Cameron,
J.
:—This
is
an
appeal
from
assessments
to
income
tax
made
upon
the
appellant
company
for
each
of
the
fiscal
years
ending
December
31,
1950,
1951
and
1952.
The
appeal
raises
the
question
as
to
the
deductibility
of
certain
expenses
incurred
by
the
appellant
in
carrying
out
a
timber
survey
on
properties
over
Which
it
had
cutting
rights
and
the
preparation
of
a
Forest
Management
Plan.
Such
expenses
aggregated
$176,904.67
in
the
period
1950
to
1954,
inclusive;
in
each
of
these
years
the
appellant,
in
filing
its
corporation
income
tax
return,
claimed
as
a
deduction
the
following
amounts:
|
1950
|
$
60,863.78
|
|
1951
|
62,478.81
|
|
1952
|
36,717.24
|
|
1953
|
16,121.62
|
|
1954
|
723.22
|
|
$176,904.67
|
In
this
appeal
I
am
concerned
only
with
the
assessment
relating
to
the
years
1950,
1951
and
1952,
those
relating
to
the
years
1953
and
1954
not
having
been
issued
at
the
date
of
the
trial.
In
assessing
the
appellant
for
the
years
in
question,
the
respondent
disallowed
as
expenses
the
following
portions
of
these
costs:
|
1950
|
$48,363.78
|
|
1951
|
49,655.84
|
|
1952
|
20,854.34
|
Paragraphs
8
and
9
of
the
respondent’s
Reply
to
the
Notice
of
Appeal,
as
amended
without
objection
at
the
trial,
are
as
follows
:
«8.
That
of
the
amounts
of
$60,863.78,
$62,478.81
and
$36,717.24,
claimed
as
deductions
by
the
Appellant
in
com-
puting
its
income
for
the
taxation
years
1950,
1951
and
1952,
the
amounts,
$48,363.78,
$49,655.84
and
$20,854.34,
respectively,
were
not
allowable
deductions
because
they
were:
(a)
outlays
or
expenses
not
made
or
incurred
by
the
Appellant
for
the
purpose
of
gaining
or
producing
income
from
property
or
a
business
of
the
Appellant,
within
the
meaning
of
paragraph
(a)
of
subsection
(1)
of
section
12
of
the
Income
Tax
Act,
and
(b)
outlays
or
payments
on
account
of
capital
within
the
meaning
of
paragraph
(b)
of
subsection
(1)
of
section
12
of
the
Act.
9.
That,
alternatively,
no
part
of
the
said
amounts
which
were
claimed
as
deductions
by
the
Appellant
should
have
been
allowed
as
the
whole
of
each
of
those
amounts
was
an
outlay,
expense
or
payment
of
the
kind
referred
to
in
subparagraphs
a)
and
(b)
of
paragraph
8
hereof.’’
it
is
to
be
noted
that
although
the
alternative
claim
of
the
respondent
in
paragraph
9
denies
the
deductibility
of
any
portion
of
the
amount
so
expended
(notwithstanding
the
fact
that
part
thereof
had
been
allowed
in
each
of
the
years),
counsel
for
the
Minister
stated
his
purpose
in
asking
for
the
amendment
which
included
these
paragraphs:
The
purpose
of
this
Motion
is
to
enable
us
to
be
in
a
position
to
argue
that
no
part
of
the
costs
should
have
been
allowed.
We
are
not
asking
for
any
reassessment
or
anything
like
that.
We
are
merely
clearing
the
way
for
a
legal
argument.’’
The
appellant
company
is
a
Canadian
subsidiary
of
the
Kalamazoo
Vegetable
Parchment
Company
of
Kalamazoo,
Michigan,
and
is
engaged
in
the
business
of
logging
and
producing
pulp
and
paper
in
the
vicinity
of
Espanola,
Ontario.
In
1943
the
parent
company
acquired
certain
properties
from
the
Abitibi
Company
(in
receivership)
and
on
May
26,
1944,
negotiated
a
timber
concession
from
the
Province
of
Ontario
(Appendix
1A
to
the
Notice
of
Appeal)
by
which
the
Crown
granted
to
the
parent
company
the
right
to
cut
certain
species
of
timber
at
the
rates
and
subject
to
the
conditions
mentioned
therein.
These
cutting
rights
were
assigned
to
the
appellant
by
the
parent
company
by
an
agreement
dated
March
25,
1946,
with
the
consent
of
the
Minister
of
Lands
and
Forests.
In
1947
the
appellant
acquired
further
licences
in
the
same
drainage
area
from
the
McFadden
Lumber
Company.
Then
by
an
agreement
dated
February
27,
1947
(Appendix
1B
to
the
Notice
of
Appeal),
the
Crown,
in
the
right
of
the
Province
of
Ontario,
entered
into
a
further
agreement
with
the
appellant
company
by
which
certain
cutting
rights
were
granted
to
the
appellant
on
the
terms
and
conditions
therein
set
forth.
