The
Assistant
Chairman:—Although
this
appeal
relates
to
an
assessment
of
income
tax
for
the
1971
taxation
year,
the
dispute,
in
actuality,
relates
to
a
claimed
expense
in
the
1969
taxation
year
and
a
further
expense
in
the
1970
taxation
year
of
the
appellant.
Because
of
the
loss-carry-forward
provisions
of
the
Income
Tax
Act,
RSC’
1952,
c
148,
there
was
no
assessment
of
tax
for
either
of
those
years
from
which
it
could
appeal,
but
in
1971
the
appellant
was
assessed
by
the
Minister
of
National
Revenue
for
a
greater
quantum
of
tax
in
that
year
than
the
appellant
expected.
The
appellant
had
carried
forward
from
1969
and
1970
what
.it
thought
was
its
loss
position
and
applied
those
amounts
against
its
income
for
the
1971
taxation
year.
The
Minister’s
opinion
was
different
from
that
of
the
appellant’s
as
he
did
not
agree
that
the
expenses
claimed
by
the
appellant,
which
will
be
detailed
more
fully
hereinafter,
were
expenses
and
consequently,
insofar
as
he
was
concerned,
there
was
no
loss
to
carry
forward
to
1971.
The
appellant,
at
the
time
the
claims
involved
in
this
appeal
arose,
was
a
subsidiary
of
a
corporation
which
was
incorporated
under
the
laws
of
Germany.
The
name
of
the
appellant’s
parent
was
Bopparder
Maschinenbaugesellschaft
MBH—BOMAG
(hereinafter
called
“Bomag
Germany’’).
In
April
1969
Bomag
Germany
caused
another
company
to
be
incorporated
pursuant
to
the
laws
of
the
Province
of
Ontario,
whose
name
was
Com-Pakall
Construction
Equipment
Limited
(hereinafter
called
“Com-Pakall”).
By
agreement
dated
April
29,
1969,
Com-
Pakall
entered
into
an
agreement
with
companies,
namely,
Pakall
Limited,
Pakall
Manufacturing
Limited
and
Pakall
Compaction
Equipment
Limited
to
acquire
their
assets
and
equipment.
By
further
agreement
dated
the
30th
day
of
April
1969,
Com-Pakall
made
with
Pakall
Compaction
Equipment
Limited
(hereinafter
called
“Pakall”)
a
sales
and
consulting
agreement.
Several
matters
were
agreed
to
in
the
agreement.
The
most
relevant
paragraphs
are
as
follows:
(In
this
agreement
the
“Company
referred
to
is
Com-Pakall.)
1.
The
Company
hereby
retains
Pakall
as
a
consultant
to
advise
the
Company
in
the
manufacture
of
compaction
equipment
and
to
assist
in
the
sale
of
the
product
throughout
North
America
for
a
period
commencing
on
May
1,
1969
and
ended
and
fully
to
be
completed
on
April
30,
1970.
2.
PAKALL
shall
be:
paid
and
the
Company
hereby
agrees
to
pay
Pakall
the
sum
of
$10,000
to
be
paid
in
12
equal
instalments
of
$833.33
on
the
first
day
of
each
and
every
calendar
month
throughout
the
term
of
this
Agreement.
3.
PAKALL
shall
make
Long
available
during
ordinary
business
hours
to
advise
the
Company
regarding
the
manufacture
and
sale
of
the
products
of
the
Company
throughout
the
North
American
market
and
Long
shall
be
employed
by
Pakall.
4.
PAKALL
is
hereby
retained
to
act
as
a
sales
agent
for
the
product
of
the
Company
upon
the
following
terms:
(a)
Pakall
shall
have
no
defined
territory
within
North
America
but
shall
have
the
right
to
sell
the
product
of
the
Company
to
anyone
in
North
America
but
not
on
an
exclusive
basis
and
shall
not
be
able
to
sell
to
the
ultimate
user
in
a
territory
in
which
the
Company
may
now
or
in
the
future
have
an
exclusive
dealer,
in
which
case
the
sale
shall
be
made
by
Pakall
through
the
dealer
and
the
commission
hereinafter
mentioned
shall
be
at
the
sale
price
to
the
dealer
and
not
to
the
ultimate
user;
(b)
It
is
agreed
that
in
the
case
of
the
five
machines
listed
by
type
and
serial
number
in
Schedule
“A”
annexed
hereto
and
the
first
five
machines
manufactured
by
the
Company,
or
any
person,
firm,
corporation,
partnership,
company
or
other
legal
entity
on
behalf
of
the
Company,
that
special
conditions
with
regard
to
commission
only
shall
apply.
