical business sense and equity, or to deduce from decided
cases the governing rule, which should be applied in determining
whether the respondent was or was not entitled, [under s. 6 of
the Income War Tax Act] . . . to the deduction claimed . .
. I should have no hesitation in adopting the conclusion at which
the learned President of the Exchequer Court arrived and the
reasons he has given therefor.
[32] However,
Crocket J. considered himself bound by the judgments of the Privy
Council in Tata, supra, and the Scottish Court of
Session in Addie, supra. In his view the provisions
of paragraphs 6(a) and (b) of the Income War Tax
Act and the analogous provisions of the English Income Tax
Act were "practically identical" and "impossible
to distinguish".
[33] Five
years after the Supreme Court rendered its decision in
Dominion Natural Gas, supra, Thorson P. stated in
Siscoe Gold Mines v. M.N.R.[15] that:
. . . Some caution must be exercised in applying an English
decision in the construction of this section because of the
differences between it and the section upon which the decision is
based. Section 6(a) contains the word "necessarily"
which does not appear in the corresponding English section;
moreover, section 6(a) uses the expression "for the
purpose of earning the income" while the English section
contains the expression "for the purposes of the
trade." . . . this difference in language may have, it is,
I think, safe to say that the English section is more generous in
its allowance of deductions than is the Canadian one, and it may,
therefore, be said generally that, while English decisions
disallowing deductions may be applicable, those allowing them are
not necessarily so.
[34] However,
the Canadian courts continued to adopt the position taken by the
English courts disregarding the differences in the two statutory
provisions.[16]
[35] The
Judicial Committee of the Privy Council dealt with the
deductibility of expenses under the Canadian Income War Tax
Act in Montreal Coke and Manufacturing Co. v. M.N.R.
and Montreal Light, Heat and Power Consolidated v.
M.N.R.[17] in
a manner similar to its application of the English statutes.
Lord Macmillan, noting previous decisions by Canadian
courts, stated, at pages 133-34, that:
. . . It is obvious that there can be many forms of
expenditure designed to increase income which would not be
appropriate deductions in ascertaining annual net profit or gain.
The statutory criterion is a much narrower one. Expenditure,
to be deductible, must be directly related to the earning of
income. The earnings of a trader are the product of trading
operations which he conducts. . . . It is not the business of
either of the appellants to engage in financial operations. The
nature of their businesses is sufficiently indicated by their
titles. It is to those businesses that they look for their
earnings. . . . [T]heir financial arrangements are quite distinct
from the activities by which they earn their income. [Emphasis
added]
[36] Thus the
"purpose of earning income" text in paragraph
6(1)(a) of the Income War Tax Act was not
considered as important as the income-earning process test which
was paramount. The latter test suggested a direct relation
between the expenditure and the income; that is, all outgoings
must be expended as part of a trading operation to be deductible.
In discussing the income-earning process test fashioned by the
Supreme Court in Dominion Natural Gas, supra, and the
Privy Council in Montreal Coke, supra, Mr. Edwin C. Harris
explained that it was "[n]o longer sufficient that an outlay
be incurred 'for the purpose of earning the income', as
the statute required; to be deductible, the outlay also must have
been incurred as part of and in immediate connection, in both
time and result, with the trading aspects of the business
operations".[18]
[37] In 1948
The Income Tax Act[19] ("1948 Act") did
away with the requirement that "a deduction shall not be
allowed in respect of disbursements or expenses not wholly,
exclusively and necessarily" incurred for the purpose of
earning income. An expense would be deductible if the purpose of
the expense was to gain or produce income.
Paragraphs 12(1)(a) and (b) [similar to
present paragraphs 18(1)(a) and (b)] of the
1948 Act provided that:
In computing income, no deduction shall be made in respect
of
(a) any outlay or expense except to the extent that it was
made or incurred by the taxpayer for the purpose of gaining or
producing income from property or a business of the taxpayer,
(b) any 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.
