N. D. L. Nouvelles Distributrices Ltée v. Minister of National Revenue, [1986] 1 CTC 2153, 86 DTC 1097

Tremblay, T.C.J. [TRANSLATION]:—These appeals were heard on August 29, 1984. The matter was taken under advisement in early January 1985 when the last written pleadings were received.

1. Issue

According to the originating pleadings, the issue is whether in computing his income the appellant is entitled to deduct the sums of $149,826 in 1979, $72,281 in 1980 and $84,340 in 1981 as “deficits on operations abroad/' in short business losses. During the years from 1972 to 1979 the appellant apparently tried to market a recreational device called a "Shuffler-Board" [sic] in England, but without success, hence the said losses which the appellant is claiming under paragraph 111(1 )(a) of the Income Tax Act.

The respondent disallowed the deduction on the ground: that the sums expended were capital outlays within the meaning of paragraph 18(1)(b) of the Act.

2. Burden of Proof

2.01 The burden is on the appellants to show that the respondent's assessments are incorrect. This burden of proof derives not from one particular section of the Act but from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v. M.N.R., [1948] C.T.C. 195; 3 D.T.C. 1182.

2.02 This judgment also held that the assumptions of fact on which the respondent relied in establishing the assessments are also presumed to be true.

These facts presumed by the respondent are set out in paragraph 10 of the replies to the appellant's notices of appeal. This paragraph reads as follows with respect to the 1979 taxation year:

Para. 10 In assessing the appellant for the 1979 taxation year, the respondent took the following facts into account:

(a) The appellant is a business corporation incorporated under the Canada Business Corporations Act, S.C. 1974-75-76, c. 33, as amended; it is involved primarily in the sale and rental of vending machines, and in the sale of products sold in these machines:

(b) In 1972 and the following years, the appellant attempted to market a recreational device known as a “Shuffler-Board” in England;

(c) On October 11, 1974 the appellant incorporated in England a British company called Maredell Ltd., which was to market the “Shuffler-Board” in the United Kingdom;

(d) Subsequently the appellant lent certain sums of money to Maredell Ltd., and to the latter's business manager, Mr. Carl Hayward:

Maredell Ltd.	$60,114.00
Carl Hayward	$34,856.00
	$94,970.00

(e) The appellant was never repaid the above-mentioned sums of money, despite its debtors' obligation to reimburse them;

(f) In computing its net income for the 1979 taxation year, the appellant claimed a deduction for the said amount of $94,970.00 as a “deficit on operations abroad”’;

(g) The above-mentioned sums of money were spent on account of capital, and are capital outlays within the meaning of paragraph 18(1)(b) of the Income Tax Act.

2.03 The general facts assumed by the respondent with respect to 1980 and 1981 are no different from those for 1979. The amounts of the claims for these years are set out in paragraph 7(g) of the reply to the notice of appeal (83-774), which reads as follows:

Para. (g) In computing its taxable income for the 1980 and 1981 taxation years, the appellant also deducted the following amounts as non-capital losses carried forward:

1980	$ 72,291,00
1981	$ 84,340.00
	$156,631.00

3. Facts

3.01 The facts described in paragraphs 1 to 43 of the appellant's written argument are substantially admitted by the respondent in his argument except as regards paragraphs 31, 32 and 33. I shall first quote paragraphs 1 to 43.

1. N.D.L.’s main activity is, and always has been, the sale and rental of vending machines, in particular hot beverage vending machines, as well as the sale of the ingredients which these vending machines produce for the public.

2. In 1972, one year after it was incorporated, N.D.L. was invited to exhibit its vending machines at a trade fair in Hanover, Germany.

3. At the same time as N.D.L. was exhibiting its own products at this fair in Hanover, in réponse to a request by the Canadian Export Development Corporation, N.D.L. exhibited a prototype of a product that was being developed by another company.

4. This product being developed was called a “Shuffle-Board” and the company that was developing it was International Shuffler-Board Inc. (hereinafter “International”).