A
commission
of
$2,000
shall
be
paid
to
Pakall
when
each
of
the
said
machines
is
sold
by
the
Company.
If
however
any
one
of
the
said
machines
is
sold
by
Pakall
for
less
than
$30,000
the
commission
payable
to
Pakall
for
such
machine
shall
abate
dollar
for
dollar
as
the
sale
price
shall
reduce
so
that
if
the
sale
price
were
$29,000
the
commission
Pakall
would
receive
would
be
$1,000,
if
$28,500
the
commission
Pakall
would
receive
would
be
$500
and
if
$28,000
there
would
be
no
commission
at
all,
no
sale
shall
however
be
made
without
the
Company’s
consent.
Provided
always
however
that
if
Pakall
shall
obtain
the
consent
of
the
Company
to
such
sale,
commission
shall
be
in
such
amount
as
the
parties
shall
agree
upon.
Subject
to
the
terms
of
this
clause,
the
commission
payable
to
Pakall
shall
be
paid
proportionately
to
it
as
payment
is
made
for
the
machine.
If
any
one
of
the
said
10
machines
is
repossessed,
the
balance
of
commission
still
outstanding
on
the
sale
under
which
the
said
machine
was
originally
sold
and
repossessed
shall
be
paid
to
Pakall
when
the
machine
is
disposed
of
and
such
commission
shall
be
paid
to
Pakall
proportionately
as
payment
is
made
for
the
machine
when
disposed
of
after
being
repossessed
and
so
on
from
time
to
time
until
Pakall
shall
have
received
the
full
commission
it
would
have
received
if
the
machine
had
not
been
repossessed.
If
any
dispute
shall
arise
over
the
amount
due
to
Pakall
for
commission
such
dispute
shall
be
determined
by
such
firm
of
chartered
accountants
mutually
agreed
upon
by
Pakall
and
the
Company
and
the
fee
of
which
shall
be
paid
equally
by
Pakall
and
the
Company.
(c)
In
all
cases
other
than
as
set
out
in
the
foregoing
subclause
Pakall
shall
be
paid
a
commission
of
4%
on
all
sales
effected
by
Pakall
which
commission
shall
be
calculated
on
the
sale
price
which
the
purchaser
shall
agree
to
pay,
fob
the
manufacturing
facilities
of
the
Company
and
for
reasons
of
clarity
only,
this
shall
not
be
deemed
to
include
any
retail
sales
tax
payable
by
the
purchaser,
interest
or
carrying
charges
payable
by
a
purchaser
in
order
to
finance
a
purchase
or
freight
charges.
The
said
commission
shall
be
payable
by
the
Company
when
the
Company
receives
payment
from
the
purchaser
in
any
manner
whatsoever;
for
example,
if
a
down
payment
of
$5,000
is
received,
4%
of
that
amount
would
be
paid
to
Pakall
on
account
of
its
commission
and
if
a
further
payment
of
$2,000
is
received,
4%
of
that
amount
would
be
paid
to
Pakall
on
account
of
its
commission
and
if
the
sale
price
is
secured
by
any
conditional
sale
contract,
chattel
mortgage,
promissory
note
or
any
like
contract
or
security
and
such
contract
or
security
is
sold
the
4%
of
the
value
of
such
contract
or
security
would
immediately
be
paid
to
Pakall
as
commission,
or
calculated
on
the
amount
actually
received
by
the
Company;
if
Long
approves
the
sale
of
such
security.
(e)
Pakall
shall
always
employ
and
make
available
the
services
of
Long
and
Pakall
shall
not,
from
May
1,
1969,
until
December
31,
1969,
be
employed
directly
or
indirectly
by
another
but
shall
devote
its
whole
time
and
attention
to
the
affairs
of
the
Company
and.
shall
act
dilligently
as
a
salesman
and
shall
not
accept
any
remuneration
or
honorarium
from
another
during
such
period.
From
January
1,
1970
until
April
30,
1970
Pakall
shall
as
as
consultant
to
the
Company
and
make
itself
available
to
the
Company
at
such
reasonable
times
and
for
such
reasonable
periods
as
the
Company
shall
reasonably
require,
There
are
other
paragraphs
to
the
agreement
of
that
date,
but
they
really
have
slight
significance
to
this
appeal.
The
transaction
took
place
in
accordance
with
the
said
agreement
and
reasonably
shortly
thereafter
Com-Pakall
started
to
carry
on
the
business
which,
in
effect,
had
previously
been
carried
on
by
Pakall.
It
should
be
mentioned
that
the
“Long”
referred
to
in
the
sales
and
consulting
agreement
was
the
person
who
was,
if
not
the
sole
shareholder
of
each
of
the
corporations
in
the
sale
agreement,
the
controlling
shareholder.
