Her Majesty the Queen v. Sie-Mac Pipeline Contractors Ltd., [1990] 2 CTC 8, 90 DTC 6344

Jerome, A.C.J.:—Thank you, Mr. Shaw. I don't need to hear you in reply, Mr. Cherniawsky. I can’t agree with the Crown's position or the Crown's submission here today. I think that Mr. Shaw was candid enough in closing his argument to refer to some of the difficulties that happen when you start to take these things item by item and get into a piecemeal approach. It can easily lead to an absurdity that, for example, it would be permissible to entertain guests at the lodge in issue here, but not to transport them there. You can't entertain them unless you get them there, so those are the kind of absurdities that can be produced if the approach taken is piecemeal.

What is needed is a decision in principle whether this kind of use of these facilities by a taxpayer is deductible in the same way that similar entertainment of clients takes place in other hotels.

I should hasten to say that the analysis of the Tax Court judge, was quite comprehensive, and I agree with it. I think Judge Brulé analyzed the situation very accurately, including the facts, the appellant's position, and the Minister's position. I don't intend to repeat his analysis. I include page 6 of his judgment, which does two things: First, his reasons for finding that the use in issue here should not be caught by paragraph 18(1)(l). I concur in that. I also concur in the distinction he makes in Jaddco Anderson, which was my decision. The difficulty in Jaddco Anderson was that it was not a transaction at arm's length. The company at one time owned the property, and transferred it to another related company or to one of the directors or something like that. The closeness, the failure to be at arm's length was a big factor in the Jaddco Anderson decision. Judge Brulé has highlighted that quite correctly on page 6 of his judgment.

There are a number of other reasons why I think his conclusion about use here is correct. I am already on record against the deduction of entertainment expense of clients in commercial establishments except commercial establishments which happen to be in the country. That is a distinction which has no basis in law, in fairness or justice.

The Minister here does not question any of the usual difficulties. He doesn't question the amount of these expenses, doesn't question the fact that they are at arm's length, and indeed they are, and doesn't question the fact that they were made in good faith. None of that is present here. So it is a proper expense unless it's caught, technically caught by paragraph 18(1)(1). Look at the meaning of that section. First of all, Judge Brulé has correctly identified that "use" has to mean something more than simply checking into an establishment that provides lodging.

According to subparagraph 18(1)(l)(i), included in disallowable expenses are these: an outlay or expense made for the "use or maintenance” of property, that is a yacht, a camp or a lodge. Can one expenditure be for both use and maintenance at the same time? Use implies using somebody else's property. Maintenance implies caring for your own property. If it's yours, then the dispute should be that the expense claimed for entertainment is used to maintain your own property. If it's not yours, then it can't be for maintenance. So the dispute should be that it's for improper use. And I think the Minister has to pick and choose.

I note that in the Minister's pleadings he doesn't say “use or maintenance” and doesn't say "use" only; he unfortunately says "use and maintenance". This money outlay by this taxpayer for this [sic] accommodation services simply cannot be both at the same time. That's exactly what the Minister has pleaded, so I suppose technically the case of the taxpayer might succeed on that ground alone. That would be regrettably narrow, but as I say, there is every other reason to allow the appeal anyway.

I look also at the word "unless" in this section. The expense will be disallowed, and then there is a condition; "unless the taxpayer made it in the ordinary course of his business of providing the property for hire or reward". Now, that simply cannot be done unless it's the taxpayer's property or unless the taxpayer has acquired control over the property for a period of time; a rent or a lease. So the exception again confirms that the evil contemplated by this subsection is not the commercial use of country properties or fishing lodges instead of downtown hotels, but is related to property which is somehow in the possession of the taxpayer at which people are entertained. Therefore, I do not find that the evil contemplated here is simply the transference of one kind of commercial entertainment for another one. It should be something more than that. It should be something as in Jaddco Anderson even, where it was thought that the company was using it to entertain guests occasionally and writing off expense which should have been its own expense just for the ownership of the company, because there was nothing operated there, it was the taxpayer's own property. That's the kind of evil that appears to be contemplated here.

There would be no justice, no legal basis in principle for permitting this taxpayer to entertain his guests in downtown Edmonton or in Jasper, and not permit it at this facility, unless there is some very clear reason for doing so. If Parliament intends to make that distinction, I again say that it should do so.

For example, subparagraph 18(1)(l)(ii). It says there, membership fees in these kind[s] of clubs—recreational clubs, golf clubs, it doesn't suggest that it's not deductible to take a client for a game of golf at the club and try to deduct the expense if, in fact, it meets all the other conditions. But what it says is that the membership fee is not deductible, the membership fee to belong to the club in the first place. That's a clear distinction. There are reasons for it. There would be no similar justification in my opinion for making the distinction that the Minister seeks to make here, which would simply be that it would be all right for this taxpayer to do this entertaining of these clients at one place, one commercial lodging type operation and not do it here. That would make no sense to me.

Accordingly, I reiterate that, in my opinion, Judge Brulé made the correct analysis, reached the correct conclusion, and this appeal should be dismissed, with costs.

Appeal dismissed.