The
matter
is
not
at
all
clear
but
it
would
appear
that
the
cutting
rights
so
granted
covered
the
areas
formerly
under
licence
to
the
McFadden
Lumber
Company
as
well
as
certain
additional
properties
in
the
township
of
Ermatinger,
and
possibly
also
the
properties
referred
to
in
the
original
agreement
of
May
26,
1944.
On
March
10,
1947,
the
Minister
of
Lands
and
Forests
forwarded
a
letter
to
the
appellant
(Exhibit
3)
in
these
terms:
‘
For
your
information
I
am
enclosing
a
copy
of
the
‘Manual
of
Requirements
for
Working
or
Management
Plans,
Operating
Plans,
Annual
Cutting
Applications
and
Forest
Surveys’.
This
manual
should
be
used
by
you
as
a
guide
in
the
preparation
of
reports
required
under
the
terms
of
your
agreement
with
the
Crown.
Your
working
plan
is
due
on
May
26th,
1949.”
Subsequently,
the
date
for
filing
the
Working
Plan
was
extended
to
March
31,
1952.
Exhibit
4
is
the
Manual
of
Requirements’’
mentioned
in
that
letter.
It
includes
a
copy
of
The
Forest
Management
Act,
1947,
and
a
statement
of
the
data
which
should
be
included
in
(1)
a
Working
or
Management
Plan;
(2)
an
Operating
Plan;
(3)
the
annual
cutting
applications;
and
(4)
a
statement
of
the
minimum
requirements
for
summarizing
information
on
forest
surveys
conducted
for
the
Department
of
Lands
and
Forests.
The
Forest
Management
Act,
1947,
is
chapter
38
of
the
Statutes
of
Ontario
1947.
Inasmuch
as
the
expenditures
here
in
question
were
made
pursuant
to
its
provisions
and
the
regulations
established
thereunder,
it
will
be
helpful
to
state
the
operative
sections
in
full:
"2.
(1)
Every
person
who
has
cutting
rights
in
a
Crown
timber
area
shall,
when
required
by
the
Minister,
furnish
to
him—
(a)
an
estimated
inventory
of
the
timber
on
the
Crown
timber
area
with
respect
to
which
he
has
cutting
rights,
classifying
the
timber
as
to
age,
species,
size
and
type
;
(b)
a
proposed
master
plan
for
managing
the
Crown
timber
area
and
utilizing
the
timber
thereon;
and
(c)
a
map,
which
shall
form
a
part
of
the
master
plan,
dividing
the
Crown
timber
area
into
proposed
operational
units.
(2)
The
Minister
may
approve
a
master
plan
as
submitted
to
him
or
may
approve
it
with
such
alterations
therein
as
he
may
deem
advisable.
(3)
Subject
to
section
3,
a
person
who
has
received
a
request
to
furnish
a
master
plan
shall
manage
the
Crown
timber
area
covered
by
it
and
utilize
the
timber
thereon
in
accordance
with
the
provisions
of
the
approved
master
plan.
(4)
Where
conflict
exists
between
an
approved
master
plan
and
any
agreement
made
or
license
granted
under
The
Crown
Timber
Act,
the
provisions
of
the
master
plan
shall
govern.
3.
(1)
Every
person
who
is
required
to
furnish
a
master
plan
shall
annually
during
the
life
of
such
master
plan,
furnish
to
the
Minister,—
(a)
at
least
sixty
days
before
cutting
operations
commence,
a
plan
for
cutting
operations
to
be
conducted
during
the
twelve-month
period
commencing
on
the
1st
day
of
April;
and
(b)
on
or
before
the
31st
day
of
October,
a
map
indicating
the
cut-over
areas
together
with
a
statement
showing
the
amount,
species
and
size
of
timber
cut
from
each
cutting
area
during
the
twelve-month
period
ending
March
31st
of
that
year.
(2)
The
Minister
may
direct
such
alteration
to
be
made
in
an
annual
plan
as
he
deems
advisable
and
where
such
alteration
involves
the
alteration
of
an
approved
master
plan,
the
master
plan
shall
be
deemed
to
be
altered
accordingly.
4.
The
Minister
may
direct
the
cessation
of
cutting
operations
until
a
master
plan
has
been
approved.
5.
Where
any
person
fails
to
comply
with
an
approved
master
plan,
the
Minister
may
suspend
or
cancel
the
agreement,
or
license,
or
both,
under
which
he
derives
his
cutting
rights.
6.
The
Lieutenant-Governor
in
Council
may
make
regulations,
(a)
prescribing
the
manner
of
preparing
and
the
form
of
inventories,
maps
and
statements
required
under
this
Act
and
governing
the
accuracy
and
verification
thereof
;
and
(b)
generally
for
the
better
carrying
out
of
the
provisions
of
this
Act.
7.
This
Act
shall
come
into
force
on
the
1st
day
of
June,
1947.1’
It
is
common
ground
that
Exhibit
4—the
Manual
of
Requirements—constitutes
the
regulations
provided
for
in
Section
6
of
the
Act.