After
Com-Pakall
started
to
operate
the
business,
it
found
that
Long
was
interfering
with
production
in
that,
in
the
course
of
production,
he
was
stopping
the
operation
to
make
changes
rather
than
going
through
the
engineering
department.
He
was,
in
the
words
of
Walter
Kuettner
(hereinafter
called
“Kuettner”)
who
was
the
general
manager
and
secretary
of
Com-Pakall
as
well
as
Bomag
(Canada)
Limited
(hereinafter
called
“the
appellant”),
always
interfering
with
production
and
the
relationship
between
the
men
was
deteriorating.
He
discussed
the
matter
with
Long
and
advised
him
to
stop
working
on
production
and
spend
his
time
and
efforts
concentrating
on
the
sale
of
Com-
Pakall’s
products.
Shortly
thereafter
Long
let
it
be
known
that
he
could
not
work
on
a
full-time
basis.
In
addition,
shortly
after
Com-
Pakall
started
business,
it
found
that
its
suppliers
would
not
deal
with
it
on
a
regular
basis
because
of
the
history
they
had
had
with
Pakall.
It
found
that
it
was
forced
to
pay
for
goods
in
advance
and
then
had
to
wait
3
or
4
months
to
get
them.
When
it
acquired
the
business,
it
obviously,
in
the
opinion
of
Kuettner,
did
not
acquire
any
goodwill.
In
that
respect
Com-Pakall
decided
to
get
out
of
the
Com-Pakall
name.
It
should
be
mentioned
that
at
this
time
the
issued
share
capital
of
Com-Pakall
was
owned
80
per
cent
by
Bomag
Germany,
10
per
cent
by
Kuettner
and
10
per
cent
by
either
Long
or
Pakall.
Those
obstacles
being
considered,
a
decision
was
made
by
Bomag
Germany
that
another
company
should
be
incorporated
under
a
different
name
and
it
should
take
over
the
business
operations
carried
on
by
Com-Pakall.
To
this
end
the
appellant
was
incorporated
in
July
of
1969
pursuant
to
the
laws
of
the
Province
of
Ontario.
At
all
material
times
to
this
appeal
the
shares
of
the
appellant
were
owned
90%
by
Bomag
Germany
and
10%
by
Kuettner.
The
inventory
of
Com-Pakall
was,
shortly
after
incorporation,
transferred
to
the
appellant
if
no
tax
was
involved
as
a
result.
of
the
transfer.
The
employees
of
Com-Pakall
for
the
next
month
or
so
remained
with
Com-Pakall
and
Com-Pakall
invoiced
the
appellant
to
reimburse
it
for
the
services
provided
including
the
making
of
the
machinery.
Com-Pakall
sent
out
invoices
for
equipment
it
leased
in
the
period
of
August
to
September
1969.
On
or
about
October
1,
1969,
the
appellant
sent
to
all
distributors
with
which
it
was
familiar,
a
notice
that
it
had
taken
over
the
operations
of
Com-Pakall
as
of
October
1,
1969.
Com-Pakall
retained
ownership
of
the
buildings
and
some
equipment
which
the
appellant
rented
from
it.
They
carried
on
business
in
this
fashion
between
each
other
until
Com-Pakall
had
made
a
profit
against
which
it
could
write
off
its
prior
losses.
After
that,
Com-Pakall
was
wound
up
and
Kuettner
was
of
the.belief
this
happened
around
1972.
The
relationship
with
Long
continued
to
deteriorate
and
Kuettner
approached
Long
to
see
on
what
basis
the
sales
and
consulting
agreement
could
be
terminated.
Ultimately,
by
document
captioned
“Release”
and
dated
the
blank
day
of
November
1969,
Long
and
the
companies
mentioned
in
the
sales
agreement,
namely,
Pakall
Limited,
Pakall
Manufacturing
Limited
and
Pakall
Compaction
Equipment
Limited,
gave
the
release
to
certain
persons.
