MARTLAND,
J.:—I
agree
with
my
brother
Ritchie
that
the
commissions
paid
by
the
appellant
to
Mr.
McFadyn
in
the
years
1951
and
1952
were
not
taxable
in
the
hands
of
the
appellant.
I
agree
with
the
conclusion
reached
by
my
brother
Hall
that
the
appelant
was
entitled
to
deduct
as
items
of
expense
the
amounts
of
$12,317.36
and
$8,514.16,
paid
for
legal
expenses,
in
the
years
1991
and
1952
respectively,
when
determining
its
taxable
income
in
those
two
years.
I
have,
however,
reached
this
conclusion
on
somewhat
narrower
grounds
than
those
which
he
has
stated.
The
reason
for
these
payments
is
given
in
the
judgment
of
the
Tax
Appeal
Board
[21
Tax
A.B.C.
178
at
184],
as
follows:
Turning
to
the
second
phase
of
the
matter,
the
appellant
learned
some
years
after
it
had
begun
to
sell
ore
in
substantial
quantities
that
the
American
revenue
authorities
had
designs
on
its
income
on
the
alleged
grounds
that
it
had
been
earned
in
the
United
States
of
America
and
that
the
appellant
had
a
permanent
establishment
there
within
the
meaning
of
the
Tax
Convention
and
Protocol
between
Canada
and
the
United
States
of
America,
signed
on
or
about
4th
March,
1942.
The
suggestion
that
tax
liability
obtained
in
the
latter
country
was
both
surprising
and
startling
to
the
appellant
and
steps
were
taken
promptly
to
ascertain
its
legal
position.
It
was
a
matter
of
great
importance
to
the
appellant
as,
if
liability
were
to
be
established,
the
income
relating
to
past,
present
and
future
years
would
be
in
jeopardy
and,
according
to
the
evidence
heard,
in
the
event
of
the
American
claim
proving
successful,
immense
harm
would
be
done
to
the
appellant,
financially.
On
this
account,
opinions
were
sought
in
Canada
and
the
United
States
of
America
and
great
trouble
was
gone
to
and
expense
incurred
in
the
latter
country
for
the
purpose
of
ascertaining
all
relevant
facts
and
reaching
a
position
in
which
the
claim
could
be
effectively
opposed
if
it
were,
proceeded
with
in
the
appropriate
American
court.’’
The
relevant
provisions
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148,
are
Section
12(1)
(a)
and
(b)
which
provide.
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,”
The
predecessor
of
Section
12(1)
(a)
was
Section
6(1)
(a)
of
the
Income
War
Tax
Act,
R.S.C.
1927,
c.
97,
which
provided
that:
“6.
(1)
In
computing
the
amount
of
the
profits
or
gains
to
be
assessed,
a
deduction
shall
not
be
allowed
in
respect
of
(a)
disbursements
or
expenses
not
wholly,
exclusively
and
necessarily
laid
out
or
expended
for
the
purpose
of
earning
the
income.’’
It
seems
clear
that
the
present
wording
of
paragraph
(a),
which
first
appeared
in
The
1948
Income
Tax
Act,
Statutes
of
Canada
1948,
c.
52,
was
intended
to
broaden
the
definition
of
deductible
expenses.
The
Income
War
Tax
Act
defined
‘
income”
as
meaning
‘‘the
annual
net
profit
or
gain
or
gratuity’’.
Under
Section
6(1)(a),
in
computing
such
profit
or
gain
it
was
only
permissible
to
deduct
expenses
wholly,
exclusively
and
necessarily
expended
for
the
purpose
of
earning
that
income.
The
present
Act
does
not
contain
this
definition
of
‘‘income’’.
It
frequently
uses
the
phrase
‘‘income
for
a
taxation
year’’,
which
appears
in
Section
11(1)
dealing
with
allowable
deductions.
The
phrase
does
not
appear
in
Section
12(1)
(a)
which,
as
now
worded,
permits
the
deduction
of
any
expense
made
for
the
purpose
of
producing
income
from
a
property
or
business.
Even
under
the
narrower
provisions
of
Section
6(1)
(a)
of
the
Income
War
Tax
Act,
legal
expenses
were
deductible
in
the
ordinary
course
as
a
current
expenditure.
This
was
stated
by
Duff,
C.J.
in
M.N.R.
v.
The
Dominion
Natural
Gas
Company
Limited,
[1941]
S.C.R.
19
at
25;
[1940-41]
C.T.C.
155,
a
case
which
involved
the
application
of
Section
6(1)
(a)
and
(b)
of
the
Income
War
Tax
Act.
The
statement
was
affirmed
by
unanimous
decision
of
this
Court
when
he
delivered
the
judgment
in
M.N.R.
v.
The
Kellogg
Company
of
Canada,
Limited,
[1943]
S.C.R.
58
at
61;
[1943]
C.T.C.
1.
In
that
case
the
question
in
issue
was
as
to
the
right
of
the
Kellogg
Company
to
claim
as
an
expense,
in
determining
its
taxable
income
under
the
Income
War
Tax
Act,
legal
fees
incurred
by
it
in
successfully
defending
a
suit
for
an
injunction
against
alleged
infringement
of
registered
trade
marks
by
using
certain
words
in
connection
with
the
sale
of
its
products.
These
expenses
were
held
to
be
deductible
under
Section
6(1)
(a)
of
that
Act,
and
not
to
constitute
an
outlay
or
payment
on
account
of
capital
within
Section
6(1)
(b).
They
fell
within
the
general
rule
that
in
the
ordinary
course
legal
expenses
are
simply
current
expenditures
and
deductible
as
such.
Clearly
these
expenses
were
not
made
solely
for
the
purpose
of
earning
income
in
the
year
in
which
they
were
incurred.
They
did
not
directly
result
in
the
earning
of
income
at
all.
But
they
were
made
with
a
view
to
protecting
the
income
earning
capacity
of
the
company,
since
it
must
be
assumed
that
the
loss
of
the
right
to
the
use
of
the
words
in
connection
with
its
sales
would
have
indirectly
resulted
in
a
reduction
of
its
income,
not
only
in
the
year
in
which
they
were
incurred,
but
also
in
future
years
as
well.
In
Evans
v.
M.N.R.,
[1960]
S.C.R.
391;
[1960]
C.T.C.
69,
the
question
in
issue
was
as
to
the
right
to
deduct,
under
Section
12(1)
(a)
of
the
Income
Tax
Act,
legal
expenses
incurred
by
the
appellant
in
connection
with
an
application
by
the
trustee
of
an
estate
for
advice
and
directions.
What
the
Court
had
to
deter-
mine
upon
the
application
was
the
appellant’s
right
to
receive
the
income
from
a
portion
of
the
estate.
Judgment
on
that
application
was
given
in
1954.
There
were
appeals
to
the
Court
of
Appeal
for
Ontario
and
to
this
Court.
The
final
judgment
was
given
in
1955
and
the
appellant
sought
to
deduct
from
her
income
for
that
year
her
legal
fees
which
she
paid
in
that
year.
Here
again,
the
expense
was
not
one
which
was
made
solely
for
the
purpose
of
earning
income
in
that
year.
In
the
light
of
the
decision
of
this
Court,
she
had
been
entitled
to
that
income
all
along.
Such
expense
was
made
in
order
to
protect
her
right
to
receive
income,
not
only
in
1955,
but
in
each
of
the
years
in
which
income
became
available
for
distribution
from
the
estate.
This
right
was
held
not
to
be
a
capital
asset,
and
the
expense
in
question
did
not
fall
within
Section
12(1)(b).
Such
expense
was
held
to
be
properly
incurred
within
Section
12(1)
(a)
for
the
purpose
of
gaining
an
income
to
which
the
appellant
was
entitled.
In
the
present
case
the
legal
fees
paid
by
the
appellant
were
expended
with
a
view
to
resisting
the
claim
of
the
American
government
that
the
appellant
had
a
permanent
establishment
in
the
United
States
and
so
was
liable
for
the
payment
of
income
tax
there.
As
stated
in
the
reasons
of
the
Tax
Appeal
Board,
previously
cited
[21
Tax
A.B.C.
178
at
184]:
‘It
was
a
matter
of
great
importance
to
the
appellant
as,
if
liability
were
to
be
established,
the
income
relating
to
past,
present
and
future
years
would
be
in
jeopardy,
and,
according
to
the
evidence
heard,
in
the
event
of
the
American
claim
proving
successful,
immense
harm
would
be
done
to
the
appellant,
financially.”
I
have
great
difficulty
in
seeing
how,
in
principle,
this
expense
for
legal
services,
made
as
it
was
for
the
purpose
of
protecting
the
appellant’s
income,
can
be
regarded
as
being
different
from
that
which
was
held
to
be
properly
deductible
in
the
Kellogg
case
and
also
in
the
Evans
case.
The
disbursement
made
was
not
an
outlay
or
replacement
of
capital,
nor
a
payment
on
account
of
capital,
within
Section
12(1)
(b).
The
claim
of
the
American
government
was
not
in
respect
of
the
appellant’s
capital,
but
a
claim
which,
if
established,
would
have
created
a
liability
in
relation
to
its
income.
It
is
true
that
the
American
government
considered
as
taxable
income
items
of
profit
which
had
not
been
so
regarded
in
Canada,
but
the
basis
of
the
claim
was
in
respect
of
income.
It
is
also
true
that
the
disbursement
was
made
to
protect
profits
earned
in
years
prior
to
the
year
in
which
the
disbursement
was
made
as
well
as
the
income
of
that
and
subsequent
years.
But
in
the
light
of
the
present
wording
of
Section
12(1)
(a)
and
its
application
in
the
Evans
case,
this
does
not
prevent
this
expense
from
being
deductible.
In
both
that
case
and
the
Kellogg
case
the
expense
involved
was
to
establish
a
right
to
receive
income,
or
for
the
protection
of
income
in
other
years
as
well
as
that
of
the
year
in
which
the
expenditure
was
made.
The
learned
trial
judge
refused
to
allow
the
deduction
of
these
expenses
because
he
felt
that
the
matter
was
determined
by
the
judgment
of
the
House
of
Lords
in
Smith’s
Potato
Estates
Limited
v.
Bolland
(Inspector
of
Taxes),
[1948]
A.C.
508.
In
that
case,
by
a
majority
of
three
to
two,
the
appellant
was
held
not
to
be
entitled,
in
determining
its
taxable
income,
to
deduct
legal
and
accountancy
expenses
made
to
contest
an
assessment
to
excess
profits
tax.
Assuming,
without
agreeing,
that
the
reasoning
of
the
majority
should
be
preferred
to
that
of
the
minority,
I
do
not
agree
that
that
case
is
a
parallel
to
the
present
one.
The
relevant
statutory
provision
in
that
case
was
materially
different
from
Section
12(1)
(a)
of
our
Act.
The
English
statute
only
permitted
deduction
of
:
“money
wholly
and
exclusively
laid
out
and
expended
for
the
purposes
of
the
trade.”
Reference
to
the
words
which
I
have
italicized,
as
compared
with
the
wording
of
our
Section
12(1)
(a),
indicates
that
the
English
provision
was
much
narrower
in
its
scope.
The
Smith’s
case
was
concerned
with
legal
expenses
made
by
an
English
company
in
England
with
a
view
to
reducing
its
liability
for
tax
in
England.
The
effect
of
the
decision
is
that
an
expenditure
by
a
trader
for
legal
fees
incurred
for
the
purpose
of
contesting
an
assessment
of
income
tax
cannot,
as
against
the
assessor
of
that
tax,
be
claimed
as
money
wholly
and
exclusively
expended
for
the
purpose
of
the
trade.
But
that
is
not
this
case.
The
expense
incurred
here
was
for
the
purpose
of
resisting
the
demands
of
a
foreign
taxing
authority,
which,
had
it
succeeded,
would
have
substantially
depleted
the
income
of
a
Canadian
company.
In
my
opinion,
a
claim
of
that
kind
is
a
claim
by
a
third
party.
The
resistance
of
the
claim
is
an
attempt
to
protect
Canadian
income,
and
it
matters
not,
so
far
as
the
Canadian
taxing
authority
is
concerned,
that
the
nature
of
the
claim
is
one
for
income
tax.
In
so
far
as
the
Canadian
taxing
authority
is
concerned,
I
can
see
no
difference,
in
principle,
between
an
ex-
penditure
in
the
form
of
legal
fees
paid
by
a
railway
company
to
defend
a
damage
claim
by
a
passenger,
and
thus
to
protect
the
company’s
income,
and
the
expenditure
for
legal
fees
paid
by
the
appellant
to
resist
a
foreign
tax
claim
and
thus
to
protect
its
income.
The
former
type
of
expense
is
admittedly
properly
deductible.
The
other
authority
relied
upon
by
the
learned
trial
judge,
also
a
decision
of
the
House
of
Lords,
was
C.I.R.
v.
Dowdell
O’Mahoney
&
Co.
Ltd.,
[1952]
1
All
E.R.
531.
That
case
is
also
distinguishable.
It
dealt
with
a
claim
by
an
Irish
company,
doing
business
in
England,
to
deduct,
in
computing
its
excess
profits
tax
in
England,
tax
paid
by
it
in
Ireland.
This
claim
was
refused.
The
case
does
not
involve
legal
fees
at
all.
The
payment
of
the
Irish
tax
was
not
made
with
a
view
to
resisting
a
claim
which
would
reduce
its
income.
In
my
opinion
a
payment
made
for
legal
services
in
an
attempt
to
protect
income
against
encroachment
by
a
third
party
is,
in
principle,
on
the
authority
of
the
Kellogg
and
Evans
cases
in
this
Court,
properly
deductible.
I
would
allow
the
appeal
in
toto,
with
costs
throughout.
Hall,
J.:—I
have
had
the
opportunity
of
reading
the
reasons
for
judgment
of
my
brother
Ritchie
and
I
agree
with
him
that
the
commissions
paid
by
the
appellant
to
Mr.
MeFadyn
in
the
years
1951
and
1952
were
not
taxable
in
the
hands
of
the
appellant.
However,
with
respect,
I
disagree
as
to
the
$20,832.51
paid
in
the
two
years
in
question
as
legal
expenses
incurred
as
a
result
of
an
unwarranted
claim
for
income
tax
and
capital
gains
tax
amounting
to
between
two
and
three
million
dollars
by
the
United
States
Internal
Revenue
Service
which
claim
was
successfully
resisted
resulting
in
this
very
substantial
saving
to
the
appellant.
Or,
put
differently,
the
working
capital
of
the
appellant
and
its
profit
earning
potential
were
preserved
by
the
rejection
of
this
unjustified
demand.