Pursuant
to
the
request
of
the
Minister
of
Lands
and
Forests
dated
March
10,
1947
(Exhibit
3),
and
in
accordance
with
the
provisions
of
the
Act
and
its
regulations,
the
witnesses
D.
W.
Gray—who
was
the
assistant
woods
manager
and
the
logging
engineer
of
the
appellant
company—proceeded
to
secure
the
information
necessary
to
prepare
the
Forest
Management
Plan.
Certain
data
was
already
on
hand,
some
of
which
had
been
taken
over
from
the
previous
owners
and
some
of
which
had
been
acquired
in
previous
years
by
cruises
and
surveys
carried
out
by
the
appellant
company
itself.
This
information,
however,
was
insufficient
to
meet
the
requirements
of
the
regulations;
it
was
necessary,
therefore,
to
secure
further
and
up-to-date
information
as
to
the
inventory
of
timber
before
the
required
"
"
estimated
inventory’’,
the
Master
Plan
for
managing
the
timber
area,
and
the
Map
could
be
furnished
to
the
Minister.
There
is
no
precise
statement
as
to
the
details
of
this
operation,
but
in
the
main
they
consisted
of
extensive
aerial
surveys
and
ground
cruises,
involving
also
to
some
extent
the
use
of
office
personnel
and
the
preparation
of
prints
and
maps.
As
I
have
said,
the
entire
operation
took
about
five
years
to
complete,
the
total
cost
being
$176,904.67;
no
exception
is
taken
to
that
amount
or
as
to
the
proportion
thereof
expended
in
each
year.
Exhibit
1
is
the
Forest
Management
Plan;
it
is
a
summary
of
findings
relative
to
quantity
of
timber,
their
location
and
condition.
Exhibits
2(a)
to
2(g)
are
the
operating
plans
dealing
with
individual
watersheds
set
up
as
operating
areas
by
the
company
;
they
constitute
a
broad
outline
of
operating
procedure
which
should
be
followed
in
their
development.
The
evidence
indicates
that
in
the
years
prior
to
1947
(when
it
was
required
to
prepare
the
Forest
Management
Plan)
the
appellant,
for
its
own
purposes
and
in
the
operation
of
its
business,
had
expended
annually
an
amount
of
about
$17,000
for
surveys
and
timber
cruises,
which
amounts
had
been
allowed
as
operating
expenses.
While
the
preparation
of
the
Forest
Management
Plan
was
undertaken
solely
for
the
purpose
of
meeting
the
requirements
of
the
Minister
of
Lands
and
Forests,
part
of
the
information
thereby
secured
was
of
direct
assistance
to
the
company
and
resulted
in
a
lessening
of
the
cost
of
the
annual
surveys
and
cruises
which
would
normally
have
been
undertaken.
While
such
expense
had
averaged
$17,000
per
annum
before
the
preparation
of
the
Plan,
it
was
reduced
to
about
$4,500
per
annum
after
the
Plan
was
undertaken,
and
the
latter
amount
of
normal
expenditures
was
apparently
allowed
as
a
proper
deduction.
In
addition,
for
each
of
the
years
in
question
the
Minister,
in
assessing
the
appellant,
allowed
a
further
sum
of
$12,500,
being
apparently
of
the
opinion
that
$17,000
was
a
normal
and
proper
deduction
for
such
surveys
and
cruises.
In
addition,
he
allowed
$322.97
and
$3,362.90
as
the
cost
of
maps
for
the
years
1951
and
1952
respectively.
From
the
assessments
made
on
this
basis,
the
appellant
now
appeals
to
this
Court.
For
each
of
the
taxation
years
in
question,
the
following
provisions
were
contained
in
the
Income
Tax
Act:
‘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,
(b)
an
outlay,
loss
or
replacement
of
capital,
a
payment
on
account
of
capital
or
an
allowance
in
respect
of
depreciation,
obsolescence
or
depletion
except
as
expressly
permitted
by
this
Part,”
Briefly,
the
contention
of
the
appellant
is
that
the
whole
of
the
expenditures
so
incurred
was
made
for
the
purpose
of
gaining
or
producing
income
from
property
or
a
business
of
the
taxpayer
and
were
consequently
not
barred
from
deduction
by
the
provisions
of
subsection
(1)
(a)
of
Section
12.
For
the
respondent,
it
is
submitted
that
the
outlays
were
barred
from
deduction
by
the
provisions
of
that
subsection
in
that
they
were
not
made
for
the
purpose
of
gaining
or
producing
income
from
property
or
a
business
of
the
taxpayer;
and
also
that
they
were
barred
by
the
provisions
of
subsection
(1)(b)
as
being
an
outlay
or
payment
on
account
of
capital.
Before
considering
these
subsections,
it
will
be
convenient
to
dispose
first
of
one
submission
made
by
Mr.
Tolmie,
counsel
for
the
appellant
company.
It
relates
to
the
evidence
of
Mr.
A.
McG.
Kennedy,
manager
of
the
Toronto
office
of
Ernst
and
Ernst,
accountants
and
auditors
of
the
appellant
company.
