M
J
Bonner:—The
appellant
is
a
company
formed
by
an
amalgamation
which
took
place
in
1977.
It
appeals
from
assessments
of
income
tax
for
the
1972
to
1975
taxation
years
of
one
of
its
predecessor
corporations,
United
Trust
Company
(hereinafter
called
“United”).
In
the
taxation
years
in
question
United
claimed
deductions
under
paragraph
20(1)(b)
of
the
Income
Tax
Act.
The
deductions
were
available
only
if
it
had
made
an
“eligible
capital
expenditure”
within
the
meaning
of
paragraph
14(5)(b)
of
the
Act.
The
primary
position
of
the
appellant
in
these
appeals
was
that
in
1972
it
paid
amounts
totalling
$175,500
to
an
underwriter,
Pitfield,
Mackay,
Ross
&
Company
Limited
(hereinafter
called
“PMR”)
as
a
commission
in
respect
of
the
sale
of
325,000
shares
of
the
capital
stock
of
United
and
that
in
so
doing
it
made
an
eligible
capital
expenditure.
Its
alternative
position
was
that
if
the
payment
was
not
a
commission
then
the
full
amount
of
the
payment
was
deductible
in
computing
1972
income
under
the
then
applicable
provisions
of
paragraph
20(1)(e)
of
the
Income
Tax
Act.
The
Minister’s
position
was
that
no
commission
was
paid,
but
rather
the
payment
was
a
rebate
of
the
purchase
price
paid
by
PMR
for
the
shares,
and
that
therefore
no
deduction
was
available
under
either
of
the
provisions
relied
on
by
the
appellant.
United
carried
on
the
business
of
a
trust
company,
that
is,
it
offered
savings
and
trust
services,
mortgage
loans
and
real
estate
brokerage
services
to
the
public.
In
1972
it
decided
to
issue
325,000
shares
of
its
capital
stock.
One
of
its
objectives
was
to
raise
capital
for
use
in
its
business.
However,
in
addition
it
hoped
to
see
the
shares
widely
distributed
among
members
of
the
public
for
two
reasons.
Firstly,
management
wanted
the
shares
listed
on
the
Montreal
and
Toronto
stock
exchanges
and
the
regulations
of
those
bodies
did
not
permit
listing
unless
board
lots
(100
shares)
were
held
by
a
minimum
of
three
hundred
persons.
Secondly,
it
was
thought
that
shareholders
would
be
inclined
to
do
business
with
the
company
and
thus,
from
the
standpoint
of
management,
the
more
shareholders,
the
better
for
business.
United
entered
into
an
agreement
in
writing
with
PMR.
The
agreement
was
the
subject
of
negotiation
over
a
period
of
time.
When
concluded
it
took
the
form
of
a
letter
of
offer
dated
September
7,
1972,
from
PMR
to
United,
which
offer
was
accepted
on
the
same
day.
The
relevant
part
of
the
letter
read
as
follows:
We
further
understand
that
you
are
willing
to
sell
to
us
the
said
325,000
shares
at
the
price
of
$8
per
share
and
to
pay
to
us
a
commission
of
$0.54
per
share
in
consideration
of
our
subscribing
for
the
said
325,000
shares
and
we
confirm
that
we
have
agreed
to
buy
and
you
have
agreed
to
issue
to
us
at
the
said
price
the
said
325,000
shares
and
that
you
have
agreed
to
pay
to
us
the
said
commission,
the
whole
on
the
terms
and
conditions
set
out
below.
Nowhere
in
the
agreement
was
there
any
attempt
to
impose
any
obligation
on
PMR
to
effect
a
wide
public
distribution
or
indeed
to
resell
the
shares
at
all.
In
response
to
concerns
expressed
by
United,
PMR
wrote
a
letter
on
September
8,
1972,
the
body
of
which
reads
as
follows:
With
respect
to
the
public
offering
of
325,000
shares
of
United
Trust
Company,
we
hereby
confirm
to
you
that
we
shall
endeavour
to
achieve
a
broad
public
distribution
of
the
shares
by
asking
our
Banking
Group
members
to
limit
sales
to
approximately
500
shares
per
purchaser
on
a
best
efforts
basis.
We
also
wish
to
confirm
to
you
that
it
would
be
our
intention
to
limit
institutional
placements
to
approximately
30%
including
the
sale
of
50,000
shares
to
Cemp
Investments
Limited.
The
foregoing,
of
course,
will
be
subject
to
our
judgment
of
market
conditions
as
they
develop
during
the
course
of
the
offering.
The
shares
were,
in
fact,
offered
for
sale
by
PMR
to
the
public.
It
is
quite
plain
that
when
the
September
7
agreement
was
entered
into
both
parties
contemplated
resale
by
PMR
of
the
shares.
It
is
also
plain
that
the
parties
expected
PMR
would
offer
the
shares
to
the
public
at
$8
per
share.
PMR
was
confident,
as
a
result
of
its
“tests”
of
the
market,
which
tests
were
made
before
the
date
on
which
PMR
became
obliged
under
the
September
7
agreement
to
pick
up
the
shares,
that
it
would
be
able
to
resell
the
shares
for
$8
each.
