O’Connor,
J.T.C.C.:—These
appeals
were
heard
in
Vancouver,
British
Columbia
on
January
10
and
11,
1994
pursuant
to
the
General
Procedure
of
this
Court.
Issue
The
years
under
appeal
are
1986
and
1987
and
the
principal
issue
is
whether
certain
expenditures
made
by
the
appellant
qualify
as
expenses
incurred
to
earn
income,
as
maintained
by
the
appellant,
or
are
on
account
of
capital,
as
maintained
by
the
respondent,
acting
through
the
Minister
of
National
Revenue
("Minister").
A
subsidiary
issue
is
one
of
timing;
that
is
can
the
Court
look
at
the
1988
year
(which
is
not
under
appeal)
to
determine
that
amounts
owing
to
the
appellant
ecame
a
bad
debt
in
that
year
thus
permitting
the
appellant
to
carry
portions
of
any
resultant
non-capital
loss
in
1988
back
to
1986
and/or
1987.
Facts
The
facts
are
complex.
In
the
years
in
question
Harbour
Air
Ltd.
("Harbour
Air"),
a
Canadian
company,
was
engaged
principally
in
flying
operations.
Its
three
equal
shareholders
were:
1.
Cliff
Oakley
("Oakley")
2.
James
M.
MacDougall
("MacDougall")
and
3.
Key
Lyn
Holdings
Ltd.
("Key
Lyn”),
a
holding
company
of
a
Keith
N.
Fraser
("Fraser").
The
principal
contributions
of
these
people
to
the
business
were
as
follows:
Oakley
was
involved
almost
exclusively
with
being
a
pilot
and
maintaining
aircraft,
Key
Lyn,
through
Fraser
provided
the
administrative
direction
and
MacDougall
looked
after
scheduling
of
the
aircraft
and
the
pilots.
A
shareholders’
agreement
between
these
three
contained
a
“shotgun
clause”,
which
in
effect
meant
that
if
one
of
the
shareholders
offered
his
shares
to
the
others
and
they
accepted
the
offer
then
in
normal
circumstances
a
sale
would
follow
at
the
price
fixed
in
the
offer;
but
if
the
other
shareholders
rejected
the
offer
within
a
specified
period
of
time,
then
the
shareholder
who
had
made
the
offer
to
sell
had
the
right
to
buy,
again
within
a
certain
period
of
time,
the
shares
of
the
others,
at
the
same
price
as
he
had
offered
to
sell
his
shares.
In
1985
each
of
MacDougall
and
Key
Lyn,
by
separate
offers,
offered
to
sell
to
Oakley
their
total
of
A
of
the
shares
of
Harbour
Air
for
$100,000,
that
is
to
say
$50,000
for
each
of
the
two
offering
shareholders.
This
offer
contained
a
condition,
however,
that
if
the
sales
were
to
proceed
the
offering
shareholders
must
be
released
of
their
guarantees
of
a
$700,000
indebtedness
of
Harbour
Air
to
certain
creditors.
Oakley,
after
taking
the
advice
of
the
appellant
discussed
later,
accepted
the
offers
but
upon
doing
so
the
offering
shareholders
rejected
his
acceptance
and
said
that
they
were
withdrawing
the
offers.
Oakley
felt
that
in
all
of
the
circumstances,
the
offering
shareholders
were
not
entitled
to
reject
his
acceptance
and
he
continued
with
attempting
to
raise
the
$100,000
required
to
purchase
the
shares.
Further,
after
being
unable
to
get
releases
of
the
personal
guarantees
of
the
two
offering
shareholders
from
the
creditors,
Oakley,
again
with
the
assistance
of
the
appellant
as
hereinafter
described,
set
about
to
obtain
replacement
financing
for
an
amount
sufficient
to
pay
off
those
creditors.
Notwithstanding
the
earlier
rejections
of
the
offers
Oakley
and
the
appellant
set
up
a
proposed
closing/tendering
meeting
on
August
20,
1985
at
Harper,
Gray,
Easton,
the
lawyers
Oakley
and
the
appellant
had
retained
for
the
transaction.
These
lawyers
had
advised
that
the
rejections
of
Oakley’s
acceptance
were
invalid
and
that
a
tendering
procedure
was
in
order.
At
the
meeting
the
two
shareholders
persisted
in
their
rejections.
Moreover
at
or
prior
to
the
meeting
they
produced
a
letter
wherein
Harbour
Air
fired
Oakley
as
president
and
general
manager.
