65302 British Columbia Limited v. Her Majesty the Queen, [1995] 2 CTC 2294, 96 DTC 2049

Lamarre J.T.C.C.:-This appeal arises out of a disallowance by the Minister of National Revenue (the ’’Minister") of certain deductions claimed by the appellant as current business expenses for the 1985, 1988 and 1989 taxation years.

Facts

The relevant facts admitted by the parties may be summarized as follows:

—The appellant carries on an egg producing poultry farm business near Prince George, British Columbia. In 1992, the appellant changed its name to 65302 British Columbia Ltd. from Veekens Poultry Farms Ltd. During the years 1984 through 1989, Mr. Laurentius Franciscus Veeken was director, shareholder and secretary of Veekens Poultry Farms Ltd.

—Pursuant to an audit inspection in 1988 by the B.C. Egg Marketing Board (the "Board"), it was determined that the appellant was over quota. By an invoice dated June 20, 1988, the appellant was assessed an over quota levy of $269,629.69 by the Board pursuant to paragraph 6(e) of the British Columbia Egg Marketing Board Standing Order (the "standing order"). An inspector directed the appellant to dispose of the extra egg producing birds and it did.

-After seeking legal advice, the appellant came to terms with the Board and by agreement dated August 26, 1988, acknowledged a joint and several indebtedness to the Board in the amount of $269,629.69 and agreed to pay the levy over time with interest charged accordingly. The appellant claimed this amount in its 1988 taxation year, as business expenses. Subsequently, in its 1989 taxation year, the appellant deducted interest expense in the amount of $9,704.50 and legal expenses of $3,766 incurred for representation in respect of the over quota levy.

-The appellant was reassessed in respect of its 1985, 1988 and 1989 taxation years by notices of reassessments dated November 14, 1991 which, inter alia:

(a) disallowed the appellant’s claimed deduction of the over quota levy in the amount of $269,629.69 as a business expense in its 1988 taxation year;

(b) disallowed a loss carryback of $61,876 (which is the net of the 1988 profit of $200,166 less the over quota levy), which was claimed by the appellant pursuant to section 111 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") from its 1985 taxation year, because the loss in the 1988 taxation year had been disallowed as a result of the disallowance of the appellant’s deduction of the over quota levy;

(c) disallowed interest expense incurred by the appellant of $9,074.50 on

the unpaid balance of the over quota levy in its 1989 taxation year; and

(d) disallowed legal expenses in the amount of $3,766 incurred in the appellant’s 1989 taxation year for representation in respect of the over quota levy.

Counsel for both parties however conceded in their argument that the issues raised in (b), (c) and (d) above would follow the trial result in (a).

-At the hearing, Mr. Veeken testified. Testimony was also given by Mr. Richard Cederic Green, a former field representative of 16 years for the Board, who had inspected the appellant’s operations during the years in question. The final witness was Mr. Peter Mark Whitlock, controller of the Board. An objection was raised by counsel for the appellant on Mr. Whitlock’s testimony; that objection was taken under reserve. The principal argument against Mr. Whitlock’s testimony was that he was not qualified as an expert and therefore could not testify or give any opinion on the purpose of the quota system or on any economical aspect resulting from the application of this quota system for egg producers. This objection will be dealt with below.

-The evidence revealed that during the years in question the appellant ran an integrated poultry operation in the Prince George area. The poultry farm had meat production chickens ("broilers") and egg laying chickens which produced eggs for the table market. In addition, the appellant had a grading station where they graded those eggs sold to the public, and a processing plant where they disposed of the spent fowl once they had passed their useful laying life.

-During this time, Mr. Veeken obtained egg laying chickens ("layers") for his operation by purchasing day-old chicks from certain hatcheries. Until such chicks were 19 weeks old, they were classified as "pullets" and the quota system did not apply to them. However, once such pullets crossed the 19-week threshold and became mature egg laying chickens, they were classified as layers and the quota restrictions applied.

-In the course of carrying on its egg production business during the period from 1984 to 1988, the appellant exceeded the quota fixed by the Board, pursuant to the standing order, for the layers allowed to the appellant as a registered producer. Specifically, the appellant had more layers than it was permitted to have under the quota allocated to it by the Board.