Had
the
claim
succeeded,
according
to
the
witness
Daly
whose
evidence
was
not
challenged,
it
would
have
taken
up
nearly
all
the
income
of
the
appellant,
leaving
the
appellant
unable
to
carry
out
its
obligations
under
the
sales
contract
of
January
15,
1943
and
to
earn
the
income
needed
to
sustain
its
operations.
Cattanach,
J.
dealt
with
this
item
as
follows:
“It
is
well
settled
that
the
legal
costs
incurred
in
disputing
a
claim
for
income
tax
may
not
be
allowed
as
a
deduction
in
computing
business
profits.
In
Smith’s
Potato
Estates,
Ltd.
v.
Bolland,
[1948]
2
All
E.R.
367
Lord
Simonds
said
at
page
374
:
.
.
neither
the
cost
of
ascertaining
taxable
profit
nor
the
cost
of
disputing
it
with
the
revenue
authorities
is
money
spent
to
enable
the
trader
to
earn
profit
in
his
trade.
What
profit
he
has
earned,
he
has
earned
before
ever
the
voice
of
the
taxgatherer
is
heard.
He
would
have
earned
no
more
and
no
less
if
there
was
no
such
thing
as
income
tax.
.
.
.’
”
I
cannot
accept
the
proposition
that
“it
is
well
settled
that
the
legal
costs
incurred
in
disputing
a
claim
for
income
tax
may
not
be
allowed
as
a
deduction
in
computing
business
profits’’.
Cattanach,
J.
quotes
Lord
Simonds
in
Smith’s
Potato
Estates
case,
[1948]
2
All
E.R.
367
at
p.
374,
but
he
also
said
on
the
same
page:
“My
Lords,
I
suppose
that
few
expressions
have
been
discussed
more
often
in
the
courts
than
that
which
you
have
once
again
to
consider,
money
wholly
and
exclusively
laid
out
or
expended
for
the
purposes
of
the
trade,’
but
it
is
their
application
rather
than
their
meaning
that
is
in
doubt.
I
agree
with
the
submission
of
learned
counsel
that
it
does
not
help
to
substitute
other
words
for
those
which
are
found
in
the
statute
and
then
to
put
a
gloss
on
those
other
words,
but
it
is,
I
think,
important
to
emphasise
that
the
words
‘for
the
purposes
of
the
trade’
in
their
context,
i.e.,
where
a
computation
of
‘profits’
for
the
ascertainment
of
taxable
income
is
being
made,
must
mean
‘for
the
purpose
of
enabling
a
person
to
carry
on
and
earn
profits
in
the
trade.
’
These
familiar
words
I
cite
from
LORD
DAVEY’S
speech
in
Strong
&
Co.,
Ltd.
v.
Woodifield
([1906]
A.C.
448,
453).
They
have
been
cited
and
applied
over
and
over
again,
and,
if
they
are
kept
firmly
in
mind,
they
dispose
in
limine
of
the
argument
which
prevailed
with
ATKINSON,
J.,
and
has
been
urged
before
your
Lordships.
’
’
It
will
be
seen
that
Lord
Simonds
adopts
a
phrase
from
Lord
Davey’s
speech
in
Strong
Co.,
Ltd.
v.
Woodifield,
[1906]
A.C,
448.
Strong
v.
Woodifield
was
a
case
where
the
taxpayers,
innkeepers,
were
seeking
to
deduct
costs
and
damages
paid
to
a
person
staying
in
their
inn
who
was
injured
by
the
fall
of
a
chimney.
I
do
not
think
it
has
ever
been
successfully
contended
in
Canada
that
damages
and
costs
payable
by
a
common
carrier
or
by
an
occupier
to
an
invitee
or
licensee
or
in
any
similar
circumstances
were
not
proper
deductions
in
arriving
at
the
taxable
income
of
such
a
taxpayer.
I
understood
counsel
for
the
Minister
to
concede
that
such
deductions
are
not
challenged.
Even
in
Strong
v.
Woodifield
Lord
Loreburn
said
at
p.
452:
‘“In
my
opinion,
however,
it
does
not
follow
that
if
a
loss
is
in
any
sense
connected
with
the
trade,
it
must
always
be
allowed
as
a
deduction;
for
it
may
be
only
remotely
connected
with
the
trade,
or
it
may
be
connected
with
something
else
quite
as
much
as
or
even
more
than
with
the
trade.
I
think
only
such
losses
can
be
deducted
as
are
connected
with
in
the
sense
that
they
are
really
incidental
to
the
trade
itself.
They
cannot
be
deducted
if
they
are
mainly
incidental
to
some
other
vocation
or
fall
on
the
trader
in
some
character
other
than
that
of
trader.
The
nature
of
the
trade
is
to
be
considered.
To
give
an
illustration,
losses
sustained
by
a
railway
company
in
compensating
passengers
for
accidents
in
travelling
might
be
deducted.
On
the
other
hand,
if
a
man
kept
a
grocer’s
shop,
for
keeping
which
a
house
is
necessary,
and
one
of
the
window
shutters
fell
upon
and
injured
a
man
walking
in
the
street,
the
loss
arising
thereby
to
the
grocer
ought
not
to
be
deducted.
Many
cases
might
be
put
near
the
line,
and
no
degree
of
ingenuity
can
frame
a
formula
so
precise
and
comprehensive
as
to
solve
at
sight
all
the
cases
that
may
arise.’’
and
Lord
James
of
Hereford
said
at
p.
454
:
‘‘The
only
question
is
as
to
the
application
of
that
principle
in
one
small
matter
to
the
facts
of
this
case.
If
the
fact
were
that
the
accident
had
occurred
to
a
stranger
walking
in
the
street,
then
I
should
have
no
doubt
at
all.
The
doubt
that
did
arise
in
my
mind
was
as
to
the
rule
applicable
when
the
accident
occurred
to
a
person
who
was
a
customer
in
the
house
who
would
not
have
been
injured
unless
the
business
of
an
innkeeper
was
being
carried
on,
and
when
it
was
in
the
course
of
the
carrying
on
of
a
portion
of
that
business
that
the
customer
injured
was
there;
then
I
think
a
different
principle
might
arise,
and
my
doubts
consequently
existed.’’
Now
reverting
to
Smith
s
Potato
Estates
case,
Viscount
Simon
said
regarding
Lord
Da
ey’s
statement
in
Strong
v.
Woodifield
at
p.
369
:
“It
seems
to
me
that
it
is
essential
for
the
proper
carrying
on
of
a
trade
that
the
trader
should
know
what
portion
of
his
profits
in
a
given
year
is
left
to
him
after
the
Revenue
has
taken
its
share
by
taxation.
Tf,
therefore,
he
considers
that
the
Revenue
seeks
to
take
too
large
a
share
and
to
leave
him
with
too
little,
the
expenditure
which
the
trader
ineurs
in
endeavouring
to
correct
this
mistake
is
a
disbursement
laid
out
for
the
purposes
of
his
trade.
If
he
succeeds,
he
will
have
more
money
with
which
to
earn
profits
next
year.
It
is
true
that
the
result
of
his
success
is
to
reduce
the
tax
he
has
to
pay—alternatively,
one
may
say
that
the
result
is
to
show
that
the
profit
of
the
year’s
trading
left
to
him
after
paying
tax
is
greater
than
the
Revenue
was
willing
to
admit—but,
to
my
mind,
the
purpose
was
a
trading
purpose
and
nothing
else.
The
trade
is
not
to
be
regarded
as
extending
over
twelve
months
and
no
more.
Indeed,
as
I
have
already
pointed
out,
excess
profits
tax
is
liable
to
be
adjusted
in
the
light
of
subsequent
trading
results,
and
assessment
for
income
tax
is
arrived
at
on
figures
of
the
previous
year.
With
all
respect
to
those
who
think
otherwise,
I
regard
it
as
fallacious
to
argue
that
the
trader’s
expenditure
in
fighting
the
Revenue’s
assessment
is
not
‘‘
wholly
and
exclusively”
incurred
for
the
purposes
of
the
trade
because
the
expenditure
would
not
be
incurred
if
there
was
no
tax
to
pay.
If
there
was
no
tax
to
pay,
the
benefit
realised
by
the
trader
from
carrying
on
the
trade
would
not
be
reduced
by
taxation,
and
it
is
the
purpose
of
trade
(at
any
rate,
under
private
enterprise)
to
make
its
legitimate
profit.
Viewed
in
this
light,
I
do
not
see
why
the
expenditure
here
in
question
is
not
wholly
and
exclusively
laid
out
for
the
purposes
of
the
trade—
if
it
had
not
been
incurred,
the
trade
would
be
less
profitable.
Lord
Davey’s
gloss
on
the
words
of
the
statute
in
Strong
&
Co.,
Ltd.
v.
Woodifield
(11906]
A.C.
448,
453)
is
well
known,
but
I
think
it
is
better
to
concentrate
on
the
statutory
words
themselves.
Rightly
understood,
however,
I
do
not
find
that
Lord
Davey’s
words
contradict
the
view
I
am
disposed
to
take.
Strong
&
Co.,
Ltd.
v.
Woodifield
was
a
case
in
which
the
taxpayer
sought
to
deduct
a
loss
not
connected
with
or
arising
out
of
his
trade.
Lord
Loreburn
said
(ibid.,
452):
‘I
think
only
such
losses
can
be
deducted
as
are
connected
with,
in
the
sense
that
they
are
really
incidental
to,
the
trade
itself’.
Lord
Davey’s
test
was
that
the
purpose
of
the
expenditure
must
be
‘the
purpose
of
enabling
a
person
to
carry
on
and
earn
profits
in
the
trade
.
.
.’
(ibid.,
453).
Here,
the
expenditure
was,
in
my
view,
incurred
for
the
purpose
of
carrying
on
and
earning
profits
in
the
trade,
for
a
reduction
in
the
amount
of
tax
does
increase
the
fund
in
the
trader’s
hands
after
tax
is
paid
and
so
promotes
the
carrying
on
of
the
trade
and
the
earning
of
trading
profits.
The
incidental
consequence
that
the
trader
is
not
taxed
so
heavily
in
respect
of
his
profits
from
trade
does
not,
as
it
seems
to
me,
alter
the
fact
that
the
litigation
was
wholly
and
exclusively
undertaken
for
the
purposes
of
the
trade.”
Lord
Oaksey
in
the
same
case
said
at
p.
377
:
“My
Lords,
the
question
in
this
appeal
is
whether
the
costs
of
litigation
undertaken
for
the
purpose
of
arriving
at
the
true
profits
of
a
trade
for
the
purposes
of
taxation
are
proper
deductions
in
order
to
arrive
at
the
balance
of
profits
and
gains
or
as
expenses
wholly
and
exclusively
laid
out
or
expended
for
the
purposes
of
trade
within
the
meaning
of
r.
3(a)
of
the
Rules
Applicable
to
Cases
I
and
II
of
sched.
D
to
the
Income
Tax
Act,
1918.
The
contention
on
behalf
of
the
Crown
is
that
no
expenses
connected
with
taxation
are
deductible
because
it
is
said
they
are
not
expended
for
the
purposes
of
the
trade
and
it
is
sought
to
limit
the
words
‘the
purposes
of
the
trade’
to
the
purpose
of
earning
the
profits
of
the
trade
by
the
operations
of
the
trade.
Reliance
is
placed
on
the
dictum
of
Lord
Davey
in
Strong
&
Co.,
Lid.
v.
Woodifield
([1906]
A.C,
448,
453),
which
has
frequently
been
cited
with
approval
in
other
eases,
but
it
is
to
be
observed
that
Lord
Davey
did
not
say
earning
the
profits
by
the
operations
of
the
trade
and,
in
my
opinion,
the
words
‘the
purposes
of
the
trade’
ought
not
to
be
construed
in
this
way.
A
trader
does
not
expend
money
in
an
action
brought
for
or
against
him
for
negligence
or
breach
of
contract
in
the
course
of
his
trade
for
the
purpose
of
earning
the
profits
of
the
trade
in
this
sense,
for
it
is
not
an
operation
of
his
trade
to
engage
in
litigation.
It
is,
of
course,
an
incident
which
he
may
think
reasonably
necessary
for
the
purposes
of
his
trade
to
bring
or
defend
actions,
but
so
it
is
an
incident
which
he
may
think
reasonably
necessary
for
the
purposes
of
his
trade
to
engage
in
litigation
as
to
the
amount
of
his
taxes.
If
he
succeeds
in
either
case
he
increases
the
profits
arising
from
his
trade,
and
it
appears
to
me
to
be
no
straining
of
language
to
say
that
a
trader
who
increases
his
profits
by
incurring
a
certain
expense
incurs
that
expense
for
the
purpose
of
earning
the
profits.
In
my
opinion,
the
real
question
which
has
to
be
decided
in
every
case
is
whether
the
expense
is
one
which
is
incurred
in
order
to
earn
gain
or
profit
from
the
trade,
or
is
the
application
of
the
gain
or
profit
when
earned:
see
per
Lord
Selborne,
L.C.
in
Mersey
Docks
&
Harbour
Board
v.
Lucas
((1883)
8
App.
Cas.
891,
906),
and,
in
my
opinion,
it
cannot
be
truly
said
that
the
expense
of
paying
accountants
or
of
litigating
the
question
of
what
is
the
balance
of
profits
and
gains
for
the
purposes
of
taxation
is
the
application
of
these
profits.
Profits
cannot
properly
be
applied
or
divided
until
they
are
ascertained,
and
every
expense
which
is
properly
incurred
for
the
ascertainment
of
profits
is,
in
my
opinion,
an
expense
of
earn-
ing
the
profits
and
not
an
application
of
them.
That
is
not
to
say
that
all
expenses
which
are
incurred
in
point
of
time
before
the
profits
are
ascertained
can
be
deducted.
The
point
of
time
is
unimportant.
Some
expenses
which
are
clearly
the
application
or
distribution
of
profits
may
be
incurred
before
the
ascertainment
of
profits,
e.g.,
capital
investments
or
payments
of
interim
dividends,
but
it
is
the
character
of
the
expense
which
must
be
considered.
The
expense
in
this
case
was
not
a
capital
investment.
It
was
incurred,
not
to
distribute,
but
to
increase,
and,
in
that
sense,
to
earn,
the
profits.
On
the
other
hand,
if
it
is
to
be
held
that
such
expenses
are
not
deductible,
what
is
to
be
said
of
the
costs
of
audit
which
the
Companies
Acts
make
necessary
or
of
that
part
of
the
cost
of
bookkeeping
which
is
used
in
the
preparation
of
such
an
audit
or
of
accounts
for
taxation?