Since
these
two
shareholders
were
the
signing
officers
on
cheques
for
the
company
and
although
the
firing
may
not
have
been
legal,
it
was
nevertheless
effectual
as
no
more
payment
cheques
could
be
expected
by
Oakley.
The
lawyers
mentioned
above
advised
Oakley
that
the
actions
of
the
other
two
shareholders
were
preposterous
and
they
recommended
that
Oakley
proceed
to
a
summary
hearing
pursuant
to
Rule
18(a)
of
the
Rules
of
the
Supreme
Court
of
British
Columbia.
This
Rule
provides
for
a
very
quick
hearing
based
essentially
on
affidavit
evidence
and
the
said
lawyers
advised
that
Oakley
would
be
successful
and
the
dispute
would
end
quickly.
The
summary
hearing
was
held
in
October
1985
before
Justice
Paris.
He
found,
contrary
to
the
expected
outcome,
that
there
might
be
a
triable
issue.
Consequently
the
case
went
to
trial
before
the
Supreme
Court
of
British
Columbia
in
the
spring
of
1986
and
by
judgment
rendered
later,
Justice
Bouck
decided
that
the
original
offers
to
sell
were
invalid,
principally
because
they
contained
the
condition
relative
to
releasing
the
two
offering
shareholders
of
their
personal
guarantees.
Again,
on
legal
advice,
Oakley
decided
to
appeal
to
the
Appeal
Court.
The
appeal
was
heard
on
May
6,
1987
and
by
judgment
rendered
June
5,
1987
the
Appeal
Court
held,
for
reasons
not
explained,
that
the
other
two
shareholders
had
the
right
to
purchase
Oakley's
shares
at
a
price
to
be
determined
in
accordance
with
directions
to
be
obtained
from
the
B.C.
Supreme
Court
and
if
they
did
not
do
so,
Oakley
had
the
right
to
purchase
their
shares
at
the
same
price.
This
necessitated
a
further
application
to
the
B.C.
Supreme
Court
as
to
the
process
of
establishing
the
value
of
the
shares
and
by
order
dated
February
3,
1988
the
B.C.
Supreme
Court
appointed
M.M.
McFarlane,
Q.C.
as
arbitrator
to
determine
the
values.
After
hearing
evidence
of
experts
the
arbitrator
ruled
on
April
7,
1988
that
the
value
of
all
of
tne
shares
of
Harbour
Air
was
$480,000.
Eventually
the
two
offering
shareholders
purchased
Oakley’s
shares
and
paid
him
$160,000
(i.e.,
/3
of
$480,000).
It
is
necessary
to
explain
the
structure
of
the
appellant's
operations,
appellant's
involvement
in
all
of
the
foregoing
as
well
as
to
analyze
the
expenses
the
appellant
incurred
in
relation
to
the
court
cases.
As
to
structure,
Bob
Leighton
and
Associates
("Associates")
is
an
umbrella
company
involved
in
consultation
on
a
broad
range
of
business
activities
includ-
ing
valuations
of
assets
or
shares,
marketing
strategies,
systems
set
up
and
organization
and
essentially
any
aspect
of
concern
to
any
business.
Associates
had
at
the
relevant
times
approximately
40
employees.
It
carried
on
its
activities
through
the
personal
holding
companies
of
several
consultants
including
the
appellant.
Associates
would
provide
backup
services
to
the
consultants
such
as
office
space,
secretarial
staff,
courier,
communications
and
the
like.
This
gave
the
actual
consultants
freedom
to
be
in
the
field
attempting
to
get
clients,
visiting
them,
examining
their
operations,
books,
structures,
systems,
etc.
The
appellant
owns
100
per
cent
of
the
common
shares
of
Associates
and,
as
mentioned,
the
appellant
is
owned
100
per
cent
by
Bob
Leighton.
This
illustrates
the
importance
to
Bob
Leighton
of
the
operations
of
the
umbrella
company
(Associates)
and
of
his
own
consulting
company,
the
appellant.
The
billing
procedures
are
best
illustrated
by
the
testimony
of
Mr.
Mueller,
the
accountant
at
Associates:
Q.
What
was
the
relationship
between
all
of
the
associates
and.
.
.Associates
in
terms
of
how
the
funding
was
done
for
disbursements
between
them?
A.
Each
associate,
through
his
own
incorporated
company,
would
invoice.
.
.Associates
for
the
time
spent
by
that
associate
on
his
various
consulting
assignments
plus
any
related
disbursements
that
he
had
made
to.
.
.Associates
on
a
monthly
basis.
Q.
And
then
what
would.
.
.Associates
do
with
respect
to
the
client?
A.
.
.
