Walsh,
J:—This
case
was
heard
on
common
evidence
with
eleven
other
cases
bearing
Court
Nos
T-4291-74,
Sigmund
J
Vaile
v
Her
Majesty
the
Queen,
T-4258-74,
Ralph
O
Howie
v
Her
Majesty
the
Queen,
T-4259-74,
Frank
A
Rush
v
Her
Majesty
the
Queen,
T-4260-74,
James
M
Farley
v
Her
Majesty
the
Queen,
T-4261-74,
William
P
Rogers
v
Her
Majesty
the
Queen,
T-4262-74,
Robert
W
Macaulay
v
Her
Majesty
the
Queen,
T-4263-74,
Kenneth
E
Howie
v
Her
Majesty
the
Queen,
T-4264-74,
Keith
Munro
Gibson
v
Her
Majesty
the
Queen,
T-4265-74,
Donald
Lilly
v
Her
Majesty
the
Queen,
T-4266-74,
Ian
W
Outerbridge
v
Her
Majesty
the
Queen,
and
T-4267-74,
V
R
E
Perry
v
Her
Majesty
the
Queen,
pursuant
to
an
order
issued
on
October
10,
1975.
The
issue
arises
out
of
Notices
of
Objection
made
by
the
plaintiffs
in
each
case
to
reassessments
made
of
their
income
tax
for
the
1971
taxation
year.
The
grounds
for
the
objection
are
set
out
by
plaintiff
Lawrence
H
Mandel
in
his
Notice
of
Objection
dated
January
3,
1974
to
the
reassessment
of
his
taxation
made
on
October
19,
1973,
which
reads
as
follows:
On
or
about
December
23,
1971,
I,
Lawrence
H
Mandel,
became
a
limited
partner
in
a
limited
partnership
Known
as
and
registered
as
One
Flag
Under
Ontario
Investments
Limited
&
Film
Associates
(“the
partnership’’)
for
the
purpose
of
investing
in
and
acquiring
the
ownership
of
a
film
called
“Mahoney’s
Estate”.
The
acquisition
of
the
said
film
by
the
partnership
occurred
on
or
about
December
23,
1971.
I
would
submit
therefore
that
pursuant
to
Section
11(1)(a)
of
the
Pre-1972
Income
Tax
Act
(Canada)
and
Section
1100(1)(a)(xv)
of
the
Income
Tax
Act
Regulations
of
the
Pre-1972
Income
Tax
Act
(Canada)
that
I
was
entitled
as
a
partner
in
the
partnership
to
capital
cost
allowance
of
60%
of
the
aggregate
of
the
cash
down
payment
and
promissory
note
attributable
to
my
partnership
interest
and
with
respect
to
the
purchase
of
the
film
by
the
partnership.
Pursuant
to
Paragraph
165(3)(b)
of
the
post-1972
Income
Tax
Act
(Canada)
I
wish
to
appeal
immediately
to
the
Federal
Court
and
I
hereby
waive
reconsideration
of
the
reassessment
and
would
request
the
consent
of
the
Minister
of
National
Revenue
to
same.
In
the
other
eleven
cases
similar
reassessments
were
made
followed
by
similar
Notices
of
Objection,
but
the
amounts
involved
are
not
identical
since
the
contributions
of
each
of
the
parties
to
the
limited
partnership
was
different,
and
of
course
the
personal
incomes
of
each
of
the
parties
from
other
sources
also
differed.
It
is
common
ground
however
that
once
the
legal
issue
involved
has
been
determined
by
final
judgment
rendered
in
this
case,
corrections
of
the
assessments
can
be
made,
if
same
becomes
necessary,
by
applying
the
same
principle
to
the
other
eleven
cases.*
In
the
amended
Statement
of
Defence
to
the
Notice
of
Objection
defendant
contends
that
in
filing
his
return
of
income
for
the
1971
taxation
year
plaintiff
claimed
as
a
deduction
in
computing
his
income
a
loss
on
his
partnership
investment
in
“‘Mahoney’s
Estate”
in
the
amount
of
$14,264.96,
which
loss
consisted
solely
of
capital
cost
allowance
claimed
by
him.
In
reassessing
plaintiff
the
Minister
of
National
Revenue
disallowed
a
portion
of
the
said
loss
in
the
amount
of
$9,522.56.
In
so
reassessing
plaintiff
the
Minister
concluded
that
the
capital
cost
of
the
interest
in
the
film
“Mahoney’s
Estate”
to
the
limited
partnership
was
$150,000
(being
the
total
of
the
partners’
cash
contributions
to
the
limited
partnership)
of
which
plaintiff’s
contribution
was
$7,904,
that
the
limited
partnership
during
the
1971
taxation
year
was
not
engaged
directly
or
otherwise
in
the
motion
picture
business
or
in
any
other
business,
that
the
film
“Mahoney’s
Estate”
was
not
acquired
by
the
partnership
in
the
1971
taxation
year,
nor
was
any
interest
in
it
acquired
that
year,
and
if
an
interest
was
acquired
in
the
film
the
interest
is
merely
a
licence
to
distribute
same.
The
Minister
further
contends
that
if
the
film
“Mahoney’s
Estate”
or
an
interest
in
it
was
acquired
by
the
partnership
it
was
not
acquired
for
the
purpose
of
gaining
or
producing
income
nor
was
the
film
used
at
any
time
during
the
1971
taxation
year
by
the
partnership
for
this
purpose,
that
the
capital
cost
to
the
partnership
of
the
film
was
not
in
excess
of
$150,000
and
it
did
not
acquire
the
film
or
any
interest
therein
and
that
plaintiff’s
share
of
the
losses
of
the
partnership
was
limited
to
his
capital
contribution
in
the
amount
of
$7,904.
The
Minister
further
contends
that
the
purported
acquisition
of
the
film
was
a
sham
transaction
undertaken
solely
to
avoid
tax
on
the
professional
and
other
income
of
plaintiff
and
for
no
legitimate
business
purpose.
Alternatively
the
Minister
pleads
that
if
the
film
“Mahoney’s
Estate”
was
acquired
by
the
partnership
for
the
purpose
of
gaining
or
producing
income,
the
1971
taxation
year
of
the
limited
partnership
was
less
than
12
months
and
any
such
income
would
be
income
from
a
business
so
that
the
deduction
of
capital
cost
allowance
by
the
plaintiff
would
be
limited
by
the
provisions
of
Regulations
1100(3)
and
1104
of
the
Regulations
to
the
Income
Tax
Act.
The
Minister
relies
inter
alia
upon
sections
3,
4,
paragraphs
11(1)(a),
12(1)(a)
and
subsection
137(1)
of
the
Income
Tax
Act,
RSC
1952
as
amended
prior
to
SC
1970-71-72,
c
63
and
Regulations
1100,
1102
and
1104
thereto.
If
the
film
was
not
acquired
for
the
purpose
of
gaining
or
producing
income,
as
the
Minister
contends,
then
he
states
that
by
virtue
of
Regulation
1102(1
)(c)
't
does
not
come
within
one
of
the
classes
of
property
for
which
a
deduction
may
be
taken
under
paragraph
11(1)(a)
of
the
Income
Tax
Act,
and
that
plaintiff
in
any
event
is
not
entitled
to
deduct
capita!
cost
allowance
with
respect
to
the
film
in
excess
of
that
allowed
by
the
Minister
of
National
Revenue
as
the
deduction
thereof
would
unduly
or
artificially
reduce
plaintiff’s
income.
A
book
of
documents
was
produced
by
consent
of
the
parties
as
well
as
additional
documents
arising
out
of
the
discovery
which
were
produced
from
time
to
time
during
the
evidence
of
various
witnesses.
lt
was
agreed
that
the
discoveries
taken
in
one
case
would
apply
to
all
the
others.
It
is
not
necessary
for
the
purpose
of
these
proceedings
to
analyze
in
detail
the
very
complex
series
of
agreements
relating
to
the
production
of
the
film
“Mahoney’s
Estate”
which
were
entered
into
by
various
parties
before
plaintiff
and
his
eleven
associates
all
of
whom,
with
one
exception,
were
members
of
the
same
law
firm
in
Toronto,
the
sole
exception
being
a
doctor,
entered
into
the
picture.
It
is
sufficient
to
say
that
as
of
September
14,
1971
an
agreement
was
entered
into
between
Topaz
Productions
Limited,
Niagara
Television
Limited,
Robert
Lawrence
Productions
(Canada)
Limited,
and
John
T
Ross,
who
was
to
be
the
executive
producer
of
the
film
“Mahoney's
Estate”,
which
was
to
be
produced
for
a
budget
estimated
at
$653,000,
by
virtue
of
which
it
was
stated
that
Alexis
Kanner
should
play
the
role
of
Mahoney,
that
he
was
also
the
co-writer
of
the
screenplay
and
the
picture,
that
Topaz
sold
25%
of
iis
rights,
title
and
interest
in
the
screenplay
and
picture
to
Niagara,
retaining
75%
ownership,
that
Topaz
as
producer
would
commence
photography
on
or
about
September
27,
1971
so
as
to
ensure
the
completion
of
the
filming
by
December
31,
1971,
that
of
the
compensation
to
be
paid
to
Topaz
for
the
production
of
the
picture
$20,000
was
to
be
deferred
and
it
was
to
receive
25%
of
the
net
profits
for
the
picture.
Of
the
compensation
to
be
paid
to
Robert
Lawrence
Productions,
$15,000
was
deferred
and
it
was
to
receive
8%
of
the
net
profits.
Niagara
advanced
Topaz
$125,000
towards
the
production
repayable
out
of
revenues.
Robert
Lawrence
Productions
was
responsible
for
arranging
the
financing
of
any
costs
of
production
in
excess
of
$375,000
exclusive
of
deferred
costs.
When
the
picture
was
completed
an
audit
was
to
be
made
by
Deloitte,
Haskins
&
Sells,
Chartered
Accountants,
to
verify
and
determine
the
total
production
costs
on
instructions
from
Topaz
which
was
required
to
also
furnish
a
copy
to
Niagara
and
Robert
Lawrence
Productions.