They
are
not
ineurred
for
the
purposes
of
earning
the
profits
of
the
trade
in
the
limited
sense
contended
for
by
the
Crown.
It
is
said
that
the
expense
of
litigating
questions
of
taxation
has
never
been
sought
to
be
deducted,
and
it
may
be
so,
but
it
is
also
true
that
the
expense
of
paying
accountants
and
auditors
has
been
deducted,
and,
in
any
event,
the
fact,
if
it
be
the
fact,
throws
no
legal
light
on
the
construction
of
the
words
in
question.
’
’
The
judgment
in
Smith’s
Potato
Estates
case
is
persuasive
and
entitled
to
respect,
but
as
Lord
Oaksey
says,
Lord
Davey’s
statement
in
Strong
v.
Woodifield,
relied
on
so
strongly
by
the
majority
was
dictum
(p.
377).
I
cannot
accept
the
majority
Judgment
in
Smith’s
Potato
Estates
case
as
being
the
correct
statement
of
the
law
as
applied
to
the
provisions
of
the
Income
Tax
Act.
It
will
be
observed
that
the
English
rule
differs
somewhat
in
wording
from
the
Canadian
Act.
The
former
reads:
“In
computing
the
amount
of
the
profits
or
gains
to
be
charged,
no
sum
shall
be
deducted
in
respect
of
(a)
disbursements
or
expenses,
not
being
money
wholly
and
exclusively
laid
out
or
expended
for
the
purposes
of
the
trade
.
.
.”?
The
latter
reads
:
“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”.
It
cannot
be
overlooked
that
Parliament,
in
enacting
Section
12(1)
(a),
did
not
include
the
words
‘‘not
wholly,
exclusively
and
necessarily
laid
out
or
expended’’
which
were
in
Section
6
of
the
Income
War
Tax
Act
prior
to
1948
and
which
are
found
almost
verbatim
in
the
English
counterpart
quoted
above
except
for
the
word
‘‘necessarily’’.
Consequently,
the
English
decisions
like
Strong
v.
Woodificld
and
all
those
founded
on
Strong
v.
Woodifield
based
on
the
wording
of
the
English
rule
cannot
now
be
invoked
as
wholly
applicable
and
indistinguishable
in
the
interpretation
of
Section
12(1)(a).
Some
significance
must
be
given
to
the
difference
in
wording
noted
above
and
to
the
change
in
wording
when
the
Income
Tax
Act
was
enacted
in
1948.
The
statement
by
Abbott,
J.
in
B.C.
Electric
Railway
Co.
Ltd.
v.
M.N.R.,
[1958]
S.C.R.
133
at
136;
[1958]
C.T.C.
21
at
31:
“The
less
stringent
provisions
of
the
new
section
should,
I
think,
be
borne
in
mind
in
considering
judicial
opinions
based
upon
the
former
sections.”
points
up
the
error
that
may
arise
from
an
unquestioned
acceptance
of
such
cases
as
Smith’s
Potato
Estates
as
being
completely
applicable
in
Canada
after
1948.
In
that
year
the
words
‘‘wholly,
exclusively
and
necessarily”
were
replaced
with
the
much
broader
‘‘made
or
incurred
for
the
purpose
of
gaining
or
producing
income
from
property
or
a
business’’.
The
limitation,
spelled
out
in
Section
12(1)
(a),
does
not,
in
referring
to
“producing
income
from
the
property
or
business
of
a
taxpayer”,
limit
the
words
quoted
solely
to
the
taxation
year
in
which
the
deduction
is
being
claimed.
It
is
a
clear
indication
to
me
that
the
income
thus
referred
to
may
be
the
income
of
the
taxation
year
under
review
or
of
a
succeeding
year.
A
company
such
as
the
appellant
exists
to
make
a
profit.
All
its
operations
are
directed
to
that
end.
The
operations
must
be
viewed
as
one
whole
and
not
segregated
into
revenue
producing
as
distinct
from
revenue
retaining
functions,
otherwise
a
condition
of
chaos
would
obtain.
For
example,
is
the
function
of
the
Paymaster’s
Department
to
be
considered
as
directly
relating
to
the
production
of
income,
which
it
undoubtedly
is,
as
distinct
from
the
Audit
Department
which
scrutinizes
the
disbursements
made
by
the
Paymaster?
What
of
the
sophisticated
systems
of
internal
and
external
audits
adopted
by
commercial
companies
to
assure
that
the
income
received
by
the
company
is
properly
retained?
What
of
security
arrangements
to
protect
income
already
earned?
What
of
claims
against,
say,
a
shopping
centre
for
damages
sustained
by
a
customer
or
claimed
to
have
been
sustained
and
the
legal
costs
of
investigating
and
defending
such
claims?
Counsel
for
the
Minister
freely
admitted
that
these
are
routinely
allowed
as
expenses
incurred
in
earning
‘the
income’’.
“The
income”
surely
means
the
net
receipts
over
disbursements
in
the
taxation
year
in
the
totality
of
the
taxpayer’s
business
as
an
on-going
concern
other
than
capital
expenditures,
gifts
and
the
like.
I
can
see
no
reason
to
regard
legal
expenses
as
differing
from
other
expenses
in
that
they
differ
solely
by
the
fact
that
they
are
disbursements
paid
to
lawyers
as
distinct
from
payments
made
to
auditors
or
to
accountants
and
others
for
work
done
in
preparing
the
yearly
income
tax
returns,
or
premiums
paid
for
insurance
to
indemnify
the
taxpayer
from
loss
by
fire
or
from
negligence
or
liability
imposed
by
law.
In
my
view,
no
distinction
is
to
be
drawn
between
proper
legal
expenses
and
other
business
expenses.
All
must
be
tested
by
the
same
standards.
Canadian
courts
have
not
always
accepted
the
result
in
Strong
v.
Woodifield.
Angers,
J.
in
Hudson’s
Bay
Company
v.
M.N.R.,
[1947]
Ex.
C.R.
130;
[1947]
C.T.C.
86,
made
an
exhaustive
review
of
many
cases,
including
Strong
v.
Woodifield.
The
facts
in
the
Hudson’s
Bay
case
were
that
a
company
calling
itself
Hudson
Bay
Fur
Company
was
organized
to
deal
in
furs
in
the
States
of
Oregon
and
Washington
and
for
a
time
operated
two
stores
in
Seattle,
Washington.
The
Hudson’s
Bay
Company
took
action
in
the
State
of
Washington
to
restrain
Hudson
Bay
Fur
Company
from
interfering
with
its
trade
and
it
was
successful.
It
paid
out
for
legal
costs
in
connection
with
that
action
the
sum
of
$10,377
in
1938
and
$22,952.80
in
1939
and
included
these
disbursements
as
deductible
expenses
in
its
income
tax
returns
for
the
said
years.
The
Minister
disallowed
these
deductions
and
Hudson’s
Bay
Company
appealed
the
disallowances.
Section
6
of
the
Income
War
Tax
Act
then
read:
“
(1)
In
computing
the
amount
of
the
profits
or
gains
to
be
assessed,
a
deduction
shall
not
be
allowed
in
respect
of
(a)
disbursements
or
expenses
not
wholly,
exclusively
and
necessarily
laid
out
or
expended
for
the
purpose
of
earning
the
income,
(b)
any
outlay,
loss
or
replacement
of
capital
or
any
payment
on
account
of
capital
or
any
depreciation,
depletion
or
obsolescence,
except
as
otherwise
provided
in
this
Act.
’
’
Angers,
J.
at
pp.
148-9,
111
said
:
‘
Can
the
expenses
or
costs
paid
out
by
the
appellant
in
the
circumstances
hereinabove
related
be
considered
as
disbursements
or
expenses
‘wholly,
exclusively
and
necessarily
laid
out
out
or
expended
for
the
purpose
of
earning
the
income?’
This
is
the
question
which
I
have
to
solve.
Counsel
for
the
appellant
in
his
argument
pointed
out
that
the
Minister,
assisted
by
a
very
able
staff,
did
not
think
at
first
that
there
was
any
objection
to
the
legal
costs
and
expenses
in
issue
being
deducted
from
the
income
and
the
return
was
accepted.
He
submitted
that
it
was
only
when
the
decision
of
the
Supreme
Court
in
the
case
of
The
Minister
of
National
Revenue
v.
Dominion
Natural
Gas
Company
Limited,
[1941]
S.C.R.
19;
[1940-41]
C.T.C.
155,
was
rendered
that
the
Minister
changed
his
mind,
reopened
the
assessment
and
disallowed
the
deduction
of
the
said
costs
and
expenses.
Counsel
intimated
that
the
reassessment
was
made
on
an
erroneous
view
of
what
was
decided
in
the
Minister
of
National
Revenue
v.
Dominion
Natural
Gas
Company
Limited
case
and
that,
if
the
case
of
Income
Tax
Commissioner
v.
Singh,
[1942]
1
All
E.R.
262,
had
been
decided
before
the
Minister
of
National
Revenue
v.
Dominion
Natural
Gas
Company
Limited
case,
the
decision
of
the
Supreme
Court
in
the
latter
case
might
have
been
different.
Counsel
suggested
that
the
Supreme
Court
thought
that
they
were
compelled
to
give
judgment
against
their
own
opinions
possibly,
because
they
considered
themselves
bound
by
some
remarks
of
the
Privy
Council.
He
drew
the
conelusion
that
it
is
clear,
according
to
the
judgment
in
the
case
of
Income
Tax
Commissioner
v.
Singh,
that
the
Privy
Couneil
did
not
intend
to
lay
down
any
such
rule
as
that
suggested
in
the
Supreme
Court
judgment
Counsel
for
respondent
on
the
other
hand
relied
on
the
case
Of
Minister
of
National
Revenue
v.
Dominion
Natural
Gas
Company
Limited,
among
several
others,
and
it
seems
convenient
to
analyze
it
first.’’
It
is
important
to
note
that
at
pp.
25,
161
of
M.N.R.
v.
Dominion
Natural
Gas
Company
Limited,
Duff,
C.J.C.
said:
In
the
ordinary
course,
it
is
true,
legal
expenses
are
simply
current
expenditure
and
deductible
as
such;
but
that
is
not
necessarily
so.
The
legal
expenses
incurred,
for
example,
in
procuring
authority
for
reduction
of
capital
were
held
by
the
Court
of
Sessions
not
to
be
deductible
in
Thomson
v.
Batty
({1919]
S.C,
289).”
and
Crocket,
J.
said
at
pp.
26,
161
:
“If
we
were
free
to
decide
this
appeal
on
considerations
of
practical
business
sense
and
equity,
or
to
deduce
from
decided
cases
the
governing
rule,
which
should
be
applied
in
determining
whether
the
respondent
was
or
was
not
entitled,
under
the
formula
prescribed
by
s.
6
of
the
Canadian
Income
War
Tax
Act,
to
the
deduction
claimed
in
computing
its
assessable
profits
or
gains
for
the
year
1934,
I
should
have
no
hesitation
in
adopting
the
conclusion
at
which
the
learned
President
of
the
Exchequer
Court
arrived
and
the
reasons
he
has
given
therefor.
We
are
confronted,
however,
with
a
recent
judgment
of
the
Judicial
Committee
of
the
Privy
Council
in
the
case
of
the
appeal
of
Tata
Hydro-Electric
Agencies,
Lid.,
Bombay,
v.
Commissioner
of
Income
Tax,
Bombay
Presidency
and
Aden
({1937]
A.C.
685)
in
which
a
test,
formulated
in
1924
by
Lord
President
Clyde
of
the
Scottish
Court
of
Session
in
the
case
of
Robert
Addie
&
Sons
Collieries,
Ltd.
v.
Commissioners
of
Inland
Revenue
(
[1924]
S.C.
231),
for
determining
whether
a
deduction
is
allowable
under
practically
identical
provisions
of
the
English
Income
Tax
Act,
1918,
is
expressly
adopted
and
applied.
The
English
Act
of
1918,
ch.
40,
8
&
9
Geo.
V,
by
rule
3
of
Schedule
‘D’,
prohibits
deductions
in
respect
of
‘any
disbursements
or
expenses,
not
being
money
wholly
and
exclusively
laid
out
or
expended
for
the
purposes
of
the
trade,
profession,
employment
or
vocation’,
or
in
respect
of
‘any
capital
withdrawn
from,
or
any
sum
employed
or
intended
to
be
employed
as
capital
in
such
trade’,
etc.,
as
well
as
other
specified
capital
expenditures
for
improvements
and
the
like,
the
effect
of
which,
as
regards
this
case,
it
seems
to
be
impossible
to
distinguish
from
the
prohibitions
(a)
and
(b)
of
s.
6
of
the
Canadian
Act.
I
apprehend,
therefore,
that
the
test
so
distinctly
adopted
by
the
Judicial
Committee
in
the
Tata
case
({1937]
A.C.
685)
is
binding
upon
us.”
Maclean,
P.
in
the
Dominion
Natural
Gas
case
at
pp.
19,
20,
153
said
:
“It
seems
to
me
that
if
legal
expenses
are
incurred
in
successfully
defending
an
action
in
which
one’s
title
to
existing
assets,
rights
or
facilities
are
put
in
serious
question,
such
expenses
should
normally
be
admissible
as
deductions,
and
particularly
would
this
be
so
in
the
case
where
the
earning
of
profits
are
directly
dependent
upon
and
require
the
utilization
of
such
assets,
rights
or
facilities,
as
was
the
case
here.
If
the
action
is
unsuccessfully
defended
the
revenue
authorities
might
contend
that
there
was
no
asset,
right
or
facility
to
defend,
and
that
therefore
such
expenses
should
not
be
allowed
as
a
deduction
in
computing
net
taxable
income,
but
that
is
not
this
case.
If
such
expenses
arose
out
of
the
promotion
or
acquisition
of
additional
assets,
rights
or
facilities,
it
is
prob-
able
no
deduction
would
be
permissable.
It
was
imperative
here
that
the
Dominion
Company
defend
the
action
and
the
failure
of
its
directors
to
do
so
would
probably
have
rendered
themselves
liable
in
damages
to
the
shareholders
of
that
company.
The
action
threatened
the
earnings
of
the
Dominion
Company,
wholly
or
partially,
and
had
the
action
succeeded
it
would
have
been
unable
to
sell
gas,
at
least
in
some
sections
of
the
City
of
Hamilton;
the
company’s
capacity
to
earn
revenue
was
put
in
jeopardy
and,
I
think,
it
is
immaterial
tha
its
capital
assets,
or
some
of
them,
were
incidentally
threatened
with
extinction
or
depreciation.
It
was
because
the
Dominion
Company
was
producing
and
selling
gas
that
it
had
to
defend
the
action
and
thus
protect
and
preserve
its
credit
and
its
revenue.