-The audit inspection, finally accepted by the appellant, performed by Touche Ross for the Board was made from the invoices of eggs sold. It determined that the appellant kept layers in excess of the amount permitted by the Board as follows:

The contents of this table are not yet imported to Tax Interpretations.

—During the period in question, the appellant was required to pay to the Board a levy of $0.07 per layer per week in respect of its quota of 33,680 layers. It was admitted by the Minister that this levy was deductible on income account for income tax purposes.

—In 1988, the Board’s over quota assessment in respect of the 1984 to 1988 calendar years for $269,629 represented a rate of $0.05 per layer per day for the year 1984 and for 293 days in 1985, and a rate of $0.08 per layer per day from October 20 to December 31, 1985 and for 1986, 1987 and 1988. It is for this over quota levy that the Minister disallowed the deduction on income account.

-The purpose of this over quota levy, as mentioned in paragraph (f) of the reply to the notice of appeal and admitted by counsel for the appellant at the hearing, was to eliminate any profit resulting from the keeping of excess layers. In fact, the over quota levy represented eight times the levy paid on layers included in the quota.

—Upon being questioned on why they became over quota, Mr. Veeken testified that he had to estimate how many baby chicks the appellant was going to need to replace a flock approximately five months in advance of the moment the anticipated processing of the spent fowl would take place, in order to allow them to go through the pullet stage and become layers. Such a procedure seemed reasonable in order to ensure a continuous flow of layers and a stable production of eggs.

-Mr. Veeken indicated that he was concerned about the fact that if the appellant did not produce up to quota, and indeed over quota, it would face a significant risk of losing its major customer (Overwaita Foods) in the Prince George area. Moreover, there was a risk of losing its quota if it did not fully use it. Mr. Veeken knew that the appellant was over quota and intentionally continued at such production levels during the period in question in order to supply the demand of their customers and to get a maximum profitability. He testified that it was normal for such an operation to be 2 to 6 per cent over quota due to the differential survival rates of baby chicks and the problem of not being able to get rid of spent fowl through processing plants in time. Moreover, he believed that it was a normal risk of the egg production business to be over quota.

—Mr. Veeken also testified about the fact that his business was profitable as a whole and even with the over quota levy assessed in 1988; it did not affect the profits on the grading and processing operations. The financial statements for the taxation years 1985, 1988 and 1989 were filed as Exhibit A-2. From these financial statements, we see that the operations were all integrated and the appellant showed a profit before taxes of $274,076 in 1984, $164,632 in 1985, $169,934 in 1987, $200,166 in 1988 (before the over quota levy) and $82,781 in 1989.

-Mr. Richard Cederic Green, who had inspected the appellant’s operations during the years in question, testified that during his flock verification report on May 5, 1988, the appellant was 6,705 layers over quota. He testified that before 1988 the inspector was counting only egg producing barns referred by the farmers. In the case of the appellant, it was never found over quota. From 1988, the new policy was to check all the barns. Indeed, in the appellant’s case, there was an extra barn that was not visited before, which housed their over quota layers. Green stated that Veeken’s explanation for the over quota was that they were just in the process of trying to buy an additional quota. In fact, they bought more quota in 1989 and were never found over quota after. On this point, Mr Veeken explained in his testimony that there was no quota available in his area (Prince George area) during the years in question. He said he could have bought quota in the lower mainland area, but the price was $50 a bird compared to $30 a bird in his own area. They consequently took a business decision to wait to buy more quota. Mr. Green finally testified about the fact that there is a system of quota credit that you can build and use later. No evidence was brought to show if this credit was ever used by the appellant.

-The last witness was Mr. Peter Mark Whitlock, controller of the Board. He explained that the producers in the province got together to form a marketing board and that the quota were introduced to stabilize the producer’s return and the price for consumers as well as to allow the wholesaler to have a constant supply of product, with never any shortage, at a reasonable price. He also said that if the producers did not use their maximum quota for 180 days, the Board could withdraw the quota.