The
net
profits
in
excess
of
the
expenses
as
established
by
the
auditors
were
to
be
divided
in
the
proportion
of
20%
to
the
Canadian
Film
Development
Corporation,
22%
to
Niagara,
8%
to
Robert
Lawrence
Productions,
25%
to
Topaz,
7%
to
Harvey
Hart,
1.5%
to
Maud
Adams
and
1.5%
to
Sam
Waterston
with
the
remaining
15%
to
such
persons
as
might
be
jointly
designated
by
Topaz
and
Robert
Lawrence
Productions
and
in
default
of
such
designation,
equally
between
these
two
corporations.
By
an
earlier
agreement
on
July
8,
1971
Harvey
Hart
was
engaged
as
director
of
the
film.
By
agreement
dated
August
20,
1971
Alexis
Kanner
was
engaged
as
an
actor
to
play
the
part
of
Mahoney.
Kanner
had
assigned
to
Topaz
Productions
Limited
(of
which
he
was
president)
all
his
rights
in
the
draft
screenplay
which
he
had
co-authored
into
a
shooting
script.
By
agreement
dated
September
14,
1971,
the
same
date
as
the
main
agreement
between
the
various
parties,
the
Canadian
Film
Development
Corporation
agreed
with
Topaz
Productions
Limited
and
Niagara
Television
Limited
as
owners,
Topaz
Productions
Limited
as
the
producer
and
John
T
Ross
as
the
executive
producer
to
advance
$250,000
towards
the
production
of
the
film
of
which
$5,000
had
already
been
advanced.
In
return
for
this
it
was
to
receive
20%
of
the
net
profits
of
the
film
as
stated
above.
By
agreement
dated
August
31,
1971
between
Topaz
Productions
Limited
and
Niagara
Television
Limited
referred
to
as
the
licensors
and
International
Film
Distributors
Limited
referred
to
as
the
distributors,
the
distributors
agreed
to
the
distribution
of
the
film
on
a
percentage
basis
of
gross
receipts
and
on
December
9,
1971
the
Bank
of
Montreal
loaned
$100,000
in
consideration
of
a
214%
participation
in
the
net
profits,
the
rate
of
Interest
to
be
242%
over
the
bank’s
prime
rate,
repayment
to
commence
approximately
three
months
after
completion
of
production.
On
December
22,
1971
the
Toronto
law
firm
of
Thomson,
Rogers
of
which
plaintiff
and
all
the
other
plaintiffs
save
one
are
members
wrote
Topaz
Productions
and
Niagara
Television
Limited
confirming
that
$150,000
had
been
assembled
in
order
to
purchase
100%
ownership
of
the
film
"Mahoney’s
Estate’’
to
be
advanced
by
December
31,
1971
on
condition
that
Niagara
would
convert
the
$125,000
that
was
already
invested
in
the
production
under
the
agreement
of
September
14,
1971
to
an
advance
bearing
no
interest
repayable
on
the
same
terms
as
the
advance
of
$250,000
made
by
the
Canadian
Film
Development
Corporation.
The
balance
of
the
purchase
price
was
to
be
paid
by
the
assumption
by
the
purchasers
who
were
to
be
formed
into
a
limited
partnership
with
a
company
to
be
incorporated
as
the
general
partner
and
all
the
investors
to
be
limited
partners,
of
all
the
obligations
of
the
producer
for
payment
or
repayment
Including
the
moneys
advanced
by
the
Canadian
Film
Development
Corporation
and
by
Niagara
and
the
moneys
agreed
to
be
paid
by
the
producer
under
all
agreements,
contracts
and
arrangements
in
existence
or
made
thereafter
for
the
purpose
of
completing
the
film.
The
producer
was
to
arrange
financing
to
the
extent
of
$100,000
with
a
Canadian
chartered
bank
(this
was
apparently
the
loan
which
had
been
arranged
with
the
Bank
of
Montreal)
and
the
total
purchase
price
was
to
be
the
cost
of
production
as
determined
by
the
producers’
auditors,
Messrs
Deloitte,
Haskins
&
Sells.
The
$150,000
paid
as
the
cash
portion
of
the
purchase
price
was
to
be
eventually
refunded
pari
passu
and
pro
rata
with
the
Canadian
Film
Development
Corporation
for
its
advance
of
$250,000
and
Niagara
for
its
advance
of
$125,000,
the
limited
partnership
to
receive
1214%
of
the
net
profits
of
the
film.
On
December
30,
1971
these
terms
were
incorporated
into
an
agreement
between
Topaz
Productions,
Niagara
Television
Limited,
Canadian
Film
Development
Corporation,
Robert
Lawrence
Productions
(Canada)
Limited,
John
T
Ross,
and
One
Flag
Under
Ontario
Investments
Limited
&
Film
Associates,
acting
by
its
general
partner
One
Flag
Under
Ontario
Investments
Limited.
As
a
result
of
this
agreement
the
15%
of
the
net
profits
which,
under
the
production
agreement
of
September
14,
1971
was
to
be
paid
to
such
persons
as
might
be
jointly
designated
by
Topaz
and
Robert
Lawrence
Productions
was
now
distributed
in
the
proportion
of
12.5%
to
the
purchasers
One
Flag
Under
Ontario
Investments
Limited
&
Film
Associates,
and
2.5%
to
the
bank,
the
percentages
of
the
other
parties
to
the
original
agreement
remaining
unchanged.
Thomson,
Rogers
were
paid
$15,000
forthwith
by
Topaz
in
consideration
of
their
services
in
procuring
the
purchase
by
the
owner
of
the
film.
As
of
December
31,
1971
the
cost
of
the
film
had
come
to
$577,892
as
established
by
the
auditors,
although
the
payment
of
some
portions
of
this
amount
was
deferred.
On
December
30,
1971
the
partnership
One
Flag
Under
Ontario
Investments
Limited
&
Film
Associates
was
duly
registered
as
a
partnership
commencing
business
on
December
23,
1971.
The
audited
statement
showed
in
addition
to
the
investment
in
“Mahoney’s
Estate”
amounting
to
$577,892,
an
item
referred
to
as
deferred
costs
of
film
production
in
the
amount
of
$179,050,
and
an
advance
to
production
company
of
$93,539.
The
deferred
costs
of
film
production
is
shown
as
both
an
asset
and
a
liability
and
the
accompanying
notes
explain
that
the
deferred
costs
represent
costs
incurred
on
a
contingent
basis
and
liabilities
to
be
settled
only
out
of
the
proceeds
of
distribution.
Another
note
states
that
under
the
terms
of
the
agreement
the
limited
partnership
assumed
all
liabilities
associated
with
the
production
including
obligations
to
repay
amounts
advanced
by
Canadian
Film
Development
Corporation,
Niagara
Television
Limited
and
other
creditors,
shown
as
the
bank
in
the
amount
of
$100,000
of
which
$50,000
had
been
provided
to
December
31,
1971,
Niagara
in
the
amount
$125,000,
Canadian
Film
Development
Corporation
in
the
amount
of
$250,000
of
which
$246,580
had
been
advanced
to
December
31,
1971,
and
the
partnership
in
the
amount
of
$150,000.
Reference
was
also
made
to
the
fact
that
Niagara
had
agreed
to
advance
any
amount
required
to
complete
the
film
in
excess
of
the
amount
of
$625,000
with
the
repayment
of
any
amount
so
advanced
to
be
an
obligation
of
the
partnership
but
that
no
such
amounts
had
been
so
advanced
as
of
December
31,
1971.
Reference
is
also
made
to
amounts
totalling
$54,850
to
various
persons
participating
in
the
production
as
“preferred
deferred”
creditors.
Their
names
and
the
amounts
due
to
them
appear
in
the
purchase
agreement
of
December
30,
1971.
This
amount
of
$54,850
together
with
a
reference
to
other
deferred
production
costs
totalling
$124,200,
seems
to
form
the
total
of
$179,050
shown
as
deferred
costs
of
film
production
in
the
balance
sheet.
Certain
agreements
although
made
after
the
1971
taxation
year
may
have
some
bearing
on
the
decision
of
the
matter.
An
agreement
dated
February
1,
1973
between
Canadian
Film
Development
Corporation,
Amaho
Limited
referred
to
as
the
assignee,
Topaz
Productions
Limited,
Niagara
Television
Limited,
Robert
Lawrence
Productions
Limited,
John
T
Ross,
and
One
Flag
Under
Ontario
Investments
Limited
&
Film
Associates
and
Alexis
Kanner,
sets
out
that
Niagara
provided
financing
of
the
film
in
the
amount
of
$125,000
and
paid
a
further
sum
of
approximately
$10,000
in
connection
with
the
completion
of
it.
It
assigns
all
its
rights,
save
for
the
$10,000,
to
Amaho
Limited,
the
assignee,
and
in
consideration
of
$1
the
Canadian
Film
Development
Corporation
assigns
any
interest
which
it
had
to
recoupment
of
moneys
advanced
by
it
out
of
a
share
of
the
profits
the
film
made,
and
the
parties
release
the
corporation
from
any
demands
or
claims
for
the
balance
of
its
$250,000
commitment
which
it
had
not
yet
paid
(which
was
only
$3,420).
On
February
11,
1974
an
agreement
was
entered
into
between
Topaz
Productions
Limited
and
British
Lion
Films
Limited
which
sets
forth
that
principal
photography
in
the
film
has
been
completed
but
that
additional
finance
is
required
to
complete
production
and
deliver
same
ready
for
exhibition
which
Lion
has
agreed
to
provide
in
return
for
the
acquisition
of
distribution
rights
tn
the
film
and
media
throughout
the
world.
The
agreement
is
a
lengthy
and
complex
one
containing
what
are
said
to
be
the
standard
distribution
clauses.
Before
dealing
with
the
evidence
of
the
accounting
experts
it
would
be
best
to
deal
with
the
evidence
of
the
witnesses
with
respect
to
the
prospects
of
the
film
eventually
producing
revenue
and
with
respect
to
reasons
for
the
delay
in
its
completion
and
distribution.
Mr
Victor
Perry,
one
of
the
plaintiffs,
testified
that
at
the
time
of
the
purchase
by
them
of
“Mahoney’s
Estate”
the
filming
of
it
had
been
completed.