Mr.
Kennedy
stated
that
the
outlays
in
question,
under
generally
accepted
accounting
principles,
would
be
treated
as
expenses
and
charged
to
operating
expenses
at
the
time
they
were
incurred
and
that
he
had
treated
them
in
that
manner.
He
considered
that
no
portion
should
be
capitalized
as
he
could
not
find
that
any
capital
asset
had
been
created
or
enhanced
in
value
by
the
expen-
ditures.
In
cross-examination,
he
stated
that
the
absence
of
any
capital
asset
(as
a
result
of
the
expenditures)
was
the
sole
reason
for
the
opinion
at
which
he
had
arrived.
It
is
well
settled,
however,
that
an
outlay
or
expense
which
might
be
deductible
from
income
on
generally
accepted
accounting
principles
is
not
deductible
if
it
be
barred
by
express
provisions
of
the
Act.
In
the
case
of
Imperial
Oil
Lid.
v.
M.N.R.,
[1947]
Ex.
C.R.
527
at
530
;
[1947]
C.T.C.
353
at
359,
the
learned
President
of
this
Court
stated
in
reference
to
the
somewhat
similar
provisions
of
Section
6(a)
of
the
Income
War
Tax
Act:
"...
The
section
directs
that
such
disbursements
or
expenses
are
not
to
be
deducted,
even
although
they
might
be
deductible
according
to
ordinary
principles
of
commercial
trading
or,
as
it
has
been
suggested
"
well
accepted
principles
of
business
and
accounting
practice’.
The
range
of
deductibility
according
to
such
principles
may
be
wider
than
that
which
is
inferentially
permitted
under
the
section.
To
that
extent
they
must
give
way
to
the
express
terms
of
the
section,
which
must,
of
course,
prevail.
The
result
is
that
the
deductibility
of
disbursements
or
expenses
is
to
be
determined
according
to
the
ordinary
principles
of
commercial
trading
or
well
accepted
principles
of
business
and
accounting
practice
unless
their
deduction
is
prohibited
by
reason
of
their
coming
within
the
express
terms
of
the
excluding
provisions
of
the
section.’’
In
order
to
determine
whether
the
outlay
was
made
for
the
purpose
of
gaining
or
producing
income
from
property
or
a
business
of
the
appellant
company,
it
becomes
necessary
to
examine
the
real
nature
of
the
expenses
and
why
they
were
incurred.
It
is
abundantly
clear
from
the
evidence
that,
had
not
the
appellant
been
required
to
prepare
the
master
plan,
it
would
not
have
embarked
on
the
very
extensive
woods
inventory
survey
which
it
actually
made
;
it
would
merely
have
continued
to
make
the
ordinary
annual
cruises
and
surveys
necessary
for
its
own
logging
operations
that
it
had
made
in
previous
years.
Mr.
Gray
stated
that
"The
purpose
of
this
plan
was
to
fulfil
the
requirements
of
the
Department
of
Lands
and
Forests
under
the
Forest
Management
Act.
We
already
had
the
information
which
was
sufficient
to
put
our
limits
on
a
sustained
yield
basis
.
.
.
The
purpose
of
this
plan
was
to
provide
the
Department
of
Lands
and
Forests
with
information
which
would
enable
them
to
prepare
a
picture
of
the
forest
.
.
.
an
inventory
of
the
forest
condition
in
the
province
as
a
whole.’’
This
latter
view
is
supported
by
a
statement
on
page
10
of
the
Manual
of
Requirements
that
"‘By
following
a
form
such
as
outlined
herewith,
basic
data
from
all
forest
surveys
conducted
for
the
Department
of
Lands
and
Forests
can
be
amalgamated
to
form
a
mosaic
of
forest
conditions
over
large
territories
and
provide
uniform
summaries
from
which
to
determine
the
present
and
future
values
of
the
forests
of
Ontario.
‘
‘
Later
Mr.
Gray
reiterated
the
point:
"‘Yet
again,
if
I
may
repeat,
we
were
under
an
obligation,
and
the
only
reason
that
this
work
was
undertaken
was
in
order
to
satisfy
the
requirements
of
that
manual,
which
has
the
effect
of
being
a
regulation
issued
under
the
Forest
Management
Act
.
.
.
I
prepared
them
(i.e.,
the
cruise
regulations)
to
satisfy
the
conditions
of
that
manual.
‘
‘
Mr.
Avery,
president
and
general
manager
of
the
appellant
company,
was
equally
emphatic
on
this
point.
He
stated
that
the
purpose
of
gathering
the
data
"‘was
to
conform
with
the
directions
received
and
the
plan
was
written
and
submitted
in
accordance
with
that.’’
Further,
he
stated
that
the
company’s
operations
had
always
been
based
on
a
policy
of
maintaining
yields
in
perpetuity
and
that
the
plan
which
was
prepared
was
not
needed
to
carry
out
that
policy.
‘‘The
survey
made
to
secure
the
data
for
the
plan
was
merely
the
carrying
out
of
a
duty
required
under
the
1947
legislation.