5. International was then still in the early stages of being organized and did not yet have the organization to allow it to participate in the Hanover fair on its own.

6. N.D.L. and International were totally unrelated companies; N.D.L. and its shareholders did not hold any shares in International either directly or indirectly or through related persons and International and its shareholders did not hold any shares in N.D.L. either directly or indirectly or through related persons; International's promoter and the designer of the particular Shuffler-Board model in question was a certain Cal Hayward, who had no connection with N.D.L. or N.D.L.’s shareholders.

7. The Shuffler-Board was very successful at the Hanover fair, but owing to International’s organizational infancy, neither N.D.L. nor International could profit from this success.

8. Later N.D.L. was contacted by an individual living in England, a Mr. Bloor, who wished to exhibit the Shuffler-Board at another fair, this time in England, in Liverpool; it was N.D.L. and not International that was contacted by this individual because International did not yet have any organization and N.D.L. had been in charge of exhibiting the Shuffler-Board in Hanover.

9. Hoping to profit from the Shuffler-Board's popularity, N.D.L. made the necessary arrangements to have the Shuffler-Board exhibited in Liverpool, where it was as successful as it had been in Hanover.

10. An order was received from Bloor, following the Liverpool exhibition, and N.D.L. felt it would be profitable to become an intermediary, as a manufacturing agent, between International, which did not have any sales organization in the circumstances, and the future purchasers; N.D.L. saw a possibility of receiving an income, either from commissions or otherwise, for the role it was going to play as an intermediary.

11. International then went bankrupt, however, but its promoter, Cal Hayward, succeeded in convincing N.D.L. to continue promoting Shuffler-Boards by stressing the size of the English market.

12. Together with Cal Hayward, N.D.L. arranged to have the Shuffler-Board manufactured by an independent manufacturer.

13. In the meantime, Bloor was doing extraordinary promotional work with the Shuffler-Board prototype which had been supplied to him for the Liverpool exhibition, with the result that the demand for Shuffler-Boards was becoming solidly established.

14. The strategy for marketing the Shuffler-Boards in England developed by Bloor, Carl Hayward and N.D.L. at that time was as follows:

(a) The Shuffler-Boards were purchased by an operator;

(b) This operator placed these Shuffler-Boards in pubs, with the owner’s agreement, of course, so that the patrons could play on them;

(c) In order to use the Shuffler-Boards, the pubs’ patrons had to put coins into the machine to activate it;

(d) The operator would come from time to time to collect the coins put into

the machine and would give the owner of the pub a certain percentage.

15. It was Bloor’s intention to act as an operator; after a certain length of time, however, and even before Shuffler-Boards had been delivered to him, he decided not to go ahead with this plan; however, he immediately found someone else to replace him, by the name of John Tatum.

16. When John Tatum took over from Bloor, he founded a company called Marnhill Ltd., to which he had Shuffler-Boards delivered.

17. In accordance with the marketing system explained earlier, these Shuffler- Boards were placed in various pubs and Marnhill Ltd. began collecting the coins deposited in the machines and distributing the commissions payable to the publicans.

18. After a certain length of time, however, it became obvious that Marnhill Ltd.’s efforts were not as successful as hoped and N.D.L. sent Cal Hayward to England to try to get things going.

19. Cal Hayward concluded and convinced N.D.L. that Harnhill Ltd. as run by John Tatum was not able to develop and continue developing the market for the Shuffler-Boards; Marnhill Ltd.’s business was a secondary business for John Tatum, and being a developing one, it required a less orthodox work schedule than the one to which John Tatum was accustomed in his principal business; for example, it was necessary to have people available to service the Shuffler-Boards after regular working hours and on weekends.

20. John Tatum was persuaded to transfer the shares in Marnhill Ltd. to someone else, Simon Davie, and under the latter’s direction the demand for Shuffler- Boards rebounded and new orders were received and filled.