Mr
Kanner
wanted
to
cut
it
to
his
own
satisfaction,
Mr
Hart
having
already
done
so
in
a
manner
not
approved
by
Mr
Kanner
who
was
the
producer,
part-author,
and
star,
whereas
Mr
Hart
was
the
director.
There
was
friction
between
them.
When
British
Lion
came
into
the
picture
subsequently
it
was
their
intention
to
add
background
music.
Mr
Nathan
Taylor
who
is
also
a
lawyer
but
not
one
of
the
plaintiffs
and
is
an
expert
in
the
film
industry,
being
a
member
of
the
Advisory
Group
of
the
Canadian
Film
Development
Corporation
testified
as
an
expert
witness
his
affidavit
being
taken
as
read.
He
has
been
engaged
in
the
film
industry
since
about.
1924
when
he
became
secretary
of
the
Motion
Picture
Theatre
Owners
of
Ontario,
has
operated
theatres
and
was
president
of
International
Film
Distributors,
as
well
as
having
financed
feature
film
productions,
built
studios,
and
has
also
been
involved
in
television.
He
testified
that
as
of
1971
a
regular
and
acceptable
method
of
financing
a
production
was
to
have
money
advanced
to
defray
the
costs
on
the
basis
that
such
money
would
be
repaid
out
of
the
earnings
of
the
film.
In
his
view
“Mahoney’s
Estate”,
with
Alexis
Kanner
as
producer
and
star,
and
co-stars
Sam
Waterston,
Maud
Adams
and
Diana
Leblanc,
together
with
Robert
Lawrence
Productions
(Canada)
Limited
with
John
T
Ross
as
executive
producer
and
Harvey
Hart
as
director
provided
all
the
elements
for
a
successful
motion
picture.
His
company,
International
Film
Distributors
had
sufficient
confidence
in
it
to
make
a
deferment
of
studio
rental
which
would
approximate
$20,000,
the
film
being
produced
in
its
studios.
He
also
believes
that
Mr
Ross
would
not
have
gone
into
it
as
executive
producer
without
feeling
confident
of
the
success
of
the
film
and
that
the
distribution
agreement
eventually
entered
into
with
British
Lion
Films
Limited,
one
of
the
major
distributors
in
the
United
Kingdom,
significantly
improves
the
chances
of
its
financial
success.
The
fact
that
it
invested
£70,000
sterling
in
1964
in
the
film
indicates
to
him
that
they
must
have
considered
it
had
great
potential.
On
cross-examination
he
conceded
that
the
five
years
it
took
to
complete
the
film
was
exceptionally
long.
He
stated
in
general
in
deciding
whether
to
invest
in
a
film
one
looks
first
at
what
he
calls
a
“handle”
that
is
to
say
either
a
pre-sold
property
like
a
play
or
a
book,
or
a
weil
known
cast
or
some
special
“gimmick”
as
well
as
a
good
script.
‘‘Mahoney’s
Estate”
had
a
good
cast,
director
and
script.
He
conceded
that
the
present
plaintiffs
are
something
like
“angels”
for
stage
productions
and
that
there
is
a
tax
advantage
in
having
a
large
cost
to
use
as
a
capital
cost
allowance
base.
Michael
Spencer,
the
executive
director
of
the
Canadian
Film
Development
Corporation,
who
previously
had
been
with
the
National
Film
Board
as
a
producer
and
director
of
planning
and
before
that
with
the
Canadian
Army
Film
Unit
testified
that
by
the
agreement
of
February
1,
1973
the
Corporation
withdrew
from
“Mahoney’s
Estate”.
He
had
seen
the
edited
material
in
about
November
1972
and
concluded
that
the
film
might
never
be
finished
in
a
manner
to
have
any
potential
for
distribution.
As
a
result
he
recommended
to
the
Corporation
that
they
withdraw.
He
felt
that
the
editing
of
the
film
had
taken
an
extraordinarily
long
time
and
although
the
Corporation
had
advanced
all
the
money
they
had
undertaken
to
with
the
exception
of
some
$3,400
he
nevertheless
felt
that
even
this
small
saving
could
be
used
to
better
advantage
elsewhere.
He
understood
that
there
had
been
unresolvable
artistic
differences
between
the
producer,
director
and
principal
actor
and
in
his
view
the
film
which
in
its
original
concept
was
an
amusing
one
had
become
a
boring
lengthy
one.
He
stated
that
the
Canadian
Film
Development
Corporation
has
backed
188
films
from
April
1,
1968
to
March
31,
1976,
and
has
got
some
money
back
from
40
or
50
of
them
and
all
its
money
back
in
only
10.
In
the
case
of
the
well
known
film
“Duddy
Kravitz”
all
their
money
was
recovered
plus
a
10%
profit.
In
another
film
which
cost
only
$150,000
they
got
back
their
investment
plus
an
additional
125%.
The
only
film
which
the
Corporation
has
abandoned
after
an
initial
investment
is
the
subject
film
“Mahoney’s
Estate”.
He
said
that
the
film
was
supposed
to
be
fully
completed
by
January-February
of
1972
and
that
the
delay
from
then
until
November
had
disturbed
him.
He
is
aware
that
there
had
been
a
camera
problem
which
led
to
an
insurance
claim
in
1972,
some
film
being
damaged
which
might
have
involved
some
reshooting.
It
is
his
understanding
that
Mr
Hart,
the
director,
made
the
first
cuts
but
that
the
actual
director
Kanner
and
the
producer
were
not
satisfied.
Don
Owen
who
has
worked
in
film
business
for
20
years
being
a
writer,
director
and
producer
for
some
15
years,
having
turned
out
4
feature
films
and
some
30
documentaries,
testified
as
an
expert,
his
report
being
taken
as
read.
It
is
his
opinion
that
“Mahoney’s
Estate”
is
without
narrative,
drive
or
shape,
that
the
behaviour
of
the
central
character
is
inconsistent
and
unmotivated,
the
story
confused
and
boring
and
totally
lacking
in
commercial
or
artistic
value.
He
stated
that
he
sometimes
reads
scripts
and
gives
advice.
He
knows
and
respects
Kanner
as
an
actor
but
doubts
his
maturity
and
experience
to
act
as
a
producer.
He
admitted
however
in
testifying
that
Kanner,
Adams,
Waterston,
and
Robert
Lawrence
Productions
operated
by
John
T
Ross
are
all
well
known
in
Canada.
He
agreed
that
the
Canadian
Film
Development
Corporation
must
have
had
confidence
in
the
success
of
the
film
in
1971
to
undertake
to
put
up
$250,000
and
he
can
see
that
he
himself
might
have
agreed
with
this
as
of
that
date,
his
present
opinion
being
based
on
the
present
state
of
the
film.
He
does
not
consider
that
the
script
is
bad
but
that
the
story
line
got
lost
in
the
shooting
and
the
film
was
mutilated
by
bad
editing.
Another
witness,
Lawrence
Rittenberg,
was
called
on
behalf
of
the
plaintiffs.
He
is
employed
with
International
Film
Distributors
Limited,
his
responsibility
being
to
place
the
film
in
as
many
theatres
as
possible.
At
the
time
of
the
trial
in
June
1976
arrangements
had
been
made
to
place
the
film
in
Edmonton
on
August
13,
Calgary
August
27,
Halifax
October
22,
Saint
John,
NB
December
3,
Moncton,
NB
December
15
to
18,
and
Fredericton,
NB
December
15
to
18,
and
negotiations
were
going
on
for
other
theatres
in
the
rest
of
the
country.
He
stated
that
it
was
not
offered
for
exhibiting
before
because
all
the
material
was
not
ready.
International
Film
Distributors
would
receive
35%
to
50%
of
the
gross
on
a
sliding
scale.
The
Court
refused
a
motion
by
defendant
to
view
the
film.
I
do
not
consider
it
appropriate
to
attempt
to
form
a
personal
opinion,
without
having
any
special
qualifications
for
doing
so,
either
as
to
the
artistic
merits
or
commercial
prospects
of
the
film
generating
sufficient
earnings
to
pay
back
the
substantial
amounts
invested
in
it.
Any
such
findings
should
be
based
on
the
evidence
of
the
experienced
witnesses
who
testified
together
with
whatever
conclusions
can
be
drawn
from
the
existing
contracts.
For
what
it
is
worth
a
letter
of
Deloitte,
Haskins
&
Sells
dated
December
3,
1971
to
Messrs
Thomson
and
Rogers
was
admitted
in
evidence
over
plaintiff’s
objection.
This
letter
had
various
tax
calculations
and
tables
based
on
various
hypotheses
attached.
It
is
not
necessary
to
go
into
the
details
but
the
purport
of
the
letter
and
tables
was
that
based
on
assumed
taxable
income
of
$100,000
per
annum
for
each
of
six
investors
in
a
film
costing
$500,000
of
which
$125,000
was
invested
by
the
six
individuals,
each
investor
would
have
a
total
after
tax
income
of
$284,205
for
the
years
1971
to
1976
inclusive
if
there
had
been
no
investment
in
the
film.
As
a
result
of
the
film
investment,
if
no
income
was
derived
from
the
film
the
total
after
tax
income
for
the
same
6-year
period
would
be
$313,555,
an
increase
of
nearly
$30.000.
If
the
film
were
successful
and
all
the
$500,000
invested
were
recovered
and
an
additional
$250,000
was
earned
in
each
of
the
years
1973
and
1974,
the
after
tax
income
of
each
individual
investor
would
have
totalled
$287,337
for
the
1971
to
1976
period
an
increase
of
only
some
$3,000
over
his
situation
if
the
film
investment
had
never
been
made.
In
a
final
illustration
based
on
the
hypothesis
that
only
$300,000
of
the
$500,000
invested
in
the
film
was
recovered,
the
total
after
tax
income
would
have
amounted
to
$295,519
for
the
6-year
period,
a
gain
of
some
$11,000.
The
fundamental
conclusion
is
that
the
tax
savings
would
be
greatest
if
the
film
earned
no
income
and
none
of
the
investments
could
be
recovered,
and
that
there
would
be
little
tax
advantage
to
the
individual
investors
if
the
film
proved
to
be
very
successful.