-He clarified that the appellant’s quota from 1984 to 1988 was 33,680 layers. He confirmed that it was possible to buy and sell quota and that, during 1988, he personally knew of at least two large quota sales in British Columbia. He said that there was an average of ten to 15 over quota levies issued a year. According to him, the normal over quota is usually around 1 per cent. Since 1984, five or six egg producers would have been over quota for more than 1 per cent. The sanction for not paying the levy is the possibility for the producer to lose his licence. However, a licence or a quota was never cancelled by the Board except once when an egg producer had been assessed for six consecutive over quota levies by the Board. In that case, the licence was suspended for one year. Here, it did not happen as the appellant was never found over quota in previous years and was not after 1988. Furthermore, a producer cannot transfer his quota if the levies are not paid.

—Mr. Whitlock also mentioned that the average profit per layer per day for egg production was approximately 0.05 cents per bird. He also said that the cost of over quota production to society was 50 to 60 cents per dozen while the over quota levy charged to the producers was $1.27 per dozen. In that sense, the over quota assessments are designed not only to remove any profit from over quota production but also to act as a significant disincentive to hold over quota layers.

—On cross-examination, he said that whether the producer was intentionally or not over quota, the levy on over quota had to be paid. He also said that when the Board raised the levy from 0.05 cents to 0.08 cents per over quota layer per day, there was a concern that this amount should not be too high in order that the levy should not be considered as a penalty.

Appellant's position

Counsel for the appellant contends first that the over quota levy which is the object of this appeal is not a penalty as it is not in the authority of the Board to fine or penalize but rather to assess levies to collect money for purposes of the administrative scheme. The purpose of the levy is to fund the cost of removal of the over quota production, and in this sense the levy cannot be considered as a penalty. According to him, the levy may have a deterrent effect, but this is not the purpose of it. Counsel secondly contends that the expenses were necessarily incurred in the course of the day-to-day operation of the egg producing business. Over quota production is a normal risk of an egg production business and therefore, was incurred for the purpose of gaining or producing income. Furthermore, the fact there may be no resulting income does not prevent the deductibility of the amount of the outlay or expense. Thirdly, he argued that the over quota levy being designed to remove any profit from excess production, it could not be considered as an outrageous transgression of public policy. And finally, the over quota levy is not an outlay on capital account as it did not bring any advantage into existence. In fact, it is more of a recurrent nature.

Respondent's argument

Counsel for the respondent argued first that the over quota levy was in the nature of a penalty on the basis that the purpose of it was to be a deterrent. The levy is more than mere compensation for the over quota production; according to him, it is clear that the levy more than taxed back the profit on the over quota production. He based his argument on the testimony of Mr. Whitlock on the average profit for egg production in the province and on defini- tions in dictionaries. Then he advanced the position that the outlay was not a proper business expense incurred for the purpose of gaining or producing income. He said that to be deductible under paragraph 18(1 )(a) of the Act, an expense has to be consistent with good business practice, and intentionally being over quota could certainly not, according to him, be considered as acting with good business practice. His last argument is, in the alternative, that the expenses are on capital account and therefore prohibited under paragraph 18(1 )(b) of the Act. He said that by not paying the levy, the appellant was facing the possibility of losing its quota and, in that sense, the outlay should be considered as a capital outlay. Analysis

Preliminary matter

I will deal first with the objection raised on the testimony of Mr. Whitlock. As for his explanation on the existence and purpose of the quota, he only enlightened the Court about the functioning of the quota system in the province and I do not view his testimony as an opinion given in law or on any hypothetical question as contended by the appellant’s counsel. I will therefore accept his testimony on this aspect. As to his answers with regard to over quota levies assessments, I will also accept the testimony he gave as a controller of the Board, as these were based on information on which I believe he had personal knowledge.