The
release
agreement
contains
the
following
recital
clause:
AND
WHEREAS
John
H
Long,
Pakall
Limited,
Pakall
Manufacturing
Limited
and
Pakall
Compaction
Equipment
Limited
wish
no
longer
to
be
associated
with
or
to
be
employed
by
Com-Pakall
and
wish
to
give
up
their
rights
under
the
said
recited
Agreements;
WITNESSETH
that
in
consideration
of
the
sum
of
$20,000
now
paid
to
John
H
Long,
Pakall
Limited,
Pakall
Manufacturing
Limited
and
Pakall
Compaction
Equipment
Limited,
the
receipt
whereof
is
by
each
of
them
hereby
acknowledged,
and
in
consideration
of
these
presents,
Long
and
Pakall
Limited,
Pakall
Manufacturing
Limited
and
Pakall
Compaction
Equipment
Limited
do
hereby
remise,
release
and
forever
discharge
Karl
Heinz
Schwamborn
and
Com-Pakall
Construction
Equipment
Limited
and
each
of
them,
their
respective
heirs,
executors,
administrators,
successors
and
assigns,
of
and
from
all
manner
of
actions,
causes
of
action,
suits,
debts,
claims
and
demands
whatsoever
which
the
said
John
H
Long,
Pakall
Limited,
Pakall
Manufacturing
Limited
and
Pakall
Compaction
Equipment
Limited
ever
had,
now
have
or
which
their
respective
heirs,
executors,
administrators,
successors
or
assigns,
or
any
of
them,
hereafter
can,
shall
or
may
have
for
or
by
reason
of
any
cause,
matter
or
thing
whatseover
(sic)
existing
up
to
the
present
time
and
arising
out
of
the
said
recited
Agreements
or
otherwise.
An
agreement
was
entered
into
between
Com-Pakall
and
the
appellant
dated
February
2,
1970
(Exhibit
A-6)
as
follows:
WHEREAS
Com-Pakall
has
a
line
of
credit
with
the
Canadian
Imperial
Bank
of
Commerce
which
it
has
allowed
Bomag
to
use;
AND
WHEREAS
Com-Pakall
has
paid
John
Long
$20,000
in
lieu
of
commission,
terminated
its
contract
with
him
and
allowed
Bomag
to
sell
certain
of
Com-Pakall’s
products.
WITNESSETH
that
the
parties
agree
as
follows:
1.
Any
monies
borrowed
by
Com-Pakall
and
used
by
Bomag
shall
be
repaid
by
Bomag
to
the
Canadian
Imperial
Bank
of
Commerce
and
Bomag
shall
be
responsible
for
any
interest
due
on
such
monies.
2.
Bomag
and
Com-Pakall
acknowledge
that:
Bomag
has
advanced
money
to
pay
John
Long
the
amount
of
$20,000
in
lieu
of
commission
and
to
terminate
his
contract
and
accordingly
Bomag
has
obtained
the
advantage
of
selling
the
compaction
equipment
formerly
sold
by
John
Long
and
Com-
Pakall.
3.
This
Agreement
confirms
the
verbal
arrangement
made
between
the
parties
and
the
course
of
conduct
of
the
parties
with
regard
to
the
matters
mentioned
herein.
Kuettner
stated
that,
insofar
as
he
was
aware,
the
only
payment
to
Pakall
from
the
appellant
was
for
the
inventory
of
Pakall’s
goods.
He
believes
that
there
was
no
goodwill.
On
cross-examination
Kuettner
agreed
that
the
sales
and
consulting
agreement
which
Pakall
had
with
Com-Pakall
was
not
an
exclusive
agreement
in
either
respect.
He
also
agreed
that
the
sales
and
consulting
agreement
was
never
assigned
by
Com-Pakall
to
the
appellant.
He
also
agreed
that
in
the
release
agreement
from
Long
et
al
to
Com-Pakall,
no
mention
was
made
of
the
appellant.
In
explanation
of
that
fact,
it
was
pointed
out
that
the
original
agreement
was
between
Com-Pakall
and
Pakall,
not
the
appellant.
The
obligation
under
the
release
was
just
assumed
by
the
appellant
and
the
only
evidence
that
Pakall
and
Long
et
a/
accepted
the
appellant
as
a
new
debtor
consists
solely
of
the
fact
that
the
cheque
in
payment
of
the
amount
referred
to
in
the
release
was
negotiated
as
drawn.
As
to
the
actual
payment
of
the
$20,000,
the
payer
was
Com-Pakall
and
the
payee
could
have
either
been
Long
or
‘Pakall.
According
to
Kuettner,
the
appellant
did
reimburse
Com-
Pakall
for
the
cost
as
it
was
getting
the
business—it
should
assume
the
expenses.
It
was
presumably
set
up
as
a
payable
by
the
appellant
to
Com-Pakall
in
November
1969.
As
to
the
payment
by
the
appellant
to
Pakall,
it
could
have
been
in
cash,
possibly
put
through
as
part
of
another
transaction,
or
paid
by
journal
entry
to
offset
amounts
which
the
appellant
owed
Com-Pakall.
The
audited
financial
statements
of
the
appellant
for
the
1970
fiscal
year
ending
on
November
30
contained
several
notes.
