Direct Lumber Company Limited v. Minister of National Revenue, [1981] CTC 2710, 81 DTC 627

John B Goetz:—This is an appeal with respect to an income tax assessment for the appellant’s 1974 taxation year.

The appellant attempted to deduct, from its 1974 taxation year, income in the amount of $13,098 on certain insurance policies set out as follows:

In this regard, at the outset of the hearing, it was agreed by both counsel for the appellant and counsel for the respondent that deduction of the Sun Life policy premium in the sum of $395 not be allowed; that the deduction of the premium for the Maritime Life Policy number 154510 be allowed; that the deduction of the premiums for the Maritime Life policy number 206223 be allowed; leaving in dispute and in issue the deductibility of premiums paid on Maritime Life Policy number 154503.

In assessing the appellant, the respondent relied, inter alia, upon paragraphs 18(1 )(a) and 20(1)(e) and (q) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Mr John Fabry Sr, the sole owner of Direct Lumber Company Limited, was the insured under the Maritime Life policy number 154503 in the amount of $200,000. This policy was issued on February 5, 1973 and was payable to Direct Lumber Company Limited as beneficiary. Direct Lumber Company Limited (hereinafter referred to as “Direct Lumber”) had been using the financial facilities of Aetna Factors Corporation Limited for many years. Mr Fabry says that he took out this policy to safeguard Direct Lumber with respect to moneys owing to Aetna Factors Corporation Limited (hereinafter referred to as “Aetna”) by a company known as JAR Leaseholds with whom Direct Lumber did over 50% of their business. Aetna, at the time of Mr Fabry taking out this insurance policy, insisted that the insurance on the life of John Fabry be assigned from Direct Lumber to Aetna. This was done by formal assignment for collateral security. A letter was filed from Aetna dated February 21, 1973, addressed to the accountants for Direct Lumber which reads as follows: (Exhibit A-15)

AETNA

FACTORS

February 21, 1973

Goldfarb, Shulman & Co.,

3077 Bathurst Street,

TORONTO 19, Ontario.

Attention: Lawrence M. Shulman
Dear Sir:	Re: JAR Leaseholds Limited
	Direct Lumber Company Limited

Further to your letter of February 13, 1973 regarding the subject companies we wish to report that as at October 31, 1972 the following was on file:

Direct Lumber Company: Assignment of life insurance on the life of John

Fabry — $200,000.

JAR Leaseholds: (1) Registered General Assignment of Book Debts — Accounts

receivable — Oct 31/72 — $892,629.46

(2) Personal guarantees given by:

John Fabry

Mrs. Katharina Fabry

Direct Lumber Company Limited.

Yours very truly,

(Signature)

C. Carr

Obviously, Direct Lumber and Fabry Lumber had done business with JAR Leaseholds for years as a major and most important customer.

See Rousseau Metal v MNR, [1979] CTC 2681 ; 79 DTC 467. At 2685 and 470, my learned colleague Guy Tremblay, Esq, CGA stated as follows:

Due to a business association which was the very basis of the decision to guarantee the debt, the sums paid by the appellant to reimburse the debt would therefore be allowed as a deduction in computing the appellant’s income. Furthermore, the capital sums paid by Moto Kometik Inc would not be allowed as a deduction. Inter alia, it did receive the loan without including it in its income. As for the appellant, it did not receive anything, it only assumed the risk of standing as guarantor for the purpose of earning income. In addition, it would not receive the insurance indemnity in the event of Mr Lévesque’s death. Should not the payment of the insurance policy premium be considered in the same way as the payment of the debt? Could it not be said that the payment of the premium is for the guarantor, the collateral security for payment of the debt? The Board holds that it is and believes that the payment of the premium is allowable as a deduction just as the payment of the debt would be.

