Morton Goldhar Holdings Limited v. Minister of National Revenue, [1972] CTC 2118, 72 DTC 1118

The Chairman:—This matter was disposed of on the hearing’s conclusion at Toronto. However, it still remains to record the reasons for the decision then reached. An income tax assessment relating to the appellant’s taxation year 1968 is involved, its fiscal period ending on April 30.

The appellant was incorporated as a provincial, private company on April 30, 1964, for the purpose of engaging “in all or any of the businesses of financial, industrial and management consultants”. There are ten other paragraphs in the relevant Letters Patent containing what purport to be objects, but are really powers and, it would seem, hardly needed to be included. Curiously enough, on the face of its 1968 income tax return the appellant’s business in that year is stated to be “public relations and trading securities”. Again, in the notice of appeal, it is shown as “making investments and dealing in securities’. The present grounds of appeal are as is succinctly set forth in the following paragraphs of the said notice of appeal:

2. In October of 1966, the Appellant, together with others agreed to invest certain monies in a private company called Columbia Auto Rentals & Services Limited (“Columbia”). Columbia was going to engage in the car wash business at the Park Towers Apartments, 400 Walmer Road, Toronto, Ontario.

3. The Appellant, together with I. Siderson Investments Limited and Wayne Tanenbaum, caused to be incorporated under the laws of the Province of Ontario on October 20, 1966, a company called Experiment C. W. Investments Limited (“Experiment”). The purpose of the incorporation of Experiment was to consolidate the joint investments of the Appellant, I. Siderson Investments Limited and Wayne Tannenbaum in Columbia.

4. By Agreement dated October 25, 1966, a shareholders’ agreement was entered into between Experiment and Concord Auto Rentals & Services Limited (“Concord”), whereby it was agreed that Experiment would own 49% of the issued share capital of Columbia, Concord would own 51% of the issued share capital of Columbia, and the board of directors of Columbia would consist of two nominees of Experiment and three nominees of Concord. It was further agreed that Experiment would advance the sum of $25,000 to Columbia, to finance the acquisition by Columbia of car wash equipment, such loan to be secured by an interest bearing promissory note, and by a chattel mortgage on the car wash equipment. Experiment subscribed for 49 shares of Columbia for $4.90 and advanced $25,000 as aforesaid.

5. By Agreement dated October 25, 1966, a shareholders’ agreement was entered into between the Appellant, I. Siderson Investments Limited and Wayne Tanenbaum, whereby it was agreed that each party would own 1/3 of the issued capital of Experiment, and each party would lend to Experiment the sum of $8,333.33, to be advanced by Experiment to Columbia, to fulfill the agreement made by Experiment with Columbia referred to in Paragraph 4 hereof. The Appellant subscribed for two shares of Experiment and paid therefor $2.00, and advanced to Experiment the sum of $8,333.33, secured by a demand promissory note with interest at 6% per annum.

6. In June, 1967 the Appellant purchased the note made by Experiment payable to I. Siderson Investments Limited and paid therefor the sum of $1,000.

7. The total investment by the Appellant in Experiment was the sum of $9,577, as follows:

Loan	$8,333.33
Shares	2.00
Purchase of Note	1,000.00
Legal Expense	241.67
Total	9,577.00

8. Columbia engaged in the car wash business for a period of time, but ran into financial difficulties and as a result closed down this operation.

9. Experiment demanded repayment on its promissory note, but Columbia was unable to make any payments on it.

10. Experiment attempted to sell the car wash equipment secured by the chattel mortgage in its favour, but to this date has been unable to find a purchaser for the same.

11. In view of the foregoing, the Appellant, as at April 30, 1968, considered its investment in shares and loan to Experiment worthless, and wrote this investment off against other income earned in that year.

12. Should the car wash equipment be sold, the Appellant’s share of the proceeds of such sale will be included in the taxable income of the Appellant in the year received.