The
plan
which
the
company
had
prepared
and
used
previously,
supplemented
by
necessary
annual
‘current
cruising’
to
ascertain
damage
by
fire
and
insects
and
unauthorized
cutting,
was
sufficient
to
keep
the
inventory
up
to
date
for
its
own
purposes.’’
In
his
opinion,
the
purpose
of
requiring
all
licensees
in
the
province
to
prepare
Forest
Management
Plans
was
to
ensure
uniformity
of
survey
throughout
the
province.
It
was
undoubtedly
necessary
for
the
appellant
company
to
comply
with
the
requirement
of
the
Minister
of
Lands
and
Forests
that
it
prepare
the
Forest
Management
Plan.
If
it
failed
to
do
so,
the
Minister
under
the
terms
of
the
Act
was
empowered
to
direct
the
suspension
of
all
its
cutting
activities.
Further,
and
notwithstanding
its
general
licence
from
the
province,
the
company
was
required
annually
(Section
3)
to
apply
for
a
“cutting
permit’’
over
specified
areas
and
in
specified
quantities,
and
this
cutting
permit
could
also
have
been
withheld
had
the
require-
ments
not
been
fulfilled.
Mr.
Avery
stated
the
position
of
the
company
as
follows
:
“As
a
licensee
of
the
Crown,
in
order
to
continue
the
rights
under
the
licence,
we
were
required
to
do
the
work
and
we
had
to
do
it.
It
would
not
have
been
done
in
this
manner
had
we
not
been
required
under
the
statute
to
do
it.”
He
admitted
that,
if
the
annual
cutting
permit
were
denied,
the
company
would
be
out
of
business
in
six
months,
as
its
supply
of
wood
would
have
been
cut
off.
In
these
circumstances,
it
seems
to
me
that
the
overriding
purpose
of
the
appellant
company,
in
incurring
these
expenses,
was
not
that
of
gaining
or
producing
income
from
its
property
or
business
but
rather
for
the
purpose
of
complying
with
the
requirement
of
the
Minister
of
Lands
and
Forests,
as
authorized
by
The
Forest
Management
Act
and
its
regulations,
in
order
to
preserve
its
rights
under
the
licensing
agreements
which
it
held.
The
business
operations
of
the
appellant
company
consisted
in
acquiring
timber,
either
by
cutting
on
its
own
limits
or
by
purchase
from
others,
and
in
processing
it
into
pulp
or
paper
for
sale.
To
the
extent
that
the
special
surveys
made
for
the
purpose
of
collecting
data
for
the
Forest
Management
Plan
exceeded
the
ordinary
annual
cruises
incidental
to
the
company’s
normal
operations,
the
sole
purpose
in
undertaking
them
was
to
supply
data
to
the
provincial
authorities
for
their
own
use
in
planning
forest
management
control
for
the
whole
of
the
province
and
was
of
benefit
only
to
those
authorities.
To
that
extent,
the
outlays
were
not
made
for
the
purpose
of
gaining
or
producing
income
and
were
made
by
the
appellant
not
as
trader
or
operator,
but
as
owner.
While
the
expenses
were
incurred
in
connection
with
the
appellant’s
business,
that
is
not
of
itself
sufficient
to
render
them
deductible.
In
the
case
of
Strong
&
Co.
v.
Woodifield,
[1906]
A.C.
448
at
453,
Lord
Davey
said:
.
It
is
not
enough
that
the
disbursement
is
made
in
the
course
of,
or
arises
out
of,
or
is
connected
with,
the
trade,
or
is
made
out
of
the
profits
of
the
trade.
It
must
be
made
for
the
purpose
of
earnings
the
profits.”
In
M.N.R.
v.
The
Dominion
Natural
Gas
Co.
Ltd.,
[1941]
S.C.R.
19
at
22;
[1940-41]
C.T.C.
155
at
158,
Duff,
C.J.C.,
stated:
«
First,
in
order
to
fall
within
the
category
disbursements
or
expenses
wholly,
exclusively
and
necessarily
laid
out
or
expended
for
the
purpose
of
earning
the
income’,
expenses
must,
I
think,
be
working
expenses
;
that
is
to
say,
expenses
incurred
in
the
process
of
earning
‘the
income’.’’
Reference
may
also
be
made
to
Montreal
Coke
and
Manufacturing
Co.
v.
M.N.R.,
[1944]
A.C.
126
at
133,
where
Lord
Macmillan,
in
the
Judicial
Committee
of
the
Privy
Council,
said:
.
Expenditure,
to
be
deductible,
must
be
directly
related
to
the
earning
of
income.
The
earnings
of
a
trader
are
the
product
of
the
trading
operations
which
he
conducts.”
Again,
in
Tata
Hydro-Electric
Agencies,
Ltd.,
Bombay
v.
Commissioner
of
Income
Tax,
[1937]
A.C.