21. In the meantime, Cal Hayward, who had stayed in England to help promote the Shuffler-Boards, got in touch, through Canada House in London, which, it should be mentioned in passing was involved in developing the export of Canadian products to England, with the management of one of the major English breweries, Watney’s, who expressed serious interest in using the Shuffler-Boards for promotional purposes.

22. The importance of the interest shown by Watney’s Brewery lies in the fact that in England the vast majority of the pubs are owned by breweries like Watney’s, which owned 8,000 pubs at the time of the contact with Cal Hayward, and it was Watney’s intention to install Shuffler-Boards in its pubs and mount a publicity Campaign around this fact.

23. The plan proposed by Watney’s and developed in co-operation with Cal Hayward involved the organization of tournaments and the setting up of leagues, both regional and national, with the possibility of international activities with other countries in Europe.

24. There was only one problem: the development proposed by Watney's could not take place if Simon Davie remained in charge of Marnhill Ltd.; Simon Davie's personality was not proving suitable for doing business with the special world of pubs.

25. Since it was a commercial policy of Watney's, and of the other breweries, not to own any equipment other than the equipment used for serving beer that is found in a pub, but rather to lease it or allow it to be installed, for compensation, it was therefore necessary to find someone else to replace Simon Davie.

26. Since at the time it was important to take the best and quickest action possible to take advantage of the opportunity offered by Watney’s, since it was necessary to replace Simon Davie and there was no one who was able to do so at the time despite the efforts that had been made to find someone and since it had already happened twice that the previously developed marketing strategy had not achieved the degree of success hoped for when entrusted to third parties, it was decided by N.D.L.’s board of directors to form a company in England of which N.D.L. would be a shareholder with Cal Hayward, and this led to the establishment of Maredell Ltd.

27. Maredell Ltd. then purchased Marnhill Ltd.’s assets, consisting primarily of the Shuffler-Boards previously ordered and delivered, as well as its liabilities, including the accounts payable by Marnhill Ltd. to N.D.L. for the Shuffler-Boards purchased.

28. Maredell Ltd. was formed, as the witnesses called by N.D.L., including the person who was the chairman of N.D.L.’s board of directors at the time of these events, explained, because N.D.L. through its board of directors felt that it was stuck, that it could not do anything else and that this was the only way both to save the accounts payable to N.D.L. in connection with the Shuffler-Boards that had been sold so far, and to take advantage of the opportunity offered by Watney's.

29. At the time Maredell Ltd. was formed, N.D.L. did not have the financial means or human resources to operate a business of the type Maredell Ltd. was going to operate in England, 3,000 miles away; all the receipts Maredell Ltd. was going to gather would be liquid, owing to the nature of its activities, and it was important that constant control be exercised; obviously N.D.L. could not exercise adequate control in England from Canada.

30. Furthermore, in order to finance the number of Shuffler-Boards that would be required for the development project with Watney's, N.D.L. attempted to obtain export credits; the fact that Maredell Ltd. was controlled by Canadians disqualified N.D.L.’s sales to Maredell Ltd. for purposes of these credits.

31. For all these reasons N.D.L.’s involvement in Maredell Ltd. could only be temporary, until a capable and interested purchaser was found to buy N.D.L.’s interests in Maredell Ltd., and in the circumstances this had to be done as quickly as possible.

32. In the meantime, having Maredell Ltd.'s business well established would make it easier to sell N.D.L.’s shares in Maredell Ltd.

33. Throughout this maze of events, however, N.D.L.’s intention remained the same: to make profits by selling Shuffler-Boards; it was never N.D.L.’s intention to operate Shuffler-Boards in England, or to draw dividends as a shareholder in Maredell Ltd.

34. Maredell Ltd. was formed in November 1974 with Cal Hayward being the key person who was to make the company a success; during February 1975, while he was working on developing the European Shuffler-Board league, Cal Hayward died of a heart attack in a taxi in Spain, at the age of 37.

35. Subsequently, with the help of Canada House, which offered its services, efforts were made to find a replacement for Cal Hayward, in the hope that the replacement might also purchase the shares in Maredell Ltd.