Note
6
which
was
referred
to
by
counsel
for
the
respondent
reads
as
follows:
Loan
Payable
(bank,
via)
Associated
Company:
This
loan
was
made
by
the
bank
to
Com-Pakall
Construction
Equipment
Limited
and
lent
in
turn
to
Bomag
(Canada)
Limited.
Although
the
loan
is
due
to
an
associated
company,
it
should
be
regarded
as
a
bank
loan,
for
the
purpose
of
liquidity.
Mr
Kuettner
agreed
that
the
proper
interpretation
from
that
note
would
be
that,
to
the
accountants,
the
appellant
had
loaned
the
money,
but
really
the
appellant
had
paid
the
$20,000
to
Long
et
a/.
Kuettner
agreed
that
the
money
advanced
(the
$20,000)
did
not
collect
interest.
He
also
confirmed
that
the
appellant
is
still
selling
goods
which
Com-
Pakall
had
manufactured
and
is
doing
it
without
any
new
agreement.
We
now
turn
to
the
other
expense
claimed
by
the
appellant
in
the
1970:
taxation
year
which
the
Minister,
by
his
assessment
in
1971,
disallowed
in
the
computation
of
the
loss
it
could
carry
forward.
The
appellant,
as
stated
by
Kuettner,
was
incorporated
solely
for
one
purpose,
namely,
to
acquire
the
assets
and
business
undertaking
carried
on
by
Com-Pakall.
Sales
were
not
too
good.
If
I
recall
the
evidence
correctly
as
a
matter
of
fact,
there
had
been
no
sales
by
the
time
the
sales
and
consultation
agreement
was
nullified.
Kuettner,
the
appellant
and
Bornag
Germany
knew
that
Bomag
Germany,
by
document
dated
January
30,
1967,
had
granted
to
a
company,
Wett-
laufer
Equipment
Limited
(hereinafter
called
“Wettlaufer”),
a
sales
and
distributorship
agreement
of
its
property
throughout
Canada.
Kuettner
stated
that,
insofar
as
he
knew,
no
fee
was
paid
by
Wettlaufer
to
Bomag
Germany
for
this
franchise.
It
was
presumed
that
Wettlaufer
was
making
money
selling
Bomag
Germany’s
equipment.
Kuettner
apparently
consulted
Bomag
Germany
and
its
officials.
as
to
the
position
of
the
appellant
and
apparently
the
suggestion
was
made
that
the
losses
of
the
appellant
would
be
minimized
if
it
could
take
over
the
franchise
which
had
been
given
to
Wettlaufer
more
or
less
immediately.
Apparently
Kuettner
was
authorized
to
approach
Wettlaufer
on
this
basis.
Of
course
it
was
expected
that
the
appellant
would
take
over
after
the
expiration
of
the
franchise
agreement.
It
would
appear
that
the
franchise
agreement
would
expire
on
December
31,
1970.
Paragraph
15
of
the
agreement
reads
as
follows:
This
agreement
shall
remain
in
force
until
December
31,
1970.
Thereafter
it
will
run
and
operate
as
an
agreement
which
may
be
terminated
by
either
party
on
6
months’
notice.
Presumably
any
time
after
incorporation
of
the
appellant,
Bomag
Germany
could
have
given
notice
that
the
agreement
would
expire
on
December
31,
1970.
The
Board
was
advised
that
sometime,
possibly
in
1967,
Wettlaufer
became
the
wholly-owned
subsidiary
of
Charterhouse
Canada
Limited
(hereinafter
called
“Chartérhouse”).
Kuettner
approached
the
officers
of
Wettlaufer
or
Charterhouse
for
the
purpose
of
discussing
the
termination
of
the
agreement
at
the
end
of
December
1969
rather
than
its
regular
expiry
date
of
the
end
of
December
1970.
In
due
course
an
agreement
was
reached.
The
agreement
was
expressed
in
a
formal
document
dated
June
27,
1969
between
Charterhouse
and
Bomag
Germany.
The
main
paragraph
of
that
agreement
is
as
follows:
2.
Bomag
shall
pay
to
Charterhouse
on
the
1st
day
of
each
and
every
month
in
1970
the
sum
of
$9000
(Canadian
funds)
by
cash
or
certified
cheque
payable
at
Toronto,
Canada;
provided
that
Bomag
may
at
its
option
in
lieu
of
the
aforesaid
monthly
payments
pay
to
Charterhouse
on.
January
1,
1970
the
sum
of
$103,680
(Canadian
funds)
by
cash
or
certified
cheque
payable
at
Toronto,
Canada.
(The
Bomag
mentioned
in
this
quote
is
Bomag
Germany
in
these
Reasons.)
It
should
be
noted
that
the
appellant’s
name
is
nowhere
mentioned
in
that
agreement.
