Andco Anderson Limited v. Minister of National Revenue, [1978] CTC 2244, 78 DTC 1197

The Chairman:—The appeal of Andco Anderson Limited (formerly A E Anderson Limited) is from an assessment in respect of the 1972 taxation year in which the Minister disallowed an amount of $8,000 claimed by the appellant as entertainment expenses incurred for the purpose of earning income.

The issue in this appeal is twofold: (1) whether the expenses Claimed were incurred to produce income, and (2) whether or not the application of subparagraph 18(1)(l)(i) of the Income Tax Act, SC 1970-71-72, c 63, as amended, prohibits the deduction of such entertainment expenses.

The Facts

The facts in this appeal are not in dispute and can be summarized briefly from evidence given by Mr John Delaney, president of the appellant company, and by Mr Alan Boyce, CA, a chartered accountant for the appellant company. Andco Anderson Limited, as I understand it, was. formerly known as A E Anderson Limited which company had, at least at one time, some share relationship with an American firm known as Arthur L Stevens Incorporated. In 1970 a company known as Monck Road Properties Limited was incorporated in Ontario as a holding company and was a subsidiary of Arthur L Stevens Incorporated. Monck Road Properties Limited owned property in Norland near Lindsay, Ontario. These properties included the lake property known as Hedgehog Lake or Crooked Lake Camp which extended into the lake and on which there was a stone building capable of sleeping some 30 persons. There was also another building with a dining room, kitchen and lounge facilities for 30 persons. There was a floating dock, some half dozen boats, fishing gear and water- skiing facilities. Monck Road Properties Limited also operated an aircraft which would bring in luggage and passengers who preferred to fly to the camp rather than cross over the lakes by boat where portages were necessary.

The lodge or camp was used by personnel of both Arthur L Stevens Incorporated and Andco Anderson Limited. During a period of some 8 months during the spring, summer and fall, groups of persons from either company would indicate what periods of time, usually from Friday to Sunday, they proposed using the camp and a schedule was drawn up accordingly. The cost for a weekend was $250 per person which was income to Monck Road Properties Limited (Exhibit A-2). There was no obligation or commitment by either the appellant company or Arthur L Stevens Incorporated to use the camp, but it was available should they desire to do so.

The appellant company was in the business of the construction of steel plants and the building and repairing of blast furnaces. Its principal customers were The Steel Company of Canada (Stelco) and Dofasco who together represented 90% to 95% of the appellant’s business and whose gross sales are alleged to have been $16, 971 in 1972.

From July 28 to July 30, 1972 a group of persons, six of whom were on the appellant company’s managerial staff and eleven of whom were personnel from various companies such as Dofasco, Stelco, etc, used the camp.

From August 18 to August 20, 1972 a similar group made a similar use of the camp.

It was alleged that the appellant company’s personnel invited persons from customer companies with whom they were in especially close and frequent contact during the course of their business transactions. The weekend at the camp facilitated and even promoted business transactions.

The cost to the appellant company for these two weekends was Stated by the appellant to have been $8,000, even though the invoice dated December 31, 1972 shows charges for $10,000 (Exhibit A-1). (The balance of $2,000 was explained as a balance of expenses incurred in another taxation year.)

On the balance of probabilities I am satisfied that the use of the camp and the resulting expenditures incurred were not for the personal use of officers of the appellant company, but were related to the appellant company’s business and constituted entertainment for customers with a view to promoting business and for the purpose of earning income. I am also satisfied that in the light of the appellant company’s volume of business the expenditure of $8,000 can be considered as reasonable.

However, even though the expenses were incurred to earn income the pertinent question is whether, in the circumstances of this appeal, such expenses are deductible.

The pertinent section of the Income Tax Act is subparagraph 18(1)(l)(i) which is a prohibitive section and must be interpreted restrictively. Subparagraph 18(1)(l)(i) reads as follows:

18. (1) General limitations.—In computing the income of a taxpayer from a business or property no deduction* [1] shall be made in respect of

(I) an outlay or expense made or incurred by the taxpayer after 1971,

(i) for the use or maintenance of property that is a yacht, a camp, a lodge or golf course or facility, unless the taxpayer made or incurred the outlay or expense in the ordinary course of his business of providing the property for hire or reward, or

In describing the property on Crooked Lake I have used the term “camp or lodge” because I know of no other word to describe the Crooked Lake facilities. The Income Tax Act does not define the term ‘‘camp or lodge”, nor does it make any distinction between a private lodge or a public lodge, which might otherwise restrict the application of subparagraph 18(1)(l)(i).

In my view the section is clear, and it is equally clear from the evidence that the appellant company did not incur the $8,000 expense in the ordinary course of its business or providing the property for hire or reward.

I conclude that subparagraph 18(1)(l)(i) of the Income Tax Act does apply to the appellant company’s expenditure of $8,000 in 1972 for the use of recreational facilities and bars the appellant from deducting the said amount from its income for that year.

The appeal is therefore dismissed.

Appeal dismissed.