36. A replacement was found, but he turned out to be dishonest, and subsequently the other persons interested did not meet the requirements, N.D.L. having become more demanding as a result of its earlier experiences.

37. N.D.L.’s involvement in Shuffler-Boards ended during its fiscal year that ended on May 31, 1979.

38. The amounts in dispute are $114,970 described as advances to Maredell Ltd. and $34,856 described as advances to Cal Hayward, for a total of $149,826.00.

39. The sum of $114,970 described as advances to Maredell Ltd. is the sum of amounts which N.D.L. in fact remitted to Maredell Ltd. between the latter’s incorporation and the time N.D.L. decided to end its involvement with Shuffler-Boards

40. This money was used by Maredell Ltd. to pay the expenses incurred in its operations as a Shuffler-Board operator.

41. The $34,856 is also the sum of amounts that were remitted by N.D.L. to Cal Hayward when the latter was working on promoting Shuffler-Boards, from which N.D.L. would ultimately profit.

42. It was during the fiscal year ended on May 31, 1979 that the "advances” appeared as expenses.

43. In the financial statements of May 31, 1979, the amounts thus paid to Cal Hayward and to Maredell Ltd. form part of what was called “deficit on operations abroad”; what prior to May 31, 1979 had been regarded as advances to Cal Hayward and to Maredell Ltd. was thus regarded as a deductible expense in the financial statements of May 31, 1979.

3.02 With regard to the appellant’s paragraphs 31, 32 and 33 cited above, the respondent referred to the following facts introduced in evidence on pages 2 and 3 of his argument.

With respect to paragraphs 31, 32 and 33, the evidence seems to show that N.D.L. did not intend to keep its shares in Maredell Ltd., or to draw any dividends. It appears, however, that N.D.L. always intended to pursue its sales of Shuffler-Boards in the United Kingdom, and thereby to realize long-term profits. In cross-examination, Mr. Marcel Breault stated in this regard that there were approximately 60,000 pubs in the United Kingdom, and that with Shuffier-Boards in 10 per cent of the pubs there was a potential market for 6,000 of these machines. The witness seemed to admit that it would have taken 5 or 6 years to sell 6,000 Shuffler-Boards, in other words, that approximately 1,000 machines would be sold each year. Shuffler-Boards were sold at the time for $1,650 Canadian each.

The evidence also showed that Carl Hayward was not a shareholder of N.D.L. and that the latter was only to pay him commissions. N.D.L. was not operating a money lending business at the time, and no interest had been stipulated on the sums of money in question. Finally, these sums of money were never repaid to N.D.L., despite the obligation of Maredell Ltd. and Carl Hayward to repay them.

In view of these facts, it is important to determine whether paragraph 18(1)(b) of the Income Tax Act should be applied in this case. We share the appellant’s opinion that this paragraph 18(1)(b) is identical to paragraph 12(1)(b) of the old Income Tax Act. The case law respecting the old paragraph 12(1 )(b) is therefore applicable in this case.

3.03 It should be noted that the respondent has already allowed the appellant a net capital loss of $74,913, or half the sum of $149,826, as appears in the revised table of net capital losses to be carried forward filed as Exhibit 1-1, p. 105. It should be remembered, however, that a net capital loss is deductible only from a taxable capital gain. Since the appellant did not realize any taxable capital gains, the sum of $74,913 did not result in any deductions in 1979, 1980, 1981 or subsequently.

4, Act, Case law, Analysis

4.01 Act

The principal provisions of the Income Tax Act involved in this case are sections 3, 9, 18(1)(a), 18(1)(b), 20(1)(b), 20(1)(p), 38(b), 39(1)(b), 111(1)(a), 111 (1)(b) and 248(1). They will be cited during the analysis where necessary.