[38] The
courts acknowledged that the new phrase ‘gaining or
producing income' was less stringent than the phrase
‘earning the income'. The Supreme Court of Canada in
B.C. Electric Railway Co. Ltd. v. M.N.R.[20] first recognized
that the paragraph 12(1)(a) of the 1948 Act
expanded the sphere of deductibility from that of the Income
War Tax Act.[21] The Court then unequivocally adopted a two-test
approach in interpreting paragraphs 12(1)(a) and
12(1)(b) of the 1948 Act: "Once it is
determined that a particular expenditure is one made for the
purpose of gaining or producing income, in order to compute
income tax liability it must next be ascertained whether such
disbursement is an income expense or a capital outlay".[22]
[39] In
several earlier cases President Thorson recognized the broader
scope for the deductibility of business expenses and moved away
from the restrictive approach of the income-earning process test.
An expenditure, to be deductible, need not be directly related to
the earning of income: The Royal Trust Co. v. M.N.R..[23] See also
Imperial Oil Limited v. M.N.R.[24] Mr. Harris concluded his discussion
of the "marriage" of paragraphs 12(1)(a) and
12(1)(b) with the comment that "[Q]uestions of the
remoteness of an outlay from the income-earning process, to
the extent that they have any relevance whatever, ought to be
considered only with reference to what constitute ordinary
commercial outlays under section 4 and not with reference to the
'purpose' of the outlay under paragraph
12(1)(a)".[25]
[40] The
Supreme Court reviewed and analyzed the deductibility of an
expense in Symes v. The Queen et al.[26] Iacobucci J. described the
analysis:
Thus, in a deductibility analysis, one's first recourse
is to s. 9(1), a section which embodies, as the trial judge
suggested, a form of "business test" for taxable
profit.
This is a test which has been variously phrased. As the trial
judge rightly noted, the determination of profit under s. 9(1) is
a question of law: Neonex International Ltd. v. The
Queen, [1978] C.T.C 485, 78 DTC 6339 (F.C.A.). Perhaps for
this reason, and as Neonex itself impliedly suggests,
courts have been reluctant to posit a s. 9(1) test based upon
"generally accepted accounting principles"
(G.A.A.P.): see also "Business Income and Taxable
Income" (1953 Conference Report: Canadian Tax Foundation)
cited in B.J. Arnold and T.W. Edgar, eds., Materials on
Canadian Income Tax (9th ed. 1990), at page 336.
Any reference to G.A.A.P. connotes a degree of control by
professional accountants which is inconsistent with a
legal test for "profit" under subsection 9(1).
Further, whereas an accountant questioning the propriety of a
deduction may be motivated by a desire to present an
appropriately conservative picture of current profitability, the
Income Tax Act is motivated by a different purpose: the
raising of public revenues. For these reasons, it is more
appropriate in considering the s. 9(1) business test to speak of
"well accepted principles of business (or accounting)
practice" or "well accepted principles of commercial
trading".
Adopting this approach to deductibility, it becomes immediately
apparent that the well accepted principles of business practice
encompassed by s. 9(1) would generally operate to prohibit the
deduction of expenses which lack an income earning purpose, or
which are personal expenses, just as much as
ss. 18(1)(a) and (h) operate expressly to
prohibit such deductions. For this reason, there is an
artificiality apparent in the suggestion that one can first
examine s. 9(1) in order to determine whether a deduction is
authorized, and can then turns to s. 18(1) where another analysis
can be undertaken.
[41] The
central question in the appeals at bar is whether advertising
expenses may be deducted as business expenses by the Corporation
in computing its net income. The respondent characterized the
expenses as "too remote" from the appellant's
wood and lumber business and therefore not deductible. Not only
is the concept of remoteness not present in the Act, but
no court has ever set forth to test on how to determine what is
remote. Remoteness, then, is in the eyes of the beholder. It may
be necessary for an appellate to visit this question. I am of the
view that this submission is without merit. The fact that the
expenses may not have resulted in income does not prevent them
from being deductible, as it is the purpose of the expenditure
that must be assessed: Royal Trust, supra. Also, if
the expense is incurred for the purpose of earning business
income it is deductible.
[42]
Subsection 9(1) of the Act provides that a
taxpayer's business income is the profit from the business.