That leaves the issue to be decided as to whether the premiums in the amount of $8,701 on this policy, are deductible as a legitimate business expense. In that half of the total business of the appellant depended upon the financial viability of JAR Leaseholds Limited, it is not unreasonable to conclude that the steps taken by the appellant were necessary in the ordinary conduct of its business. In Her Majesty The Queen v F H Jones Tobacco Sales Co Ltd, [1973] CTC 784; 73 DTC 5577, Noël, ACJ, made the following statement at 791 and 5581 respectively:

It was in Halstroms Pty Ltd v FTC (8 ATD 190), however, that the Court held, at p 196, that a realistic attitude must be adopted towards deduction of expenses or losses. Indeed, it stated that in such cases the solution “depends on what the expense is calculated to effect from a practical and business point of view, rather than upon a juristic classification of the legal rights, if any, secured, employed or exhausted in the process”.

Further at 792 and 5582 respectively, he said:

It is thus clear that the actions taken by Jones for his company were of a nature that would benefit the latter, at least for a time. Their sole purpose was to increase sales, and hence its profits, and this moreover is what did happen,at least for some time, that is to say until La Société des Tabacs Québec Inc ceased operations.

The appellant acted virtually as guarantor of loans from Aetna to its main customer, JAR Leaseholds Limited and the costs of maintaining such guarantee, in my view, are legitimate business expenses. The premium expense is clearly related to the income earning process of the taxpayer and hence the expense is deductible. See Côté-Reco Inc v MNR, [1980] CTC 2019; 80 DTC 1012. At 2024 and 1016 respectively, my learned colleague Guy Tremblay, CGA, says as follows:

In the Board’s opinion, the payment of insurance policy premiums complies word for word with the condition specified by s 20(1 )(e)(ii), namely that the expense was incurred “dans l’année à l’occasion d’un emprunt contracté par le contribuable et utilise en vue de tirer un revenu d’une entreprise ou de bien . . .”.

It is worth citing the English wording:

(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 . . .

The phrase “in the course of” may appear at first sight to have a more limited meaning than “à l'occasion de”. In 1974, however, ten years after the Equitable Acceptance Corp Ltd judgment in Yonge-Eglinton Building Ltd v MNR, 74 DTC 6180, [1974] CTC 209, 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 to arisen but it seems to me that the words ‘in the course of’ in section 11 (1)(cb) are not a reference in 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.”

The $4,000 advanced to John Fabry on account of his registered retirement savings plan in light of the admission of John S Fabry in his appeal, should be added to his income for 1974. It follows that it is then a legitimate expense of the appellant by way of bonus or remuneration for services rendered, not necessarily qua shareholder but as an employee of the appellant.

The cases cited to me and considered by me are as follows:

Emile Morin v MNR, 26 Tax ABC 161; 61 DTC 161;

Equitable Acceptance Corporation v MNR, [1964] CTC 74; 64 DTC 5045;

MNR v Yonge-Eglinton Building Limited, [1974] CTC 209; 74 DTC 6180;

Côté-Reco Inc v MNR, [1980] CTC 2019; 80 DTC 1012;

Rousseau Metal Inc v MNR [1979] CTC 2681; 79 DTC 467,

DJ MacDonald Sales Limited v MNR, 16 Tax ABC 49; 56 DTC 481;

Heap & Partners (Nfld) Limited v MNR, 42 Tax ABC 278; 66 DTC 772,

L Berman & Co Ltd v MNR, [ 1961 ] CTC 237; 61 DTC 1150;

John W Ramsay v MNR, 26 Tax ABC 193; 61 DTC 191;

William Harold Loughran v MNR, 13 Tax ABC 154; 55 DTC 361;

Joseph Zatzman v MNR, 23 Tax ABC 193; 59 DTC 635;

Massey-Ferguson Limited v Her Majesty The Queen, [1974] CTC 671; 74 DTC 6529;

Eastern Paving Limited v MNR, [1967] Tax ABC 928; 67 DTC 639.

I disallow the Sun Life premium of $325 as a deduction and allow the following deductions of insurance premiums as a business expense:

The amount of $4,000 paid on account of John Fabry’s registered retirement savings plan is allowed as a business expense on the basis of paragraph 20(1 )(q) of the Income Tax Act. The matter is referred back to the Minister for reconsideration and reassessment in computing the appellant’s income for its 1974 taxation year.

Appeal allowed in part.