4.02 Case Law

The case law to which the Court was referred is as follows:

1. M.N.R. v Algoma Central Railway, [1968] S.C.R. 447; [1968] C.T.C. 161; 68 D.T.C. 5096;

2. The Queen v. F. H. Jones Tobacco Sales Co. Ltd., [1973] C.T.C. 784; 73 D.T.C. 5577;

3. The Queen v. R. Lavigueur, [1973] C.T.C. 773; 73 D.T.C. 5538;

4. M.N.R. v. Henry J. Freud, [1969] S.C.R. 75; [1968] C.T.C. 438; 68 D.T.C. 5279;

5. Sydney John Becker v. The Queen, [1983] C.T.C. 11; 83 D.T.C. 5032;

6. Paco Corporation v. The Queen, [1980] C.T.C. 409; 80 D.T.C. 6215;

7. Associated Investors of Canada Limited v. M.N.R., [1967] C.T.C. 138; 67 D.T.C. 5096;

8. The Queen v. H. Griffiths Co. Ltd., [1976] C.T.C. 454; 76 D.T.C. 6261;

9. The Queen v. Dr. Eugène Lalande and Dr. H. Watelle, [1983] C.T.C.311; 83 D.T.C. 5351;

10. Stewart & Morrison Ltd v. M.N.R., [1974] S.C.R. 477; [1972] C.T.C. 73; 72 D.T.C. 6049.

4.03. Analysis

4.03.1 Should the advances made to Maredell Ltd. and to Cal Hayward be regarded as an expense incurred for the purpose of gaining income within the meaning of paragraph 18(1)(a) of the Act as argued by the appellant or as a Capital outlay within the meaning of 18(1)(b) of the Act as argued by the respondent?

The difference between these two types of expense is not in practice always easy to determine, as was emphasized by the Supreme Court in Algoma Central Railway, at 162 (D.T.C. 5097)

(No single test)

Parliament did not define the expressions “outlay . . . of capital” or “payment on account of capital.” There being no statutory criterion, the application or nonapplication of these expressions to any particular expenditures must depend upon the facts of the particular case. We do not think that any single test applies in making that determination and agree with the view expressed in a recent decision of the Privy Council, B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia, [1966] A.C. 224, by Lord Pearce. In referring to the matter of determining whether an expenditure was of a capital or an income nature, he said, at p. 264:

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.

4.03.2 Appellant’s argument

Relying on various judicial decisions, the appellant based his argument on the following principles:

1. In determining whether an expense is capital in nature, one cannot use a rigid or predetermined test and must take into account several factors that may have led to the expense (Algoma Central Railway).

2. In making such a determination it is necessary to adopt the viewpoint of a businessman and rely on ordinary commercial principles and business practices (F. H. Jones Tobacco Sales Co. Ltd.; Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (8 A.T.D.L. 190); Associated Investors of Canada Ltd.).

3. A capital outlay contributes to the acquisition of an asset or a permanent advantage or to the creation of a stable structure for doing business (British Insulated and Helsby Cables Ltd. v. Atherton, [1926] A.C. 205).

4. In certain cases non-repayable loans or guarantees exercised and paid can be regarded as expenses incurred for the purpose of gaining or producing income (Scott, [1963] S.C.R. 223; Mac-Innes, [1963] S.C.R. 299; Car- lett, [1967] S.C.R. 280).

5. One of the factors that will be taken into consideration in the case of a loan or a guarantee will be the fact the loan has been made or the guarantee given for the purpose of having the borrower contribute to the production of income from the lender's current operations [Henry Freud].

4.03.3 Respondent's general argument

Relying on various judicial decisions as well, the respondent for his part based his argument on the following considerations:

(i) losses on loan debts sustained by persons not operating money lending businesses are normally capital in nature, except in exceptional circumstances: M.N.R. v. Freud, supra, 443 (D.T.C. 5282).

(ii) The immediate purpose of the loans to Maredell Ltd was promotion of the Shuffler-Boards, and their ultimate purpose was the obtaining of long-term income, namely income from the sale of Shuffler-Boards in the United Kingdom. This was to be a new source of income for a business that had specialized until then in the sale and rental of vending machines.