The
United
Company
sought
an
injunction
restraining
the
Dominion
Company
from
continuing
to
supply
gas
to
the
inhabitants
of
the
City
of
Hamilton,
which,
had
the
United
Company
been
successful,
would
have
prevented
the
Dominion
Company
from
earning
its
usual
revenue.”
The
Supreme
Court
reversed
Maclean,
P.
because
they
felt
bound
by
Tata
Hydro-Electric
Agencies,
Lid.,
[1937]
A.C.
685
(see
remarks
of
Crocket,
J.
above).
Angers,
J.
in
the
Hudson’s
Bay
Company
case
dealt
at
length
with
the
Tata
decision
at
pp.
156,
157
and
158
(pp.
118,
119
and
120)
and
concluded
by
saying
that
the
Tata
decision
had
very
little,
if
any,
weight
in
the
circumstances
of
the
Hudson’s
Bay
Company
case.
The
facts
in
Tata,
were
:
.
the
appellant
was
a
private
limited
company
carrying
on
the
business
of
managing
agents
of
Tata
Power
Co.
Ltd.
and
other
hydro-electric
companies.
The
company
acquired
this
agency
business
from
Tata
Sons
Ltd.
under
an
assignment
whereby
the
latter
transferred
to
the
appellant
their
rights
and
interests
as
agents
of
the
hydro-electric
companies
under
their
subsisting
agreement
with
them,
but
subject,
as
to
their
rights
and
interests
under
their
agreement
with
Tata
Power
Co.
Ltd.,
to
their
obligations
under
two
agreements
with
F.
E.
Dinshaw
Ltd.
and
Richard
T.
Smith.
The
assignment
declared
that
the
appellant
should
thenceforth
be
and
act
as
the
agents
of
the
hydro-electric
companies
and
be
entitled
to
all
benefits
conferred
by
the
agreement
between
Tata
Sons
Ltd.
and
these
companies
and
should
perform
all
the
obligations
thereby
imposed
and
that
the
appellant
should
receive
all
the
commissions
to
which
Tata
Sons
Ltd.
were
entitled
thereunder.
The
appellant
agreed
to
carry
out
the
conditions
of
the
agreements
with
F,
K.
Dinshaw
Ltd.
and
Richard
T.
Smith
and
to
in
dem-
nify
Tata
Sons
Ltd.
against
any
consequences
of
the
non-
observance
thereof.
Under
the
agency
agreement
betwen
Tata
Sons
Ltd.
and
Tata
Power
Co.
Ltd.,
the
benefit
whereof
the
appellant
acquired,
the
remuneration
of
Tata
Sons
Ltd.
for
their
services
consisted
of
a
commission
of
10
per
cent
on
the
annual
net
profits
of
Tata
Power
Co.
Ltd.,
with
a
minimum
of
Rs.
50,000
whether
the
company
should
make
any
profits
or
not,
and
they
were
entitled
to
have
their
expenses
reimbursed.
In
return,
Tata
Sons
Ltd.
undertook
to
endeavour
to
promote
the
interests
of
Tata
Power
Co.
Ltd.
The
agreement
was
declared
assignable
and
Tata
Power
Co.
Ltd.
undertook
to
recognize
any
assignees
as
its
agents
and,
if
required,
to
enter
into
an
identical
agreement
with
such
assignees.
In
1926,
Tata
Power
Co.
Ltd.,
being
in
need
of
financial
assistance,
Tata
Sons
Ltd.,
its
then
managing
agents,
approached
F.
E.
Din-
shaw
Ltd.
and
Richard
T.
Smith,
who
agreed
to
provide
the
necessary
funds.
One
of
the
conditions
on
which
they
agreed
to
do
so
was
that
in
addition
to
the
interest
payable
by
Tata
Power
Co.
Ltd.
for
the
loan,
they
should
each
receive
from
Tata
Cons
Ltd.
two
annas
in
the
rupee
or
1214
per
cent
of
the
commission
earned
by
Tata
Sons
Ltd.
under
their
agreement
with
Tata
Power
Co.
Ltd.
Agreements
were
entered
into
between
Tata
Sons
Ltd.
and
IF.
E.
Dinshaw
Ltd.
and
between
Tata
Sons
Ltd.
and
Richard
T.
Smith
dated
October
15
and
19,
1926,
respectively.
After
the
acquisition
of
the
agency
business
by
the
appellant
the
Tata
Power
Co.
Ltd.,
in
fulfilment
of
its
obligation
under
the
agreemeent
with
Tata
Sons
Ltd.,
entered
into
a
new
agency
agreement
with
the
appellant
in
terms
identical
with
those
of
its
previous
agreement
with
Tata
Sons
Ltd.
and
the
appellant
also
entered
into
agreements
with
F.
KE.
Dinshaw
Ltd.
and
the
administrator
of
the
estate
of
Richard
T.
Smith,
who
had
died
in
the
meantime,
in
terms
identical
with
those
of
the
previous
agreements
between
Tata
Sons
Ltd.
and
these
parties.
By
these
transactions
the
appellant
came
in
the
place
and
stead
of
Tata
Sons
Ltd.,
both
as
regards
the
right
to
receive
from
Tata
Power
Co.
Ltd.
the
agency
remuneration
and
as
regards
the
obligation
to
pay
out
of
its
remuneration
121%
per
cent
to
F.
EK.
Dinshaw
Ltd.
and
121%,
per
cent
to
the
administrator
of
Richard
T.
Smith’s
estate.
The
assessment
of
appellant’s
income
for
the
fiscal
year
to
March
51,
1954,
is
based
on
its
income,
profits
and
gains
for
the
year
1932
and
the
question
is
whether
in
the
computation
for
tax
purposes
of
its
income,
profits
and
gains
for
that
year
it
is
entitled
to
deduct
a
sum
representing
the
25
per
cent
of
the
commission
earned
and
received
from
Tata
Power
Co,
Ltd.
which
it
paid
to
F.
E'.
Dinshaw
Ltd.
and
Richard
T.
Smith’s
administrator.
It
was
held
that
in
computing
its
income,
profits
and
gains,
the
appellant
was
not
entitled
to
deduct
the
25
per
cent
in
question;
that
this
percentage
of
the
commission
paid
to
F.
14.
Dinshaw
Ltd.
and
the
administrator
of
Richard
T.
Smith’s
estate
was
not
expenditure
incurred
by
appellant
‘solely
for
the
purpose
of
earning
.
..
profits
or
gains’
of
its
business;
that
the
obligation
to
make
the
payments
was
undertaken
by
appellant
in
consideration
of
its
acquisition
of
the
right
and
opportunity
to
earn
profits,
i.e.
of
the
right
to
conduct
the
business,
and
not
for
the
purpose
of
producing
profits
in
the
conduct
of
the
business.”
I
am
bound
to
paraphrase
Angers,
J.
in
saying
that
in
my
opinion
the
Tata
case
has
little,
if
any,
relevance
to
the
present
case
except
that
it
may
resemble
it
on
the
first
question
upon
which
we
all
agree
the
Minister
fails.
The
following
quotation
from
Angers,
J.
starting
at
pp.
166,
129
is
very
helpful:
There
are
two
cases
in
which
the
judgments
were
delivered
subsequently
to
the
hearing
by
the
Supreme
Court
of
the
case
of
the
Minister
of
National
Revenue
and
Dominion
Natural
Gas
Company.
These
cases,
in
my
opinion,
offer
as
much
relevancy
to
the
problem
at
issue
herein
as
those
previously
referred
to
and
they
certainly
deserve
being
noted.
The
first
of
these
cases
is
that
of
Southern
v.
Borax
Consolidated,
Ltd.,
[1940]
4
A.E.R.
412.
The
respondent
purchased
certain
property
for
the
purposes
of
its
business.
Subsequently
an
action
was
taken
against
the
company
claiming
that
its
title
was
invalid.
The
company
defended
the
action
and
ineurred
legal
expenses
amounting
to
£6,249,
which
it
claimed
to
be
entitled
to
deduct
as
business
expenses
in
computing
its
profits
for
the
purposes
of
assessment
to
income
tax.
The
Crown
contended
that
the
action
concerned
the
capital
assets
of
the
company
and
was
contested
in
order
to
preserve
the
existence
of
those
assets
and
that
the
sum
of
£6,249
was
a
capital
expense.
The
King’s
Beneh
Division
(Lawrence,
J.)
held
that
the
expense
had
been
incurred,
not
in
creating
any
new
asset,
but
in
maintaining
the
title
to
the
company’s
property
and
was,
therefore,
an
expense
wholly
and
exclusively
incurred
for
the
purposes
of
the
company’s
trade
and,
as
such,
properly
deductible.
Lawrence,
J.,
after
reviewing
the
precedents
cited
by
counsel,
concluded
as
follows
(p.
419)
:
It
appears
to
me
that
the
legal
expenses
which
were
incurred
by
the
respondent
company
did
not
create
any
new
asset
at
all,
but
were
expenses
which
were
incurred
in
the
ordinary
course
of
maintaining
the
assets
of
the
company,
and
the
fact
that
it
was
maintaining
the
title,
and
not
the
value,
of
the
company’s
business
does
not
make
it
any
different.
’
The
second
case
is
Income
Tax
Commissioner
v.
Singh
(exactly
Maharajadhiraj
Sir
Rameshwar
Singh
of
Darb-
hanga)
[1942]
1
A.E.R.
362.
In
this
case
the
Judicial
Committee
of
the
Privy
Council
affirmed
the
judgment
of
the
High
Court
of
Judicature
at
Patna,
India,
which
had
decided
a
reference
made
to
it,
at
the
request
of
the
respondent,
in
favour
of
the
latter.
The
summary
of
the
judgment,
fairly
comprehensive
and
exact,
may
advantageously
be
quoted:
‘The
respondent’s
father
made
a
loan
of
10
lakhs
of
rupees
to
a
company
in
which
he
was
a
shareholder,
and
recovered
this
loan
in
an
action,
the
costs
of
which
were
allowed
as
an
expense
incurred
in
his
moneylending
business
in
the
assessment
of
his
income
tax.
Certain
shareholders
in
the
company
brought
an
action
against
the
respondent’s
father
and
others
for
conspiracy,
collusion,
misrepresentation,
and
breach
of
contract.
The
basis
of
this
action
was
an
alleged
transaction,
of
which
the
loan
was
part,
whereby
the
respondent’s
father
agreed
to
finance
and
manage
the
company.
The
action
was
dismissed,
the
version
of
what
took
place
relied
upon
by
the
plaintiffs
being
found
to
be
completely
false.
The
respondent’s
father
died
before
the
conclusion
of
the
suit,
and
the
respondent
who
continued
his
business
claimed
to
deduct
the
costs
in
arriving
at
the
assessment
of
profits.
The
appellant
contended
that
there
was
no
connection
between
the
loan
and
the
alleged
transaction
which
was
the
basis
of
the
action
against
the
respondent’s
father,
the
action
being
of
a
personal
character
and
unrelated
to
his
business
as
a
moneylender:
Held:
the
respondent
was
entitled
to
make
the
deduction
claimed.
The
allegations
against
the
respondent’s
father
were
built
up
upon
the
transaction
in
which
the
loan
was
made,
and
the
defence
of
the
action
was
necessary
for
the
protection
of
his
rights
as
the
creditor
in
the
loan.’
Lord
Thankerton,
who
delivered
the
judgment
of
the
Court,
stated
(p.
365,
in
fine)
:
‘Their
Lordships
are,
therefore,
of
opinion
that
the
facts
stated
by
the
commissioner
cannot
justify
the
opinion
expressed
by
him,
but
that
the
expenditure
in
question
was
incurred
solely
for
the
purpose
of
earning
the
profits
or
gains
of
the
money
lending
business,
and
that
the
High
Court
are
right
in
holding
the
respondent
entitled
to
the
deduction
claimed
and
in
answering
the
question
of
law
asked
by
the
commissioner
in
favour
of
the
respondent.’
”’
Angers,
J.
concluded
by
allowing
the
deductions.
No
appeal
was
taken
from
his
judgment.
The
decision
in
Kellogg
Company
of
Canada
Limited
v.
[1942]
Ex.
C.R.
33;
[1942]
C.T.C.
51,
is
very
helpful.
Angers,
J.
deals
with
it
at
pp.
177-8,
138
as
follows:
“.
.
.
the
appellant,
a
manufacturer
of
cereal
products,
and
one
of
its
customers
were
made
defendants
in
an
action
brought
by
Canadian
Shredded
Wheat
Company
which
claimed
infringement
by
both
defendants
of
certain
trade
mark
rights
and
asked
for
an
injunction
restraining
them
from
using
the
words
‘Shredded
Wheat’
or
‘Shredded
Whole
Wheat’
or
‘Shredded
Whole
Wheat
Biscuit’
or
any
words
only
colourably
differing
therefrom
and
damages.
The
appellant
successfully
defended
the
action
on
behalf
of
both
defendants.
In
computing
its
income
for
1936
and
1937
the
appellant
deducted
the
sums
of
money
paid
out
for
legal
expenses
on
accounts
of
said
action.
These
deductions
were
disallowed
by
the
Commissioner
of
Income
Tax.
The
latter’s
disallowance
was
naturally
affirmed
by
the
Minister
of
National
Revenue,
from
whose
decision
an
appeal
was
taken
to
the
Court.
It
was
held
that
the
payments
were
made
involuntarily
in
the
course
of
business
to
enable
the
appellant
to
continue
the
sales
of
its
products
as
before
action
was
taken
against
it
and
not
to
secure
or
preserve
an
actual
asset
or
enduring
advantage
to
appellant.
A
brief
extract
from
the
judgment
of
Maclean,
J.
may
be
convenient
(pp.
43,
61)
:
‘The
broad
principle
laid
down
by
Lord
Cave
in
British
Insulated
v.
Atherton,
[1926]
A.C.
205
at
218,
is
not,
in
my
opinion,
of
any
assistance
in
the
present
case.
Applying
that
test
to
the
present
case,
the
payment
here
made
was
not,
I
think,
an
expenditure
incurred
or
made
‘
‘
once
and
for
all
’
’,
with
a
view
of
bringing
a
new
asset
into
existence,
nor
can
it,
in
my
opinion,
properly
be
said
that
it
brought
into
exist-
ence
an
advantage
for
the
enduring
benefit
of
Kellogg’s
trade
within
the
meaning
of
the
well
known
language
used
by
Lord
Cave
in
a
certain
passage
of
his
speech
in
that
case.
