Strayer,
].:
—
Relief
Requested
This
is
an
appeal
against
a
reassessment
by
the
Minister
of
National
Revenue
in
respect
of
the
plaintiff’s
1982
taxation
year
in
which
the
Minister
refused
to
allow
a
deduction
of
$284,854
from
income.
The
plaintiff
had
made
this
deduction
on
the
basis
that
the
amount
in
question
had
been
expended
for
the
purpose
of
gaining
or
producing
income.
The
Minister
took
the
position
that
it
was
a
capital
outlay.
Facts
The
plaintiff
Morflot
Freightliners
Limited
is
95
per
cent
owned
by
a
Soviet
company
V.V.O.
Sovfracht
which
in
turn
is
owned
by
a
ministry
of
the
Soviet
Union.
During
the
years
in
question
the
plaintiff
acted
as
agent
for
a
Soviet
shipping
company,
Far
Eastern
Shipping
Company
of
Vladivostok,
in
respect
of
the
operation
of
its
ships
into
and
out
of
ports
on
the
Pacific
coast
of
Canada
and
northwestern
United
States.
The
plaintiff
company
was
established
in
1975
as
a
successor
to
an
earlier
company
with
similar
functions.
Also
in
1975,
the
plaintiff
established
Morflot
Freightliners
Inc.,
a
U.S.
company,
as
a
wholly-owned
subsidiary.
The
latter
was
a
successor
of
another
U.S.
company
with
similar
functions.
Thereafter
the
plaintiff
in
its
annual
financial
statement
included
an
item
"Investment
in
subsidiary”
relating
to
Morflot
Freightliners
Inc.
in
the
amount
of
$50,000.
This
continued
until
the
financial
statement
in
respect
of
1982
when
this
amount
was
written
down
to
$1.
As
the
agent
for
Far
Eastern
Shipping
Company,
the
plaintiff
received
commissions
in
respect
of
freight
earnings
from
liner
services
(that
is,
carriage
by
ships
on
scheduled
routes)
and
fees
for
services
performed
in
respect
of
tramp
freight
(that
is,
ad
hoc
shipments
by
ships
engaged
for
moving
particular
freight
from
a
particular
port,
consisting
here
mostly
of
grain
shipments
to
the
Soviet
Union).
Morflot
Freightliners
Inc.,
was
established
to
carry
out
in
the
United
States
the
plaintiff's
function
as
agent
flowing
from
its
agreement
with
the
Far
Eastern
Shipping
Company.
An
agreement
dated
January
1,1976
describes
the
plaintiff
as
the
"agent",
and
Morflot
Freightliners
Inc.
as
the
"sub-agent".
The
U.S.
company
was
to
receive
a
fixed
portion
of
the
commissions
earned
by
the
plaintiff
in
respect
of
cargo
carried
on
Far
Eastern
Shipping
Company
vessels
where
such
cargo
was
shipped
from,
or
delivered
to,
a
U.S.
port
within
the
plaintiff's
area
of
responsibility
as
agent.
The
plaintiff
was
to
provide
Morflot
Freightliners
Inc.
with
accounting,
claims
handling,
statistical
and
other
services
for
which
the
U.S.
subsidiary
was
to
pay
an
annual
fee.
Evidence
given
by
John
Dale,
Executive
Vice-President
of
the
plaintiff,
indicated
that
the
ability
to
service
by
this
means
all
of
Far
Eastern's
shipping
to
and
from
the
ports
within
the
plaintiff's
area
was
very
important
from
an
economic
point
of
view
as
the
volume
of
freight
thus
made
possible
was
very
important
to
the
profitability
of
its
agency
arrangement
with
Far
Eastern.
Starting
in
1978
political
problems
arose
which
discouraged
Soviet
shipping
to
and
from
the
United
States.
In
1978
Congress
adopted
the
Ocean
Shipping
Act,
a
protectionist
measure
directed
against
government-owned
shipping
lines.
This
brought
into
question
whether
rates
charged
by
such
lines
were
unfair
as
being
subsidized.
Tensions
between
the
United
States
and
the
Union
of
Soviet
Socialist
Republics
increased
with
the
Soviet
invasion
of
Afghanistan
in
1979
and
the
imposition
of
martial
law
in
Poland
in
1981.
This
caused
negative
reaction
to
the
use
by
Americans
of
Soviet
vessels.