On the strength of these admirably clear allegations, the majority of which were admitted by the respondent, the appellant sought to deduct the sum of $9,577 from its taxable income for 1968, as a business loss.

In March, 1970, the respondent ruled that the deduction claimed was not properly in respect of a business loss, but was a capital loss under paragraph 12(1 )(b) of the Income Tax Act and thus not allowable. This appeal eventually ensued.

On the plain facts disclosed herein, I do not find fault with the respondent’s ruling. The outlays made by the appellant that appear in paragraph 7, above, were not sums spent in the earning of income; instead, these were sums paid in order to keep another and rather shaky enterprise afloat, so to speak. Also, the outlays were not of a kind peculiar to the business that the appellant actually was purporting to pursue. They were unusual and more in the nature of financing or “setting-up” costs than income-earning expenses and I think that it must be so found. Accordingly, this appeal ought to be dismissed and the pertinent assessment not disturbed.

Appeal dismissed.

DONALD MacINTYRE, Appellant,

and

MINISTER OF NATIONAL REVENUE, Respondent.

Tax Review Board (Maurice Boisvert, QC), January 7, 1972.

Income Tax Act, RSC 1952, c 148 — 4, 5(1 )(a), 16(1) — Indirect payments —

The appeal concerned amounts of $2 and $26.80 added to appellant’s income as contributions made on his behalf to an insurance plan. The appellant, an actor, claimed that the two items were expenses inherent in his profession and that he was entitled to deduct them from his income. The Minister added the amounts to appellant’s income relying upon paragraph 5(1)(a) and subsection 16(1). The Minister subsequently withdrew his reliance on paragraph 5(1 )(a) (the appellant not being an employee) and substituted a reference to section 4.

HELD:

The premium paid was not subject to assessment and in the circumstances the appeal should be allowed. The appeal was allowed in part on the question of expenses, as agreed by the parties.

P Vineberg, QC and P Cutler, QC for the Appellant.

G Drolet for the Respondent.

Maurice Boisvert:—This appeal is from an assessment for the taxation year 1968, dated June 27, 1969.

The income tax return indicates that during 1968 appellant earned a net income of $5,411.46 as a free lance actor. The sum of $632.49 was deducted from his income, and he claimed the sum of $25.37 in overdeductions.

After examining the return, respondent raised the net income for the year to $6,380.76, as shown by Form T7W-8, set out below:

section 12(1) of the Income Tax Act, RSC 1952, c 148). We know that a profession is grouped, for income tax purposes, with a “calling, trade, manufacture or undertaking of any kind whatsoever and includes an adventure or concern in the nature of trade but does not include an office or employment” (paragraph 139(1)(e) of the aforementioned Income Tax Act).

Appellant objected to the assessment. Respondent reconsidered the assessment and notified said appellant its conclusions were that “the contribution of $2.00 to ACTRA Insurance Plan on your behalf by Canadian Marconi Company and the contribution of $26.80 to ACTRA Pension and Insurance Plans on your behalf by the National Film Board have been properly added to your income in accordance with the provisions of paragraph (a) of subsection (1) of section 16 of the Act [s/c]”.

The appeal was heard in Montreal on March 23, 1971. There was an investigation and counsel for the appellant presented verbal argument. Respondent’s counsel asked to plead in writing, and this was granted. The record was only completed on August 13, 1971. This judgment is therefore made pursuant to the Income Tax Act in effect at that time, and by the undersigned then a Member of the Tax Appeal Board.

The sections of the Act relied on by the Minister in his Notification in reply to appellant’s notice of objection read as follows:

5. (1) Income for a taxation year from an office or employment is the Salary, wages and other remuneration, including gratuities, received by the taxpayer in the year plus

(a) the value of board, lodging and other benefits of any kind whatsoever (except the benefit he derives from his employer’s contributions to or under a registered pension fund or plan, group sickness or accident insurance plan, medical services plan, supplementary unemployment benefit plan, deferred profit sharing plan or group term life, insurance policy) received or enjoyed by him in the year in respect of, in the course of, or by virtue of the office or employment; . . .