What
the
House
of
Lords
was
considering
in
that
case
was
a
sum
irrevocably
set
aside
as
a
nucleus
of
a
pension
fund
established
by
a
trust
deed
for
the
benefit
of
the
company’s
clerical
staff,
and,
as
was
said
by
Lawrence
L.J.
in
the
Anglo
Persian
Oil
Company
Limited
v.
Dale
case,
[1932]
1
K.B.
124,
I
have
no
doubt
that
Lord
Cave
had
that
fact
in
mind
when
he
spoke
of
an
advantage
for
the
enduring
benefit
of
the
company’s
trade.
Such
an
expenditure
differs
fundamentally
from
the
expenditure
with
which
we
are
concerned
in
the
present
case.
Here,
the
expenditure
brought
no
such
permanent
advantage
into
existence
for
the
taxpayer’s
trade.
I
do
not
think
it
can
be
said
that
the
expenditure
in
question
here
brought
into
existence
any
asset
that
could
possibly
appear
as
such
in
any
balance
sheet,
or
that
it
procured
an
enduring
advantage
for
the
taxpayer’s
trade
which
must
pre-suppose
that
something
was
acquired
which
had
no
prior
existence.’
After
stating
that
the
case
of
Kellogg
v.
Minister
of
National
Revenue
closely
resembles
that
of
Mitchell
v.
B.
W.
Noble
Limited,
[1927]
1
K.B.
719,
in
which
a
large
sum
of
money
was
expended
by
a
company
to
get
rid
of
a
managing
director,
and
quoting
passages
from
the
reasons
of
the
Master
of
the
Rolls
and
of
Lord
Justice
Sargent,
which
I
do
not
deem
necessary
to
transcribe
here
and
which
may
be
easily
referred
to,
Maclean,
J.
declared
that
these
remarks
would
appear
to
be
applicable
and
added
(p.
45;
p.
63)
:
Here,
Kellogg
had
encountered
a
business
difficulty,
one
associated
directly
with
the
sales
branch
of
its
business,
which
it
had
to
get
rid
of,
if
possible,
in
order
to
continue
the
sales
of
its
products
as
it
had
in
the
past.’
An
appeal
was
taken
by
the
Minister
of
National
Revenue
and
the
same
was
dismissed,
[1943]
S.C.R.
58;
[1943]
C.T.C.
1.
Sir
Lyman
Duff,
who
delivered
the
judgment
of
the
Court,
after
referring
to
the
case
of
the
Minister
of
National
Revenue
v.
The
Dominion
Natural
Gas
Company,
Limited,
made,
among
others,
the
following
statements
(p.
60;
p.
3):
‘The
present
appear
concerns
expenditures
made
by
the
respondent
company
in
payment
of
the
costs
of
litigation
between
that
company
and
the
Canadian
Shredded
Wheat
Company.
As
regards
this
payment,
the
question
in
issue
was
whether
or
not
the
registered
trade
marks
of
the
plaintiffs
in
the
action
were
valid
trade
marks,
or,
in
other
words,
whether
or
not
the
present
respondents,
the
Kellogg
Company,
and
all
other
members
of
the
public
were
excluded
from
the
use
of
the
words
in
respect
of
which
the
complaint
was
made.
The
right
upon
which
the
respondents
relied
was
not
a
right
of
property,
or
an
exclusive
right
of
any
description,
but
the
right
(in
common
with
all
other
members
of
the
public)
to
describe
their
goods
in
the
manner
in
which
they
were
describing
them.’
”’
Halsbury’s
Laws
of
England,
3rd
ed.
at
p.
168
states
as
part
of
para.
287:
‘“Legal
expenses
have
been
allowed
where
they
did
not
create
a
new
asset
but
maintained
a
company’s
title
to
land
abroad
(h)
(Southern
v.
Borax
Consolidated,
Ltd.,
[1941]
1
K.B.
111;
[1940]
4
All
E.R.
214;
23
T.C.
597),
and
where
they
were
incurred
by
a
moneylender
in
protection
of
his
rights
as
a
creditor
for
a
loan
(i)
(Income
Tax
Commissioners
(Bihar
and
Orissa)
v.
Singh,
[1942]
1
All
E.R.
362,
P.C.)
Sums
paid
by
a
company
to
settle
an
action
for
fraud
in
connexion
with
its
trade
have
also
been
allowed,
together
with
incidental
legal
expenses
(k)
{Golder
(Inspector
of
Taxes)
v.
Great
Boulder
Proprietary
Gold
Mines,
Ltd.,
[1952]
1
All
K.R.
360
;
33
T.C.
75.)”
and
again
on
p.
169:
“Though
it
is
clear
that
the
expenses
allowable
are
such
only
as
are
necessary
to
earn
the
receipts
of
the
trade
(u),
{Bussell
v.
Town
and
County
Bank
(1888),
13
App.
Cas.
418,
at
p.
424;
2
T.C.
321,
at
p.
327,
per
LORD
HERSCHELL:
Gresham
Life
Assurance
Society
v.
Styles,
[1892]
A.C.
309,
H.L.,
at
316;
3
T.C.
185,
at
p.
189;
and
see
p.
166,
ante.),
this
proposition
must
be
applied
in
a
reasonable
way,
and
must
not
be
construed
so
as
to
preclude
the
deduction
of
those
expenses
as
a
result
of
which
receipts
or
profits
may
accrue
in
the
future.
For
example,
the
cost
of
a
reasonable
amount
of
advertising
is
usually
admitted
as
a
business
expense,
although
the
result
of
a
particular
advertisement
might
not
be
reflected
in
an
increase
in
trade
receipts
in
the
year
in
which
the
cost
was
incurred.
The
principle
is
that
expenses
to
earn
future
profits
are
allowable
deductions
(a),
(a)
Vallambrosa
Rubber
Co.,
Ltd.
v.
Farmer
(Surveyor
of
Taxes),
[1910]
8.C.
519;
5
T.C.
529
(a
rubber
company
part
only
of
whose
estate
was
producing
rubber
was
allowed
the
cost
of
weeding,
watching,
manuring
and
clearing
immature
areas)
;
Whelan
(Inspector
of
Taxes)
v.
Dover
Harbour
Board
(1934),
151
L.T.
288,
C.A.;
18
T.C.
555,
cited
in
note
(1),
p.
227,
post;
Cooke
(Inspector
of
Taxes)
v.
Quick
Shoe
Repair
Service
(1949),
30
T.C.
460
(purchaser
of
business
paid,
by
sale
agreement,
vendor’s
business
debts
to
preserve
goodwill
and
continuity
of
supplies;
allowed
as
deductions)
and
this
principle
has
been
extended
to
include
expenditure
to
avoid
future
expense
which
does
not
bring
into
being
a
tangible
asset
(b)
(b)
Mitchell
v.
B.
W.
Noble,
Ltd.,
[1927]
1
K.B.
719,
C.A.;
11
T.C.
372
(payment
to
get
rid
of
a
director)
;
Hancock
v.
General
Reversionary
and
Investment
Co.,
Ltd.,
[1919]
1
K.B.
25;
7
T.C.
358
(an
annuity
purchased
to
get
rid
of
an
annual
payment
to
a
retired
servant)
;
Anglo-Persian
Oil
Co.,
Ltd.
v.
Dale,
[1932]
1
K.B.
124,
C.A.:
16
T.C.
253
(payment
to
cancel
an
agency
agreement)
;
Scammell
and
Nephew,
Ltd.
v.
Rowles,
[1939]
1
All
E.R.
337,
C.A.;
22
T.C.
479
(payments
to
compromise
action
procuring
termination
of
disadvantageous
trading
relations);
Inland
Revenue
Commissionner
s
v.
Patrick
Thomson,
Ltd.
(1956),
L.
(T.C.)
1813
(change
in
control
of
company;
compensation
to
managing
director
for
cancellation
of
service
agreement;
right
of
company
to
treat
compensation
as
trade
expense
not
affected
by
subsequent
liquidation
of
company
and
carrying
on
of
company’s
trade
by
the
other
company
which
had
secured
control
of
the
company
which
went
into
liquidation);
but
see
Alexander
Howard
&
Co.,
Ltd.
v.
Bentley
(1948),
30
T.C.
334
(lump
sum
paid
by
a
company
for
the
surrender
of
a
right
to
an
annuity
to
widow
of
previous
owner
of
company’s
business;
not
deducted).’’
It
is
of
interest
that
all
of
the
decisions
referred
to
in
footnotes
(a)
and
(b)
above
were
decided
after
Strong
v.
Woodifield.
The
Privy
Council
decision
in
Income
Tax
Commissioner
v.
Singh
(supra)
referred
to
on
p.
168
of
Halsbury’s
Laws
of
England
in
which
the
appellant
relied
on
Strong
v.
Woodifield
(supra)
shows
how
far
the
English
courts
have
moved
since
Strong
v.
Woodifield
was
decided
in
1906.
The
editorial
note
on
p.
363
of
the
report
points
this
out
as
follows:
‘
It
is
clear
that
in
the
conduct
of
any
business
the
bringing
of
proceedings
to
enforce
the
payment
of
sums
due
to
the
owner
of
the
business
must
from
time
to
time
form
part
of
the
transactions
necessary
to
the
proper
carrying
on
of
the
business.
The
expenses
of
bringing
these
actions
are
recognised
as
a
proper
deduction
against
profits.
The
present
case
takes
the
matter
a
considerable
step
further.
Here
an
action,
which
the
court
in
the
exercise
of
considerable
judicial
restraint
has
characterised
as
unfounded,
was
brought
against
the
taxpayer.
The
action
in
fact
was
based
on
matters
which
the
plaintiffs
found
it
quite
impossible
to
prove,
and
it
seems
that
the
plaint
itself
covered
some
80
pages
of
print,
and
was
said
to
be
quite
unintelligible.
The
defence
of
such
an
action,
which
must
be
a
serious
charge
upon
the
profits
of
the
business,
is
held
to
be
undertaken
as
part
of
the
transactions
of
the
business
and
the
costs
incurred
in
such
defence
are
held
to
be
a
proper
deduction
against
profits.
The
material
provisions
of
the
Indian
Act
in
this
connection
are
the
same
as
those
of
the
English
Act,
and
the
decision
can
be
cited
in
relation
to
the
latter
Act
to
the
same
extent
as
any
other
decision
of
the
Privy
Council
may
—
that
is,
though
not
absolutely
binding,
it
is
to
be
treated
with
the
greatest
respect.
’
’
The
references
to
advertising
in
some
of
the
cases
are
most
apt.
The
millions
now
spent
by
commercial
companies
on
advertising
in
any
given
taxation
year
which
admittedly
is
aimed
at
securing
business
in
succeeding
years
could
not,
on
an
acceptance
of
the
so-called
rule
in
Strong
v.
Woodifield,
be
allowed.
But
such
expenses
are
allowed
without
question
and
it
is
only
common
sense
that
they
should
be
allowed.
While
it
may
be
possible
to
isolate
the
receipts
and
expenditures
of
a
salaried
individual
for
a
one
taxation
year
period,
it
is
impossible
to
do
so
with
commercial
or
corporate
enterprises
whose
business
activities
are
continuous
and
where
expenditures
made
in
one
taxation
year
may
have
no
effect
nor
be
intended
to
have
any
effect
in
producing
the
income
of
that
year
but
are
expected
to
produce
income
from
the
business
operation
of
the
taxpayer
in
subsequent
taxation
years
within
the
meaning
of
Section
12(1)
(a)
of
the
Income
Tax
Act.
A
passage
from
the
reasons
for
Judgment
of
Abbott,
J.
in
B.C.
Electric
Railway
Co.
Ltd.
v.
M.N.R.
at
pp.
187,
31
has
been
quoted
by
my
brother
Ritchie.
I
think
the
important
fact
to
note
is
that
in
B.C.
Electric
Railway
Co.
Ltd.
v.
M.N.R.,
Abbott,
J.
went
on
to
find
that
the
expenditure
then
in
question
was
a
capital
outlay
within
the
terms
of
Section
12(1)
(b)
(pp.
138,
32)
of
the
Income
Tax
Act.
As
such
it
was
not
deductible
as
an
income
expense
in
any
event.
The
B.C.
Electric
Railway
Co.
Ltd.
decision
does
not
in
consequence
deal
with
the
type
of
expenditure
in
issue
here.
To
limit
the
expenditure,
if
it
is
to
qualify
as
a
deductible,
to
the
income
of
the
particular
year
in
which
it
was
made
requires
writing
into
Section
12(1)
(a)
of
the
Income
Tax
Act
words
which
Parliament
did
not
put
there.
The
only
qualification
which
Parliament
imposed
was
that
the
outlay
or
expense
be
‘made
or
incurred
by
the
taxpayer
for
the
purpose
of
gaining
or
producing
income
from
the
property
or
business
of
the
taxpayer’’.
No
limitation
as
to
time
can
be
found
in
the
section
in
question.
Two
other
Canadian
decisions
are
very
much
in
point.
They
are
M.N.R.
v.
Goldsmith
Bros,
and
M.N.R.
v.
L.
D.
Caulk
Co.
(tried
together),
[1954]
S.C.R.
55;
[1954]
C.T.C.
28,
and
Rolland
Paper
Co.
v.
M.N.R.,
[1960]
Ex.
C.R.
334;
[1960]
C.T.C.
158.
In
the
Goldsmith
and
Caulk
cases,
Rand,
J.
said:
“The
question
here
is
whether
expenses
incurred
by
the
respondent
company
in
defending
itself
against
charges
of
violating
the
criminal
law
by
combining
with
others
to
prevent
or
lessen
unduly
competition
in
the
commercial
distribution
of
dental
supplies,
are
deductible
in
ascertaining
taxable
income.
The
agreement
or
arrangement
alleged
to
have
been
unlawful
purported
to
regulate
day
to
day
practices
in
the
conduct
of
the
respondent’s
business.
It
formed
no
part
of
the
permanent
establishment
of
the
business;
it
was
a
scheme
to
govern
operations
rather
than
to
create
a
capital
asset;
and
the
payment
to
defend
the
usages
under
it
was
a
beneficial
outlay
to
preserve
what
helped
to
produce
the
income.
These
expenses
included
legal
fees
both
for
appearing
before
the
Commissioner
under
the
Combines
Investigation
Act
and
at
the
trial
which
resulted
in
acquittal.
The
provisions
of
the
Income
Tax
Act
are
imposed
on
the
settled
practices
of
commercial
accounting,
but
they
create
in
effect
a
statutory
mode
of
determining
taxable
income.
Deductions
from
revenue
must
have
been
‘wholly,
exclusively
and
necessarily
laid
out
or
expended
for
the
purpose
of
earning
the
income’.
Each
word
of
this
requirement
is
significant,
and
decisions
based
on
different
statutory
language
are
strictly
of
limited
assistance.