.Associates
would
then
take
that
invoice
from
the
associate,
add
any
office
time,
telephone
calls,
photocopying,
typing
services
that
had
been
provided
for
each
client,
allocate
the
billings,
and
then
submit
the
billings
to
the
individual
clients.
Q.
What
would
happen
if
the
client
didn't
pay.
.
.Associates?
A.
The
rule
at.
.
.Associates
is
that
the
associate
and
his
incorporated
company
would
only
be
paid
if
the
client
paid.
.
.Associates.
If
the
account
went
bad
the
associate’s
company
would
be
responsible
for
any
of
those
disbursements
that
had
been
made
on
that
specific
consulting
assignment.
and
later
Q.
If
the
disbursements
became
uncollectible,
Leighton
Enterprises
was
responsible
for
those
disbursements?
A.
Yes,
because.
.
.Associates
would
not
reimburse
them,
the
uncollected
disbursements.
As
to
the
appellant's
involvement
with
Oakley,
when
Oakley
received
the
original
offers
he
asked
the
appellant
in
April
of
1985
to
look
at
Harbour
Air
and
advise
whether
Oakley
should
accept
the
offers
and
buy
the
shares
being
offered
or
alternatively
sell
his
own
shares
for
$50,000.
The
appellant's
initial
advice
was
(a)
secure
a
lawyer
to
check
the
validity
of
the
offers;
(b)
have
Harbour
Air's
assets
appraised;
and
(c)
have
Harbour
Air's
books
audited.
A
lawyer
was
retained
(Terry
O'Brien
of
Harper,
Gray,
Easton)
who
advised
that
the
offers
were
indeed
valid.
An
appraisal
was
done
and
arrangements
were
made
with
Pannell,
Kerr
and
Forster
to
conduct
an
audit.
After
preliminary
findings
with
respect
to
the
value
of
the
assets
and
preliminary
results
of
the
audit
were
available,
Bob
Leighton
advised
Oakley
to
accept
the
offers
and
buy
the
shares.
At
this
stage
however,
because
of
Oakley’s
inexperience
in
matters
other
than
flying
and
maintaining
aircraft
and
limited
by
his
grade
8
education,
he
requested
the
appellant
to
assist
in
obtaining
the
required
financing
and
concluding
the
deal.
At
this
stage
the
appellant’s
mandate
obviously
had
expanded
from
one
of
simply
advising
Oakley
that
it
was
a
good
deal
to
buy
the
shares,
to
now
assisting
him
in
implementing
the
entire
transaction.
Several
financial
institutions
were
approached
and
after
considerable
effort,
principally
by
the
appellant,
a
loan
commitment
was
secured
from
Vancouver
City
Financial
("VanCity")
for
$750,000,
$700,000
of
which
was
to
pay
off
the
existing
creditors
with
$59,000
being
destined
as
an
addition
to
the
working
capital
of
Harbour
Air.
Also
a
loan
commitment
for
$100,000
to
pay
for
the
shares
was
obtained
from
Western
Pacific
Bank.
VanCity
wanted
appraisals
of
assets,
an
audit
and
a
business
plan
and
these
were
supplied.
It
was
a
serious
concern
of
VanCity
that
after
Oakley
acquired
all
of
the
shares
the
contributions
to
the
business
previously
provided
by
the
other
two
shareholders
would
cease
and
Oakley
would
not
be
able
to
run
the
company
alone.
It
is
useful
to
quote
from
the
transcript
of
Bob
Leighton's
evidence
as
to
how
he
intended
to
resolve
this
concern
of
VanCity:
Q.
And
what
did
they
suggest
or
did
anyone
suggest
anything?
A.
Well,
I
suggested
to
Cliff,
and
he
agreed,
that
I
could
provide
the
executive
management
for
the
company,
that
Jenny
Clark
and
Beverly
Browning
in
my
office
could
provide
the
administration
supporting
requirements,
and
that
he
could
take
on
the
role
of
the
operations
manager,
and
one
of
his
key
people
that
he
got
on
quite
well
with,
Hammerton,
could
take
on
the
maintenance
function,
and
in
doing
that
we
would
meet
the
requirements
for
VanCity
in
terms
of
an
ongoing
organizational
structure.
Q.
And
to
provide
these
management
services,
who
were
you
intending
to
provide
those?
Were
you
intending
to
provide
those
personally
or
were
they
corporately
being
provided?
How
were
they
being
provided?
A.
As
it
outlines
in
the
plan,
if
you
go
to
the
attachments
of
the
plan,
in
fact
there
is
an
income
and
expense
forecast
titled
"Assumptions",
and
these
were
the
assumptions
upon
which
we
based
the
information
we
were
providing
to
VanCity.