The
appellant
took
over
the
Bomag
Germany
stock
which
Charterhouse
had
on
hand
at
the
end
of
1969
and,
in
due
course,
employed
some
of
the
employees
of
Charterhouse.
The
appellant
paid
the
sums
required
to
be
paid
by
paragraph
2
of
the
agreement
of
June
27,
1969.
Each
month
Charterhouse
invoiced
the
appellant
for
the
payment
required
in
that
paragraph,
and
each
month
the
appellant
paid
the
amount.
In
the
opinion
of
Kuettner,
net
earnings
generated
to
the
appellant
exceeded
$108,000
which
it
paid
pursuant
to
paragraph
2
to
Charterhouse.
In
addition
to
that,
if
the
contract
had
not
been
cancelled
and
then
assumed
by
the
appellant,
the
appellant
clearly
would
have
lost
money.
In
1970,
as
far
as
corporate
bodies
were
concerned,
there
was
no
doubt
that
the
appellant
would
be
paying
the
money
due
to
Charterhouse
pursuant
to
the
agreement.
An
agreement
dated
February
2,
1970,
was
signed
by
Bomag
Germany
and
the
appellant
with
respect
to
the
Charterhouse
franchise.
That
agreement
(Exhibit
A-9)
reads
as
follows:
WHEREAS
Bomag
Germany
entered
into
an
Agreement
with
Charterhouse
Canada
Limited
dated
June
27,
1969
and
the
shareholders
of
Bomag
Germany
thereafter
caused
Bomag
Canada
to
be
created
for
the
purpos
(sic)
of
selling
the
products
contemplated
by
the
Charterhouse
Agreement,
WITNESSETH
that
the
parties
agree
as
follows:
1.
This
Agreement
confirms
the
verbal
arrangements
and
course
of
conduct
of
the
parties
following
the
incorporation
of
Bomag
Canada.
2.
Bomag
Canada
shall
have
the
right
to
all
of
the
benefits
contained
in
the
Charterhouse
Agreement
and
shall
assume
the
responsibilities
thereunder.
3.
All
payments
under
the
Agreement
shall
accordingly
be
paid
by
Bomag
Canada
to
Charterhouse
for
the
franchise
rights
which
Bomag
Canada
enjoys.
It
was
not
usual
that
Bomag
Germany
would
issue
franchise
agreements.
In
1971
such
an
agreement
was
issued.
The
reason
for
this
was
that
an
American
company
acquired
control
of
Bomag
Germany
in
late
1970
and,
apparently
because
of
some
requirements,
the
agreement
had
to
be
entered
into.
Such
an
agreement
was
entered
into
by
the
appellant
with
Bomag
Germany.
There
is
no
sum
mentioned
in
that
franchise.
Mr
Kuettner
confirmed
that
the
franchise
agreement
between
Wettlaufer
and
Bomag
Germany
was
an
arm’s-length
transaction
and
it
was
not.
assigned
to
the
appellant.
Insofar
as
the
amount
which
was
paid
to
Charterhouse
to
reduce
the
term
from
3
years
to
2
years
is
concerned,
the
negotiations
were
what
one
could
call
typical
negotiations.
Charterhouse
wanted
more
than
$108,000
and
Bomag
Germany
wanted
to
pay
less.
The
final
figure
was
the
result
of
negotiations.
As
Kuettner
put
it—in
the
eyes
of
the
appellant,
it
received
the
benefit
from
the
release
and
it
should
pay
the
price.
Actually,
as
he
also
stated,
Bomag
Germany
paid
nothing
for
that
release—the
appellant
paid
all.
On
cross-examination
of
Keuttner,
reference
was
once
again
made
to
the
appellant’s
financial
statements
for
its
1970
fiscal
year
previously
referred
to,
and
in
this
instance
reference
was
made
to
Note
12.
Note
12
reads
as
follows:
Settlement
of
Franchise
Agreement:
The
parent
company,
Bopparder
Maschinenbaugesellschaft
GmbH
was
party
to
an
agreement
with
Wettlaufer
Equipment
Limited
dated
January
30,
1967
for
the
agency
of
Bomag
Equipment
in
Canada.
This
agreement
was
assigned.
by
Wettlaufer
to:
Charterhouse
Canada
Limited.
The
agreement
was
to
terminate
on
December
31,
1970.
In
order
to
terminate
the
agreement
on
December
31,
1969
Bopparder
Maschinenbaugesellschaft
entered
into
an
agreement
with
Charterhouse
dated
June
27,
1969,
under
which
$108,000
were
due
to
the
latter.
This
obligation
was
assumed
and
discharged
by
Bomag
(Canada)
Ltd.