The
payment
arose
from
what
were
considered
the
necessity
of
the
practices
to
the
earning
of
the
income.
The
case
is
then
governed
by
M.N.R.
v.
Kellogg,
[1943]
S.C.R.
58;
[1943]
C.T.C.
1.
Proceedings
there
had
been
brought
against
the
com
pany
to
restrain
it
from
using
certain
ordinary
descriptive
words
in
connection
with
the
sale
of
its
products
and
the
expenses
had
been
incurred
in
successfully
resisting
them.
That
use
was
likewise
part
of
the
day
to
day
usage
in
marketing
the
company’s
products
and
the
expenses
were
held
to
be
deductible.
The
word
‘necessarily’
was
urged
by
Mr.
Varcoe
as
being
unsatisfied
by
the
facts.
This
term
is
not
found
in
the
English
Act
and
it
cannot
be
taken
in
a
literal
or
absolute
sense.
Fire
insurance,
for
instance,
is
admittedly
a
deductible
expense,
and
yet
how
can
it
be
said
to
be
necessary
when
thousands
of
business
houses
have
gone
through
generations
of
trade
without
loss
from
fire?
The
word
must
be
taken
as
it
was
in
Kellogg
in
the
commercial
sense
of
necessity.
The
judgment
of
this
Court
in
M.N.R.
v.
Dominion
Natural
Gas,
[1941]
S.C.R.
19;
[1940-41]
C.T.C.
155,
is
clearly
distinguishable
as
having
been
a
case
of
expenses
to
preserve
a
capital
asset
in
a
capital
aspect.’’
In
the
Rolland
Paper
case
the
deduction
challenged
was
for
legal
fees
of
$5,948.27
paid
in
the
taxation
year
1955
as
its
share
of
the
legal
costs
of
an
appeal
against
the
judgment
of
the
Supreme
Court
of
Ontario
finding
Rolland
Paper
Company
and
others
guilty
of
illegal
trade
practices
contrary
to
Section
498(1)
(d)
of
the
Criminal
Code.
The
case
resembled
Goldsmith
and
Caulk
but
differed
in
that
where
the
Goldsmith
Company
and
the
Caulk
Company
had
been
acquitted
Rolland
Paper
Company
was
convicted.
Fournier,
J.
followed
the
Goldsmith
and
Caulk
decision,
holding
that
the
fact
of
conviction
was
not
material.
He
allowed
the
deduction.
Notice
of
Appeal
to
this
Court
was
given
by
the
Minister.
The
appeal
was
not
proceeded
with,
Notice
of
Discontinuance
having
been
filed.
Finally,
this
Court
dealt
with
Section
12(1)
(a)
of
the
Income
Tax
Act
in
Evans
v.
M.N.R.,
[1960]
S.C.R.
391;
[1960]
C.T.C.
69.
The
facts
of
that
case
are
stated
in
the
headnote
as
follows
:
“Exercising
a
power
of
appointment
conferred
upon
him
by
the
will
of
his
father,
the
appellant’s
first
husband
bequeathed
her
the
income
for
life
of
a
one-third
share
of
the
father’s
estate.
The
trustee
of
the
father’s
estate
applied
to
the
Court
for
advice
and
direction
as
to
whether
she
was
entitled
to
the
income.
In
1955,
the
matter
was
finally
decided
by
this
Court
in
favour
of
the
appellant
who
had
been
represented
by
counsel
in
all
the
proceedings.
In
computing
her
income
tax
return
for
1955,
she
deducted
the
legal
fees
she
had
paid
her
solicitors.
The
deduction
was
disallowed
by
the
Minister.
The
Income
Tax
Appeal
Board
allowed
the
deduction,
but
the
Minister’s
assessment
was
affirmed
by
the
Exchequer
Court
of
Canada.”
Cartwright,
J.,
speaking
for
the
majority,
said
at
pp.
395
et
seq.,
74
et
seq.:
‘As
I
read
the
whole
of
his
reasons,
the
learned
judge
was
of
opinion
that
if
the
decisions
of
the
courts
in
England
were
applicable
he
would
have
decided
the
question
in
favour
of
the
taxpayer
but
felt
himself
bound
by
the
decision
of
this
Court
in
Dominion
Natural
Gas
Lid.
v.
M.N.R.,
[1941]
S.C.R.
19;
[1940-41]
C.T.C.
155,
to
reach
a
contrary
conclusion.
That
case
was
decided
under
Section
6(1)
of
the
Income
War
Tax
Act,
quoted
above.
In
giving
the
judgment
of
the
majority
of
this
Court
in
B.C.
Electric
Ry.
Co.
v.
M.N.R.,
[1958]
S.C.R.
133
at
136
;
[1958]
C.T.C.
21
at
31
;
77
C.R.T.C.
29,
my
brother
Abbott
said:
‘The
less
stringent
provisions
of
the
new
section
should,
I
think,
be
borne
in
mind
in
considering
judicial
opinions
based
upon
the
former
sections.
’
Whether,
in
view
of
the
later
decisions
of
this
Court
in
M.N.R.
v.
The
Kellogg
Company
of
Canada
Ltd.,
[1943]
S.C.R.
58;
2
D.L.R.
62;
[1943]
C.T.C.
1,
and
M.N.R.
v.
Goldsmith
Bros.
Smelting
and
Refining
Co.
Lid.,
[1954]
S.C.R.
55,
2
D.L.R.
1
;
[1954]
C.T.C.
28,
the
Dominion
Natural
Gas
case
would
be
decided
in
the
same
manner
if
it
arose
to-day
under
the
present
section
is
a
question
which
I
do
not
have
to
consider.
It
is
distinguishable
from
the
case
at
bar.
The
‘asset’
or
‘advantage’
under
consideration
in
Dominion
Natural
Gas
was
a
valuable,
exclusive
perpetual
franchise
;
this
franchise
did
not
of
itself
yield
any
income
to
the
Company
which
held
it;
it
was
a
permanent
right
used
and
useful
in
the
earning
of
the
company’s
income
by
the
sale
of
its
product
to
the
persons
residing
in
the
territory
covered
by
the
franchise;
it
was
rightly
regarded
as
an
item
of
fixed
capital.
If
the
circumstances
of
the
case
at
bar
are
view
in
the
light
most
favourable
to
the
respondent
it
can
be
said
that
the
legal
expenses
were
incurred
not
only
to
collect
the
income
to
which
the
appellant
was
entitled
and
which
was
being
wrongly
with-
held
from
her
but
also
to
prevent
the
right
to
receive
that
income
being
destroyed
;
the
right
in
question
remains
throughout
a
right
to
income.
In
the
Dominion
Natural
Gas
case,
on
the
other
hand,
the
expenses
were
incurred
in
litigation
the
subject
matter
of
which
was
an
item
of
fixed
capital.
In
my
opinion,
in
the
circumstances
of
this
case
there
are
two
relevant
questions
both
of
which
must,
on
the
admitted
facts,
be
answered
in
the
affirmative;
(i)
was
the
appellant’s
claim
in
regard
to
which
the
expenses
were
incurred
a
claim
to
income
to
which
she
was
entitled?
(ii)
were
the
legal
expenses
properly
incurred
in
order
to
obtain
payment
of
that
income?
It
does
not
appear
to
me
to
be
either
necessary
or
relevant
to
inquire
further
as
to
what
were
the
grounds
(held
by
the
Court
to
be
without
substance)
upon
which
the
payment
of
the
income
was
withheld.
It
would
be
a
strange
result
if
the
question,
whether
legal
expenses
incurred
in
enforcing
or
preserving
a
right
should
be
regarded
as
an
outlay
on
account
of
capital
or
on
account
of
income,
fell
to
be
determined
on
a
consideration
not
of
the
true
nature
of
that
right
but
of
the
nature
of
the
ill-founded
grounds
on
which
it
was
disputed.
For
the
above
reasons
it
is
my
opinion
that
the
outlay
of
the
legal
expenses
in
question
was
not
a
payment
on
account
of
capital
falling
within
Section
12(1)
(b)
but
was
an
expense,
falling
within
Section
12(1)
(a),
incurred
by
the
appellant
for
the
purpose
of
gaining
income
from
property,
to
which
income
she
was
at
all
relevant
times
entitled
but
of
which
she
was
unable
to
obtain
payment
without
incurring
these
expenses.”
These
observations
are
equally
applicable
to
the
expenditures
made
by
the
appellant
in
the
instant
case.
In
conclusion,
as
I
see
it,
the
expenditures
here
were
ones
which
under
sound
accounting
and
commercial
practice
would
be
deducted
in
the
Statement
of
Profit
and
Loss
as
expenditures
for
the
year
in
determining
the
profit,
if
any,
of
the
company
for
that
year.
Cattanach,
J.
appears
to
have
placed
too
much
reliance
on
Lord
Simond’s
words
in
Smith’s
Potato
Estates
case
:
“What
profit
he
has
earned,
he
has
earned
before
ever
the
voice
of
the
taxgatherer
is
heard.’’
I
think
it
proper
to
observe
that
in
each
of
the
years
in
question
before
ever
the
voice
of
the
tax-
gatherer
was
heard
the
expenditures
in
question
had
to
be
made
to
preserve
the
income
and
the
working
capital
from
the
unwarranted
claim
of
a
foreign
taxing
authority
otherwise
the
Canadian
taxgatherer
would
have
called
in
vain.
He
would
have
found
an
empty
treasury
and
a
commercial
operation
condemned
to
pay
the
United
States
Internal
Revenue
Service
tribute
by
way
of
income
tax
in
future
years.
I
would
accordingly
allow
the
appeal
in
toto
with
costs
throughout
payable
by
the
respondent.
RITCHIE,
J.:—This
is
an
appeal
from
two
judgments
of
the
Exchequer
Court
of
Canada
based
on
a
single
decision
rendered
by
Cattanach,
J.
whereby
he
allowed
the
appeal
of
the
Minister
of
National
Revenue
from
a
decision
of
the
Tax
Appeal
Board
and
thereby
approved
a
re-assessment
of
the
present
appellant’s
taxable
income
for
the
years
1951
and
1952
adding
thereto
amounts
of
$46,532.56
and
$45,192.03
which
were
described
by
the
Minister
of
National
Revenue
as
Commissions
paid
pursuant
to
agreement
of
December
29,
1944
with
Transcontinental
Resources
Limited’’
and
whereby
he
also
dismissed
the
present
appellant’s
cross
appeal
from
a
decision
of
the
Tax
Appeal
Board
disallowing
a
deduction
from
its
taxable
income
for
the
years
1951
and
1952
of
$20,832.51
being
the
total
amount
paid
in
those
two
years
as
legal
expenses
incurred
in
respect
of
a
disputed
claim
for
income
tax
by
the
United
States
Internal
Revenue
Service.
The
appellant
company
was
incorporated
in
Ontario
in
November
1942
for
the
purpose
of
undertaking,
in
co-operation
with
other
Canadian
and
United
States
interests,
the
financing
of
the
development
of
an
iron
ore
deposit
at
Steep
Rock
Lake
in
northwestern
Ontario
and
for
the
further
purpose
of
marketing
the
ore
produced
from
that
deposit
and
the
question
raised
by
this
appeal
with
respect
to
the
payment
of
commissions
must,
in
my
view,
be
considered
in
light
of
the
circumstances
surrounding
the
early
stages
of
this
important
mining
development.
The
ore
deposit
in
question
was
discovered
in
1938
on
property
owned
by
Steep
Rock
Iron
Ore
Mines
Limited
(hereinafter
called
Steep
Rock’’)
and
the
financing
of
the
very
considerable
operation
necessary
to
extract
the
ore
from
under
the
Lake
was
initially
undertaken
by
a
Canadian
group
consisting
of
Mr.
Arthur
Carr,
the
president
of
Transcontinental
Resources
Limited,
and
his
associates
in
that
Company.
Large
sums
of
money
were
expended
in
sinking
a
shaft
and
running
drifts
under
the
Lake
in
an
effort
to
mine
the
ore
but
this
proved
unsuccessful
and
it
was
decided
that
the
only
alternative
was
to
embark
on
the
extensive
and
very
costly
task
of
pumping
over
100
billion
gallons
of
water
out
of
Steep
Rock
Lake.
In
order
to
obtain
the
substantial
additional
capital
necessary
to
finance
this
difficult
operation,
contact
was
made
with
Mr.
Cyrus
Eaton
and
the
Otis
Company
of
Cleveland,
Ohio,
of
which
he
was
the
president.
It
was
originally
contemplated
that
the
financing
would
be
arranged
by
Steep
Rock
issuing
$7,500,000
worth
of
first
mortgage
bonds
of
which
$1,500,000
were
to
be
marketed
in
Canada
through
Mr.
Carr
and
Transcontinental
Resources
Limited
(hereinafter
referred
to
as
"Transcontinen-
tal’’)
and
the
balance
in
the
United
States
through
Otis
and
Company;
Steep
Rock,
however,
found
it
more
convenient
to
deal
through
one
agency
and
it
was
for
this
reason
that
after
discussing
the
matter
with
Otis
and
Company
and
Transcontinental
it
was
decided
that
the
appellant
company
should
be
incorporated.
The
way
in
which
this
decision
was
made
is
perhaps
best
described
in
the
evidence
of
Mr.
William
R.
Daley,
who
is
now
president
of
Otis
and
Company
and
Chairman
of
the
Board
of
Directors
of
the
appellant
company
and
who
was
the
only
witness
called
in
these
proceedings.
In
this
regard
he
said:
"‘Q.
in
your
previous
testimony
when
you
have
referred
to
Mr.
Carr
and
his
associates,
we
must
imply
that
you
referred
to
Transcontinental
as
being
the
principal
associate?
<A.
Yes,
I
am.
We
ran
into
some
complications
in
that
Steep
Rock
wanted
to
deal
with
one
agency.
So
in
the
ultimate
—
I
guess
it
is
a
long
time
before
we
got
to
the
ultimate
setup,
but
we
then
agreed
we
would
form
one
agency,
which
would
be
a
Canadian
company
—
Premium
Iron
Ores
Limited,
which
would
have
a
branch
company
in
the
United
States.
Arthur
Carr
and
his
associates
would
have
a
contract
to
distribute
the
iron
ore
that
was
being
sold
in
Canada.
Steep
Rock
wanted
to
deal
with
one
agency,
so
it
was
finally
agreed
that
Premium
Iron
Ores
Limited
itself
would
have
exclusive
agency
and
that
it
would
have
the
co-operation
of
Arthur
Carr
and
his
associates
both
in
the
financing
and
in
the
sale
of
the
iron
ore.”’
