Grant,
DJ:—The
plaintiff
is
a
company
that
carried
on
business
as
a
manufacturer
and
fabricator
of
metal
forgings,
castings
and
other
metal
products
for
some
time
prior
to
December
31,
1976.
Two
of
the
principal
management
employees
of
the
plaintiff
were
James
W
Fraser
and
Fletcher
Peacock
who
were
the
president
and
vice-president
of
the
company,
respectively.
By
written
agreement
dated
August
13,
1970,
the
plaintiff
had
entered
into
contracts
with
each
of
such
employees
granting
to
each
of
them
an
option
to
purchase
25,000
shares
of
the
common
stock
of
the
plaintiff
company
at
a
price
of
$4
per
share.
The
expiry
date
of
such
option
was
August
13,
1980.
By
such
agreement,
these
two
employees
were
to
continue
to
be
employed
as
officers
of
the
company
at
least
until
August
13,
1972
and
they
were
to
devote
their
full
time
and
effort
to
the
affairs
of
the
company
during
such
period
of
employment
at
a
salary
not
less
than
that
which
they
were
then
receiving.
If
the
employment
of
either
of
such
parties
should
cease,
the
option
was
to
be
automatically
cancelled.
The
said
contracts
further
provided
that
in
the
event
of
the
plaintiff
company
being
reorganized,
amalgamated,
merged
or
consolidated
into
another
corporation,
the
directors
of
the
plaintiff
might
make
such
provision
in
respect
of
the
options
as
they
should
in
their
sole
discretion
determine,
provided
only
that
such
determination
be
equitable
to
the
employees.
Under
the
terms
of
an
agreement
dated
September
1,
1975
between
Toro-
mont
Industries
Limited
as
purchasers,
and
the
said
Fraser
and
Peacock
with
FM&P
Investments
Limited,
Toromont
made
an
offer
to
purchase
ali
outstanding
shares
of
the
plaintiff
company
held
by
FM&P
Investments.
FM&P
Investments
Limited
was
a
private
company
owned
and
controlled
by
Fraser
and
Peacock
which
held
147,680
shares
of
the
plaintiff
for
them
which
it
agreed
to
sell
to
Toromont
at
$17
per
share.
Such
shares
amounted
to
85%
of
the
outstanding
shares
of
the
plaintiff
company
at
that
time.
Toromont
were
anxious
to
retain
the
services
of
Fraser
and
Peacock
as
employees
to
operate
such
business
on
its
behalf.
Eventually,
Toromont
secured
all
outstanding
shares
of
the
plaintiff
company
at
$17
per
share.
About
November
6,
1979
[sic],
Fraser
and
Peacock
entered
into
a
further
agreement
with
Canada
Forgings
whereby
each
of
such
employees
disposed
of
and
relinquished
to
the
plaintiff
all
their
rights
to
purchase
shares
pursuant
to
the
options
which
they
held.
In
consideration
therefor
Canada
Forgings
paid
to
each
of
them
the
sum
of
$325,000.
This
sum
was
arrived
at
by
subtracting
the
$4
being
the
price
which
such
employees
were
to
pay
per
share
under
the
option
from
the
market
value
of
$17
which
Toromont
paid
for
shares
of
the
plaintiff
company
in
such
takeover.
This
made
a
difference
of
$13
per
share
and
multiplied
by
the
number
of
shares
involved
in
the
option
(25,000)
made
up
the
figure
of
$325,000.
Canada
Forgings
was
not
in
the
business
of
acquiring
operations
or
dealing
in
shares.
Both
Fraser
and
Peacock
included
such
sum
of
$325,000
as
income
in
their
hands,
conferred
as
a
benefit
under
section
7
of
the
Income
Tax
Act,
and
have
purchased
averaging
annuity
contracts
therewith.
The
plaintiff
deducted
the
said
payments,
totalling
$650,000,
as
a
current
business
expense
in
the
1976
[sic]
income
tax
return,
treating
it
as
a
benefit
or
compensation
paid
to
key
employees.