The
U.S.-U.S.S.R.
maritime
agreement
which
had
been
in
effect
since
the
early
1970s
and
which
permitted
ready
access
to
certain
U.S.
ports
by
U.S.S.R.
ships
was
allowed
to
lapse
at
the
end
of
1981.
By
March
1982
it
had
become
apparent
that
such
access
was
not
going
to
continue.
There
had
been
a
flow
of
money
back
and
forth
between
the
plaintiff
and
Morflot
Freightliners
Inc.
and
at
each
year's
end
up
until
the
end
of
1978
there
had
been
balances
owing
from
the
plaintiff
to
its
U.S.
subsidiary.
Commencing
in
1979
the
plaintiff
found
it
necessary
to
advance
money
to
Morflot
Freightliners
Inc.
to
keep
it
in
funds,
having
regard
to
the
growing
difficulties
of
shipping
to
and
from
U.S.
ports
by
Soviet
vessels.
After
March,
1982,
with
its
business
virtually
destroyed
by
the
political
situation,
the
affairs
of
Morflot
Freightliners
Inc.
were
wound
down.
These
advances
were
almost
entirely
in
the
form
of
money
paid
directly
to
Morflot
Freightliners
Inc.
from
which
it
continued
to
pay
salaries
and
other
costs
of
keeping
the
business
in
operation.
By
the
end
of
1982
the
accumulated
advances
owing
by
Morflot
Freightliners
Inc.
to
the
plaintiff
was
$230,818
(U.S.)
or
the
equivalent
of
$284,854
(Canadian)
and
the
plaintiff
wrote
them
off.
It
is
this
amount
which
the
plaintiff
then
claimed
as
an
expense
incurred
for
the
purpose
of
gaining
or
producing
income
from
its
business
and
which
the
Minister
has
treated
as
a
capital
outlay.
According
to
Mr.
Dale,
the
plaintiff
continued
to
provide
advances
to
its
U.S.
subsidiary
in
the
period
starting
in
1979
because
it
was
hoped
that
the
situation
for
Soviet
shipping
in
northwestern
United
States
would
improve.
It
was
important
to
the
plaintiff
that
it
have
a
sub-agent
in
place
in
the
United
States
if
the
political
situation
improved
and
Soviet
shipping
to
and
from
the
U.S.
became
relatively
easy
again.
He
agreed
that
the
plaintiff
was
not
in
the
business
of
moneylending.
Issues
Subsection
18(1)
of
the
Income
Tax
Act
provides:
(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.
.
.
.
The
question
for
determination
is
as
to
whether
the
$284,854
in
question
comes
within
paragraph
(a),
as
the
plaintiff
alleges,
or
within
paragraph
(b)
as
the
Minister
contends.
Conclusions
It
should
first
be
emphasized
that
the
plaintiff
and
its
U.S.
subsidiary
were
separate
companies.
Legally,
the
business
of
the
U.S.
company
was
not
the
business
of
the
plaintiff
and,
prima
facie,
the
money
advanced
by
the
plaintiff
appears
not
to
have
been
incurred
for
the
purpose
of
gaining
or
producing
income
from
its
business
but
rather
from
the
business
of
the
U.S.
subsidiary.
The
evidence
is
clear
that
the
plaintiff
was
not
in
the
business
of
lending
money
and
therefore
this
cannot
be
viewed
as
a
business
loss
of
a
moneylender.
Normally
payments
made
by
a
parent
company
to
a
subsidiary
to
help
finance
the
operations
of
a
subsidiary
are
regarded
as
capital
payments.
In
Stewart
&
Morrison
Limited
v.
M.N.R.
a
company
located
in
Toronto
had
established
a
wholly-owned
U.S.
subsidiary
to
operate
an
office
in
New
York.
The
New
York
company
carried
on
business
in
its
own
name
and
had
its
own
staff
but
it
was
generally
directed
by
the
Toronto
parent
company.
Eventually
the
New
York
company
suffered
losses
and
had
to
cease
Operations.
It
was
unable
to
repay
the
advances
from
the
Toronto
company
which
sought
to
deduct
these
amounts
as
expenses
incurred
for
the
purpose
of
earning
income
from
its
own
business.
The
Supreme
Court
of
Canada
rejected
this
position
and
treated
the
advances
as
“working
capital".