John B Goetz:—This is an appeal with respect to the appellant’s income tax assessment for its 1975 taxation year.

In assessing the appellant, the respondent relied, inter alia, upon paragraph 18(1 )(a), 18(1 )(b) and 20(1)(c) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

At the outset of the hearing counsel for the appellant and counsel for the respondent agreed that the Sun Life premium in the amount of $321 should not be allowed. It was further agreed that the deduction of premiums on Maritime Life policy #154510 in the amount of $17,986 and the deduction of premiums on Maritime Life policy #206223 in the amount of $6,026 both be allowed. It was further agreed that legal expenses claimed by the appellant in the amount of $850 and the sum of $7,500 on account of legal fees and bank charges should be disallowed. That leaves in issue the deductibility of premiums on Maritime Life policy #154503 in the amount of $9,493 and of premiums on Maritime Life policy #155986 in the amount of $585 to be determined.

Findings

Dealing first with the Maritime Life policy #154503, issued on February 1973, on the life of John Fabry Sr with Direct Lumber Company Limited (hereinafter referred to as “Direct Lumber” or “Direct”) as beneficiary, on the basis of my judgment in the appeal of Direct Lumber Company Limited v MNR, (80-616) for its 1974 taxation year, I allow the deduction of these premiums in the amount of $9,493 as a proper business expense.

That leaves to be determined the deductibility of the premiums on the life of Robert J Klein, under the Maritime Life insurance policy #155986, which was a term policy. The schedule of benefits indicates $500,000 coverage and that policy was issued on February 19, 1975, the applicant being Direct Lumber. The annual premium was $585. Robert Klein had been executive vice-president of Atlantic and Pacific Limited prior to his employment with Direct Lumber. Direct Lumber was the applicant and beneficiary, in the event of Klein’s death. Mr Klein was a key employee during 1975 and onto 1978 when he ceased to be an employee, and at that point in time Direct Lumber stopped paying his insurance premiums. Mr Klein was never a shareholder nor did he have any equity in Direct Lumber. The premium expense was of a recurring nature and the policy was designed to protect Direct Lumber’s loss of such key employee.

Do such payments come within the ambit of the provisions of sections 18 and 20 of the Income Tax Act? Admittedly, Klein was a most valued employee of Direct, his death or cessation of employment with Direct would have had, apparently, a marked effect on Direct’s business. Klein was being treated as a capital asset of Direct, for if he died at any time, shortly, or some time after his employment with Direct, the proceeds of the policy would have passed to the beneficiary, Direct, as replacement for that capital asset. The premiums for insurance on his life were therefore not a deductible business expense.

I disallow the appeal with respect to:

1) Sun Life premium in the amount of $321;

2) Leal fees and bank charges in the amounts of $850 and $7,500;

3) Maritime Life premium in the amount of $585 for policy #155986 on the life of Robert J. Klein.

I allow the appeal with respect to deductions of premiums as a business expense for the following:

1) Maritime Life policy #154503 in the amount of $9,493;

2) Maritime Life policy #154510 in the amount of $17,986;

3) Maritime Life policy #206233 in the amount of $6,026.

The matter is referred back to the Minister for reconsideration and reassess ment in computing the appellant’s income for its 1975 taxation year.

Appeal allowed in part.

John B Goetz:—This is an appeal by the appellant with respect to its 1976 taxation year.

In assessing the appellant, the respondent relied, inter alia, upon paragraphs 18(1 )(a) and 20(1 )(c) and (e) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

At the outset of the hearing, counsel agreed as follows: the premiums in the sum of $321 on the Sun Life policy should not be allowed as being deductible. The appellant conceded that the $31,450 being bank charges and legal expenses, were also not deductible.

I find that the premiums on policy #154503 in the amount of $9,493 are deductible and I disallow the premium on policy #155986 on the life of Robert J. Klein as being deductible on the basis of my reasons for judgment in Direct Lumber Company Limited v MNR, (80-617). I further disallow the deduction of the sum of $31,450 for legal expenses and bank charges.

The appeal is therefore allowed in part and the matter referred back to the respondent for reconsideration and reassessment.

Appeal allowed in part.