It
was
stressed
that
to
obtain
the
highest
leverage
it
was
essential
that
the
Canadian
Film
Development
Corporation,
the
distributors,
and
others
who
advanced
substantial
amounts
be
induced
to
accept
repayment
only
out
of
the
proceeds
and
that
the
individual
investors
would
be
able
to
depreciate
all
of
the
film
costs
for
tax
purposes
regardless
of
the
amount
that
they
had
invested
in
order
to
obtain
100%
ownership
of
it.
One
conclusion
to
be
drawn
from
this
document
is
that,
save
for
the
possible
loss
of
the
$150,000
cash
invested,
the
plaintiffs
were
in
a
position
where
they
would
secure
tax
advantages
from
an
unprofitable
business
venture,
and
that
the
more
unprofitable
the
film
was
up
to
a
certain
point
the
greater
the
tax
advantage.
The
other
conclusion
to
be
drawn,
which
is
not
surprising
in
view
of
the
fact
that
the
plaintiffs
are
knowledgeable
attorneys,
is
that
they
were
well
aware
of
the
tax
advantages
at
the
time
they
purchased
the
film
and
that
this
was
undoubtedly
a
major
consideration
in
inducing
them
to
purchase
it.
This
does
not,
however,
justify
a
conclusion
that
this
was
in
any
way
improper
nor
that
their
motivation
has
the
consequence
of
depriving
them
of
whatever
tax
advantages
resulted
from
the
purchase,
since
it
is
a
fundamental
principle
in
taxation
law
that
a
businessman
may
so
arrange
his
affairs
in
the
frame
of
the
relevant
taxing
statute
and
regulations
as
to
minimize
his
tax
liability.
Neither
do
I
find
on
the
evidence
before
me
that,
as
defendant
suggests,
plaintiffs
deliberately
sought
to
purchase
a
film
which
would
not
be
financially
successful.
While
there
is
considerable
difference
of
opinion
between
the
various
witnesses
as
to
the
potential
of
the
film,
I
believe
that
the
better
view,
and
I
so
find
on
the
facts
before
me,
is
that
as
of
1971,
there
was
nothing
to
indicate
that
the
film
“Mahoney’s
Estate”
had
little
prospect
of
succeeding,
other
than
the
generally
accepted
statement
that
film
producing
is
a
business
with
a
high
element
of
risk
with
only
a
minority
of
the
films
produced
being
really
successful.
It
is
not
sufficient
to
say
by
hindsight
that
if
by
late
1972
or
early
1973
it
became
evident
that
the
film
was
unlikely
to
be
a
commercial
success
this
was
anticipated
when
plaintiffs
bought
it
in
1971.
In
1971
it
had
a
good
script,
cast,
producers
and
directors,
to
such
an
extent
that
not
only
the
Canadian
Film
Development
Corporation
but
the
Bank
of
Montreal
and
Niagara
Television
Limited
were
prepared
to
contribute
substantial
sums
to
its
production.
Moreover
even
at
a
much
later
date,
in
February
1974,
an
experienced
distributor,
British
Lion
Films
Limited,
was
prepared
to
invest
very
substantial
additional
sums
in
the
film,
and
it
is
now
finally
about
to
be
shown
in
commercial
theatres,
although
some
three
years
later
than
anticipated.
It
would
be
wrong
therefore
to
conclude
that
in
1971
it
was
purchased
deliberately
for
its
loss
potential.
What
the
purchasers
actually
did
was
to
invest
$150,000
in
a
highly
risky
business
adventure
with
the
knowledge
that,
even
if
it
were
not
successful,
they
would
benefit
from
substantial
tax
advantages
while
if,
by
some
chance,
it
should
prove
to
be
highly
successful
then
of
course
they
would
benefit
by
the
profits
from
same.
I
now
turn
to
the
accounting
evidence
respecting
the
manner
in
which
this
investment
should
have
been
treated
for
taxation
purposes
which
is
the
real
issue.
The
sections
of
the
Act
and
regulations
to
which
reference
was
made
in
argument
are
as
follows:
11.
(1)
Notwithstanding
paragraphs
(a),
(b)
and
(h)
of
subsection
(1)
of
section
12,
the
following
amounts
may
be
deducted
in
computing
the
income
of
a
taxpayer
for
a
taxation
year:
(a)
such
part
of
the
capital
cost
to
the
taxpayer
of
property,
or
such
amount
in
respect
of
the
capital
cost
to
the
taxpayer
of
property,
if
any,
as
is
allowed
by
regulation;
12.
(1)
In
computing
income,
no
deduction
shall
be
made
in
respect
of
(a)
an
outlay
or
expense
except
to
the
extent
that
it
was
made
or
incurred
by
the
taxpayer
for
the
purpose
of
gaining
or
producing
income
from
property
or
a
business
of
the
taxpayer,
137.
(1)
In
computing
income
for
the
purposes
of
this
Act
no
deduction
may
be
made
in
respect
of
a
disbursement
or
expense
made
or
incurred
in
respect
of
a
transaction
or
operation
that,
if
allowed,
would
unduly
or
artificially
reduce
the
income.
1100.
(1)
Under
paragraph
(a)
of
subsection
(1)
of
section
11
of
the
Act,
there
is
hereby
allowed
to
the
taxpayer,
in
computing
his
income
from
a
business
or
property,
as
the
case
may
be,
deductions
for
each
taxation
year
equal
to
(a)
such
amounts
as
he
may
claim
in
respect
of
property
of
each
of
the
following
classes
in
Schedule
B
not
exceeding
in
respect
of
property
(i)
of
class
1,
4%,
(ii)
of
class
2,
6%,
(iii)
of
class
3,
5%,
(iv)
of
class
4,
6%,
(v)
of
class
5,
10%,
(vi)
of
class
6,
10%,
(vii)
of
class
7,
15%,
(viii)
of
class
8,
20%,
(ix)
of
class
9,
25%,
(x)
of
class
10,
30%,
(xi)
of
class
11,
35%,
(xii)
of
class
12,
100%,
(xiii)
of
class
16,
40%,
(xiv)
of
class
17,
8%,
(xv)
of
class
18,
60%,
(xvi)
of
class
22,
50%,
(xvii)
of
class
23,
100%,
(xviii)
of
class
25,
100%,
and
(xix)
of
class
26,
1%
of
the
amount
remaining,
if
any,
after
deducting
the
amounts,
determined
under
sections
1107
and
1110
in
respect
of
the
class,
from
the
undepreciated
capital
cost
to
him
as
of
the
end
of
the
taxation
year
(before
making
any
deduction
under
this
subsection
for
the
taxation
year)
of
property
of
the
class;
(3)
Where
a
taxation
year
is
less
than
12
months
in
duration,
the
amount
allowed
as
a
deduction
under
paragraphs
(a),
(d)
and
(h)
of
subsection
(1)
shall
not
exceed
that
proportion
of
the
maximum
amount
allowable
that
the
number
of
days
in
the
taxation
year
is
of
365.
1102.
(1)
The
classes
of
property
described
in
this
Part
and
in
Schedule
B
shall
be
deemed
not
to
include
property
(c)
that
was
not
acquired
by
the
taxpayer
for
the
purpose
of
gaining
or
producing
income,
1104,
(1)
Where
the
taxpayer
is
an
individual
and
his
income
for
the
taxation
year
includes
income
from
a
business
the
fiscal
period
of
which
does
not
coincide
with
the
calendar
year,
in
respect
of
the
depreciable
properties
acquired
for
the
purpose
of
gaining
or
producing
income
from
the
business,
a
reference
in
this
Part
to
(a)
“the
taxation
year”
shall
be
deemed
to
be
a
reference
to
the
fiscal
period
of
the
business,
and
(b)
“the
end
of
the
taxation
year”
shall
be
deemed
to
be
a
reference
to
the
end
of
the
fiscal
period
of
the
business.
SCHEDULE
B,
Class
18
(60%)
Property
that
is
a
motion
picture
film
other
than
a
television
commercial
message.
I
do
not
conclude
from
the
evidence
before
me
that
plaintiffs
were
or
that
any
income
which
they
might
derive
would
be
income
from
a
business
rather
than
income
from
property.
Purchase
Agreement
reads
as
follows:
7.
Except
as
herein
specifically
amended,
the
Owner
agrees
to
be
bound
by
all
the
terms
of
all
the
agreements,
contracts,
and
arrangements
at
present
In
existence
between
Topaz
and
others
for
the
production
of
the
film
and
by
the
terms
of
all
other
agreements
made
by
Topaz
hereafter
for
the
completion,
distribution
and
exploitation
of
the
film,
it
being
the
intent
that
the
Owner
shall
be
an
investor
(and,
as
such,
owner
of)
the
film
but
that
all
decisions
of
whatsoever
nature
normally
made
by
a
film
producer
shall
remain
the
responsibility
of
the
Producer
of
the
film
as
set
out
in
the
Production
Agreement.
Plaintiffs
themselves
had
nothing
whatsoever
to
do
with
the
production
of
the
film
or
with
the
distribution
of
same
and
appear
to
have
merely
made
an
investment
in
it.
Therefore
I
do
not
find
that
Regulations
1100(3)
or
1104
are
applicable.
As
I
have
already
indicated
I
do
not
conclude
on
the
evidence
before
me
that
the
property
was
not
acquired
by
the
taxpayer
for
the
purpose
of
gaining
or
producing
income,
since
there
was
always
a
possibility
that
it
might
do
so,
and
therefore
I
do
not
believe
that
paragraph
1102(1)(c)
is
applicable.
(See
Harry
Walsh
and
Archie
Robert
Micay
v
MNR,
[1965]
CTC
478;
65
DTC
5293.)
Neither
do
I
conclude
that
the
purchase
of
the
film
rights
by
plaintiff
was
a
sham
within
the
meaning
of
the
case
of
Snook
v
London
&
West
Riding
Investments
Ltd,
[1967]
1
All
ER
518
at
528.