It
appears
to
me
that
the
present
case
is
very
similar
to
the
facts
in
the
Stewart
&
Morrison
case.
The
plaintiff
contends
here,
however,
that
it
advanced
money
to
Morflot
Freightliners
Inc.,
not
with
a
view
to
getting
a
return
on
its
investment
through
dividends
but
instead
to
try
to
ensure
the
success
of
its
own
business
as
agent
for
Far
Eastern
Shipping.
It
had
concluded
that
it
could
not
carry
out
its
agency
responsibilities
in
U.S.
ports
without
having
a
U.S.
subsidiary.
Further,
it
was
of
the
view
that
unless
it
could
act
as
agent
for
all
Far
Eastern
Shipping
to
and
from
western
Canadian
ports
and
northwestern
U.S.
ports
it
would
not
have
a
profitable
business.
In
other
words
it
contends
that
the
whole
of
its
business,
including
its
Canadian
business,
would
be
rendered
unprofitable
if
it
did
not
retain
a
capacity
through
its
sub-agent
to
provide
services
in
the
United
States.
It
distinguishes
the
Stewart
&
Morrison
case
on
the
basis
that
in
that
case
the
business
of
the
parent
company
as
such
was
not
affected
by
the
success
of
the
U.S.
subsidiary
because
the
U.S.
company
did
not
act
as
an
agent
or
branch
of
its
Canadian
parent.
It
has
frequently
been
said
in
cases
of
this
nature
that
one
must
try
to
characterize
a
situation
from
a
practical
business
point
of
view
to
determine
the
intent
with
which
the
money
was
provided.
I
have
endeavoured
to
do
that,
and
have
concluded
that
the
advances
were
provided
by
the
plaintiff
with
a
long-term
objective
in
mind,
namely
to
preserve
for
the
indefinite
future
its
U.S.
subsidiary
as
a
viable
contracting
party
through
which
its
agency
responsibilities
to
Far
Eastern
Shipping
could
be
carried
out
in
the
United
States.
I
believe
the
critical
distinction
here
is
as
between
the
preservation
of
an
enduring
asset
on
the
one
hand
and
the
expenditure
of
money
for
direct
and
more
immediate
gaining
of
profit
through
sales,
or,
as
in
this
case,
the
earning
of
commissions.
I
believe
the
case
is
within
the
principles
of
the
Stewart
&
Morrison
decision,
supra,
and
is
very
similar
to
the
facts
in
The
Queen
v.
H.
Griffiths
Company
Limited.
In
the
Griffiths
case
the
loan
to
the
subsidiary
guaranteed
and
ultimately
repaid
by
the
parent
company
due
to
the
bankruptcy
of
the
subsidiary
was
an
investment
of
a
capital
nature.
The
parent
company
as
a
mechanical
contractor
required
a
reliable
supply
of
sheet
metal
products
and
incorporated
the
subsidiary
as
a
supplier
of
such
products.
This
sum
paid
by
the
parent
for
the
subsidiary
was
said
to
have
been
expended
to
ensure
an
advantage
for
the
enduring
benefit
of
the
parent
company.
Even
though,
as
in
the
present
case,
the
continuing
successful
existence
of
the
subsidiary
would
have
a
substantial
bearing
on
the
success
of
the
parent
and
in
this
sense
might
be
said
to
be
related
to
the
production
of
income
from
the
plaintiff's
business,
this
does
not
alter
the
fact
that
the
money
advanced
to
the
subsidiary
was
to
obtain
an
advantage
of
an
enduring
nature
and
this
made
it
a
capital
expenditure.
This
was
not
a
case
where
the
plaintiff's
ownership
of
the
shares
in
the
subsidiary
was
of
a
transitory
nature
only,
acquired
with
the
intention
of
early
disposal,
which
might
cause
all
related
transactions
to
be
of
an
income
nature.
Nor
were
these
advances
provided
for
the
direct
and
immediate
promotion
of
sales
or
rentals.
I
therefore
conclude
that
it
was
the
intention
of
the
plaintiff
to
lay
out
these
sums
to
preserve
for
its
advantage
in
the
indefinite
future
an
instrument
by
which
it
could
fulfil
its
agency
obligations
in
the
United
States.
I
believe
that
such
expenditures
must
be
regarded
as
capital
outlays.
The
appeal
will
therefore
be
dismissed.
Appeal
dismissed.
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