The
italics
are
my
own.
In
the
result,
by
reason
of
wartime
conditions
the
Canadian
Mniister
of
Fnance
refused
to
permit
the
marketing
of
these
bonds
in
Canada
and
therefore
the
major
portion
of
the
financing
had
to
be
arranged
by
way
of
a
loan
from
the
United
States
Reconstruction
Corporation.
This
loan
was
granted
on
the
understanding
that
the
appellant
would
undertake
to
procure
firm
purchasing
contracts
for
the
delivery
of
10,000,000
tons
of
ore
during
a
period
of
the
next
ten
years,
not
less
than
500,000
tons
of
which
was
to
be
delivered
in
each
year,
and
upon
a
further
undertaking
by
the
appellant
to
furnish
additional
funds
up
to
$1,000,000
if
the
actual
cost
of
bringing
the
mine
into
production
proved
greater
than
the
then
estimate
of
$7,500,000.
In
furtherance
of
these
arrangements
an
agreement
was
entered
into
between
Steep
Rock
and
the
appellant
on
January
15,
1943
wherein
it
was
recited
that
Steep
Rock
had
appointed
the
appellant
the
exclusive
selling
agent
in
respect
of
the
iron
ore
to
be
mined
and
produced
and
the
appellant
agreed
to
procure
firm
purchasing
orders
for
10,000,000
tons
of
ore
in
the
manner
aforesaid
and
to
render
financial
assistance
up
to
$1,000,000
if
the
same
were
required.
The
terms
of
this
agreement
which
most
directly
concern
the
issued
in
this
appeal
are
contained
in
paragraphs
5,
9,
10
and
11.
Paragraph
5
contains
an
express
covenant
by
Steep
Rock
subject
as
herein
provided,
to
pay
Premium
for
services
referred
to
herein
an
amount
equal
to
two
percentum
(2%)
of
the
value
of
all
Steep
Rock
ores
sold
by
Premium
and
Steep
Rock
during
the
life
of
this
agreement,
whether
such
ores
are
delivered
within
the
life
of
this
agreement
or
not.
‘
‘
and
by
paragraphs
9,
10
and
11
the
appellant
undertook
to
provide
on
demand
additional
financing
for
Steep
Rock
of
$1,000,-
000
by
way
of
a
loan
against
promissory
notes
to
be
issued
and
further
undertook
to
deposit
voting
trust
certificates
representing
800,000
shares
of
Steep
Rock
in
trust
with
an
approved
trust
company
by
way
of
assurance
to
Steep
Rock
of
its
ability
to
make
such
a
loan.
It
was
also
agreed
by
paragraph
18
that
1,437,500
shares
of
Steep
Rock
would
be
allotted
to
Premium
forthwith
at
a
price
of
1
cent
per
share.
Eighteen
days
after
the
execution
of
the
last-mentioned
agreement,
i.e.,
on
February
2,
1943,
an
agreement
was
entered
into
between
the
appellant
and
Arthur
W.
Carr
wherein
it
was
recited
that
Carr
had
agreed
to
waive
his
right
to
be
appointed
sales
agent
by
Steep
Rock
and
whereby
the
appellant
covenanted
and
agreed
it
that
in
each
year
hereafter
during
the
lifetime
of
the
Agency
Contract
it
will
pay
to
Carr
a
sum
equal
to
Twenty
Per
Centum
(20%)
of
all
monies
paid
to
it
by
Steep
Rock
or
its
successor
during
such
year
by
way
of
commission
or
other
compensation
under
the
terms
of
the
said
Agency
Contract."’
As
an
indication
of
the
continuing
participation
of
Transcontinental
in
the
financing
of
the
Steep
Rock
Project,
it
is
to
be
noted
that
on
May
29,
1943
it
entered
into
an
agreement
with
the
appellant
whereby
it
agreed
to
contribute
voting
trust
cerificates
representing
200,000
of
the
800,000
shares
of
Steep
Rock
which
the
appellant
had
agreed
to
deposit
under
the
terms
of
the
agreement
of
January
15th.
In
the
latter
part
of
1944
it
became
apparent
that
the
$7,500,-
000
which
had
been
estimated
as
the
cost
of
bringing
the
mine
into
production
was
not
enough
and
Steep
Rock
accordingly
called
on
Premium
Iron
Ores
to
put
up
part
of
the
$1,000,000
which
it
had
agreed
to
furnish
but
in
accordance
with
the
contracts
existing
between
Steep
Rock
and
the
Reconstruction
Finance
Corporation,
the
form
of
the
advance
had
to
be
approved
by
the
latter
body
with
the
results
which
are
described
in
the
following
evidence
of
Mr.
Daley
:
"When
Steep
Rock
and
Carr
and
myself
reached
Washington
and
took
the
matter
up
with
Mr.
McCartney,
who
represented
the
R.F.C.
at
that
time,
after
a
discussion
with
his
associates
he
said
the
R.F.C.
was
not
willing
to
let
Steep
Rock
undertake
any
further
obligation
to
pay
out
money.
We
pointed
out,
of
course,
to
Mr.
McCartney
that
R.F.C.
had
agreed
to
the
provision
in
the
Steep
Rock/Premium
Contract
whereby
it
was
to
be
represented,
the
advances
were
to
be
represented
by
an
obligation
of
Steep
Rock
up
to
a
maximum
of
six
percent,
as
I
recall
it,
for
up
to
a
five-year
period.
Mr.
McCartney
said
in
spite
of
that
they
were
not
willing
to
let
Steep
Rock
assume
any
more
debt
but
that
they
would
agree
if
Steep
Rock
desired
to
do
it,
to
let
them
issue
stock
at
the
market
price
for
the
amount
that
was
needed.
The
Steep
Rock
officials
and
Mr.
Carr
and
I
then
conferred
on
that
proposal,
which
resulted
in
an
agreement
whereby
Pre-
mium
agreed
to
take
267,000
shares
of
Steep
Rock
stock
for
approximately
$600,000.00,
of
which
Transcontinental
Resources
was
to
take
100,000
shares
with
the
balance
to
be
taken
by
Premium
Iron
Ores.’’
A
formal
agreement
was
accordingly
entered
into
on
December
29,
1944,
whereby
Transcontinental
in
its
role
as
a
continuing
participant
in
the
financing,
agreed
to
purchase
100,000
of
the
Steep
Rock
shares
which
the
appellant
had
agreed
to
take
up
and
the
appellant
covenanted
to
pay
to
Transcontinental
from
the
2
per
cent
commission
on
Steep
Rock
Iron
Ore
sales
for
which
provision
was
made
under
the
agreement
of
January
15,
1943
the
20
per
cent
which
it
had
previously
undertaken
to
pay
to
Carr
under
the
agreement
of
February
2,
1943.
The
sums
of
$46,532.56
and
$45,192.03
which
are
now
sought
to
be
deducted
from
the
appellant’s
taxable
income
represent
the
20
per
cent
payable
in
accordance
with
the
December
1944
agreement
which
were
paid
by
the
appellant
in
the
years
1951
and
1952
respectively
to
one
A.
C.
McFadyn
who
was
the
ultimate
assignee
of
the
rights
of
Transcontinental
thereunder.
In
disallowing
the
deduction
of
these
amounts
from
the
appellant’s
taxable
income
for
the
years
in
question,
Cattanach,
J.
basing
his
Judgment
upon
his
construction
of
the
"‘plain
ordinary
meaning’’
of
the
words
used
in
the
agreements
of
January
15,
1943
and
December
29,
1944,
concluded
that
the
payments
were
made
in
consideration
of
Transcontinental
purchasing
the
100,000
shares
of
Steep
Rock
and
his
analysis
of
the
effect
of
the
1944
agreement
is
summarized
in
the
following
excerpt
from
his
judgment
:
"‘On
the
one
hand,
as
I
view
it,
the
respondent
provides
services
as
a
sales
agent
to
Steep
Rock.
On
the
other
hand,
the
respondent
has
made
an
investment
in
Steep
Rock
shares.
The
purchase
of
such
shares
is
an
investment
of
capital
and
monies
paid
to
a
third
party
for
purchasing
some
of
those
shares
is
equally
a
capital
outlay
and
cannot
be
regarded
as
a
current
expense
of
the
respondent’s
business.
In
my
opinion
the
Minister
was,
therefore,
right
in
assessing
the
respondent
as
he
did
and
accordingly
the
appeal
herein
must
be
allowed
with
costs.”’
With
the
greatest
respect
it
appears
to
me
that
in
confining
himself
to
the
two
agreements
to
which
he
refers,
Cattanach,
J.
has
failed
to
take
into
account
the
gradually
developing
chain
of
circumstances
which
led
up
to
the
mine
being
finally
brought
into
production
and
in
which
Carr
and
his
associates
in
Transcontinental
had
played
a
dominant
role
from
the
outset.
There
is,
of
course,
no
doubt
that
the
agreements
are
to
be
construed
in
accordance
with
the
plain
and
ordinary
meaning
of
the
words
which
they
contain.
It
is
equally
clear,
however,
that
the
words
used
in
a
written
agreement
are
to
be
construed
in
light
of
the
circumstances
under
which
it
was
concluded.
In
this
regard
I
accept
the
opinion
expressed
by
Lord
Blackburn
in
River
Wear
Commissioners
v.
Adamson,
2
App.
Cas.
743
at
768
where
he
said
:
.
.
.
I
shall
therefore
state,
as
precisely
as
I
can,
what
I
understand
from
the
decided
cases
to
be
the
principles
on
which
the
Courts
of
Law
act
in
construing
instruments
in
writing
;
.
.
.
In
all
cases
the
object
is
to
see
what
is
the
intention
expressed
by
the
words
used.
But,
from
the
imperfection
of
language,
it
is
impossible
to
know
what
that
intention
is
without
inquiring
farther,
and
seeing
what
the
circumstances
were
with
reference
to
which
the
words
were
used,
and
what
was
the
object,
appearing
from
those
circumstances,
which
the
person
using
them
had
in
view;
for
the
meaning
of
words
varies
according
to
the
circumstances
with
respect
to
which
they
were
used.’’
The
same
proposition
was
more
succinctly
stated
by
Jessel,
M.
R.
in
Cannon
v.
Villers
(1878),
8
Ch.
D.
415
at
419
:
"When
construing
all
instruments
you
must
know
what
the
facts
were
when
the
agreements
were
entered
into.’’
When
the
series
of
agreements
which
are
exhibits
in
the
present
case
are
considered
against
the
background
of
Mr.
Daley’s
evidence
it
is,
as
I
have
indicated,
apparent
that
the
appellant
was
incorporated
at
the
instance
of
Otis
and
Company
and
Transcontinental
for
the
purpose
of
participating
in
the
financing
of
Steep
Rock
in
co-operation
with
the
two
financial
groups
represented
by
these
companies
and
that
the
agreement
of
January
1943
was
entered
into
as
the
first
step
in
fulfilment
of
this
purpose,
while
the
agreements
of
February
and
May
1943
and
December
1944
were
entered
into
in
recognition
of
the
continuing
participation
of
the
Transcontinental
interests
in
the
development
of
a
final
plan
for
the
successful
outcome
of
a
venture
with
which
they
had
been
closely
associated
from
the
beginning.
It
is
to
be
remembered
that
the
2
per
cent
commission
payable
to
the
appellant
under
the
January
1943
agreement
was
.
.
.
two
percentum
(2%)
of
the
value
of
all
Steep
Rock
ores
sold
by
Premium
and
Steep
Rock
.
.
.”?
and
that
within
eighteen
days
of
entering
into
that
agreement,
i.e.
on
February
2,
1943,
20
per
cent
of
this
2
per
cent
commission
was
assigned
to
Carr
and
later
made
payable
to
Transcontinental
under
the
agreement
of
December
1944
by
which,
to
use
the
language
of
Mr.
Daley,
"‘the
Carr
agreement
was
ab-
sorbed’’.
It
is
thus
apparent
that
from
the
time
of
its
incorporation
the
appellant
was
engaged
with
the
Transcontinental
group
in
the
joint
venture
of
financing
Steep
Rock,
and
that
before
the
ore
deposits
had
been
brought
into
commercial
production,
it
had
agreed
to
forego
20
per
cent
of
its
commission
on
their
sale
which
represented
the
share
of
its
associates
in
this
venture.
By
reason
of
the
agreement
which
it
entered
into
in
recognition
of
the
part
played
by
its
associates,
the
appellant
was
never
beneficially
entitled
to
retain
more
than
80
per
cent
of
‘the
commissions
which
it
received
from
Steep
Rock,
and
the
remaining
20
per
cent
cannot
in
my
opinion
be
said
to
form
a
portion
of
its
taxable
income.
In
this
regard
I
agree
with
the
following
statement
made
by
Mr.
R.
8S.
W.
Fordham
in
the
course
of
his
reasons
for
judgment
rendered
by
him
on
behalf
of
the
Tax
Appeal
Board
[21
Tax
A.B.C.
178
at
183]:
"I
think,
too,
it
may
be
said
that
the
appellant
and
Transcontinental
were
in
a
kind
of
joint
adventure;
each
played
an
important
part
in
making
it
possible
for
Steep
Rock
to
acquire
needed
funds.
The
appellant
—
and
not
Steep
Rock
—
became
obligated
to
Transcontinental
as
a
consequence.
The
monies
paid
to
the
latter
were
for
a
valued
service
rendered
to
the
appellant
in
its
fulfilment
of
an
important
part
of
the
agency
agreement
with
Steep
Rock.
Appellant
was
entitled
to
retain
80
per
cent
of
the
monies
received
from
Steep
Rock
and
no
more.
The
remaining
20
per
cent
had
become,
by
formal
and
enforceable
agreement,
the
property
of
Transcontinental
or
its
assignees.
Hence,
it
was
on
the
beneficial
assignee
that
liability
for
tax
on
the
20
per
cent
fell
and
not
on
the
appellant,
which
had
no
proprietary
interest
therein.’’
I
would
accordingly
allow
the
appeal
with
respect
to
the
commissions
paid
by
the
appellant
to
Mr.
McFadyn
in
the
year
1951
and
1952
and
direct
that
the
re-assessment
by
the
Minister
of
National
Revenue
in
this
regard
be
set
aside.
The
legal
expenses
which
the
appellant
seeks
to
deduct
for
the
years
1951-52
were
incurred
in
respect
of
a
claim
asserted
by
the
United
States
tax
authorities
in
the
year
1950
relating
to
earnings
of
the
appellant
during
the
years
1943-1950
inclusive.
The
exact
nature
of
the
claim
in
respect
of
which
the
legal
expenses
were
incurred
can
best
be
explained
by
somewhat
lengthy
reference
to
the
evidence
of
Mr.