The
purchase
by
plaintiff
did
not
become
a
sham
as
defendant
contends
merely
because
Topaz
Productions
Limited
in
the
subsequent
Distribution
Agreement
of
February
11,
1974
with
British
Lion
Films
Limited
acted
as
if
they
were
still
owners
and
did
not
make
it
clear
that
they
were
merely
acting
as
agents
for
the
owners
One
Flag
Under
Ontario
Investments
Limited
&
Film
Associates
in
entering
into
this
agreement.
Paragraph
7
of
plaintiff's
Purchase
Agreement
makes
the
relation
between
Topaz
Productions
Limited
and
the
purchasers
as
owners
of
the
film
clear.
This
disposes
of
most
of
the
subsidiary
arguments
raised
by
counsel
for
defendant,
but
the
main
argument
dealing
with
the
propriety
of
the
accounting
method
adopted,
which
is
the
principal
argument,
remains
to
be
dealt
with.
No
witness
testified
on
behalf
of
the
auditors,
Deloitte,
Haskins
&
Sells
but
it
can
safely
be
presumed
that
if
such
a
witness
had
been
produced
he
would
have
supported
the
manner
in
which
they
treated
the
investment
in
“Mahoney’s
Estate”
as
being
correct
and
proper.
An
expert
accounting
witness
was
called
on
behalf
of
plaintiff,
namely
Mr
Robert
Fraser,
CA
of
the
Thorne,
Riddell
firm
who
also
supported
this
treatment.
On
the
other
hand
defendant
also
called
an
expert
witness,
Mr
David
Bonham,
FCA
who
adopted
an
opposing
point
of
view.
Both
supported
their
opinions
by
frequent
references
to
accounting
authorities
as
to
the
appropriate
practice
and
both
are
highly
qualified
experts.
It
is
necessary
therefore
to
examine
their
evidence
in
some
detail
since
the
entire
issue
depends
on
this.
Mr
Fraser,
whose
affidavit
was
taken
as
read
and
who
testified
at
some
length,
states
in
his
affidavit
that
he
examined
the
method
of
financing
employed
in
meeting
the
production
expenses
of
the
film
including
the
agreements
with
the
Canadian
Film
Development
Corporation,
the
Bank
of
Montreal
and
Alexis
Kanner,
as
well
as
the
agreement
by
virtue
of
which
the
limited
partnership
purchased
the
film
and
that
he
has
reviewed
the
agreements
covering
the
financing
of
the
film
by
the
limited
partnership
and
the
financial
statements
of
the
limited
partnership
for
the
period
ending
December
31,
1971
reported
on
by
Deloitte,
Haskins
&
Sells.
He
states:
In
my
opinion
it
is
in
accordance
with
generally
accepted
accounting
principles
to
treat
the
costs
of
the
film
in
the
hands
of
the
partnership
on
the
basis
which
includes
the
payments
made
to
defray
those
costs
as
reflected
in
the
agreements
referred
to
earlier.
He
also
states:
In
my
opinion
the
cost
to
the
limited
partnership
of
the
film
Mahoney’s
Estate
in
the
amount
of
$577,892
and
disclosed
in
the
financial
statement
referred
to
above
is
appropriately
the
cost
to
the
partnership
in
accordance
with
the
generally
accepted
accounting
principles.
Mr
Bonham’s
opinion
is
given
in
the
form
of
a
letter
to
Mr
N
W
Nichols,
Barrister
and
Solicitor
of
the
Department
of
Justice
and
is
annexed
to
Mr
Nichols’
affidavit,
and
was
taken
as
read,
and
he
was
then
examined
on
it.
In
his
letter
he
states
that
he
has
been
asked
for
his
opinion
as
to
the
proper
accounting
treatment
for
an
asset
acquired
for
a
total
consideration
part
of
which
is
contingent
upon
the
happening
of
one
or
more
possible
future
events.
In
giving
his
opinion
he
States
that
he
was
asked
to
assume
that
the
obligations
incurred
by
the
purchasers
when
they
acquired
the
film
were
unconditional
to
the
extent
of
their
payment
of
$150,000
and
conditional
or
contingent
with
respect
to
the
payment
of
any
further
amounts
up
to
a
maximum
of
$427,892
as
established
as
of
December
31,
1971,
the
total
maximum
consideration
at
that
date
being
$577,892,
the
condition
being
that
there
must
first
be
moneys
available
from
the
exploitation
of
the
film
according
to
the
terms
of
the
relative
agreements.
It
is
based
on.
a
further
assumption
that
at
the
end
of
the
1971
fiscal
year
there
was
no
reasonable
basis
to
predict
that
the
economic
prospects
for
the
exploitation
of
the
film
were
such
that
the
conditional
obligation
referred
to
above
would
almost
certainly
become
payable.
In
other
words
the
acquisition
of
the
film
by
One
Flag
was
ciearly
a
speculative
venture.
He
concludes
that
on
the
basis
of
these
assumptions
the
most
appropriate
accounting
treatment
for
this
transaction
in
Canada
under
generally
accepted
accounting
principles
at
the
relevant
date
would
have
been:
1.
To
record
an
asset
as
to
the
end
of
1971
fiscal
year
being
the
rights
of
the
film
acquired
for
an
initial
cost
of
$150,000.
2.
To
disclose
in
the
same
year
by
way
of
a
note
to
the
financial
statements
a
contingent
liability
(equal
to
the
contingent
consideration
of
$427,892)
dependent
upon
the
economic
results
of
exploiting
the
film.
3.
As
and
if
payments
were
required
under
the
contingent
liability
referred
io
in
No
2
above
the
acquisition
cost
of
the
film
rights
would
be
increased
accordingly.
Mr
Fraser
testified
that
in
accounting
practice
it
is
perfectly
proper
to
take
into
cost
liabilities
which
do
not
require
to
be
met
until
a
future
date
as
liabilities
once
assumed
form
part
of
the
cost.
The
assumption
of
the
liabilities
by
the
partnership
in
the
agreement
represent
part
of
the
cost
of
acquisition.
Reference
was
made
to
the
publication
“Terminology
for
Accountants”
of
the
Canadian
Institute
of
Chartered
Accountants
in
which
cost
is
defined
as
“The
amount
measured
in
money
of
the
expenditure
to
obtain
goods
or
services”,
and
liability
as
‘In
general,
a
debt
owed.
In
accounting
the
money
cost
of
discharging
an
enforceable
obligation
and
represented
by
a
credit
balance
that
may
properly
be
included
in
a
balance
sheet
in
accordance
with
the
accepted
accounting
principles’.
He
conceded
that
this
involves
a
determination
of
whether
the
liability
is
a
contingent
one
or
not.
He
stated
that
a
contingent
liability
is
an
obligation
which
may
arise
from
a
future
event,
the
happening
of
which
future
event
may
be
possible
or
probable.
If
it
is
probable
the
liability
is
not
contingent
and
he
believes
that
in
the
present
case
the
liabilities
assumed
were
real
and
that
it
is
only
the
payment
of
them
which
was
contingent.
He
laid
great
stress
on
the
distinction
between
the
occurrence
of
a
liability
and
the
payment
of
same.
He
was
referred
in
cross-
examination
to
the
Canadian
Institute
of
Chartered
Accountants’
Handbook
recommendations
No
1580
in
which
Section
.33
reads:
Where
the
amount
of
contingent
consideration
can
be
reasonably
estimated
at
the
date
of
acquisition
and
the
outcome
of
the
contingency
can
be
determined
beyond
reasonable
doubt,
it
should
be
recorded
at
that
date
as
part
of
the
cost
of
the
purchase.
Where
the
amount
of
contingent
consideration
or
the
outcome
of
the
contingency
cannot
be
determined
beyond
reasonable
doubt,
details
of
the
contingency
should
be
disclosed
in
a
note
to
the
financial
statements;
when
the
contingency
is
resolved,
the
consideration
should
be
recorded
as
an
additional
cost
of
the
purchase.
He
agrees
with
this
and
he
conceded
that
unless
the
outcome
of
the
contingency
can
be
determined
beyond
a
reasonable
doubt
the
amount
should
be
shown
as
a
note
and
recorded
only
when
paid.
In
the
present
case
there
was
an
obligation
enforceable
against
the
assets
of
the
partnership
although
payable
only
out
of
the
earnings,
so
in
his
view
it
was
not
contingent.
He
referred
also
to
Kohler’s
Dictionary
for
Accountants
which
defines
contingent
liability
as
one
“due
only
on
failure
to
perform
a
future
act”
stating
that
he
did
not
consider
that
this
is
such
a
case,
and
pointed
out
that
the
bank
and
Niagara
Television
Limited
evidently
considered
the
advances
to
be
an
appropriate
commercial
loan,
and
that
at
the
time
the
Canadian
Film
Development
Corporation
evidently
considered
their
advances
as
an
investment
even
though
somewhat
risky.
He
compared
it
to
a
drill
hole
for
a
mine
which
may
yield
nothing
but
is
nevertheless
expensed
in
the
accounting
statements,
or
to
the
case
of
a
bankrupt
who
may
never
have
to
pay
off
a
liability
but
nevertheless
this
liability
exists.
He
conceded
that
it
is
necessary
to
look
at
the
amount
of
the
liabilities
to
see
if
the
price
paid
was
realistic
or
not.
He
looks
on
the
total
cost
to
the
other
parties
as
a
test
of
the
cost
to
the
parinership.
He
would
value
the
obligations
to
repay
at
100%
because
there
was
a
real
liability.
The
only
liabilities
that
should
not
be
recorded
are
those
that
would
only
arise
if
a
certain
event
occurs.
The
figure
of
$179,050
shown
as
deferred
production
costs
was
because
the
creditors
of
these
amounts
had
agreed
that
if
the
film
did
not
earn
money
they
would
not
make
a
claim,
but
the
other
items
are
not
in
this
category
so
that
while
this
amount
is
a
contingent
account
the
other
amounts
due
to
the
bank,
Niagara,
Canadian
Film
Development
Corporation
and
the
partners
themselves
for
their
investment
in
the
partnership
are
not.
Mr
Bonham
for
his
part
testified
that
the
objective
of
accounting
is
to
achieve
a
fair
presentation
and
accountants
should
look
at
the
real
substances
of
transactions.