You'll
notice
under
the
management
salaries
that
I
had
agreed
that
I
would
provide
two
days
per
month
at
my
per
diem
rate,
which
I
would
have
billed
through
Leighton
Enterprises.
.
.
.
I
also
agreed
that
I
would
replace
the
two
staff
under
admin
salaries,
replace
the
two
administration
staff
they
had
with
Jenny
Clark
and
Beverly
Browning.
Now,
that
had
a
substantial
advantage
to
our
company
because,
in
effect,
they
could
have
done
the
administrative
work
for
both
companies
without
—
I
was
already
paying
their
salaries
in.
.
Associates,
in
any
event,
so
—
and
Cliff
was
agreeable
to
that.
He
said
he
would
go,
and
of
course
VanCity
thought
that
was
fine
as
well.
Q.
So
who
would
have
billed
Harbour
Air
to
provide
those
management
and
maintenance
salaries?
A.
.
.
.Associates.
In
addition,
the
marketing
salary
and
the
marketing
Commission
were
also
to
be
provided
by
our
company.
Q.
So
that
would
have
been
a
benefit
to
the
companies.
.
.Associates
and
—
A.
That’s
right.
What
I
would
have
done,
and
what
I
planned
to
do,
was
to
bill
myself
through
Leighton
Enterprises
for
my
management
activity.
I
would
have
billed
on
those
billings
Jenny
Clark
and
Beverly
Browning
for
their
administrative
activities,
and
I
would
have
ultimately
billed
another
associate
who
was
going
to
take
on
the
marketing
responsibilities.
I
would
have
billed
his
time
through
as
well.
We
had
also
discussed,
Clifford
and
I,
that
the
company
required
better
systems.
It
required,
in
effect,
a
better
accounting
system
because
the
accounting
system
was
a
mess
that
they
had.
We
were
going
to
put
in
a
computerized
general
ledger
for
them.
We
were
going
to
put
in
computerized
maintenance
systems,
and
we
were
going
to
put
in
flight
scheduling
and
operational
systems
for
him
as
well,
but
that
was
going
to
be
developed
at
a
later
date,
as
this
relationship
unfolded.
The
testimony
also
revealed
that
VanCity
wanted
Bob
Leighton
to
be
president
of
and
have
a
controlling
interest
in
Harbour
Air
and
further
insisted
on
his
personal
guarantee
of
the
$750,000
loan.
The
plan
referred
to
in
Bob
Leighton's
testimony
is
a
business
plan
which
forms
part
of
Tab
30
of
Exhibit
A-2.
It
was
proposed
as
part
of
a
submission
to
VanCity
dated
August
13,
1985.
For
the
year
September
1985
to
August
1986
it
projects
total
estimated
revenues
in
Harbour
Air
of
$2,079,231,
total
expenses
of
$1,822,639
and
profit
of
$256,592.
Under
the
heading
"Expenses"
are
included
$41,004
for
“Admin.
Salaries”,
$11,000
for
“Marketing
Salary”,
$26,499
for
“Marketing
Comm"
and
$50,040
for
“Management
Salaries”.
Mr.
Leighton
analyzed
these
figures
as
follows:
Looking
at
the
expense
side,
the
$41,000
was
what
would
have
been
paid
on
a
continuing
basis
to.
.
.Associates
for
the
services
of
Jenny
Clark
and
Beverly
Browning.
If
you
look
at
the
second
item,
admin
salaries,
that
is
the
total
amount
of
money
that
would
have
been
paid
to
.
.
.
Associates,
and
to
our
extent
it
was
very
valuable
because
we
were
already
paying
their
salaries,
so
that
would
have
been
right
to
our
bottom
line,
if
you
want,
because
we
were
already
paying
administration
salaries
at
.
.
.
Associates.
We
were
simply
going
to
be
using
that
resource
in
this
manner
and
being
able
to
bill
for
it.
The
management
salary
total,
on
that
same
schedule.
Of
that
amount,
the
two
days’
billing
per
month
that
I
would
have
personally
put
in
would
have
amounted
to
about
$16,000.
The
rest
would
have
been
salaries
paid
to
Cliff
Oakley
for
his
role
as
the
operations
manager.
In
addition
to
that,
under
the
marketing
salary
of
$11,000
and
under
the
marketing
commission,
all
of
that
amount
would
have
been
paid
to
.
.
.
Associates,
totals
a
continuing
payment
from
this
company
to
our
company
of
about
$95,000
a
year,
and
we
also
have
the
prospect
of
other
assignments
in
the
computerization.