It was well established in Symes, supra, that the
concept of profit found in subsection 9(1) authorizes the
deduction of business expenses, as profit is inherently a net
concept, and such deductions are allowed under
subsection 9(1) to the extent that they are consistent with
"well accepted principles of business practice" or
"well accepted principles of commercial trading".
Nevertheless, the limiting provisions found in subsection 18(1)
may prohibit the expenses. The present appeal concerns paragraph
18(1)(a), which provides that, in computing taxable
business income, no deduction may be made in respect of
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.
[43] As
previously mentioned, a more generous interpretation has been
adopted of the expression "expenses incurred for the
purpose of gaining income from a business". Iacobucci J.
illustrated in Symes, supra, the liberalization of
the deduction principle in paragraph 18(1)(a) of the
Act by citing Wilson J. in Mattabi Mines Ltd. v.
Ontario (Min. of Revenue).[27] In that case, Wilson J. examined a
tax provision similar to paragraph 18(1)(a) of the
Act and drew the following conclusion:
. . . The only thing that matters is that the expenditures
were a legitimate expense made in the ordinary course of business
with the intention that the company could generate a taxable
income some time in the future.
[44] Mr.
Justice Iacobucci went on to consider several interpretations of
paragraph 18(1)(a). Of particular interest is the test
referred to as the "trade/trader test". It
essentially describes the requirement assigned to the
income-earning process test that the expenses relate directly to
the business' operations in order to be deductible, as the
Privy Council affirmed in Montreal Coke, supra.
With respect to the "trade/trader test", Iacobucci J.
stated the following:
A test not unrelated to this circle test is that which asks
whether an expense is an expense "of the trader" or
"of the trade". J.E. Hershfield, supra,
["Recent Trends in the Deduction of Expenses in Computing
Income", in (Report of Proceedings of the Forty-First Tax
Conference), 1989 Conference Report (Toronto: Canadian Tax
Foundation, 1990) 44:1] describes how this language entered
Canadian law by way of quotation in Dominion Natural Gas,
supra, at p. 28 (C.T.C. 163, D.T.C. 499-138)
(per Crocket, J.). Hershfield goes on to argue that part
of the deductibility test must be "whether the expense was
an incident of the trade - part of the business operation
itself. That the ‘trader' incurred the expense to
earn income from the business is not enough" (p. 44:9).
Viewed one way, this might be seen as a little more than a
restatement of the circle argument, since it might be difficult
to distinguish between an "income-producing circle"
and "the business operation itself". Viewed more
charitably, however, to ask whether an expense is of the trader
or of the trade may be to simply realize that the deductibility
of an expense "is not to be determined by isolating
it" (Hershfield, supra, at page 44:8). To the extent
that this test simply requires child care expenses to be viewed
in the context of the appellant's business as a lawyer, I
agree with it.[28]
[45] He then
concluded:
Upon reflection, therefore, no test has been proposed which
improves upon or which substantially modifies a test derived
directly from the language of s. 18(1)(a). The
analytical trail leads back to its source, and I simply ask the
following: did the appellant incur child care expenses for the
purpose of gaining or producing income from a business?[29]
[46] The
question I must ask, therefore, is: did the appellant incur the
advertising expenses for the purpose of gaining or producing
income from its wood and lumber business? On the basis of
Iacobucci J.'s analysis and conclusion in Symes,
supra, I need not concern myself with whether the expenses
are too remotely connected to the appellant's business.
[47] I do not
find the cases of Ace Salvage, supra, Leffler,
supra, and O'Connell, supra, helpful to the
present appeal. Iacobucci J's conclusion in Symes,
supra, makes these cases irrelevant. Paragraph
18(1)(a) of the Act does not contain the words
"wholly, exclusively and necessarily laid out or
expended" as did paragraph 6(1)(a) of the
Income War Tax Act. As the Supreme Court of Canada
affirmed in Symes, supra, at page 6013:
. . . the current wording of s.18(1)(a) is sufficient
justification for the view that Parliament acted to amend its
predecessor section in such a way as to broaden the scope for
business expense deductibility.