The
fundamental
concept
of
what
constitutes
cost
to
a
purchaser
was
already
well
established
by
1971.
He
also
referred
to
the
text
of
“Terminology
for
Accountants”
which
defines
expenditure
as
“A
disbursement,
a
liability
incurred,
or
the
transfer
of
property
for
the
purpose
of
obtaining
goods
or
services
’.
He
referred
to
Accounting
Terminology
Bulletin
No
4
of
the
American
Institute
of
Certified
Public
Accountants
which
defines
cost
as
“cash
expended
.
.
.
or
a
liability
incurred,
in
consideration
of
goods
or
services
received
or
to
be
received”.
He
conceded
that
the
liabilities
to
be
recorded
in
the
balance
sheet
would
be
a
debt
even
though
only
payable
in
future.
He
considers
the
Canadian
Institute
of
Chartered
Accountants’
Handbook
as
the
most
authoritative
publication
in
Canada
and
referred
to
Item
3290
.01
dealing
with
contingencies
which
states:
Any
contingent
liabilities
to
the
extent
not
reflected
in
the
balance
sheet
should
be
disclosed.
Their
nature,
and
where
practicable,
the
approximate
amounts
involved,
and
the
nature
and
amount
of
any
guarantees
or
pledges
of
assets,
etc,
should
be
stated.
The
witness
stated
that
there
are
two
ways
of
recording
a
contingent
liability:
first
by
a
note
on
the
balance
sheet
advising
of
its
existence,
and
second
by
showing
it
as
a
surplus
reserve
and
that
either
method
can
be
used
but
in
no
case
should
they
be
shown
as
regular
liabilities
on
the
balance
sheet.
He
referred
to
Opinion
No
16
of
the
American
Institute
of
Certified
Public
Accountants
which
he
stated
is
authoritative
in
the
United
States
and
persuasive
here
which
states
under
No
79:
Contingent
consideration
should
usually
be
recorded
when
the
contingency
is
resolved
and
consideration
is
issued
or
becomes
issuable.
In
general,
the
issue
of
additional
securities
or
distribution
of
other
consideration
at
resolution
of
contingencies
based
on
earnings
should
result
in
an
additional
element
of
cost
of
an
acquired
company.
and
again
under
No
80:
Contingency
based
on
earnings.
Additional
consideration
may
be
contingent
on
maintaining
or
achieving
specified
earimgs
levels
in
future
periods.
When
the
contingency
is
resolved
and
additional
consideration
is
distributable,
the
acquiring
corporation
should
record
the
current
fair
value
of
the
consideration
issued
or
issuable
as
additional
cost
of
the
acquired
company.
This
is
similar
to
Paragraph
.33
of
Item
1580
of
the
Canadian
Institute
of
Chartered
Accountants’
Handbook
referred
to
(supra)
and
to
the
paragraph
designated
as
.35
therein
which
reads:
In
situations
where
additional
consideration
becomes
payable
as
the
result
of
maintaining
or
achieving
specified
earnings
levels
in
periods
subsequent
to
the
acquisition,
such
consideration
should
be
recorded,
when
determinable,
as
an
additional
cost
of
the
purchase.
Details
of
such
contingent
consideration
should
be
disclosed.
While
this
Handbook
was
not
adopted
until
March
1974,
and
hence
was
not
in
effect
at
the
time
the
balance
sheet
in
this
case
was
prepared
it
is
in
the
nature
of
a
codification
of
accepted
principles.
He
also
referred
to
what
the
witnesses
admit
to
be
the
leading
textbook
in
Canada,
Skinner’s
Accounting
Principles
at
page
412
in
which
the
author
states:
To
the
extent
that
liability
under
the
contingent
payment
clause
was
considered
likely
provision
for
it
should
be
made
by
the
purchaser.
{f
the
likelihood
of
the
payment
were
small,
a
note
to
the
financial
statements
disclosing
the
contingency
would
be
adequate.
Mr
Bonham
concluded
that
in
the
present
case
the
proper
way
to
disclose
the
liability
over
the
$150,000
actually
paid,
was
by
way
of
notes
to
the
balance
sheet,
and
the
additional
amounts
would
only
be
recorded
as
they
became
payable
out
of
the
proceeds
of
the
distribution
of
the
film.
He
stated
that
if
the
liabillty
is
a
contingent
one
then
the
question
of
the
valuation
of
it
does
not
come
up,
as
this
would
only
occur
if
it
were
a
real
and
determinable
liability.
In
his
view,
and
this
is
where
he
differs
totally
from
Mr
Fraser,
if
a
payment
is
contingent
it
results
in
a
contingent
liability
even
if
there
is
a
definite
liability
to
pay
subject
to
the
contingency.
He
stated
that
he
was
unable
to
find
any
justification
for
treating
the
sum
of
$179,050
shown
as
deferred
cost
of
film
production
in
any
different
manner
from
the
liability
of
$577,892
shown
on
the
balance
sheet.
He
stated
that
the
fixed
liability
to
pay
a
fixed
amount
at
an
undetermined
future
date
may
be
contingent
or
not
depending
on
the
mechanism
for
determining
the
date.
If
it
is
certain
that
payment
will
mature
at
some
time
then
it
is
not
a
contingent
liability
but
if
it
is
not
merely
the
time
of
payment
but
the
possibility
of
payment
which
is
uncertain
then
it
is
contingent.
Thus
a
demand
note
is
an
ordinary
liability
as,
while
it
is
not
certain
that
a
demand
for
payment
will
ever
be
made,
this
demand
is
in
the
control
of
the
creditor.
While
in
Topaz’s
books
the
cost
actually
expended
would
properly
be
capitalized,
the
purchasers
are
not
In
the
same
position
since
the
purchasers
in
setting
up
their
financial
statements
must
reflect
their
cost
to
them.
Even
some
of
Topaz's
liabilities
would
only
be
payable
if
the
film
made
a
profit,
and
he
would
be
concerned
if
they
should
be
shown
as
liability
on
the
balance
sheet.
Counsel
for
defendant
in
his
argument
referred
to
Stroud’s
Judicial
Dictionary,
volume
1,
4th
edition,
page
575,
which
defines
“contingent
debt”
as
“One
the
time
for
payment
of
which
may
or
may
not
arrive”
and
“contingent
liability”
as
“A
liability
which
by
reason
of
something
done
by
the
person
bound
will
necessarily
arise
if
a
certain
event
occurs”.
This
is
precisely
the
present
case.
Reference
was
also
made
to
the
definition
of
contingent
liability
in
the
publication
“Terminology
for
Accountants”
(supra)
which
reads
as
follows:
A
legal
obligation
that
may
arise
out
of
present
circumstances
provided
certain
developments
occur.
The
possibility
of
a
future
liability
does
not
of
itself
constitute
a
contingent
liability;
it
must
be
a
possibility
arising
out
of
present
circumstances
or
pending
affairs.
Both
parties
made
extensive
reference
to
the
leading
British
case
of
Winter
and
Others
(Executors
of
Sir
Arthur
Munro
Sutherland
(deceased))
v
Inland
Revenue
Commissioners,
[1961]
3
All
ER
855,
although
it
appears
that
on
the
facts
it
can
be
distinguished
from
the
present
case.
It
dealt
with
estate
duty
under
subsection
50(1)
of
the
Finance
Act,
1940
dealing
with
allowances
to
be
made
for
debts
and
encumbrances
of
a
company
which
provided
that
‘the
commissioners
shall
make
an
allowance
from
the
principal
value
of
those
assets
for
all
liabilities
of
the
company
(computed,
as
regards
liabilities
which
have
not
matured
at
the
date
of
the
death,
by
reference
to
the
value
thereof
at
that
date,
and,
as
regards
contingent
liabilities,
by
reference
to
such
estimation
as
appears
to
the
commissioners
to
be
reasonable)”.
Lord
Reid
stated
at
page
858:
No
doubt
the
words
“liability”
and
“contingent
liability”
are
more
often
used
in
connexion
with
obligations
arising
from
contract
than
with
statutory
obligations.
But
I
cannot
doubt
that
if
a
statute
says
that
a
person
who
has
done
something
must
pay
tax,
that
tax
is
a
“liabilly”
of
that
person.
If
the
amount
of
tax
has
been
ascertained
and
it
is
immediately
payable
it
is
clearly
a
liability;
if
it
is
only
payable
on
a
certain
future
date
it
must
be
a
liability
which
has
“not
matured
at
the
date
of
the
death”
within
the
meaning
of
s
50(1).
If
it
is
not
yet
certain
whether
or
when
tax
will
be
payable
or
how
much
will
be
payable
why
should
it
not
be
a
contingent
liability
under
the
same
section.
ft
is
said
that
where
there
ts
a
contract
there
Is
an
existing
obligation
even
If
you
must
await
events
to
see
if
anything
ever
becomes
payable,
but
that
there
is
no
comparable
obligation
in
a
case
like
the
present.
But
there
appears
to
me
to
be
a
close
similarity.
To
take
the
first
stage,
if
I
see
a
watch
in
a
shop
window
and
think
of
buying
it,
I
am
not
under
a
contingent
liability
to
pay
the
price:
similarly
if
an
Act
says
I
must
pay
tax
if
I
trade
and
make
a
profit,
I
am
not
before
I
begin
trading
under
a
contingent
liability
to
pay
tax
in
the
event
of
my
starting
trading.
In
neither
case
have
I
committed
myself
to
anything.
But
if
I
agree
by
contract
to
accept
allowances
on
the
footing
that
I
will
pay
a
sum
if
I
later
sell
something
above
a
certain
price
I
have
committed
myself
and
I
come
under
a
contingent
liability
to
pay
in
that
event.
At
page
859
he
quotes
from
Erskine’s
Institute
of
the
Law
of
Scotland,
vol
2,
Book
Ill,
title
l',
s
6
as
follows:
A
conditional
obligation,
or
an
obligation
granted
under
a
condition
the
existence
of
which
is
uncertain,
has
no
obligatory
force
till
the
condition
be
purified;
because
it
is
in
that
event
only
that
the
party
declares
his
intention
to
be
bound,
and
consequently
no
proper
debt
arises
against
him
till
it
actually
exist:
so
that
the
condition
of
an
uncertain
event
suspends
not
only
the
execution
of
the
obligation,
but
the
obligation
itself.