Mr
Kuettner
said
that,
as
far
as
he
was
concerned,
the
obligation
was
always
the
appellant’s
and
it
was
not
assumed
by
it,
but
he
cannot
recall
objecting
to
the
auditor’s
use
of
the
word
“assumed”
in
the
last
line
although
he
may
have.
There
was
however,
as
he
reiterated,
no
agreement
giving
the
appellant
the
right
to
sell
Bomag
Germany’s
products
in
lieu
of
Wettlaufer
(Charterhouse)
in
1970,
but
it
did
sell
and
it
is
still
selling
them.
With
respect
to
the
payment
of
the
$20,000,
counsel
for
the
appellant
submitted
that
that
expense
was
a
current
business.
expense
and
Clearly
within
the
ambit
of
paragraph
12(1
)(a)
of
the
Income
Tax
Act
before
tax
reform.
His
submission
continued
that
the
appellant
clearly
was
in
business
by
October
1,
1969.
The
contract
was
an
onerous
contract
and,
if
not
entirely,
substantially
all
payments
pursuant
to
it
would
be
on
account
of
sales
commission
and
consulting
fees,
and
as
such
were
normal
business
expenses.
If
the
contract
had
run
its
normal
course,
the
payments
required
to
be
paid
pursuant
to
it
would
clearly
have
been
a
deductible
expense
and
consequently,
his
submission
was
that
the
commutation
of
them
would
still
be
an
expense.
In
this
respect,
appellant’s
counsel
referred
to
several
cases
including
Avco
of
Canada
Limited
v
MNR,
16
Tax
ABC
144;
56
DTC
551,
especially
the
portion
of
the
reasons
on
pages
147
and
553
respectively
which
indicated
that
in
that
case
no
capital
asset
or
new
advantage
for
the
enduring
benefit
of
the
appellant
was
deemed
to
have
been
obtained
and
the
payment
was
held
to
be
deductible.
Reference
was
also
made
by
him
to
Johnston
Testers
Ltd
v
MNR,
[1965]
CTC
116;
65
DTC
5148.
This
was
a
payment
made
by
the
appellant
to
obtain
the
release
of
an
obligation
to
pay
royalties
for
the
use
of
certain
patents.
In
the
circumstances
of
the
case
the
Exchequer
Court
held
the
payment
to
be
deductible.
Counsel
for
the
Crown
in
the
instant
case
contended
that
the.
expense
was
not
an
expense
within
the
meaning
of
paragraph
12(1)(a)
of
the
Act
as,
first
of
all,
there
had
been
no
assignment
of
the
obligation
by
Com-Pakall
to
the
appellant
and
the
payment,
in
effect,
if
it
were
paid
by
the
appellant—and
he
contended
it
was
not—was
a
gratuitous
payment.
The
appellant
had
no
obligation
to
pay
commis-
siens
or
consulting
fee
pursuant
to
an
agreement
to
which
it
was
not
a
party,
which
agreement
had
not
been
assigned
to
it.
He
contended
that:
the
documentary
evidence,
especially
the
auditors
notes
which
were
quite
current
with
the
events
or
at
least
not
8
years
later,
reflects
much
more
accurately
what
happened
in
1969
than
did
the
evidence
at
the
hearing.
That
evidence
indicated
that
the
money
was
loaned
to
the
appellant
by
Com-Pakall
on
an
interest-free
basis
so
it
could
pay
its
obligation.
Exhibit
A-6
indicated
that
the
appellant
advanced
the
money
to
Com-Pakall.
Counsel
for
the
Minister
also
pointed
out
that
it
really
was
not
solely
a
commutation
of
commissions
because
of
the
circumstances
of
the
case—a
commission
could
be
something
other
than
the
$20,000.
In
addition
to
that,
there
was
a
consulting
fee
and
other
obligations
from
which
Com-Pakall
was
released
by
the
release.
Insofar
as
the
cases
of
Johnston
Testers
Ltd
and
Avco
of
Canada
Limited
were
concerned,
counsel
pointed
out
that
the
payment
by
those
taxpayers
was
to
the
person
with
whom
they
had
the
relationship,
not
to
a
person
who
was
In
effect
a
stranger
to
them.
Insofar
as
the
expense
of
$108,000
is
concerned,
counsel
for
the
appellant
contended
that
the
payment
was
to
acquire
the
right
to
sell
Bomag
Germany’s
goods
on
an
exclusive
basis.