[48] The case
law that interpreted the restrictive language in the Income
War Tax Act to mean that the expense must be incidental to
the earning of profits in order to be deductible is no longer
followed. Further, this requirement ignores the clear statutory
"purpose test" affirmed by the Supreme Court of
Canada in Symes, supra.
Paragraph 18(1)(a) of the Act, in my view,
does not support a remoteness requirement.
[49] The
appellant incurred the advertising expenses for the purpose of
gaining and producing income from its business. The decision to
advertise was a business decision made in order to realize
income. The purpose of the expenses was to increase the
appellant's business through new contacts and leads for the
benefit of the wood and lumber business.
[50] The tax
authority has no business telling a businessperson how to run
that person's business. Advertising expenditures take many
forms: radio, television, newspapers (local, provincial,
national), sponsorship or ownership of sports teams, tournaments,
community events . . . the list is endless. A form of advertising
that is beneficial to one business is not necessarily favourable
to another business or even a business' competitor. Each
business must have the freedom to choose its own form of
advertising.
[51] A
business may opt to advertise an activity in which its owner (or
principal shareholder of the corporation owning the business) has
a keen interest or a degree of personal satisfaction. There is no
reason why the expense of a particular form of advertising should
be disallowed by the fisc solely because of the owner's
interest, satisfaction or, as in the appeal at bar, participation
in the advertising or remoteness from its business. The fact that
an owner of a business (or a director of a corporation) may
experience a vicarious satisfaction from the form of
advertisement does not necessarily lead to the conclusion that
the cost of the advertisement should be disallowed. If the
expense of the advertisement, whatever it is, is incurred by the
taxpayer for the purpose of gaining or producing income from its
business and the expense is reasonable in the circumstances, the
expense ought to be deductible in computing income. This is what
the Act dictates.
[52] However,
when the form of advertising has a significant personal element,
the taxpayer has a greater than normal onus to establish that the
expense was truly incurred for the purpose of earning income from
the business. It is quite possible that an expense may serve the
needs of both the business and the shareholder and, in such a
case, one may have to determine the primary purpose of the
expense or, perhaps, apportion the expense among the business and
the shareholder. This was not raised in the pleadings or at trial
and I need not consider whether the Act would support such
an approach.
[53] I believe
that I may take judicial notice that automobile racing is a
popular worldwide sport and that many major corporations, some of
which are resident in Canada, pay great sums to sponsor such
races.[30] For
example, tobacco companies as well as international
telecommunications carriers have sponsored racing teams in the
past. It is generally accepted today that this form of
advertising is a well accepted business practice. Why, then, may
not a small business also undertake such advertising?
Mr. Harris, president of the appellant, testified as to the
popularity of stock car and snowmobile racing in New Brunswick.
He made a decision that the Corporation sponsor stock car and
snowmobile races. Once it is established the expense is incurred
for the business, the fact that Mr. Harris is the driver of
the stock car and snowmobile and enjoys racing should be no more
a factor, all things being equal, than the vicarious enjoyment
officers of sponsors of major car racing teams have before,
during and after the races.
[54] The
Corporation should succeed in its appeals. The appellant's
expenses in general were incurred for the purpose of gaining or
producing income from a business and were reasonable in the
circumstances. It is well established that it is immaterial
whether the advertising produces income or not. It is the purpose
that counts. What is taken into consideration is whether the
advertising is done for the purpose of gaining or producing
income. It is clear, that the advertising expenses were made by
the appellant for the purpose of gaining or producing income from
its business. The appellant's purpose was to promote the
name of its business and to increase its wood and lumber business
through contacts and in so gaining or producing income from the
business.
[55] However,
a portion of the expenses claimed as advertising expenses by the
appellant, were personal and not deductible. The precise amounts
were not adduced in evidence. I am allowing the appeal since it
appears the bulk of the advertising expenses were laid out for
business purposes and are deductible in computing income. The
assessments, will be referred back to the Minister for
reconsideration and reassessment to delete from the racing
expenses those expenses that are personal to Mr. Harris, such as
babysitting expenses, for example, and allow the balance. The
Corporation shall be entitled to its costs, if any.
Signed at Ottawa, Canada, this 6th day of December 2000.
"Gerald J. Rip"
J.T.C.C.
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