Tab
30
also
contains
a
chart
showing
the
proposed
employees
or
administrators
of
Harbour
Air.
It
shows
Bob
Leighton
as
"President
and
C.E.O.”,
J.
Clark
as
"Administration
Manager”
and
B.
Browning
as
"Payroll".
There
were
considerable
costs
incurred
in
connection
with
the
complex
litigation
described
above,
principally
legal
and
audit
fees.
Oakley
had
no
money
and
the
appellant
paid
the
bills
on
Oakley's
behalf.
After
some
adjustments
and
discussion
counsel
for
the
appellant
and
the
Minister
agreed
that
the
expenses
incurred
were
$78,185.27
in
1986,
$13,812
in
1987
and
$22,274.83
in
1988.
Issues
in
detail
It
is
the
appellant’s
position
that
the
amounts
spent
by
the
appellant
in
payment
of
the
above
expenses
constituted
expenditures
laid
out
for
the
purpose
of
earning
income
in
the
consulting
business,
that
the
claim
to
recover
them
from
Oakley
became
a
bad
debt
in
1988
causing
a
non-capital
loss
in
1988
and
that
the
appellant
is
entitled
to
carry
said
loss
back
to
1986
and/or
1987
pursuant
to
paragraphs
111(1)(a)
and
(b)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
("the
Act").
The
Minister's
position
is
that
the
amounts
are
to
be
considered
as
a
loan
to
Oakley,
that
when
the
account
went
bad
the
appellant
incurred
a
capital
loss
in
1988
and
that
there
can
be
no
carry
back
of
that
loss
against
income
in
1986
and/or
1987.
The
Minister
also
argues
that
for
the
application
of
paragraph
20(1
)(p)
there
must
be
an
offsetting
item
of
income
in
the
returns
for
1986
and
1987
corresponding
to
the
amount
of
tne
expenses
ultimately
written
off.
On
this
last
point
the
appellant
responds
that
it
refiled
its
1986
and
1987
returns
including
the
amounts
in
question
in
income,
i.e.,
amounts
expended
in
the
consulting
operations
claimable
from
Oakley.
There
was
a
fair
amount
of
confusion
in
this
respect.
It
appears
that
the
original
returns
filed
treated
the
amounts
in
question
as
income
(i.e.,
as
an
amount
due
from
Oakley)
and,
since
that
income
had
not
been
received,
the
amount
thereof
was
included
on
the
balance
sheet
as
an
account
receivable.
Then
it
appears
that
an
accountant,
unauthorized
by
the
appellant,
"reversed"
those
entries
by
some
means
(but
not
by
filing
a
return)
and
their
inclusion
as
income
was
deleted.
The
appellant
has
contended
however
that
the
refiled
returns
for
those
years
include
the
amounts
in
question
as
income.
The
Minister
has
also
submitted
that
the
amount
of
the
expenses
was
unreasonable.
The
principal
provisions
of
the
Income
Tax
Act
are
as
follows:
9(2)
Subject
to
section
31,
a
taxpayer's
loss
for
a
taxation
year
from
a
business
or
property
is
the
amount
of
his
loss,
if
any,
for
the
taxation
year
from
that
source
computed
by
applying
the
provisions
of
this
Act
respecting
computation
of
income
from
that
source
mutatis
mutandis.
18(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;
20(1)
Notwithstanding
paragraphs
18(1)(a),
(b)
and
(h),
in
computing
a
taxpayer’s
income
for
a
taxation
year
from
a
business
or
property,
there
may
be
deducted
such
of
the
following
amounts
as
are
wholly
applicable
to
that
source
or
such
part
of
the
following
amounts
as
may
reasonably
be
regarded
as
applicable
thereto:
(p)
the
aggregate
of
debts
owing
to
the
taxpayer
(i)
that
are
established
by
him
to
have
become
bad
debts
in
the
year,
and
(ii)
that
have
(except
in
the
case
of
debts
arising
from
loans
made
in
the
ordinary
course
of
business
by
a
taxpayer
part
of
whose
ordinary
business
was
the
lending
of
money)
been
included
in
computing
his
income
for
the
year
or
a
previous
year;
67
In
computing
income,
no
deduction
shall
be
made
in
respect
of
an
outlay
or
expense
in
respect
of
which
any
amount
is
otherwise
deductible
under
this
Act,
except
to
the
extent
that
the
outlay
or
expense
was
reasonable
in
the
circumstances.