He
then
goes
on
to
say:
So
far
as
I
am
aware
that
statement
has
never
been
questioned
during
the
two
centuries
since
it
was
written
and
later
authorities
make
it
clear
that
conditional
obligation
and
contingent
liability
have
no
different
significance.
lt
must
be
remembered
in
the
present
case,
however,
there
is
no
statute
requiring
an
estimate
at
the
date
of
the
financial
statement
of
the
present
value
of
the
obligation
to
pay
the
balance
of
the
purchase
price
and
furthermore,
as
defendant
contends,
the
uncertainty
is
not
merely
as
to
when
the
obligation
will
be
paid
but
whether
it
ever
will
be.
In
the
case
of
MNR
v
Time
Motors
Limited,
[1968]
CTC
131;
68
DTC
5081,
a
car
dealer
when
purchasing
cars
from
individuals
paid
for
them
partly
with
credit
notes
which
could
be
applied
only
by
the
holder
thereof
and
within
a
stipulated
time
against
the
purchase
price
of
another
car
of
stated
minimum
value.
These
notes
were
set
out
in
the
company’s
accounts
as
a
liability
at
their
face
value
and
when
the
credit
note
was
redeemed
the
total
selling
price
of
the
automobile
was
taken
into
income
and
the
credit
note
eliminated
from
the
liability
account.
The
notes
were
non-transferable
and
could
not
be
redeemed
for
cash.
The
Minister
contended
that
they
constituted
a
contingent
liability
to
be
excluded
from
determining
income
under
the
provisions
of
paragraph
12(1)(e)
and
the
company
argued
that
the
notes
created
an
immediate
binding
legal
obligation
that
was
in
no
way
contingent.
Gibson,
J
in
upholding
the
Minister’s
position
held
that
there
existed
uncertainty
as
to
the
obligations
arising
from
the
credit
notes
at
all
material
times
in
that
the
company
knew
that
a
substantial
number
of
them
would
expire
without
being
redeemed.
At
page
134
[5083]
he
states:
The
words
“contingent
account”
are
not
defined
in
the
Income
Tax
Act.
They
are
not
words
of
art.
By
dictionary
definition
there
must
be
an
element
of
uncertainty
before
an
account
qualifies
as
a
contingent
account,
and
the
element
of
the
uncertainty
must
be
as
to
the
obligation.
and
again:
.
.
It
is
clear
that
there
existed
the
uncertainty
as
to
the
obligations
arising
from
these
credit
notes
at
all
material
times,
in
that
the
respondent
knew
that
a
substantial
number
of
them
would
expire
and
not
be
redeemed;
Extensive
reference
was
also
made
to
three
cases
which,
while
not
directly
in
point,
give
an
indication
of
the
trend
of
authoritative
judicial
thinking
on
the
matter.
In
the
British
case
of
Lord
Mayor,
Aldermen
and
Citizens
of
the
City
of
Birmingham
v
Barnes
(Inspector
of
Taxes),
[1935]
AC
292,
the
question
was
whether
the
corporation
which
had
laid
tramway
tracks
and
received
a
grant
for
part
of
the
cost
of
the
work
done
could
claim
capital
cost
allowance
on
the
actual
cost
of
the
work
even
though
as
a
result
of
the
reimbursement
its
net
total
cost
was
a
lower
figure.
It
was
allowed
to
claim
the
total
cost
on
an
Interpretation
of
the
words
in
the
statute
‘‘actual
cost
to
the
person”.
In
rendering
judgment
Lord
Atkin
said
at
page
298:
What
a
man
pays
for
construction
or
for
the
purchase
of
a
work
seems
to
me
to
be
the
cost
to
him:
and
that
whether
some
one
has
given
him
the
money
to
construct
or
purchase
for
himself;
or,
before
the
event,
has
promised
to
give
him
the
money
after
he
has
paid
for
the
work:
or,
after
the
event,
has
promised
to
give
the
money
which
recoups
him
what
he
has
spent.
This
judgment
was
referred
to
in
the
decision
of
President
Jacket!
as
he
then
was
in
the
case
of
Ottawa
Valley
Power
Company
v
MNR,
[1969]
CTC
242;
69
DTC
5166.
In
that
case
Ontario
Hydro
expended
$1.9
million
to
change
the
generating
and
distribution
system
of
appellant
from
25
cycles
to
60
cycles
current.
Appellant
undertook
to
change
its
contract
permitting
it
to
supply
25-cycle
power
to
a
contract
for
the
supply
of
60-cycle
power.
Appellant
claimed
capital
cost
allowance
on
the
additions
and
improvements
to
its
plant
paid
for
by
Hydro
claiming
that
this
was
in
consideration
for
giving
up
the
valuable
capital
right
which
it
had
of
delivering
25-cycle
power
for
the
balance
of
the
term
of
the
contract.
The
appeal
was
dismissed
on
the
ground
that
appellant
had
failed
to
establish
that
there
was
a
capital
cost
to
it
of
the
assets
in
question
on
the
basis
of
the
arguments
raised
by
it.
In
rendering
judgment
the
learned
Chief
Justice
stated
at
page
253
[5173]:
The
straightforward
sort
of
bargain
that
might
have
been
expected
when
the
appellant
was
approached
by
Hydro
in
1955
was
that
Ontario
Hydro
would
pay
to
the
appellant,
for
the
desired
amendment
to
the
supply
contract,
whatever
it
might
cost
the
appellant
to
effect
the
necessary
change
in
its
plant.
Had
that
been
the
bargain
that
the
appellant
made
with
Ontario
Hydro,
the
appellant
would
have
incurred
the
capital
cost
of
the
additions
and
improvements
and,
even
though
it
had
been
reimbursed
by
Hydro,
it
would
have
been
entitled
to
capital
cost
allowance
in
respect
of
the
capital
cost
it
had
so
incurred.
He
supported
this
conclusion
with
reference
to
the
Corporation
of
Birmingham
v
Barnes
case
(supra)
although
at
the
same
time
pointing
out
that
the
opposite
result
was
reached
in
a
similar
case
in
the
United
States
of
Detroit
Edison
Co
v
Commissioner
of
Internal
Revenue
(1942),
319
US
98,
which
however
he
distinguished.
However,
in
a
later
judgment
in
The
D’Auteuil
Lumber
Company
Limited
v
MNR,
[1970]
CTC
122;
70
DTC
6096,
he
explained
his
reasoning
in
the
Ottawa
Valley
Power
Company
case
in
further
detail.
In
the
D’Auteuil
Lumber
case
the
Province
of
Quebec
had
expropri-
ated
95%
of
appellant’s
timber
limit
and
subsequently
the
company
exchanged
the
remainder
of
its
timber
limit
together
with
its
right
to
compensation
for
the
expropriated
portion
for
certain
cutting
rights
granted
by
the
Province.
Appellant
took
the
view
that
the
capital
cost
to
them
was
the
value
of
the
cutting
rights
at
the
time
of
their
acquisition
while
the
Minister
contended
that
the
capital
cost
was
to
be
determined
by
the
value
of
the
portion
of
the
timber
limit
expropriated
together
with
damages,
interest
and
the
value
of
the
remainder
of
the
timber
limit
at
the
time
it
was
conveyed
to
the
Province,
which
was
a
much
lower
figure.
It
was
held
that
the
cost
of
the
cutting
rights
to
the
appellant
was
the
value
of
what
it
gave
up
to
get
them.
Chief
Justice
Jackett
stated
at
page
129
[6100]:
In
view
of
the
reference
by
the
appellant
to
my
judgment
in
Ottawa
Valley
Power
Company
v
MNR,
[1969]
2
Ex
CR
64
at
75
et
seq;
[1969]
CTC
242
at
252
et
seq,
I
must
make
some
reference
to
that
judgment.
There,
in
a
part
of
my
reasons
which
did
not
express
any
concluded
view,
I
said
that,
in
the
hypothetical
case
that
I
was
discussing,
a
supplier
was
paying
for
his
plant
“by
entering
into
the
low-priced
supply
contract”
and
that
‘‘prima
facie,
what
he
pays
for
the
plant
is
the
value
of
the
plant”.
This
comes
very
close
to
the
contention
of
the
appellant
in
this
case,
and,
in
retrospect,
I
must
admit
that
I
did
not
express
myself
as
carefully
as
I
should
have
done.
There,
I
was
considering
a
case
where
the
consideration
given
for
the
“plant”
was
“entering
into
the
low-priced
supply
contract”—a
consideration
very
difficult
to
put
a
value
on—and
what
I
am
sure
that
I
had
in
mind
is
that,
“prima
facie”,
the
value
of
the
consideration
is
equal
to
the
value
of
what
is
received
for
it,
so
that
where,
as
in
my
hypothetical
case,
what
was
received
can
easily
be
valued
and
what
was
given
is
almost
impossible
to
value,
it
is
a
fair
statement
that
“prima
facie,
what
he
pays
for
the
plant
is
the
value
of
the
plant”.
Thus,
in
any
particular
case,
there
may
arise
a
question
as
to
what
evidence
is
admissible.
Where
the
value
of
the
thing
given
for
the
capital
asset
in
question
can
be
determined
with
the
same
kind
of
effort
as
is
required
to
value
the
capital
asset
itself,
I
should
have
thought
that
the
Court
would
not
look
kindly
on
attempts
to
lead
evidence
as
to
the
value
of
the
capital
asset
in
lieu
of,
or
in
addition
to,
evidence
as
to
the
value
of
what
was
given
for
it.
On
the
other
hand,
when
the
value
of
what
was
given
is
almost
impossible
to
determine
and
the
value
of
the
capital
asset
is
almost
beyond
the
realm
of
controversy,
it
may
well
be
that
the
only
practicable
basis
for
determining
the
value
of
what
was
given
is
to
look
at
the
value
of
the
capital
asset.