He
also
contended
that
this
expenditure
was
clearly
an
expenditure
falling
within
the
ambit
of
paragraph
12(1
)(a)
of
the
Act
before
tax
reform
but,
if
it
were
held
not
to
be
so,
then
it
was
a
capital
expenditure
within
the
meaning
of
paragraph
12(1)(b)
of
the
Act
and,
as
such
since
it
was
a
franchise
for
a
limited
period,
capital
cost
allowance
could
be
claimed
on
it
pursuant
to
the
provisions
of
Class
14
of
Schedule
B
to
the
Income
Tax
Regulations.
In
the
circumstances,
since
it
was
for
one
year
only,
the
effect
is
that,
if
the
appellant’s
counsel
is
correct,
the
whole
amount
is
deductible
in
1970.
Counsel
for
the
Minister
did
not
contend
that,
were
it
held
that
the
appellant
acquired
a
franchise
from
Charterhouse,
that
franchise
was
not
for
a
limited
period:
Counsel
for
the
appellant
contended
that,
after
December
31,
1969,
Charterhouse
no
longer
had
a-
franchise
from
Bomag
Germany
and
the
appellant
was
selling
Bomag
Germany’s
goods
and
consequently
it
is
obvious
that
the
appellant
now
had
the
business
which
Charterhouse
formerly
had.
Therefore,
if
it
received
the
benefit,
it
should
have
the
responsibility
for
making
the
payment.
Counsel
pointed
to
Exhibit
A-9,
being
the
agreement
between
Bomag
Germany
and
the
appellant,
which
indicated
that
Bomag
had
all
the
rights
which
had
been
contained
in
the
Charterhouse
agreement.
His
final
remark
was
that
the
final
documents
with
respect
to
the
transaction
did
not
reflect
the
substance
of
the
transaction.
Counsel
for
the
Minister
took
the
position
that
the
agreement
terminating
the
franchise
of
Charterhouse
prematurely
was
an
agreement
between
Bomag
Germany
and
Charterhouse
and
not
only
was
thé
appellant
not
a
party
to
this
agreement,
but
the
appellant
was
not
even
mentioned
in
the
agreement.
The
appellant
just
paid
the
financial
obligations
to
its
parent
and
there
was
no
assignment
of
the
franchise
formerly
held
by
Charterhouse
to
the
appellant.
Counsel
also
made
reference
to:
Exhibit
A-9
and
the
wording
of
it.
(It
is
to
be
understood,
according
to
counsel
for
the
appellant,
that
as
at
December
31,
1969,
the
Charterhouse
franchise
had
been
cancelled
by
Bomag
Germany.)
He
then
commented—What
do
some
of
the
clauses
in
that
agreement
mean?
He
stated
Clause
2
meant
the
appellant
“shall
have
the
right
to
all
of
the
benefits
contained
in
the
Charterhouse
Agreement
and
shall
assume
the
responsibilities
thereunder.’’
The
Charterhouse
agreement
at
this
time,
namely
February
2,
1970,
did
not
exist.
If
the
agreement
did
not
exist,
how
can
the
appellant
receive
any
benefits
that
were
contained
in
it.
Also
he
pointed
out
Clause
3
which
reads:
‘‘All
payments
under
the
Agreement
shall
accordingly
be
paid
by
Bomag
Canada
to
Charterhouse
for
the
franchise
rights
which
Bomag
Canada
enjoys.’’
Stress
was
made
of
the
present
tense
of
the
word
“enjoy”.
He
contended
that
without
this
agreement
the
appellant
already
had
the
franchise
rights
which
he
contends
it
received,
as
did
Charterhouse
or
Wettleufer,
gratuitously.
I
am
of
the
opinion
that
neither
payment
was
a
payment
within
the
ambit
of
paragraph
12(1)(a)
of
the
Income
Tax
Act.
The
appellant
did
not
have
any
obligation
to
Mr
Long
or
Pakall
pursuant
to
the
agreement
between
Com-Pakall
and
Pakall.
If
the
appellant
made
the
payment,
the
payment
was
made
gratuitously
and,
in
any
event,
the
obligations
under
the
agreement
between
Pakall
and
Com-Pakall
had
never
been
transferred
to
the
appellant.
Likewise
the
appellant
made
a
gratuitous
payment
to
Charterhouse.
The
agreement
cancelling
the
franchise
was
between
the
appellant’s
parent
and
Charterhouse.
There
was
no
assignment
or
purchase
of
any
franchise
from
Charterhouse
to
the
appellant.
Consequently,
the
payment
once
again
is
a
gratuitous
payment
and,
as
such,
is
neither
deductible
pursuant
to
the
provisions
of
paragraph
12(1)(a)
of
the
Income
Tax
Act,
nor
is
it
capital
which
is
subject
to
capital
cost
allowance
within
paragraph
12(1)(b)
or
paragraph
11
(1)(a).
The
appeal
is
dismissed.
Appeal
dismissed.
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