With regard to his answers on the average profit per layer per day for egg production that he established approximately at 0.05 cents per bird and on the cost to society of over quota production, I understand that these allegations were brought up to establish that the levy of 0.08 cents per layer per day on over quota layers did more than just claw back the profit on the over quota egg produc- tion and therefore was designed to act as a significant disincentive. On the first statement relating to the profit per layer per day for egg production, no evidence was specifically brought on this in the appellant’s particular case. Mr. Veeken said that all the operations, including the egg production, the grading and processing operations were profitable on a consolidated basis as they were not segregated in the financial statements. According to Mr. Veeken and this is confirmed in the financial statements for the years 1984, 1985, 1987, 1988 and 1989, the appellant was always at profit except for the year 1988 in which year the levy in the amount of $269,629.69 was assessed and claimed as an expense. This levy led the appellant, in that year, to a loss of $61,876 which was carried back to the 1985 taxation year. These facts do not support the respondent’s argument that the levy more than taxed the profit on egg production, taking into account that the levy was assessed for activities carried on during five consecutive years. For this reason, I will not accept the allegation of Mr. Whitlock concerning the average profit on egg production in the province as the evidence in the appellant’s case does not reflect this assertion. Neither will I accept his evidence on his other statement on the cost to society of over quota production as this statement is not in my opinion relevant in the appellant’s particular case.

Deductibility of the outlay

1. The B.C. law

The Natural Products Marketing B.C. Act (the "B.C. Act") is the legislative authority under which the Board has been created. The purpose of the B.C. Act pursuant to its section 2, is to provide for the promotion, control and regulation of the production, transportation, packing, storage and marketing of natural products in the province. Section 12 of the B.C. Act gives the Lieutenant Governor-In-Council power to establish a marketing board to market a regulated product. The powers of the boards and commissions which includes the B.C. Egg Marketing Board are set forth in section 13 of the B.C. Act. Among others, the power to fix and collect levies or charges is provided in paragraph (k), which reads as follows:

13 (1) Powers of board and commission.—Without limiting the generality of other provisions of this Act, the Lieutenant Governor in Council may vest in a marketing board or commission any or all of the following powers:

(k) to fix and collect levies or charges from designated persons engaged in the production or marketing of the whole or part of a regulated product and for that purpose to classify those persons into groups and fix the levies or charges payable by the members of the different groups in different amounts, and to use those levies or charges and other money and licence fees received by the commission

(i) to carry out the purposes of the scheme;

(ii) to pay the expenses of the marketing board or commission;

(iii) to pay costs and losses incurred in marketing a regulated product;

(iv) to equalize or adjust returns received by producers of regulated products during the periods the marketing board or commission may determine; and

(v) to set aside reserves for the purposes referred to in this paragraph;

Counsel for the appellant made a distinction at this point to establish that the authority to assess levies is not authority to penalize. Indeed, such power is dealt with in section 20 of the B.C. Act whereby it is said that:

every person who fails to comply with this Act or the regulations or an order...made by the Provincial board or a marketing board or commission…is liable on conviction, to a fine...or to imprisonment....

He further referred to the decision of the Supreme Court of Canada in Re: Agricultural Products Marketing Act (1978), 2 S.C.R. 1198 which is a decision dealing extensively with the powers of marketing boards in Canada, both the Canadian Egg Marketing Agency (CEMA) and the provincial boards, as well as with the nature of the levy system. The Supreme Court of Canada had to decide various questions relating to the validity of certain provisions of, among others, the Agricultural Products Marketing Act, R.S.C. 1970, c. A-7, and the Farm Products Marketing Act of Ontario, R.S.O. 1970, c. 162, which is a legislation similar to the B.C Act. In deciding the case, the Supreme Court mentioned that the purpose of the levies is to fund the boards and to provide for surplus removal of over quota production. Chief Justice Laskin, as he then was, stated at page 1218 the following:

The levies collected by grading station operators are imposed under the authority of two federal statutes, the Agricultural Products Marketing Act and the Farm Products Marketing Agencies Act, and are remitted, in Ontario, to the Ontario Egg Board which receives them both for itself and for CEMA. The validity of the imposition and collection of these levies is strongly challenged in the present case. The Ontario Egg Board, acting under authority given by subsection 2(2) of the federal Agricultural Products Marketing Act (as first enacted by 1957 (Can.), c. 15) exacts now two types of levies; first, a levy to finance its own costs of administration and, second, a levy to cover the cost of the surplus removal programme in respect of over quota eggs.

And further, at page 1238, Chief Justice Laskin stated that such levies could be regarded as a "fee for services":

that an expenses levy may validly be imposed by provincial legislation upon regulated producers and sellers to cover the cost of administering a provincial marketing scheme. It may be regarded as a "fee for services"...and...that is as an element of a valid regulatory scheme.

