Economy Carriers LTD v. Minister of National Revenue, [1984] CTC 2210, 84 DTC 1200

Goetz, TCJ:—These are appeals by the appellant with respect to its 1976, 1977 and 1978 taxation years wherein the appellant sought to deduct, from its income, insurance premiums paid in the said taxation years. The respondent disallowed these deductions and assessed tax and charged interest thereon.

Facts

The appellant, Economy Carriers Ltd (the “Company”), is a bulk load petroleum carrier commonly known as “tank haulers” and carried on business from 1960 into and beyond the taxation years involved in these appeals. In 1973 one of their larger customers offered them business to carry petroleum products to the Yukon and also requested that the Company open up offices at Edmonton, Alberta, and Dawson Creek, British Columbia. Obviously, this created a high business potential and at the time of the request in 1973, the Company only had a line of credit of $500,000. The line of credit was increased to $1,600,000, $900,000 of which was used for equipment. The president of the Company, Mr Thomas Fredericks, approached the Royal Bank of Canada for financing, and on December 5, 1975, received a letter which, among other things, stated:

Credit Line:

(1) $300,000 — Loans — Operating — Revolving

(2) $700,000 — Loans — Equipment — Revolving

(3) $600,000 — Loans — Interim

Security: (1) (2) (3)

Form 565, General Assignment of Book Debts registered in Province of Alberta. Valued August 31, 1975 at $323,916.

Form 553, hypothecation of Fixed & Floating Charge Debenture for $1,600,000 including a first Fixed Charge on the land and buildings located at 4086 Ogden Road S E, Calgary, valued at approx $420,000 and on the land and building located in Edmonton costing approx $600,000 with a floating charge on all other assets, subject to prior claims by Roy Marine Leasing Limited, aggregating $420,082 as of August 30, 1975 against specific vehicles. (Fixed charge on Edmonton property to be postponed in favour of 1st mortgage lender when Item (3) repaid).

Form 583, 586, assignment of life insurance on the life of undernoted individuals for stated amounts:

Harvey Bietz	$300,000
Alvin R Bietz	$500,000
Harry Bietz	$500,000
Thomas W Fredericks	$500,000

Insurance policies had been issued in 1974 but were increased to the levels as indicated in paragraph 8 of the notice of appeal which reads as follows:

The insurance was term insurance and the policyholders were all key employees of the company and also shareholders. Paragraph 4 of the notice of appeal states the position of each policyholder:

4. During the 1975, 1976 and 1977 taxation years, the key employees of the Appellant, who all worked full time at their positions, were its shareholders and directors, namely:

KEY KEY EMPLOYEE	POSITION
(a) Mr Harvey Bietz	President
(b) Mr Alvin R Bietz	Vice-President and
	General Manager
(c) Mr Harry Bietz	Vice-President and
	Operations Manager
(d) Mr Thomas W Fredericks	Secretary-Treasurer
	and Comptroller

In cross-examination, Mr Fredericks stated that they could draw up to the $1,600,000 figure but the amount borrowed went up and down and actually the draw down that they made was more than the insurance coverage. Mr Fredericks’ evidence was confirmed by the senior assistant bank manager of the Royal Bank and it was his view that the bank commitment was about three times the book value of the Company and that what he called the key man insurance was necessary for continued prosperity of the Company.

The appellant’s position was simple, namely, that the premiums were outlays made for the purpose of gaining or producing income from the Company’s business and that the premiums on the term insurance represented an expense which was incurred in the course of borrowing money by the Company for the purpose of earning income from the business. The appellant relied on paragraph 18(l)(a) and also on subparagraph 20(l)(e)(ii) of the Income Tax Act, SC 1970-71-72, c 63, as amended which read as follows:

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 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;

20. (1) Notwithstanding paragraphs 18(l)(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:

(e) an expense incurred in the year,

(ii) in the course of borrowing money used by the taxpayer for the purpose of earning income from a business or property (other than money used by the taxpayer for the purpose of acquiring property the income from which would be exempt),

The respondent, on the other hand, alleged that the company had sufficient collateral to cover loans without the necessity of insurance coverage and that the bank could cover its loans by the collateral. The respondent further alleged in his amended reply to notice of appeal:

3. In so assessing the Appellant, the Respondent assumed, inter alia, that:

(c) The amounts claimed as deductions from income were not expenses incurred in the year in the course of borrowing money used for the purpose of gaining or producing income from a business or property;

(d) The amounts claimed as deductions from income were not outlays or expenses made or incurred for the purpose of gaining or producing income from a business or property;

(e) The amounts claimed as deductions from income were outlays or payments on account of capital',

(f) The amounts claimed as deductions from income were not reasonable outlays or expenses in the circumstances',

In assessing the appellant, the respondent relied upon paragraphs 18(l)(a), 18(l)(b), paragraph 20(l)(e) and section 67 of the Act.

