CJRS Radio Sherbrooke Limitée v. Minister of National Revenue, [1974] CTC 2216, 74 DTC 1158

The Assistant Chairman:—This appeal is against an assessment of income tax for the 1967,1968,1969 and 1970 taxation years.

There are two quite distinct points at issue in this case. The first concerns the payment of $500 monthly rental for the use of property during these years. The Minister of National Revenue finds that this amount is not reasonable, and grants the appellant the deduction of a monthly rental of $100, but the appellant disputes this decision.

At the hearing the parties jointly submitted a consent to judgment, which reads as follows:

(Translation)

The Plaintiff and Defendant, through their respective counsel, consent to have the Tax Review Board pass judgment on the part of this appeal which concerns the cost of renting the property used by CJRS Radio Sherbrooke Limitée, under the following conditions:

(a) that the Plaintiff’s appeal be allotted for rent claimed for the 1967 and 1968 taxation years;

(b) that an annual rental charge of $3,000 be allotted for the 1969 and 1970 taxation years;

(c) that the case be referred to the Minister of National Revenue for a reassessment on this new basis.

This consent to judgment disposes of the first point at issue.

The second point on which the facts are important concerns the deduction of professional fees of $20,083.76 for the 1967 year, which the Minister rejects.

On January 20, 1965 Jacques Lacasse, Jean Nadon, Raymond Crépault and Radiodiffusion Mutuelle Limitée signed a private deed of trust to set up a company which would eventually operate a radio broadcasting station in the Sherbrooke area and be the owner of this station (Exhibit C-1). This group of persons therefore approached the appropriate authorities in Ottawa for the purpose of obtaining authorization to establish and operate this radio station, even before the company which was to own the station had been incorporated.

The deed of trust provided that the signatories to the deed would be the major stockholders in the future company, and stipulated the number of shares each would hold. It also provided that each signatory would be entitled to acquire goods, rights and other assets for and on behalf of the future company, and stated that all the signatories, individually and collectively, were trustees. It stipulated that as soon as the licence was granted and the company incorporated, all costs, expenditures and other expenses would be assumed by the company as if it had contracted them itself, and all goods, rights and assets acquired by the trustees would become the property of the company.

The appellant was incorporated on March 17, 1967 under the Canada Corporations Act, and it began to function on May 26, 1967.

In its income tax return for the 1967 fiscal year, the appellant claimed deduction for fees as follows: Jean Nadon et Associés— $5,865.50; Radiodiffusion Mutuelle Limitée—$14,218.26; making a total of $20,083.76 paid by the appellant in 1967. The respondent rejects this deduction.

At the hearing the respondent did not dispute the amount at issue. It admitted that this $20,083.76 represented the expenses involved in obtaining a licence, but maintained that they had not been incurred by the appellant, as they had been contracted before the appellant was incorporated and began functioning. Paragraph 11(1)(aa) of the Income Tax Act is an exception to the general rules underlying this Act; the respondent accordingly submits that it should be interpreted restrictively, and concludes that the facts submitted are not in conformity with the provisions of this section and that the appellant may not claim the deduction provided for therein.

The appellant submits that it has conformed with the provisions of this section, as it has paid $20,083.76 as expenses incurred in making representations to an agency of the government for the purpose of obtaining a licence for the operation of a radio station, for a “business carried on by the taxpayer”.

This is obviously a matter of the interpretation of paragraph 11 (1 )(aa), which states as follows:

(aa) an amount paid by the taxpayer in the year as or on account of expenses incurred by him in making any representation relating to a business carried on by him,

(i) to the government of a country, province or state or to a municipal or public body performing a function of government in Canada, or

(ii) to an agency of a government or of a municipal or public body referred to in subparagraph (i) that has authority to make rules, regulations or by-laws relating to the business carried on by the taxpayer,

including any representation for the purpose of obtaining a licence, permit, franchise or trade mark relating to the business carried on by the taxpayer;

This paragraph should indeed be interpreted restrictively. In interpreting it the Board should also take into account the fundamental principle of the Act, that the taxpayer himself is responsible for taxes imposed on him by the Minister and that the taxpayer who conforms with the provisions of the Act himself benefits from the allowable exemptions, without the interposition of third parties.

In this case it is not the appellant but Jean Nadon et Associés and Radiodiffusion Mutuelle Limitée (who are not “the taxpayer”) who incurred expenses for the purpose of obtaining a licence to operate a radio station. Nor is it Jean Nadon et Associés and Radiodiffusion Mutuelle Limitée who are carrying on the appellant’s business, but CJRS Radio Sherbrooke Limitée.

In the evidence given before the Board, there is not this intimate relationship between the taxpayer and the expenses incurred for the purpose of obtaining a licence which the Act requires in order to allow the deduction provided for in paragraph 11(1)(aa).

When the expenses were incurred for the purpose of obtaining the licence, “the taxpayer” did not exist. Nor should it be claimed that the taxpayer contracted them in connection with a business it carried on, since at that point there was no business.

The appellant bases itself on the private deed of trust by which Jean Nadon et Associés and Radiodiffusion Mutuelle Limitée had agreed to act as trustees or the future company and to make the company responsible for the debts contracted.

In my opinion the application of subsection 16(2) of the Canada Corporations Act, referred to by the appellant, the legal value of the private deed of trust for purposes of taxes and the interpretation of paragraph 11 (1)(aa) are academic questions.

subsection 16(2) of the Canada Corporations Act and the private deed of trust find application in other areas of law, but in this case neither of these can make Jean Nadon et Associés and Radiodiffusion Mutuelle Limitée “the taxpayer” concerned in paragraph 11(1)(aa) of the Income Tax Act, who must himself have paid during the year ‘‘an amount . . . as or on account of expenses incurred in making any representation [for the purpose of obtaining a licence] relating to the business carried on by him”. Not only is there a time gap in this transaction, but there is also a doubling of persons which is not provided for or permitted in paragraph 11(1)(aa).

I conclude that these facts are not in conformity with the provisions of paragraph 11(1)(aa) of the Income Tax Act, and that the appellant may not claim the deduction provided for therein. The appeal on the second point at issue is dismissed.

The appeal is therefore allowed in part, and the whole is referred to the Minister for new assessments under the terms of the consent to judgment submitted by the parties in the case.

Appeal allowed in part.