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, . . .

16. (1) A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer’s income to the extent that it would be if the payment or transfer had been made to him.

At the start of the argument counsel for the respondent moved to amend the Reply to the Notice of Appeal. In support of his motion he alleged that the assessor had erred in assessing appellant under section 5 of the Act. Clearly, since appellant was not an employee, but a professional actor, section 5 could not apply, especially as the employer’s payments are an exception to the general rule. Such payments cannot be regarded as remuneration within the meaning of section 5. I refer the parties to the following decisions: Henry Butt Norris v MNR, 17 Tax ABC 257, Campbell v MNR, 13 Tax ABC 273; Pazuk v MNR, 13 Tax ABC 264. The proposed amendment would fall under section 4 of the Act, which reads as follows:

4. Subject to the other provisions of this Part, income for a taxation year from a business or property is the profit therefrom for the year.

In doing this section 16 of the Act was tied in with section 4 instead of section 5.

As appellant did not show cause, the amendment was allowed. With this amendment, the question to be decided is whether or not appellant transferred taxable income to ACTRA in accordance with section 16. This is what counsel for the respondent says in his written submission:

(TRANSLATION)

. . . Appellant Donald Maclntyre is a “free lance” artist who belongs to an association known as ACTRA (Association of Canadian Television and Radio Artists); this association is composed of artists of the same kind and represents its members in dealings with producers, ie the persons hiring them. Inter alia, ACTRA enters into agreements with different producers, eg Canadian Marconi Company and the National Film Board, by which these producers are to make contributions to an ACTRA pension and insurance plan. The point at issue here is: must the contributions of the two producers cited in the foregoing example, contributions equal to 2 per cent of Mr. Maclntyre’s salary and made to the ACTRA insurance plan, be included in his income?

. . . The word “profit” used in the Income Tax Act, particularly section 4, means net profit, ie gross income from a business less the expenses necessary to earn this income.

The problem could not be better stated. Subsection 16(1) states that ‘‘a payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer’s income to the extent that it would be if the payment or transfer had been made to him”. (The italics are mine.) It must be conceded that appellant had consented to the payment of 2 per cent of the fees due him in his professional capacity. But if he had been paid this 2 per cent he would have had to pay the premiums himself, and would have been entitled to deduct the amount as an expense; otherwise he could not have earned his salary, for the very good reason that he was bound by his contracts and membership in ACTRA to make these expenditures. Appellant, therefore, by paying the expenses which he was entitled to deduct (subsection 12(1)), took nothing away from his taxable income, because it was taxable only on the profit, which is the difference between gross income and net income, ie after deducting expenses to earn such income, in this case professional fees. I cannot see how a legitimate and deductible expense could be the object of a payment that would then become taxable.

The evidence shows that the holder of the policy was the “Trustees of the Association of Canadian Television and Radio Artists Insurance and Retirement Savings Plan”, and that that policy covered loss of fees as a result of accidents, illness, loss of limbs, etc. The premiums were payable directly to the trustees by the Canadian Marconi Company and the National Film Board, under contracts between ACTRA and the two aforementioned companies. As the contracts are identical, we need only reproduce the clause relating to insurance from one of them, which reads as follows:

The Corporation shall continue to contribute an amount equal to 2% of the gross fees of each performer, payable by cheque to the Actra Insurance and Retirement Savings Plan, and mail to the National Office of Actra. These amounts shall be payable monthly, on or before the 15th of the month following the earning of such fees.

As can be seen, what respondent is claiming to tax is a contribution made by a third party to ACTRA, which insures its members and pays their premiums. This contribution by persons entering into contracts with free lance artists is as much for the protection of such persons as of artists who have accidents, or who fulfil one of the conditions giving rise to a claim against the contracting party under contracts binding on both actor and ACTRA.