685,
the
facts,
as
set
out
in
the
headnote,
are
as
follows
:
"The
appellants,
a
private
limited
company,
who
carried
on
the
business
of
managing
agents
of
A.
company,
receiving
for
their
services
a
commission
of
10
per
cent
on
the
annual
net
profits
of
A.
company,
with
a
minimum
of
Rs.
50,000
whether
that
company
should
make
any
profits
or
not,
had
acquired
that
agency
from
B.
company,
their
predecessors,
under
an
assignment
whereby
B.
company
transferred
to
the
appellants
their
whole
rights
and
interest
as
agents
of
A.
‘company,
subject,
however,
to
their
(B.
company’s)
obligations
under
two
agreements
with
D.
and
E.
respectively
whereby
B.
company,
who
while
the
managing
agents
of
A.
company
had
borrowed
money
for
that
company
from
D.
and
E.,
had
to
pay
to
both
D.
and
E.,
in
addition
to
the
interest
they
would
receive
from
A.
company
on
the
loan,
121%
per
cent
of
the
commission
earned
by
them
(B.
company)
under
their
agency
agreement
with
A.
company
:
Held,
that
in
computing
their
income,
profits
and
gains
for
tax
purposes
the
appellants
were
not
entitled
to
deduct
the
25
per
cent
of
the
commission
earned
and
received
from
A.
company
which
they
paid
over
to
D.
and
E.
under
the
agreements.
That
percentage
of
the
commission
paid
to
D.
and
E.
was
not
expenditure
incurred
by
the
appellants
‘solely
for
the
purpose
of
earning
.
.
.
profits
or
gains’
of
their
business
within
the
meaning
of
s.
10,
sub-s.
2(ix.)
of
the
Indian
Income-tax
Act,
1922.
The
obligation
to
make
the
payments
was
undertaken
by
the
appellants
in
consideration
of
their
acquisition
of
the
right
and
opportunity
to
earn
profits,
that
was,
of
the
right
to
conduct
the
business,
and
not
for
the
purpose
of
producing
profits
in
the
conduct
of
the
business.’
.,
Lord
Macmillan
at
page
695
said
this:
"
"
Their
Lordships
recognize,
and
the
decided
cases
show,
how
difficult
it
is
to
discriminate
between
expenditure
which
is,
and
expenditure
which
is
not,
incurred
solely
for
the
purpose
of
earnings
profits
or
gains.
In
the
present
case
their
Lordships
have
reached
the
conclusion
that
the
payments
in
question
were
not
expenditure
so
incurred
by
the
appellants.
They
were
certainly
not
made
in
the
process
of
earning
their
profits;
they
were
not
payments
to
creditors
for
goods
supplied
or
services
rendered
to
the
appellants
in
their
business;
they
did
not
arise
out
of
any
transactions
in
the
conduct
of
their
business.
That
they
had
to
make
those
payments
no
doubt
affected
the
ultimate
yield
in
money
to
them
from
their
business,
but
that
is
not
the
statutory
criterion.
They
must
have
taken
this
liability
into
account
when
they
agreed
to
take
over
the
business.
In
short,
the
obligation
to
make
these
payments
was
undertaken
by
the
appellants
in
consideration
of
their
acquisition
of
the
right
and
opportunity
to
earn
profits,
that
is,
of
the
right
to
conduct
the
business,
and
not
for
the
purpose
of
producing
profits
in
the
conduct
of
the
business.”
And
at
page
696
he
stated
the
test
to
be
as
follows:
"...It
is
necessary,
accordingly,
to
attend
to
the
true
nature
of
the
expenditure,
and
to
ask
oneself
the
question,
Is
it
a
part
of
the
Company’s
working
expenses;
is
it
expenditure
laid
out
as
part
of
the
process
of
profit
earning?”
Applying
the
principles
and
tests
laid
down
in
these
cases,
I
have
reached
the
conclusion
that
the
expenses
in
question,
to
the
extent
that
they
exceeded
the
normal
annual
expenses
for
cruising
and
surveys,
were,
for
the
reasons
stated,
not
made
for
the
purpose
of
gaining
or
producing
income
from
the
property
or
business
of
the
appellant.
They
were
made
by
the
appellant
in
its
capacity
as
owner,
rather
than
as
trader
or
operator,
and
were
not
made
for
the
purpose
of
producing
profits
in
the
conduct
of
the
business.
While
the
appellant
company,
during
the
years
in
question,
did
not
attempt
to
segregate
its
normal
annual
operating
expenses
for
surveys
and
cruises
from
the
total
amount
expended
in
preparing
the
data
for
the
Forest
Management
Plan,
the
assessments
made
in
the
manner
indicated
above
did
provide
for
such
segregation
on
what
appears
to
be
a
fair
and
reasonable
basis.
In
any
event,
there
was
no
evidence
led
by
the
appellant
company
to
indicate
that
the
deductions
so
permitted
were
less
than
should
have
been
allowed
for
the
cost
of
the
normal
annual
operating
cruises
and
surveys.
I
am
of
the
opinion
also
that
the
expenses
to
the
same
extent
as
mentioned
above
were
barred
from
deduction
by
the
provisions
of
subsection
(l)(b)
of
Section
12
of
the
Income
Tax
Act
as
being
an
outlay
on
account
of
capital.