111(1)
For
the
purpose
of
computing
the
taxable
income
of
a
taxpayer
for
a
taxation
year,
there
may
be
deducted
such
portion
as
he
may
claim
of
(a)
his
non-capital
losses
for
the
seven
taxation
years
immediately
preceding
and
the
three
taxation
years
immediately
following
the
year.
.
.
.
Paragraph
111
(8)(b)
contains
a
complex
definition
of
what
constitutes
a
"noncapital
loss”
but
suffice
it
to
say,
for
purposes
of
this
case,
that
it
means
an
income-
related
loss
as
opposed
to
a
capital
loss.
Analysis
The
Minister’s
principal
position
is
that
the
outlays
in
question
were
made
because
the
appellant’s
intention
in
making
them
was
to
acquire
shares
in
Harbour
Air.
Therefore
they
are
capital
in
nature
and
give
rise
to
a
capital
loss.
The
evidence
with
respect
to
this
position
of
the
Minister
is
as
follows:
(a)
the
letter
of
Associates
to
VanCity
of
August
15,
1985
at
Tab
30,
Exhibit
A-2
with
an
annexed
"Description
of
the
Company"
containing
the
following
statement:
The
refinancing
is
being
guaranteed
by
Leighton
Enterprises
Ltd.
and
Mr.
Robert
D.
Leighton
who
will
subsequently
retain
controlling
interest
in
Harbour
Air
Ltd.
and
Harbour
Air
Holdings
Ltd.
The
financing
is
being
provided
by
Vancouver
City
Savings
Credit
Union.
(b)
An
affidavit
of
Oakley
which
was
annexed
to
the
original
notice
of
objection
which
contained
statements
alluding
to
the
possibility
that
Mr.
Leighton
might
become
a
shareholder
in
Harbour
Air.
(c)
There
is
also
the
testimony
of
the
auditor
for
the
Minister,
Mr.
R.D.
Murray,
that
Bob
Leighton
told
him
at
a
meeting
on
June
6,
1989
that
he
intended
to
acquire
the
shares
but
that
at
a
further
meeting
on
June
9,
1989
Bob
Leighton
told
him
that
that
was
not
his
intention.
(d)
Counsel
for
the
Minister
further
pointed
out
that
the
guarantees
of
the
VanCity
loan
of
$750,000
by
the
appellant
and
Bob
Leighton,
plus
his
involvement
in
obtaining
for
Oakley
the
$100,000
loan
from
Western
Pacific
Bank
somehow
leads
to
the
conclusion
that
the
appellant
was
so
tied
into
the
deal
to
acquire
the
shares
it
must
mean
the
appellant
wanted
the
shares
for
itself.
Counsel
demonstrated
on
cross-examination
of
Bob
Leighton
that
on
discovery
he
stated
he
was
involved
in
the
$100,000
loan,
whereas
at
trial
he
denied
this.
In
other
words
he
changed
his
story
and
perhaps
his
credibility
is
questionable.
Counsel
also
demonstrated
that
the
business
plan
presented
to
VanCity
and
filed
as
an
exhibit
differed
in
some
respects
from
a
plan
shown
at
time
of
audit
to
the
Minister,
the
implication
being
that
there
might
be
some
contrivance
and
once
again
the
question
of
credibility
arises.
Bob
Leighton
stated
that
his
evidence
on
discovery
was
wrong
and
that
the
differences
in
the
plans
arose
from
the
fact
he
had
the
basic
plan
on
a
computer
and
altered
it
from
time
to
time
depending
upon
the
institution
or
person
to
whom
the
plan
was
being
presented.
With
respect
to
the
foregoing:
(a)
As
to
the
letter
of
August
13,
1985
to
VanCity
the
appellant
through
Bob
Leighton
stated
that:
(i)
the
terms
of
the
letter
had
been
dictated
by
VanCity;
(ii)
he
never
intended
to
acquire
shares;
and
(iii)
he
could
exercise
effective
de
facto
control
of
Harbour
Air
by
—
being
President
thereof
with
signing
authority;
—
having
his
own
employees
administer
the
company
to
a
large
degree;
and
—
the
fact
that
if
he
left
Harbour
Air
during
the
ten-year
period
of
his
guarantee
VanCity
would
call
the
loan
and
effectively
put
Harbour
Air
out
of
business.
(b)
Oakley
died
in
1992
and
it
is
impossible
to
obtain
clarification
of
his
affidavit.
It
is
to
be
noted
that
the
affidavit
also
confirms
the
consulting
arrangement
business
between
Oakley
and
the
appellant
and
states
that
had
Oakley
been
able
to
acquire
the
shares
of
Harbour
Air,
the
appellant
would
have
been
reimbursed
for
the
expenses
incurred
and
the
consulting
fees
of
associates
would
have
been
paid.