(iii) There is nothing unusual or exceptional in the appellant’s situation. It financed a subsidiary and lost its money: Stewart & Morrison Ltd. v. M.N.R., [1972] C.T.C. 73, 72 D.T.C. 6049, cited in M.N.R. v. H. Griffiths Co. Ltd., supra, at 458 (72 D.T.C. 6263).

4.03.4 The case relied on by the appellant which seems to be closest to the present case, according to the respondent himself, is Paco Corporation.

The facts can be summarized as follows. The Paco company made and sold machinery and equipment used in the production of concrete blocks. It was decided to explore the European market. Paco then formed another company in which it held 60 per cent of the shares and the French partners 40 per cent. This new company AFCOREX SA (France), built a plant near Paris to demonstrate the machinery and equipment. Paco was to provide funds. It incurred losses. The Minister of National Revenue refused to recognize that these losses were deductible because Paco had made an investment through shares in the French company.

The Federal Court found in Paco's favour. The basis of its reasoning is as follows: C.T.C. p. 411, D.T.C. p. 4216.

It would appear at first glance that this is likely to be an investment of a lasting nature in view of the large sum involved, the fact that the transaction relates to the purchase of another company's shares, and the initial tax return assigning these losses to capital outlays.

However, what is important is the substance of the transaction, the overriding intent of the taxpayer.

The Court then summarized and commented on several decisions, to which the parties in the present case themselves referred. We shall cite the following comments from pages C.T.C. 411 and 412, and D.T.C. 4216 and 4217.

In Algoma Central Railway v. M.N.R., a decision of the Exchequer Court, affirmed by the Supreme Court of Canada, it was held that outlays made by this railway company to obtain geological surveys for the purpose of increasing traffic on its line were income-related expenses. What the company had “in mind” was obtaining information to place at the disposal of potential customers. If these expenditures were incurred for the purpose of producing income, they are "current expenses".

In another decision by the same Court in the same year, 1967, Associated Investors of Canada Limited v. M.N.R., Jackett, P. also held that loans advanced to plaintiff’s employees had been so advanced for the purpose of earning income, and to enable the latter to have funds available during the period when they were Waiting on their commissions. Such loans were therefore an integral part of the company's current operations.

In Olympia Floor and Wall Tile (Quebec) Limited v. M.N.R. the same judge held in 1970 that gifts to charitable organizations made largely, if not entirely, in order to increase sales were income-related expenses since they were really a form of promotional expense.

However, the Supreme Court of Canada held in Stewart & Morrison Ltd. v. M.N.R. that loans advanced by the Canadian company to its American subsidiary did not represent current expenses, but were expenses on capital account, and that the resulting losses were on capital account. However, it should be noted that the Canadian company held all the shares of its American branch and that the purpose of creating the American company was specifically in order to produce income.

In The Queen v. Roméo Lavigueur, the taxpayer loaned money to his tenants to enable them to continue leasing his apartments. One of these loans was not repaid and in 1973 the Federal Court held that this loss was an outlay incurred for the purpose of earning income, and so deductible for that reason. The judge emphasized that the loans were "apparently an integral part of the profit-making activities of the business’.

In 1973 Noel, A.C.J. of the Federal Court observed, in The Queen v. E. H. Jones Tobacco Sales Co. Ltd., that the Court must consider the situation from a businessman's point of view, and not dwell on technicalities. The loss of $115,000 from guaranteeing a loan for an important customer resulted from a transaction entered into for “commercial reasons". He went on to say, at C.T.C. 790 [D.T.C. 5581]:

For some years, however, our courts have been inclined to accept certain expenses or losses as deductible, considering not so much the legal aspect of the transaction, but rather the practical and commercial aspects.