In
the
original
licensing
agreement,
dated
May
26,
1944,
between
the
province
and
the
parent
company
(page
10
of
Appendix
A/1
to
Exhibit
1).
there
are
the
following
provisions:
"‘
1.
In
consideration
of
the
covenants
and
agreements
on
the
part
of
the
Company
herein
contained,
the
Crown,
with
the
approval
and
consent
of
the
Lieutenant-Governor
in
Council,
and
subject
to
the
terms
and
conditions
hereof,
doth
grant
to
the
Company
for
a
period
of
twenty-one
(21)
years
from
the
First
day
of
April,
1943
the
sole
right
to
cut
and
remove
the
timber
specified
in
Clause
2
of
this
Agreement
in
and
upon
the
lands
described
in
Schedule
‘A’
hereto
and
the
lands
selected
from
Schedules
‘B‘
and
‘C‘
hereto,
which
Schedules
form
part
of
this
Agreement.
***
11.
The
Company
shall
operate
in
accordance
with
good
forestry
practice,
and
within
five
(5)
years
from
the
date
hereof
shall
file
with
the
Department
of
Lands
and
Forests
a
working
plan
prepared
by
the
Company,
which
shall
be
satisfactory
to
the
Minister,
providing
a
general
scheme
for
the
operation
and
management
of
the
area
granted,
and
providing
for
the
placing
of
its
supply
of
pulpwood
on
a
sustained-yield
basis,
to
the
end
that
the
area
will
be
kept
productive
and
in
accordance
with
the
provisions
of
the
Pulpwood
Conservation
Act.
***
29.
This
Agreement
shall
be
subject
to
all
Acts
of
the
Legislature
of
the
Province
of
Ontario
which
are
now
or
which
may
hereafter
be
in
force
and
all
regulations
duly
made
under
the
provisions
of
such
Acts,
so
far
as
they
may
be
of
general
application
to
the
cutting,
measuring,
removing
and
driving
of
timber
on
and
from
Crown
lands
throughout
the
Province,
and
the
same
shall
be
binding
upon
and
ensure
unto
the
Company
and
shall
apply
to
its
operations
under
this
Agreement
as
fully
and
effectually
as
if
they
had
been
set
forth
herein.
***
34.
The
Company
hereby
covenants
and
agrees
to
observe,
perform
and
keep
all
covenants,
provisions,
agreements
and
conditions
on
its
part
herein
contained.’’
And
in
the
licensing
agreement
of
February
27,
1947
(Appendix
1B
to
the
Notice
of
Appeal),
after
reciting
that
the
1944
agreement
had
been
assigned
by
the
parent
company
to
the
appellant
company
with
the
approval
of
the
Minister
of
Lands
and
Forests
there
is
the
following
provision
:
"‘It
is
further
agreed
by
and
between
the
parties
hereto
that
all
the
terms
and
conditions
of
the
1944
agreement
shall
apply
to
and
be
binding
upon
this
Agreement
as
fully
and
effectually
as
if
the
area
in
Schedule
‘A’
hereto
had
been
included
in
and
formed
part
of
the
1944
agreement.’’
It
is
apparent,
therefore,
that
the
appellant
company,
by
the
terms
and
conditions
of
its
licensing
agreements
with
the
province,
was
bound
to
submit
and
conform
to
all
acts
of
the
Legislature,
including
those
that
thereafter
might
come
into
force,
and
the
regulations
made
under
such
acts,
such
as
The
Forest
Management
Act,
1947
and
its
regulations.
It
seems,
therefore,
that
the
obligation
to
prepare
and
deposit
the
Forest
Management
Plan
was
assumed
by
the
appellant
company
in
part
consideration,
at
least,
of
the
acquisition
of
the
licences
and
the
opportunity
to
earn
profits
therefrom.
In
this
connection,
reference
may
be
made
to
a
portion
of
the
judgment
in
the
Tata
case
(supra),
where
at
page
695
it
is
stated
:
.
.
.
They
must
have
taken
this
liability
into
account
when
they
agreed
to
take
over
the
business.
In
short,
the
obligation
to
make
these
payments
was
undertaken
by
the
appellants
in
consideration
of
their
acquisition
of
the
right
and
opportunity
to
earn
profits,
that
is,
of
the
right
to
conduct
the
business,
and
not
for
the
purpose
of
producing
profits
in
the
conduct
of
the
business.’’
In
The
Royal
Insurance
Co.
v.
Watson,
[1897]
A.C.
1,
the
headnote
is
as
follows
:
Upon
the
transfer
of
an
insurance
business
the
transferees
agreed
to
take
into
their
service
the
transferors’
manager
at
a
fixed
salary,
with
liberty
to
commute
the
same
by
payment
to
him
of
a
gross
sum
to
be
calculated
upon
life
tables.
The
transferees
retained
the
manager’s
services
for
a
short
time
and
then
paid
him
a
gross
sum
in
commutation
of
his
salary.