Findings

The appellant had been a customer of the Royal Bank of Canada for well over 20 years. Exhibit A-l is a letter from the Bank, dated December 5, 1975, addressed to Economy Carriers Ltd setting out the various terms for the granting of a line of credit of $1,600,000. Trucking companies, basically their equipment, are under conditional sales contracts, the terms of which are rather onerous considering the interest charged by the truck manufacturers. It was certainly open to the Company to obtain a line of credit for operating capital, the purchase of equipment, the purchase of a terminal in Edmonton and land. This was a reasonable and viable approach by the company to effect the purpose of gaining or producing income from its business or property. The insurance was term insurance. Otherwise, if it had been permanent insurance, it would readily be disallowed. See Antoine Guertin Ltée v The Queen, [1981] CTC 351; 81 DTC 5268. With respect to the respondent’s allegations that the insurance premiums were not expenses incurred in the year in the course or borrowing money, I would refer to the case of MNR v Yonge-Eglinton Building Ltd, [1974] CTC 209; 74 DTC 6180, a decision of Thurlow, J of the Federal Court of Appeal, and in particular I refer to what he says at 214 and 6183 respectively:

It would be untenable if it meant that the expense must be incurred in the taxation year of the issuing or selling or borrowing and since it is impossible to know what is included in “around the time” it seems to me to be untenable on that basis as well. What appears to me to be the test is whether the expense, in whatever taxation year it occurs, arose from the issuing or selling or borrowing. It may not always be easy to decide whether an expense has so arisen but it seems to me that the words “in the course of”? in section 1 l(l)(cb) (now section 20( l)(e)(ii)) are not a reference to the time when the expenses are incurred but are used in the sense of “in connection with” or “incidental to” or “arising from” and refer to the process of carrying out or the things which must be undertaken to carry out the issuing or selling or borrowing for or in connection with which the expenses are incurred. In my opinion therefore since the amounts here in question arose from and were incidental to the borrowing of money required to finance the construction of the respondent’s building they fall within section 1 l(l)(cb)(ii) as expenses incurred in the year in the course of borrowing money etc . . .

This case clearly illustrates the deductibility of premiums on insurance during the course of the operations of the taxpayer’s business.

I particularly rely on the decision of my learned colleague Tremblay, J in the case of Côté-Reco Inc v MNR, [1980] CTC 2019; 80 DTC 1012, at 2024 and 1016 respectively:

The phrase “in the course of’ may appear at first sight to have a more limited meaning than ‘‘a l’occasion de”’. In 1974, however, ten years after the Equitable Acceptance Corp Ltd, judgment, in Yonge-Eglinton Building Ltd v MNR, [1974] CTC 209; 74 DTC 6180, the Federal Court of Appeal, per Thurlow, J, explained the meaning of “in the course of”, and appeared to give it a rather broad meaning as [sic] least as broad as “à l’occasion de”:

“It may not always be easy to decide whether an expense has so arisen but it seems to me that the words ‘in the course of in section 11( l)(cb) are not a reference to the time when the expenses are incurred but are used in the sense of ‘in connection with’ or ‘incidental to’ or ‘arising from’ and refer to the process of carrying out or the things which must be undertaken to carry out the issuing or selling or borrowing for or in connection with which the expenses are incurred.”

Being acutely aware of the vicissitudes of the “trucking business”, and the very high cost of commercial financing for the purchase of trucking equipment, the course of action of the appellant was completely reasonable and prudent having regard to the demands of the company’s bank. The appellant did what it had to do to increase its business and its outlays for insurance premiums were a condition prerequisite for the purpose of gaining or producing income from its business or property.

I therefore find that the premiums paid on term insurance as collateral for a line of credit with the Royal Bank of Canada were properly deductible in the course of the appellant’s business and the said premiums were outlays for the purpose of gaining or producing income.

For the above reasons, the appeals are allowed and the matter referred back to the respondent for reconsideration and reassessment.

Appeal allowed.