In M.N.R. v. Henry J. Freud, the Supreme Court of Canada held in 1968 that the amounts spent by the taxpayer on developing a prototype sports cart to interest potential customers should be regarded as an income-related expenditure and not an expenditure on capital account. The project was intended from the outset as an investment for the purpose of producing income. Even if the expenditure was a loan, it was not necessarily an investment. It is clear that a loan made by someone who is not in the lending business is ordinarily regarded as an investment, but the circumstances may be “unusual and exceptional".

4.03.5 The respondent also referred to and cited H. Griffiths Co. Ltd.

In that case the taxpayer had guaranteed loans made to a subsidiary called Hartevill Sheet Metal (1967), Ltd. This subsidiary was to provide the defendant with a long-term supply of sheet metal, at very competitive prices. Such an arrangement would have allowed H. Griffiths Co. Ltd. in turn to increase its income. The Federal Court rejected the taxpayer's argument.

Dubé, J. referred to Stewart & Morrison Limited, [1974] S.C.R. 477, where the Supreme Court of Canada held that money provided by the parent company to an American subsidiary that was masterminded through a bank loan in a lost cause was a Capital outlay and not deductible. Judson, J. of the Supreme Court said that the Court was not concerned about what might have been the result if the taxpayer had decided to open its own branch in New York . . . It financed a subsidiary and lots its money.

4.03.6 The issue is whether the purpose of all the appellant’s activities in this case and the advances made was to create a structure which would provide the appellant with a new source of income, as the respondent argued, or whether the said loans and advances were made to Marnhill Ltd. first and then to Maredell Ltd. and to Cal Hayward in order to have these persons contribute to producing income for the appellant, as the latter maintained.

4.03.7 All these activities began first as services rendered to International Shuffler-Board Inc. in 1972 at the trade fair in Hanover, Germany (subparagraphs 3 to 7 of 3.01). They continued in England with Bloor and then John Tatum and his company Marnhill Ltd. (subparagraphs 16 to 19 of 3.01). Then it was Simon Davie, a new shareholder of Marnhill (subparagraph 20 of 3.01) and later Cal Hayward and Maredell Ltd, the latter company being the owner of Marnhill's shares (subparagraphs 21 to 30 of 3.01). Finally, another agent, the dishonest one whose services had to be terminated, and that was the end of the activities (subparagraph 36 of 3.01).

4.03.8 From the outset of the activities in England with Bloor and Marnhill Ltd., the appellant saw the possibility of receiving income, either from commissions or otherwise, for the role it was going to play as an intermediary (subparagraph 10 of 3.01).

The formation of Maredell Ltd. and the subsequent purchase of Marn- hill's shares by Maredell Ltd. were necessary since this was the only way of both saving the accounts owing to N.D.L. for the Shuffler-Boards that had been sold up until then and taking advantage of the opportunity offered by Watney's with its 8,000 pubs (subparagraphs 27 and 28 of 3.01).

Import credits were refused by the English government owing to the Canadian control (subparagraph 30 of 3.01) of Maredell Ltd. Attempts to find a British purchaser for the shares were unsuccessful.

4.03.9 There was also evidence to the effect that the appellant would not manufacture the Shuffler-Boards after International’s bankruptcy. An independent manufacturer took over the manufacturing (subparagraphs 11 and 12 of 3.01).

4.03.10 From all the above facts the Court finds that the primary purpose of the appellant’s activities in England was to obtain commission or other income and that the purpose of making the advances or loans was not in itself to obtain interest income. Through force of circumstance the appellant was obliged, in order to save the accounts owing following its advances and loans, to form Maredell Ltd., whose shares it sought in vain to sell. It seems clear that the primary purpose of all these operations was not to organize a subsidiary which would have operated by itself and for itself and from which the appellant could have benefited as a result, which would have involved the creation of a stable and permanent commercial structure.

The Court concludes that these advances or loans must be regarded as an integral part of the process of producing income which would have been taxable. Consequently these advances and loans must be accepted as deductible in case of loss.

5. Conclusion

The appeal is allowed and the matter referred back to the respondent for reassessment in accordance with the above reasons.

Appeal allowed.