These
cases
have
some
bearing
in
the
present
action
in
that
plaintiff
contends
that,
since
sums
have
been
expended
or
committed
in
the
production
of
the
film
in
the
amount
of
$577,892,
which
is
not
disputed,
this
is
the
proper
cost
figure
to
use
in
the
calculation
of
capital
cost
allowance,
whereas
defendant
contends
that
only
the
amount
actually
expended
by
the
purchasers
prior
to
the
end
of
the
1971
taxation
year
can
be
claimed
by
them
for
capital
cost
allowance
purposes
in
that
year.
In
making
the
purchase
they
incurred
an
obligation
to
pay
the
balance
but
only
out
of
the
proceeds
of
the
film
so
that
both
the
time
of
payment
and
whether
the
payment
would
ever
be
made
were
contingent
and
these
amounts
should
only
be
claimed
when
and
if
they
are
so
paid.
Certainly,
to
use
the
words
of
Chief
Justice
Jackett
in
the
D’Auteuil
Lumber
case
“what
was
received
can
easily
be
valued
and
what
was
given
is
almost
impossible
to
value”.
He
goes
on
to
say
however:
Where
the
value
of
the
thing
given
for
the
capital
asset
in
question
can
be
determined
with
the
same
kind
of
effort
as
is
required
to
value
the
capital
asset
itself,
I
should
have
thought
that
the
Court
would
not
look
kindly
on
attempts
to
lead
evidence
as
to
the
value
of
the
capital
asset
in
lieu
of,
or
in
addition
to,
evidence
as
to
the
value
of
what
was
given
for
it.
It
appears
to
me
in
the
present
case
that
the
value
of
the
consideration
can
eventually
be
determined
with
complete
accuracy
when
the
net
proceeds
of
the
distribution
of
the
film
are
finally
received
and
there
is
no
statutory
or
other
requirement
that
an
estimate
be
made
of
this
as
of
the
end
of
the
1971
taxation
year,
in
which
event
these
proceeds
would
have
been
impossible
to
value.
I
cannot
adopt
plaintiff's
argument
therefore
that
since
the
purchasers
assumed
all
of
Topaz’s
obligations
in
addition
to
paying
$150,000
cash
they
are
in
the
place
and
stead
of
the
vendors
and
the
capital
cost
of
the
film
to
them
at
the
end
of
1971
was
the
same
as
it
would
have
been
to
the
vendors.
The
question
of
what
weight
should
be
given
to
the
expert
evidence
of
accountants
in
tax
cases
was
dealt
with
at
some
length
by
Thorson,
J,
then
President,
in
the
case
of
Publishers
Guild
of
Canada
Limited
MNR,
[1956-60]
Ex
CR
32;
[1957]
CTC
1;
57
DTC
1017,
in
which
he
stated
at
pages
49-50
[16-17,
1026]:
Ai
this
stage
it
would,
I
think,
be
appropriate
to
make
some
remarks
of
a
general
nature
regarding
the
role
of
accountancy
experts
in
income
tax
cases.
The
accountancy
profession
is
not
a
static
one
and
the
system
of
accounting
which
accountants
should
apply
to
the
accounts
of
the
businesses
in
which
they
are
called
upon
to
act
are
not
immutable.
A
system
of
accounting
that
would
be
appropriate
to
one
kind
of
business
is
not
necessarily
appropriate
to
a
different
kind.
Only
an
arbitrary-minded
person
would
contend
that
there
is
only
one
system
of
accounting
of
universal
applicability.
No
reasonable
person
would
do
so.
But
while
accountants
devise
changes
in
systems
of
accounting
to
meet
the
changing
conditions
in
the
business
world
and
new
ways
of
conducting
business
their
guiding
principle
must
always
be
the
same.
Accounting
is
really
the
recording
in
figures,
instead
of
words,
of
the
financial
implications
of
the
transactions
of
the
business
to
which
it
is
applied.
The
accountant
is
thus
the
narrator
of
the
transactions,
his
narrative
being
in
the
form
of
figures
instead
of
words.
His
narrative
should
be
such
as
to
disclose
to
persons
understanding
his
language
of
figures
the
true
position
of
his
client’s
business
at
any
given
time
or
for
any
given
period.
The
accountant
cannot
fulfil
the
duty
thus
required
of
him
unless
he
has
carefully
considered
the
manner
in
which
his
client
carries
on
his
business
and
has
applied
to
it
the
system
of
accounting
that
is
appropriate
to
it
and
most
nearly
accurately
reflects
its
financial
position,
including
its
income
position,
at
the
time
or
for
the
period
required.
But
the
Court
must
not
abdicate
to
accountants
the
function
of
determining
the
income
tax
liability
of
a
taxpayer.
That
must
be
decided
by
the
Court
in
conformity
with
the
governing
income
tax
law.
It
is
an
established
principle
of
such
law
in
this
Court
that
there
is
a
statutory
presumption
of
validity
in
favour
of
an
income
tax
assessment
until
it
is
shown
to
be
erroneous
and
that
the
onus
of
doing
so
lies
on
the
taxpayer
attacking
it.
But
while
the
Court
must
be
mindful
of
this
principle
it
must
in
its
effort
to
apply
the
law
objectively
keep
a
watchful
eye
on
arbitrary
assumptions
on
the
part
of
the
tax
authority
such
as,
for
example,
that
it
is
within
its
competence
to
permit
or
refuse
any
paricular
system
of
accounting
and
that
its
decision
in
the
matter
is
conclusive.
I
cannot
express
too
strongly
the
opinion
of
this
Court
that,
in
the
absence
of
statutory
provision
to
the
contrary,
the
validity
of
any
particular
system
of
accounting
does
not
depend
on
whether
the
Department
of
National
Revenue
permits
or
refuses
its
use,
What
the
Court
is
concerned
with
is
the
ascertainment
of
the
taxpayer’s
income
tax
liability.
Thus
the
prime
consideration,
where
there
is
a
dispute
about
a
system
of
accounting,
is,
in
the
first
place,
whether
it
is
appropriate
to
the
business
to
which
it
is
applied
and
tells
the
truth
about
the
taxpayer’s
income
position
and,
if
that
condition
is
satisfied,
whether
there
is
any
prohibition
in
the
governing
income
tax
law
against
its
use.
If
the
law
does
not
prohibit
the
use
of
a
particular
system
of
accounting
then
the
opinion
of
accountancy
experts
that
it
is
an
accepted
system
and
is
appropriate
to
the
taxpayer’s
business
and
most
nearly
accurately
reflects
his
income
position
should
prevail
with
the
Court
if
the
reasons
for
the
opinion
commend
themselves
to
it.
In
the
present
case
the
Court
had
the
benefit
of
two
expert
accountants’
opinion;
one
from
Mr
Robert
Fraser,
CA,
a
partner
with
the
well
known
firm
of
Thorne,
Riddell
who
supported
the
accounting
method
adopted
by
the
auditors
of
the
partnership,
the
equally
well
known
firm
of
Deloitte,
Haskins
&
Sells,
and
on
the
other
hand
the
opinion
of
Mr
David
Bonham,
FCA,
an
accountancy
professor
and
author
of
a
textbook
on
the
subject
who
would
merely
have
set
up
the
$150,000
down
payment
for
capital
cost
allowance
purposes,
treating
the
balance
of
price
a
contingent
liability
to
be
shown
by
footnotes
on
the
balance
sheet
to
set
up
for
capital
cost
purposes
only
when
and
if
future
payments
were
made.
There
is
certainly
no
prohibition
in
the
governing
income
tax
law
against
either
method
and
the
matter
is
sufficiently
controversial
that
it
may
be
said
that
either
method
is
an
accepted
system
of
accounting.
In
view
of
the
difference
of
opinion
between
the
experts
however
it
devolves
upon
the
Court
to
determine
which
system
was
most
appropriate
to
the
business
in
question
and
most
accurately
reflects
plaintiff’s
income
tax
position,
always
bearing
in
mind
as
President
Thorson
stated
that
there
is
a
statutory
presumption
of
validity
in
favour
of
an
income
tax
assessment
until
it
is
shown
to
be
erroneous
and
that
the
onus
of
doing
so
lies
on
the
taxpayer
attacking
it.
While
the
obligation
clearly
existed
in
the
sense
that
the
partnership
could
not
unilaterally
withdraw
from
it,
and
I
have
concluded
that
there
was
no
sham
involved
in
that
in
1971
there
always
existed
a
reasonable
possibility
of
the
film
eventually
producing
income,
I
am
nevertheless
of
the
view
that
the
question
of
whether
any
further
payments
above
$150,000
would
ever
be
made
on
the
obligation
was
sufficiently
uncertain,
both
as
to
time
of
payment
and
whether
sufficient
profits
would
ever
be
generated
to
allow
such
further
payments
to
be
made,
that
the
preferable
practice
would
be
to
treat
this
as
a
contingent
liability
directing
attention
to
it
by
footnotes
as
Mr
Bonham
suggests.
When
and
if
the
film
generates
profits
and
additional
payments
are
made
on
account
of
the
liability,
as
now
appears
possible
in
view
of
the
distribution
of
the
film
which
is
now
commencing,
the
partnership
can
at
that
time
set
up
these
further
payments
as
part
of
the
capital
cost
and
plaintiff
can
benefit
by
claiming
capital
cost
allowance
against
same
in
the
year
or
years
in
which
such
additional
capital
cost
is
created.
As
I
indicated
previously,
however,
I
do
not
consider
it
proper
to
equate
the
capital
cost
of
$577,892
incurred
or
committed
for
by
the
vendors
with
the
capital
cost
of
the
film
to
the
purchasers,
who,
while
they
undertook
to
pay
this
sum,
only
actually
paid
$150,000
with
the
balance
being
contingent
on
the
generation
of
profits
by
the
film.
For
the
above
reasons
the
appeal
is
dismissed
with
costs
and
the
same
judgment
applies
to
the
appeals
of
the
other
eleven
plaintiffs.
Since
the
actions
were
heard
at
the
same
time
on
common
evidence
however
only
one
set
of
costs
arising
out
of
the
trial
of
the
action
should
be
allowed
with
costs
being
allowed
in
the
other
eleven
actions
only
up
to
the
time
when
the
order
was
made
for
the
hearing
of
them
on
common
evidence.
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