Finally,
it
is
clear
that
PMR
avoided
undertaking
any
legal
Obligation
to
resell.
It
simply
agreed
to
buy
as
principal.
Cheques
were
issued
by
PMR
to
United
for
the
full
“purchase
price”
on
an
$8
per
share
basis.
Cheques
were
issued
by
United
to
PMR
for
“commission”
on
a
54¢
per
share
basis.
No
set-off
was
attempted.
The
witnesses
called
were
unanimous
in
describing
the
payments
made
by
United
to
PMR
as
a
“commission”.
The
documents
too
consistently
describe
the
payments
as
commission.
They
appear
to
use
the
word
commission
in
a
rather
unusual
way.
It
is
commonly
used
to
describe
a
pro
rata
remuneration
for
work
done
as
agent.
Most
witnesses
regarded
the
commission
as
compensation
to
PMR
for
services
rendered
in
distributing
the
shares
to
the
public.
As
the
witness
Turnbull
pointed
out,
the
real
expertise
of
PMR
lay
in
its
ability
to
effect
a
wide
public
distribution.
Such
analysis
disregards
the
fact
that
PMR
bought
as
principal
and
refrained
from
accepting
any
obligation
to
United
to
do
more.
It
is
plain
from
paragraph
14(5)(b)
of
the
Act
that
no
eligible
capital
expense
arises
unless
an
outlay
or
expense
has
been
made
or
incurred.
Similarly,
no
deduction
arises
under
paragraph
20(1)(e)
of
the
Act
unless
an
expense
has
been
incurred.
The
appellant’s
counsel
argued
that
if
the
54¢
charge
was
a
commission,
and
he
submitted
it
was,
then
there
was
an
outlay
of
commission.
While
it
would
seem
that
a
charge
such
as
the
54¢
in
question
here
is
one
which
those
in
the
securities
trade
would
describe
as
a
commission,
it
does
not
follow
that
there
was
an
outlay.
The
54¢
was
merely
an
entry
in
the
computation
of
what
PMR
would
pay
United
for
each
share
on
a
wholesale
purchase.
That
entry
took
the
form
of
a
discount
from
the
anticipated
retail
price.
Such,
in
my
view,
was
the
substance
of
the
transaction,
despite
the
tortured
form
of
the
previously
quoted
passage
from
the
September
7
agreement.
It
cannot
correctly
be
said
that
consideration
can
become
payable
to
a
purchaser
for
the
performance
by
him
of
a
simple
obligation
to
purchase.
The
reasoning
in
the
judgment
of
Lord
Tomlin
in
Australian
Investment
Trust,
Limited
v
Strand
and
Pitt
Street
Properties,
Limited,
[1932]
AC
735,
is
applicable
here.
In
that
case
a
company
entered
an
agreement
with
an
underwriter
whereby
the
latter
agreed
to
“underwrite”
an
issue
of
shares
which
the
company
proposed
to
offer
to
the
public.
The
word
“underwrite”
was
construed
to
mean
agree
to
take
up
by
subscription
those
shares
not
applied
for
by
the
public.
The
take
up
price
was
to
be
the
1
pound
par
value
of
the
shares.
The
underwriter
was
to
receive
a
commission
of
1
shilling
per
share
underwritten.
The
company
was
incorporated
under
a
statute
which
contained
no
express
provision
permitting
the
payment
of
a
commission.
The
contention
that
the
agreement
was
ultra
vires
the
company
as
an
agreement
to
issue
shares
at
a
discount
was
upheld.
The
parties
to
the
litigation
were
apparently
in
agreement
that
an
agreement
by
a
company
to
pay
a
commission
to
a
person
in
consideration
for
his
subscribing
for
a
definite
number
of
shares
would
be
ultra
vires.
At
page
746
of
the
reasons
His
Lordship
explained
why
as
follows:
It
would
in
effect
be
an
arrangement
whereby
he
(the
underwriter)
was
allowed
a
rebate
or
discount
on
the
amount
payable
by
him
for
the
shares
for
which
he
agreed
to
subscribe.
The
position
was
held
to
be
the
same
whether
the
agreement
applied
to
a
specified
number
of
shares
or
to
an
agreement
such
as
that
under
consideration
where
only
the
shares
not
taken
up
by
the
public
were
to
be
taken
by
the
underwriter.
At
page
747
His
Lordship
said:
In
both
cases
the
commission
is
agreed
to
be
paid
to
induce
the
same
thing—namely,
the
undertaking
of
the
obligation
to
subscribe.
No
other
service
than
undertaking
this
obligation
is
in
either
case
rendered
by
the
receiver
of
the
commission.
In
both
cases
he
in
effect
receives
from
the
company
a
discount
or
rebate
upon
the
amount
payable
upon
the
shares
which
he
has
to
take
up.
I
cannot
see
how
it
can
reasonably
be
said
that
an
expense
is
incurred
or
an
outlay
is
made
by
a
vendor
equal
to
a
discount
or
rebate
allowed
from
that
is
only
nominally
a
sale
price.
The
reality
is
that
the
$8
was
the
retail
price
and
that
PMR
was
paying
a
wholesale
price
of
$7.46.
The
appeals
are
therefore
dismissed.
Appeal
dismissed.
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