The B.C. Egg Marketing Scheme, 1967 (the "Scheme"), that was adopted under the authority of the B.C. Act, empowers the Board to regulate the supply, distribution and production of chicken eggs in the province, and in so doing to pass certain standing orders. The authority of the Board is described in section 37 of the Scheme. Among others, the Board has the power:

(d) to revoke or reduce in whole or in part unused quotas or portions of quotas, and to reissue such quotas in whole or in part as the board may deem proper;

(n) to use any moneys received by the board to carry out the purposes of the scheme and to pay the expenses of the board;

(v) to make orders fixing, imposing and collecting levies or charges from registered producers engaged in the marketing of any category of the regulated product, and for such purposes to classify registered producers into groups and to fix the levies or charges payable by the members of the different groups in different amounts, and to use such levies or charges for the board’s purposes, including the creation of reserves and the payment of expenses and losses resulting from the sale or disposal of regulated product and the equalization or adjustment among registered producers of moneys realized from the sale thereof during such period or periods of time as the board may determine.

The Standing Order passed by the Board is the specific legislation under which the levy has been charged to the appellant. Section 6 of the Standing Order states the following:

(a) Levy.-A levy (the provincial levy) is hereby imposed on each registered producer of an amount per dozen from time to time fixed by the Board, on the number of dozens of eggs marketed by him excluding any eggs, if any, marketed by him in interprovincial and export trade.

(e) Over Quota Levy.—A levy is hereby imposed in the amount of $0.08 (eight cents) per day in respect of each layer kept or maintained by a registered producer or commercial hatching egg producer at any time in excess of the number of layers which may be kept or maintained by that registered producer or commercial hatching egg producer for the period in question. The levy shall be calculated and payable for the entire period for which excess layers are kept or maintained until such date as it is established to the Board’s satisfaction that the excess layers have been disposed of by the registered producer or commercial hatching egg producer.

Under section 7 of the Standing Order, the Board can adjust quota as it deems it appropriate and has also the power to cancel quota if the registered producer does not maintain the number of layers for which he holds a quota for 180 consecutive days.

2. First issue: deductibility of the outlay under paragraph 18(l)(a) of the Act

The first question that has been raised is how the levies imposed by the Board to registered producers for being over quota must be treated. Must these levies be considered as penalties and, if so, do they constitute for the appellant an outlay made for the purpose of producing income from a business as required by paragraph 18( 1 )(a) of the Act?

Counsel for respondent relied on definitions in dictionaries to argue that these levies fill in the definition of "fine” or ’’penalty”. In the Shorter Oxford English Dictionary, these words are defined as follows:

Fine: a certain sum of money imposed as the penalty for an offence;

Penalty: a punishment imposed for breach of law, rule, or contract;

Levy: an assessment,duty, tax, etc.;

Punishment: the act of punishing...; a penalty imposed to ensure the application and enforcement of a law;

In the Black’s Law Dictionary, we find the following definitions:

Fine-di pecuniary punishment imposed by lawful tribunal upon person convicted of crime or misdemeanor.

Penalty—an elastic term with many different shades of meaning; it involves idea of punishment, corporeal or pecuniary, or civil or criminal, although its meaning is generally confined to pecuniary punishment.... A penalty is a sum of money which the law exacts payment of by way of punishment for doing some act which is prohibited or for not doing some act which is required to be done.... A punishment imposed by statute as a consequence of the commission of an offense. Also money recoverable by virtue of a statute imposing a payment by way of punishment.

Counsel for respondent also referred to a decision of the Ontario Court of Appeal, Yarrow v. Frowde, [1934] O.R. 526, [1934] 3 D.L.R. 711,

where the word "penalty" was analyzed at page 537 (D.L.R. 718):

"Penalty" has been defined as "suffering in person or property as a punishment annexed by law or judicial decision to a violation of law" (R. v. Leach (1908), 14 Can. C.C. 375, 17 O.L.R. 643, at page 398 (O.L.R. 664)). Counsel for the plaintiff points out, however, that the word is often used loosely. Sometimes it means no more than handicap. Again, more seriously, a man is said to be "penalized" when he happens through the enforcement of some Act to have suffered a loss; yet the mere fact that the enforcement of an Act results in loss to some person is not proof that the Act is, in the legal sense of the word, penalizing.