The only problem in dispute is stated thus in the Statement submitted by counsel for the appellant at the start of the investigation:

. . . What is at issue is a two per cent contribution which is known as the ACTRA Fund. It is a trust fund for the purchase of certain insurance, and on page 2 of the original Reply to the Notice of Appeal it was referred to in the following way, and I am reading from Clause 4(c)(iii): “The remaining two per cent added by the engagor is used by ACTRA to purchase sickness and accident insurance. This latter amount has been held by Respondent to be taxable’’, and it is the two percent which is added by the engagor and which is to be distinguished from a three percent and another two percent having to do with retirement benefits.

Reference must be made in this appeal to the science of accounting. Appellant called an accounting expert as a witness in the case, since he is the auditor at the office of the ACTRA trustees. He assisted in the establishment of the accounting system for the professional Association to which appellant belongs. The accountant heard as a witness stated the following:

(TRANSLATION)

Q: So, according to accounting rules, and setting aside the provisions of the statute because you are not in a position to testify on legal aspects, but in accounting and with your knowledge of this plan, is the 2 per cent income for the individual working, or is it something else? A: The 2 per cent is paid into a common fund administered by the trustees. A member has no voice in deciding on what will be done with it. As to risk, and the protection given him, it is the office of trustees — not to use the expression “board” — which every year, two or three times a year, looks at the financial situation and the direction to be given to the insurance plan, so that the members, with the means available to the office of trustees, can obtain the maximum protection, as was originally conceived or understood in the minds of all of them.

Q: It is neither more nor less than a fund to protect occupational hazards? A: Yes, these monies are completely separate and subject to annual audit and financial statements produced for the benefit of the members of the association.

If, therefore, this is not income, the premium paid cannot be subject to assessment in the case of an independent professional of theatre or radio, as well as television.

In Spicer & Pegler's Income Tax and Profits Tax, by H A R J Wilson, FCA, at p 136, section 3(v), the following deductions are mentioned

among those which are allowed: “Insurance premiums on policies of indemnity in respect of the business, eg fire, burglary, workmen’s compensation, employers’ liability, loss of profits, etc.”

I would add that the Department of National Revenue has always allowed, as expenses that are deductible from profit in the case of professionals, insurance premiums paid to protect income against any loss resulting from illness or accident.

I refer the parties to the following comments taken from The Law of Income Tax, Surtax and Profits Tax, by Wheatcroft, at p 1237, para 1-503:

What is profit is primarily a question of fact to be ascertained by the tests applied in ordinary business; questions of law only arise when some express Statutory direction applies which excludes ordinary commercial practice or when the facts cannot be ascertained sufficiently precisely and some presumption of law must be invoked to fill the gap. (Sun Insurance Office v Clark, [1912] AC 443, at p 455; 6 TC 59, at p 78). In general, therefore, if accounts are prepared in a normal commercial manner and in accordance with current accountancy practice the profit shown by these accounts will be taken as the taxable profit, subject to any specific statutory provisions and to the overriding power of the court to disregard accountancy practice where that practice appears to them to be based on a mistaken view of the law. See Associated Portland Cement Manufacturers, Ltd v IRC: Associated Portland etc v Kerr (1945), 27 TC 103.

In the circumstances, taking into account the admissions and the evidence, I think the appeal should be allowed. All taxpayers must receive equal treatment. If appellant were an employee, such a premium would not be treated as remuneration; but as he is a professional, this premium, which is a professional expenditure recognized as a legitimate and deductible expense, would for him be taxable income. Would not such an interpretation make nonsense of the theory?

This appeal also related to certain expenses amounting to the sum of $945.50. As the parties were agreed, and respondent accepted the amount of $472.75 as an allowable deduction, the appeal is allowed in part only on that item, and in toto for the other question considered.

Appeal allowed in part.