Daley.
After
having
been
questioned
as
to
the
arrangement
whereby
Premium
Iron
Ores
was
permitted
to
purchase
1,487,500
shares
of
Steep
Rock
for
$14,375,
Mr.
Daley’s
examination
continued
:
"‘Q.
Turning
to
the
question
of
the
legal
expenses
involved
in
the
United
States
and
here,
Mr.
Daley,
I
did
not
quite
understand
when
you
said
that
the
matter
first
came
up
in
1950
and
you
indicated,
I
think,
some
two
or
three
million
dollars
in
tax
that
they
wanted.
For
what
period
was
this
two
to
three
million
dollars
—
how
long?
Was
it
from
the
beginning
of
operations
or
for
the
year
1950
or
what?
A.
I
recall
that
Premium
received
this
large
block
of
shares
of
Steep
Rock
at
one
cent
per
share
and
while
the
Canadian
Income
Tax
Department
had
said
no
tax
will
result
from
this
transaction
the
United
States
government
tried
to
assert
a
claim
on
profit
for
the
difference
between
the
market
value
on
the
Toronto
Stock
Market
and
the
one
cent.
Q.
That
was
with
respect
to
your
capital
gain
between
the
one
cent
and
the
1.66?
A.
No,
it
was
not.
They
said
that
was
income
for
services.
Q.
I
am
not
getting
into
whether
it
is
a
capital
gain
or
profit,
but
it
represented
what
we
might
normally
call
the
capital
gain,
whether
it
was
considered
profit
or
what
it
was
considered.
It
represented
the
difference
between
the
one
cent
and
the
1.66?
A.
Yes,
that
is
correct.
Q.
Was
that
the
chief
substance
of
what
they
were
claiming
against
you?
A.
From
1945
on
the
claim
also
included
all
of
the
commissions
that
had
been
received
from
Steep
Rock.
Q.
Generally
it
was
with
respect
to
the
income
from
the
beginning
of
Premium’s
existence;
is
that
the
idea?
A.
You
say
‘generally’.
Of
couse
that
amount
was
not
as
large
as
the
other
amount,
but
they
did
assert
a
claim
against
all
of
those
commissions
claiming
that
was
United
States’
income.”’
Mr.
Daley
was
later
asked
:
(Q.
Can
you
tell
me
any
better
than
you
have,
Mr.
Daley,
with
respect
to
what
precise
years
the
United
States
government
were
claiming
tax?
I
do
not
want
to
put
words
into
your
mouth.
Was
it
1943
and
every
year
up
to
1950?
A.
1943
was
the
most
important
one
and
it
was
every
year
up
through.
Q.
To
the
end?
A.
To,
I
think,
1950
—
the
time
they
started
their
investigation.
Q.
Did
you
have
accounts
after
the
cases
proceeded
to
court?
Did
you
have
accounts
—
presumably
you
did
—
from
solicitors?
A.
Yes.
The
appellant
contends
that
these
legal
expenses
in
the
years
1951-52
were
deductible
as
having
been
incurred
"‘for
the
purpose
of
gaining
or
producing
income’’
under
the
provisions
of
Section
12(1)
(a)
of
the
Income
Tax
Act
which
reads
as
follows:
"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.^
The
italics
are
my
own.
In
disallowing
the
deduction
sought
by
the
appellant
for
these
expenses,
Cattanach,
J.
adopted
the
reasoning
of
the
majority
of
the
House
of
Lords
in
Smith’s
Potato
Estates
Limited
v.
Bolland
(Inspector
of
Taxes),
[1948]
2
All
E.R.
367
in
which
it
was
held
that
under
Rule
3
(a)
Schedule
D
to
the
English
Finance
Act,
1940,
the
expense
incurred
for
legal
and
accounting
costs
in
the
preparation
and
prosecution
of
an
appeal
to
the
Board
of
Referees
was
not
deductible
in
computing
the
taxable
income
of
a
taxpayer
on
the
ground
that
the
cost
of
ascertaining
the
true
amount
of
tax
to
be
paid
is
not
an
expense
made
in
order
to
earn
profits
but
rather
an
application
of
profits
after
they
had
been
earned.
The
view
of
the
majority
of
the
Law
Lords
in
this
case,
which
was
later
followed
in
the
unanimous
judgment
of
the
House
of
Lords
in
Rushden
Heel
Co.,
Ltd.,
v.
C.I.R.,
[1949]
2
All
E.R.
378,
is
epitomized
in
the
following
paragraph
from
the
reasons
of
Lord
Simonds
to
which
Cattanach,
J.
has
referred:
.
.
.
Neither
the
cost
of
ascertaining
taxable
profit
nor
the
cost
of
disputing
it
with
the
revenue
authorities
is
money
spent
to
enable
the
trader
to
earn
profit
in
his
trade.
What
profit
he
has
earned,
he
has
earned
before
ever
the
voice
of
the
taxgatherer
is
heard.
He
would
have
earned
no
more
and
no
less
if
there
was
no
such
thing
as
income
tax.
‘
’
The
appellant
sought
to
distinguish
these
cases
from
the
present
one
on
the
ground
that
the
wording
of
the
English
Rule
3(a)
differs
from
Section
12(1)
(a)
of
the
Income
Tax
Act.
The
English
Rule
reads
as
follows:
"‘In
computing
the
amount
of
the
profits
or
gains
to
be
charged,
no
sum
shall
be
deducted
in
respect
of
(a)
disbursements
or
expenses,
not
being
money
wholly
and
exclusively
laid
out
or
expended
for
the
purposes
of
the
trade
.
.
.’’
It
is
to
be
noted,
however,
that
the
reasons
of
the
majority
in
the
Smith’s
Potato
Estates
Ltd.
case
were
predicated
on
an
acceptance
of
the
interpretation
placed
on
Rule
3(a)
by
Lord
Davey
in
Strong
c
Co.
v.
Woodifield,
[1906]
A.C.
448.
In
that
case
Lord
Davey,
in
commenting
on
the
words
‘wholly
and
exclusively
laid
out
or
expended
for
the
purposes
of
the
trade”
as
they
occur
in
Rule
3(a),
had
this
to
say:
"These
words
.
.
.
appear
to
me
to
mean
for
the
purpose
of
enabling
a
person
to
carry
on
and
earn
profits
in
the
Trade.”
Viewed
in
this
light
I
am
of
opinion
that
the
reasoning
employed
in
the
Smith’s
Potato
Estates
Lid.
case
applies
to
the
interpretation
to
be
placed
on
Section
12(1)
(a).
It
was
not
until
1964,
twelve
years
after
the
last
payment
of
legal
expenses
had
been
made
by
the
appellant
in
the
present
case
that
Canadian
taxpayers
were
afforded
relief
from
the
effect
of
the
Smith’s
Potato
Estates
Ltd,
case
(supra).
In
that
year
Parliament
enacted
Section
11(1)
(w)
of
the
Income
Tax
Act,
the
relevant
portions
of
which
read
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
:
(w)
Expenses
of
objection
or
appeal.—amounts
paid
by
the
taxpayer
in
the
year
in
respect
of
fees
or
expenses
incurred
in
preparing,
instituting
or
prosecuting
an
objection
to,
or
an
appeal
in
relation
to,
an
assessment
of
tax,
interest
or
penalties
under
this
Act.’’
It
has
been
suggested
that
the
decision
of
this
Court
in
the
case
of
Evans
v.
M.N.R.,
[1960]
S.C.R.
391;
[1960]
C.T.C.
69,
affords
some
support
for
the
contention
of
the
appellant
on
this
branch
of
the
appeal,
but
that
was
not
a
case
in
which
the
taxpayer
was
seeking
to
deduct
legal
fees
paid
in
respect
of
a
dispute
as
to
tax
liability.
There
the
taxpayer
had
incurred
legal
expenses
in
respect
of
an
originating
notice
to
the
Supreme
Court
of
Ontario
for
the
opinion,
advice
and
direction
of
the
Court
as
to
whether
she
was
entitled
to
be
paid
income
for
life
under
the
will
of
the
father
of
her
husband.
It
was
ultimately
decided
in
the
Ontario
Court
that
she
was
so
entitled
and
the
very
considerable
legal
fees
were
deducted
by
the
trustee
of
the
will
out
of
the
income
to
which
she
would
otherwise
have
been
entitled
for
the
taxation
year
in
question.
The
question
at
issue
was
whether
in
computing
her
income
for
that
year
the
taxpayer
was
entitled
to
deduct
those
fees.
The
main
question
to
be
determined
was
whether
the
life
interest
to
which
the
taxpayer
was
found
to
be
entitled
was
a
capital
asset
or
whether
it
was
income,
and
Cartwright,
J.
who
delivered
the
reasons
for
judgment
on
behalf
of
the
majority
of
the
Court
held
that
it
was
income
to
which
the
taxpayer
was
entitled
but
the
payment
of
which
could
not
have
been
obtained
without
the
expense
of
litigation,
and
he
therefore
allowed
the
deduction.
It
will
be
seen
that
these
circumstances
are
very
different
from
those
in
the
present
case,
and
I
find
it
to
be
clearly
distinguishable.
It
is,
however,
argued
on
behalf
of
the
appellant
that
even
if
it
be
accepted
that
such
legal
expenses
are
not
deductible
when
they
have
been
incurred
to
dispute
a
claim
of
the
tax
authorities
of
the
taxpayer’s
own
country,
entirely
different
considerations
apply
when
the
outlay
is
made
in
order
to
determine
the
taxpayer’s
position
in
relation
to
a
claim
by
a
foreign
government.
In
this
regard,
like
the
learned
judge
in
the
Exchequer
Court,
I
am
persuaded
that
the
reasoning
of
the
House
of
Lords
in
C.I.R.
v.
Dowdell
O’Mahoney
&
Co.,
Ltd.,
[1952]
1
All
H.R.
531,
applies
to
such
a
claim.
That
was
a
case
in
which
a
company
resident
in
Eire
carried
on
business
at
two
branches
in
England.
The
whole
of
its
profits,
including
those
arising
from
business
in
England,
were
subject
in
Eire
to
income
tax
and
the
company
sought
to
deduct
a
proportion
of
the
Eire
taxes
in
computing
the
profits
of
the
business
in
England
for
assessment
of
excess
profits
tax.
In
the
course
of
his
reasons
for
judgment
disallowing
the
deduction,
Lord
Radcliffe
appears
to
me
to
have
come
to
the
heart
of
the
matter
when
he
said
at
p.
543
:
But,
once
it
is
accepted
that
the
criterion
is
the
purpose
for
which
the
expenditure
is
made
in
relation
to
the
trade
of
which
the
profits
are
being
computed,
I
have
been
unable
to
find
any
material
distinction
between
a
payment
made
to
meet
such
taxes
abroad
and
a
payment
made
to
meet
a
similar
tax
at
home.”’
The
italics
are
my
own.
In
the
present
case,
as
I
have
indicated,
the
purpose
for
which
the
expenditure
was
made
concerned
a
claim
for
income
tax
in
the
United
States
in
relation
to
profits
made
by
the
appellant
in
1943
which
the
Canadian
authorities
had
characterized
as
capital
profits
as
well
as
a
claim
in
respect
of
income
which
had
been
earned
in
the
years
1945-1950
inclusive.
These
expenditures
made
in
the
years
1951
to
1952
do
not
appear
to
me
to
have
been
made
"‘for
the
purpose
of
gaining
or
producing
income’’
but
rather
for
the
purpose
of
preserving
profits
already
earned
by
the
appellant
from
a
claim
made
by
the
United
States
tax
authorities.
The
exceptional
cases
in
which
a
taxpayer
is
permitted
to
deduct
expenses
when
computing
taxable
income
are
confined
by
the
terms
of
Section
12(1)
(a)
to
expenses
‘*,
.
.
made
or
incurred
by
the
taxpayer
for
the
purpose
of
gaining
or
producing
income
.
.
.
.”’
and
except
as
otherwise
expressly
provided
by
Section
11,
do
not
extend
to
expenses
made
for
the
purpose
of
preserving
that
income
once
it
has
been
earned.
The
effect
of
the
provisions
of
Section
12(1)
(a)
is
discussed
and
explained
by
Abbott,
J.
in
the
course
of
the
reasons
for
judgment
which
he
delivered
on
behalf
of
the
majority
of
this
Court
in
B.C.
Electric
Ry.
Co.
Ltd.
v.
M.N.R.,
[1958]
S.C.R.
133
at
137;
[1958]
C.T.C.
21
at
31,
where
he
said:
”
Since
the
main
purpose
of
every
business
undertaking
is
presumably
to
make
a
profit,
any
expenditure
made
‘for
the
purpose
of
gaining
or
producing
income’
comes
within
the
terms
of
s.
12(1)
(a)
whether
it
be
classified
as
an
income
expense
or
as
a
capital
outlay.
Once
it
is
determined
that
a
particular
expenditure
is
one
made
for
the
purpose
of
gaining
or
producing
income,
in
order
to
compute
income
tax
liability
it
must
next
be
ascertained
whether
such
disbursement
is
an
income
expense
or
a
capital
outlay.
The
principle
underlying
such
a
distinction
is,
of
course,
that
since
for
tax
purposes
income
is
determined
on
an
annual
basis,
an
income
expense
is
one
incurred
to
earn
income
of
the
particular
year
in
which
it
is
made
and
should
be
allowed
as
a
deduction
from
gross
income
in
that
year/
The
italics
are
my
own.
It
cannot
in
my
opinion
be
said
that
the
legal
expense
in
question
in
the
present
case
was
incurred
to
earn
the
income
of
the
particular
year
in
which
it
was
made
and
it
should
therefore
not
"‘be
allowed
as
a
deduction
from
gross
income
in
that
year’’.
For
these
reasons,
as
well
as
for
those
expressed
in
the
opinion
of
Cattanach,
J.,
I
would
dismiss
the
appeal
from
the
re-assess.
ment
of
the
Minister
of
National
Revenue
with
respect
to
legal
expenses
incurred
in
the
years
1951
and
1952
in
the
resisting
of
the
claim
of
the
United
States
taxing
authority.
In
the
result,
the
appeal
in
respect
of
the
commissions
paid
in
the
years
1951
and
1952
is
allowed
and
the
appeal
with
respect
to
legal
expenses
in
the
same
years
is
dismissed.
As
the
appellant
has
been
substantially
successful
in
this
Court
it
will
have
the
costs
of
this
appeal
together
with
the
costs
of
the
appeal
to
the
Exchequer
Court.
The
order
as
to
costs
of
the
cross
appeal
in
the
Exchequer
Court
will,
of
course,
remain
undisturbed.
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