Applying these definitions in the context of the legislation and regulations adopted to regulate the marketing of egg production, I do not view the levy imposed by the Board under the authority of paragraph 6(e) of the Standing Order, as a penalty. Indeed, there is a specific section in the B.C. Act dealing with penalties (section 20), and I do not see that these levies are assessed as a punishment imposed by statute as a consequence of the commission of an offence, but rather as an additional cost to the producer in the carrying on of his business. To paraphrase Chief Justice Laskin in Re: Agricultural Products Marketing Act, supra, such expenses levy imposed by provincial legislation upon regulated producers to cover the cost of administering a provincial marketing scheme may be regarded as a "fee for services". In my opinion, this reasoning applies both to the regular levies and the over quota levies imposed under paragraphs 6(a) and 6(e) of the Standing Order. One might also view the over quota levy as a risky alternate cost for the appellant pending the acquisition of a new quota to meet the demand of customers. Indeed, the evidence revealed that when it was assessed, the appellant was in the process of acquiring a new quota. In fact, this was done in 1989. The mere fact that the assessment of levy resulted in a loss to the appellant in the year it was claimed is not, as may be inferred from the decision of the Ontario Court of Appeal in Yarrows v. Frowde, supra, proof that the Regulation (the Standing Order) imposing the levy is, in the legal sense of the word penalizing.

Moreover, even if these levies could be described as penalties, this would not necessarily mean that the levy is not deductible for income tax purposes. It could be easily related to a happening that is really incidental to the business. In the case of Imperial Oil Ltd. v. M.N.R., [1947] C.T.C. 353, 3 D.T.C. 1090, in holding that the payments of damages and costs paid by the taxpayer company (which operated a fleet of oil tankers) to the owners of a sunk vessel (following a collision between one of the taxpayer’s company ship and the sunk vessel) were deductible, Justice Thorson of the Exchequer Court of Canada stated the following at page 366-67 (D.T.C. 1096):

The issue of fact is whether the payment made was in respect of a liability for a happening that was really incidental to the business. In my view, there is no doubt that it was. The undisputed evidence is that the transportation of petroleum and petroleum products by sea was part of the marine operations of the appellant and part of the business from which it earned its income, that the risk of collision between vessels is a normal and ordinary hazard of marine operations generally, and that, while the amount of the appellant’s liability in the present case was unusually large, there was nothing abnormal or unusual about the nature of the collision itself. Negligence on the part of the appellant’s servants in the operation of its vessels, with its consequential liability to pay damages for a collision resulting therefrom, was a normal and ordinary risk of the marine operations part of the appellant’s business and really incidental to it.

In TNT Canada Inc. v. The Queen, [1988] 2 C.T.C. 91, 88 D.T.C. 6334, the Federal Court-Trial Division, had to decide on the deductibility of certain fines paid by the corporate taxpayer under the Customs Act and the Excise Tax Act for various trucking violations. The taxpayer in this case carried on business as a common carrier transporting goods and freight. Cullen J. commented on the state of the jurisprudence as follows at page 99 (D.T.C. 6339):

The cases prior to Day & Ross Ltd. v. R, [1976] C.T.C. 707, 76 D.T.C. 6433, tended to adhere to the view that fines imposed as a result of an infraction of the law would not be regarded as a proper deduction. The basis for this view is found in CIR v. Alex Von Glehn & Co., 12 T.C. 232. In Day & Ross, Dube J. seemed to take a more liberal view of the deductibility of fines under paragraph 18(1 )(a) of the Act. He concluded that the fines paid in respect of violations of provincial highway infractions, such as overloading, lost licence plates, missing mudflaps and misplaced registration documents, were deductible as an expense under paragraph 18(1)(a). Dube J. came to his conclusion on the basis of a "two-part" test (at page 715 (D.T.C. 6438)):

The first determination must be as to whether or not the payment of the fines constituted an outlay made for the purpose of producing income for the plaintiff so as to meet the requirement of the exception to the prohibition of paragraph 12(l)(a). If the determination is affirmative, then the argument of public interest must be met.