They
claimed
to
deduct
that
sum
in
estimating
their
profits
for
income
tax:
Held,
that
the
agreement
to
pay
the
commutation
money
was
in
fact
part
of
the
consideration
for
the
transfer
of
the
business,
that
the
payment
was
therefore
a
‘sum
employed
as
capital’
and
could
not
be
deducted.”
At
page
8
Lord
Herschell
said:
.
The
payment
was
made
in
pursuance
of
a
bargain
entered
into
between
the
Royal
Insurance
Company
and
the
Queen
Insurance
Company,
which
bargain
contained
the
terms
on
‘which
the
Royal
Insurance
Company
was
to
become
possessed
of
the
business
of
the
Queen
Insurance
Company.
Of
course,
it
could
not
be
disputed
for
a
moment
that
the
price
paid
to
-a'
a
company
whose
concern
was
bought
by
another
company
would
not
be
expenditure
which
could
be
set
against
the
gains
of
the
year
in
which
the
payment
was
made.
It
would
obviously
be
capital
expenditure;
and
although
in
this
case
the
payment
was
a
payment
to
be
made
under
the
agreement
to
the
former
manager
of
the
Queen
Insurance
Company,
when
the
matter
is
looked
at
in
its
substance
and
essence,
I
do
not
think
that
payment
differs
from
such
a
payment
as
I
have
alluded
to.
I
think
it
was
equally
a
payment
made
in
pursuance
of
the
obligation
contained
in
the
contract
by
which
the
business
of
the
Queen
Insurance
Company
was
purchased,
and,
therefore,
is
properly
capital
expenditure.”
As
in
that
case,
I
think
that
the
expenditures
here
made,
in
so
far
as
they
exceed
the
normal
cost
of
the
annual
surveys
and
cruises
of
the
appellant
company
in
carrying
out
its
operations,
were
made
in
pursuance
of
its
obligations
in
the
licensing
agreement
and
were,
therefore,
capital
expenditures.
‘Reference
may
also
be
made
to
Robert
Addie
and
Sons
Collieries
Ltd.
v.
C.I.R.
(1924),
8
T.C.
671.
In
assessing
the
appellant,
the
respondent
had
treated
the
expenses
disallowed
as
relating
to
property
subject
to
capital
cost
allowances
under
Section
11(1)
(a)
of
the
Income
Tax
Act;
accordingly,
he
applied
the
provisions
of
Section
1100(1)
(e)
of
the
Regulations,
which
is
as
follows:
^1100.
(1)
Under
paragraph
(a)
of
subsection
(1)
of
section
11
of
the
Act,
there
is
hereby
allowed
to
a
taxpayer,
in
computing
his
income
from
a
business
or
property,
as
the
case
may
be,
deductions
for
each
taxation
year
equal
to
(e)
such
amount
as
he
may
claim
not
exceeding
the
amount
calculated
in
accordance
with
Schedule
C
in
respect
of
the
capital
cost
to
him
of
a
timber
limit
or
a
right
to
cut
timber
from
a
limit.”
It
was
suggested
in
the
Notice
of
Appeal
that,
if
the
expenditures
disallowed
were
found
to
be
of
a
capital
nature,
the
capital
cost
allowance
should
have
been
computed
at
a
rate
of
30
per
cent
under
the
provisions
of
Class
10(1)
of
Schedule
B,
which
is
as
follows
:
Property
not
included
in
any
other
class,
that
is
(1)
property
that
was
acquired
for
the
purpose
of
cutting
and
removing
merchantable
timber
from
a
timber
limit
and
will
be
of
no
further
use
to
the
taxpayer
after
all
merchantable
timber
has
been
removed
from
the
limit,
unless
the
taxpayer
has
elected
to
include
another
property
of
this
kind
in
another
class.
‘
‘
The
point
was
not
stressed
in
argument
except
for
the
purpose
of
suggesting
that
the
capital
cost
allowance
provided
for
in
the
assessments
was
inadequate.
It
is
sufficient
to
say
that
in
my
opinion
the
expenses
incurred,
to
the
extent
that
they
exceeded
the
annual
cost
of
cruises
and
surveys
in
the
appellant’s
normal
operations,
were
capital
expenditures
incurred
pursuant
to
the
terms
of
its
licensing
agreements
and
The
Forest
Management
Act,
1947,
and
were
part
of
the
capital
cost
of
the
timber
limit
or
the
right
to
cut
timber
from
a
limit,
and
consequently
fell
within
the
provisions
of
Section
1100(1)
(e)
of
the
Regulations.
It
is
unnecessary
to
define
the
properties
which
would
come
within
class
10(1)
of
Schedule
B,
but
it
is
to
be
noted
that
they.
do
not
affect
""property
included
in
any
other
class”.
For
these
reasons
the
appeals
will
be
dismissed
and
the
assessments
made
upon
the
appellant
for
the
years
1950,
1951
and
1952
will
be
affirmed.
The
respondent
is
entitled
to
his
costs
after
taxation.
Judgment
accordingly.
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