(c)
What
Mr.
Murray
remembers
is
probably
true
but
his
evidence
must
be
weighed
against
the
sworn
contradictory
testimony
given
at
trial
by
Bob
Leighton
and
Mr.
Mueller.
(d)
Even
if
Bob
Leighton
and
the
appellant
were
guarantors
and
even
if
he
was
instrumental
in
getting
the
$100,000
loan
for
Oakley
this
does
not
lead
to
the
conclusion
that
ne
intended
to
acquire
shares.
The
evidence
in
support
of
the
treatment
of
these
expenses
as
expenses
incurred
to
produce
income
was:
(a)
the
forthright
testimony
of
Bob
Leighton
that
the
appellant
had
no
intention
to
acquire
any
shares
even
though
Oakley
had
suggested
it
from
time
to
time;
(b)
the
supporting
testimony
in
respect
to
(a)
of
the
accountant
for
Associates,
Mr.
Mueller;
and
(c)
the
business
plan
which
shows
that
the
appellant’s
interest
in
Harbour
Air
related
directly
to
the
amount
of
income
it
expected
to
receive
from
Harbour
Air
commending
as
early
as
October
1985,
if
the
summary
hearing
had
produced
a
favourable
result.
The
Court
accepts
the
testimony
of
Bob
Leighton,
supported
by
the
business
pian
(Tab
30,
Exhibit
A-2)
and
concludes
that
the
expenditures
related
to
appellant's
expectations
of
an
income
flow
from
Harbour
Air
for
its
consulting
business
commencing
as
early
as
October
1985.
Moreover
the
Court
considering
the
large
amount
of
income
the
appellant
expected
to
generate,
had
the
court
cases
produced
the
desired
result,
does
not
find
the
amount
of
the
expenses
unreasonable.
In
coming
to
the
conclusion
that
the
expenditures
are
on
income
account,
the
Court
took
into
consideration
the
principles
developed
in
the
case
law
discussed
below.
The
case
law
confirms
that
no
single
test
or
legal
principle
is
useful
in
and
of
itself
in
the
determination
of
the
characterization
of
an
expenditure
as
either
being
on
capital
or
income
account.
In
R.
Bruce
Graham
Ltd.
v.
M.N.R.,
[1986]
1
C.T.C.
2326,
86
D.T.C.
1256
(T.C.C.),
the
Tax
Court
of
Canada
cited
several
authorities
on
the
issue.
At
page
2337
(D.T.C.
1264)
it
was
pointed
out:
In
B.P
Australia
Ltd.,
v.
Commissioner
of
Taxation,
[1966]
A.C.
224,
[1965]
3
All
E.R.
209,
Lord
Pearce
stated,
at
page
264
(All
E.R.
218):
The
solution
to
the
problem
is
not
to
be
found
by
any
rigid
test
or
description.
It
has
to
be
derived
from
many
aspects
of
the
whole
set
of
circumstances
some
of
which
may
point
in
one
direction,
some
in
the
other.
One
consideration
may
point
so
clearly
that
it
dominates
other
and
vaguer
indications
in
the
contrary
direction.
It
is
a
commonsense
appreciation
of
all
the
guiding
features
which
must
provide
the
ultimate
answer.
Although
the
categories
of
capital
and
income
expenditure
are
distinct
and
easily
ascertainable
in
obvious
cases
that
lie
far
from
the
boundary,
the
line
of
distinction
is
often
hard
to
draw
in
border
line
cases;
and
conflicting
considerations
may
produce
a
situation
where
the
answer
turns
on
questions
of
emphasis
and
degree.
Very
recently
Mr.
Justice
Estey,
in
the
reasons
for
judgment
of
the
Supreme
Court
of
Canada
in
Johns-Manville
Canada
Inc.
v.
The
Queen,
[1985]
2
S.C.R.
46,
[1985]
2
C.T.C.
111,
85
D.T.C.
5373,
extensively
reviewed
the
jurisprudence
and
appropriate
principles
of
law
to
be
considered
and
applied
to
the
determination
of
the
classification
of
an
expenditure
as
being
either
expense
or
capital.
On
pages
56-57
(C.T.C.
117-18,
D.T.C.5377)
he
noted
the
pronouncement
of
Lord
Pearce
in
B.P
Australia
Ltd.,
supra,
and
cited
Dixon,
J.
in
Hallstroms
Pty.
Ltd.
v.