The Court found that the fines paid by the taxpayer resulted from the day-to-day operation of its transport business and were paid as a necessary expense.

With respect to the second part of the "test", Dube J. concluded that the fines were not precluded from deductibility on the basis of a "broader principle" known as public policy.

Cullen J. then went on to conclude that the fines were expended for the purpose of gaining income and that their deductibility was not precluded by public policy considerations. With respect to the second part of the test, Cullen J. seemed to allow the deductions due to the relative infrequency of the infractions. In the present case, it was the first time that the appellant was reported to being over quota and as I expressed it above, my understanding of the evidence is that the appellant took a business decision when it operated over quota while trying to buy a new quota. In my opinion, the levy resulted from the day-to-day operation of egg production business and was incurred as a risky but necessary expense. Moreover, I think that the over quota production of eggs is no more outrageously against public policy than was the violation of the provincial highway weight restriction laws as decided in the case of Day & Ross Ltd. v. R, [1976] C.T.C. 707, 76 D.T.C. 6433, or the infraction under the Customs Act and the Excise Tax Act as was the case in TNT Canada Inc., supra. I will also add this comment of Justice Thorson, in the case of Imperial Oil Ltd., supra, page 360 (D.T.C. 1099):

It is no answer to say that an item expenditure is not deductible on the grounds that it was not made primarily to earn income but primarily to satisfy a legal liability.... In a sense, all disbursements are made primarily to satisfy legal liabilities. The fact that a legal liability is being satisfied has, by itself, no bearing on the matter. It is necessary to look behind the payment and enquire whether the liability which made it necessary-and it makes no difference whether such liability was contractual or delictual-was incurred as part of the operation by which the taxpayer earned his income.

Furthermore, the fact that the outlay did not result in income and rather caused a loss in the year it was assessed, does not prevent the deductibility of the amount. As stated above, the levy was assessed and claimed as a deduction in 1988 even though it related to the years 1984 to 1988. In Royal Trust Co. v. M.N.R., [1957] C.T.C. 32, 57 D.T.C. 1055 (Ex. Ct), Justice Thorson in discussing whether it was necessary for an outlay to result in income stated at page 44 (D.T.C. 1062):

The essential limitation in the exception expressed in paragraph 12(l)(a) is that the outlay or expense should have been made by the taxpayer "for the purpose" of gaining or producing income "from the business". It is the purpose of the outlay or expense that is emphasized but the purpose must be that of gaining or producing income "from the business" in which the taxpayer is engaged. If these conditions are met the fact that there may be no resulting income does not prevent the deductibility of the amount of the outlay or expense. Thus, in a case under the Income Tax Act if an outlay or expense is made or incurred by a taxpayer in accordance with the principles of commercial trading or accepted business practice and it is made or incurred for the purpose of gaining or producing income from his business its amount is deductible for income tax purposes.

Although the result as shown in the financial statements has been a loss in 1988, one must not forget the levy definitely did not wipe out the entire profit for the period assessed.

3. Second issue: capital outlay

Finally, I do not see the levy expenditure as bringing into existence an advantage of enduring benefit or as providing an enduring advantage for the trade. The levy on over quota is calculated on a daily basis and in the appellant’s particular case was assessed for five consecutive years. I view such an outlay as a recurrent expense rather than a capital expense made once and for all. It is an outlay that is likely to happen once in a while in the carrying on of the egg production business. Nor do I see the levy expenditure as a payment to preserve a capital asset 1.e., the quota. According to Mr. Whitlock’s testimony there is only a possibility for the producer to lose his licence if he does not pay the levy. In fact, it only happened once in the province that a producer had seen his quota suspended for one year for non-payment of the levy. For these reasons, I conclude that the levy payment is not to be considered on capital account for tax purposes under paragraph 18( 1 )(b) of the Act.

Conclusion

Counsel having conceded that the interest expense and the legal fees would follow the result of the levy expense, the appeal is therefore allowed with costs.

Appeal allowed.