Federal
Commissioner
of
Taxation
(1946),
72
C.L.R.
634,
8
A.T.D.
190
(H.C.)
at
page
648
(A.T.D.
196)
wherein
it
was
stated:
[The]
answer
depends
on
what
the
expenditure
is
calculated
to
effect
from
a
ractical
and
business
point
of
view,
rather
than
upon
the
juristic
classification
of
the
egal
rights,
if
any,
secured,
employed
or
exhausted
in
the
process.
At
pages
2337-38
(D.T.C.
1265)
the
Court
added:
Returning
to
the
decision
of
Mr.
Justice
Estey
in
Johns-Manville,
supra,
at
pages
70-71
(C.T.C.
125,
D.T.C.
5358)
he
noted
the
observations
made
by
Lord
Wilberforce
in
Tucker
v.
Granada
Motorway
Services,
[1979]
2
All
E.R.
801,
[1979]
1
W.L.R.
683
(H.L.)
at
page
804
(W.L.R.
686):
It
is
common
in
cases
which
raise
the
question
whether
a
payment
is
to
be
treated
as
a
revenue
or
as
a
Capital
payment
for
indicia
to
point
different
ways.
In
the
end
the
courts
can
do
little
better
than
form
an
opinion
which
way
the
balance
lies.
There
are
a
number
of
tests
which
have
been
stated
in
reported
cases
which
it
is
useful
to
apply,
but
we
have
been
warned
more
than
once
not
to
seek
automatically
to
apply
to
one
case
words
or
formulae
which
have
been
found
useful
in
another.
.
.
.
Nevertheless
reported
cases
are
the
best
tools
that
we
have,
even
if
they
may
sometimes
be
blunt
instruments.
Similarly,
Lord
Reid
in
Regent
Oil
Co.
v.
Inland
Revenue
Commissioners,
[1966]
A.C.
295,
[1965]
3
W.L.R.
636
(H.L.)
stated,
at
page
313
(W.L.R.
645-46):
So
it
is
not
surprising
that
no
one
test
or
principle
or
rule
of
thumb
is
paramount.
The
question
is
ultimately
a
question
of
law
for
the
court,
but
it
is
a
question
which
must
be
answered
in
light
of
all
the
circumstances
which
it
is
reasonable
to
take
into
account,
and
the
weight
which
must
be
given
to
a
particular
circumstance
in
a
particular
case
must
depend
rather
on
common
sense
than
on
strict
application
of
any
single
legal
principle.
The
Minister
also
argues
that
the
Court,
since
the
1988
taxation
year
is
not
before
it,
cannot
rule
on
whether
claims
which
have
become
a
bad
debt
in
1988
and
produced
a
non-capital
loss
in
1988
can
be
carried
back
to
1986
and/or
1987.
On
this
last
issue
it
must
be
remembered
that
the
fact
that
the
claim
became
a
bad
debt
in
1988
has
been
admitted
by
the
Minister.
Also
the
1988
tax
return
is
in
the
record
as
an
exhibit.
I
do
not
believe
that
the
Court,
having
found
that
the
related
expenses
were
on
income
account
and
were
reasonable,
in
deciding
on
the
1986
and/or
1987
years,
which
can
be
affected
by
events
of
1988,
is
precluded
from
looking
at
1988.
The
Court
is
not
''reopening"
the
1988
year
but
is
merely
considering
the
impact
of
events
occurring
in
1988
on
the
1986
and/or
1987
years.
It
is
clear
that
the
Court
does
not
have
before
it
the
1988
taxation
year.
Counsel
for
the
Minister
explains
this
was
the
result
of
a
foul-up
in
the
Minister's
department
in
that
1988
was
not
reassessed
as
was
1986
and
1987.
Consequently
the
1988
return
was
accepted
as
filed,
apparently
giving
the
appellant
the
treatment
it
desired
for
the
expenses
incurred
in
the
1988
year.
The
Court
believes
these
difficulties
should
be
resolved
by
the
reassessment
to
issue
pursuant
to
this
judgment.
In
other
words
if
in
fact
the
appellant
was,
considering
its
overall
income
and
expense
situation
in
1988,
not
obligated
to
take
into
account
in
1988,
the
appellant
is
entitled
to
carry
it
back
to
the
1986
and/or
1987
years.
For
all
of
the
above
reasons
the
appeals
for
the
1986
and
1987
taxation
years
are
allowed
with
costs
and
the
matter
is
referred
back
to
the
Minister
for
reconsideration
and
reassessment
in
accordance
with
these
reasons
for
judgment.
Appeal
allowed.