The
Minister
of
National
Revenue,
in
his
assessment
of
such
returns,
disallowed
such
deduction
of
$650,000.
The
plaintiff
had
hoped
to
make
a
tax
saving
of
$273,000
by
disposing
of
such
options
in
this
manner
under
the
provisions
of
paragraph
18(1
)(a)
of
theAct.
The
plaintiff
did
not
include
the
payment
of
the
$650,000
as
an
expenditure
in
its
annual
statement
for
the
year
1965
[sic]
because
to
do
so
would
have
indicated
too
severe
a
drop
in
its
earnings
for
that
year.
Instead,
such
amount
was
deducted
from
its
accumulation
of
retained
earnings
which
was
a
fund
built
up
from
actual
earnings
in
previous
years.
Subsection
18(1)
of
the
Income
Tax
Act
reads:
In
computing
the
income
of
a
taxpayer
from
a
business
or
property
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
the
business
or
property.
It
is
clear
from
the
evidence
of
the
plaintiff’s
only
witness,
Arthur
Fagan,
and
the
documents
filed,
that
the
purchaser,
Toromont
Industries
Limited,
desired
to
attain
all
the
shares
in
the
plaintiff
company
so
that
there
would
be
no
minority
group
of
shareholders
therein.
It
is
so
stated
as
a
recital
in
the
agreement
dated
September
1,
1975
(Exhibit
1,
page
41),
between
Toromont,
FM&P
Investments
Limited,
James
Fraser
and
Fletcher
Peacock.
To
achieve
such
result,
it
had
purchased
all
such
shares
held
by
FM&P,
being
85%
of
those
outstanding,
under
the
agreement
of
September
1,
1975.
By
agreements
separately
made
by
Toromont
with
Fraser
and
Peacock
dated
November
6,
1975
(pages
79
and
84)
each
of
such
parties
agreed
not
to
exercise
the
options
given
to
them
by
Canada
Forgings
under
the
agreement
of
August
13,
1970,
granting
to
each
of
them
the
option
to
purchase
25,000
common
shares
of
such
company
at
the
price
of
$4
per
share.
Such
agreement
further
gave
to
Toromont
the
right
to
purchase
such
optioned
shares
at
such
price
of
$17
from
Fraser
and
Peacock.
This
additional
precaution
was
inserted
to
ensure
that
Toromont
would
be
able
to
enforce
the
sale
of
such
shares
to
it
if
Canada
Forgings
should
refuse
to
execute
and
deliver
to
such
employees
an
agreement
marked
as
Exhibit
“A”
thereto
which
provided
for
payment
to
them
of
the
$325,000
each.
This
is
made
clear
in
paragraph
7A
of
the
takeover
bid
circular
which
Toromont
sent
out
to
all
shareholders
(page
98)
wherein
it
is
stated:
In
addition
Toromont
and
Messrs
Fraser
and
Peacock
have
agreed
that
Messrs
Fraser
and
Peacock
will
surrender
their
options
to
purchase
50,000
common
shares
for
a
consideration
equal
to
$17.00
per
share
less
the
exercise
price
of
the
option.
At
page
99
(Exhibit
1)
in
such
circular,
it
is
also
stated
that
if
upon
termination
of
the
offer,
it
has
been
accepted
by
at
least
90%
but
less
than
100%
of
the
common
shares
of
the
company,
it
is
the
intention
of
Toromont
to
invoke
the
provisions
of
section
136
of
the
Canada
Corporations
Act
to
acquire
the
remaining
shares.
All
the
contractual
provisions
contained
in
such
documents
establish
that
they
have
been
embodied
in
these
various
agreements
to
ensure
the
acquisition
by
Toromont
of
such
optional
shares
rather
than
as
a
bonus
to
employees.
There
is
nothing
in
the
agreement
between
Canada
Forgings
and
Peacock
and
Fraser
(p
111)
dated
January
21,
1976,
to
indicate
the
option
was
given
as
a
bonus.
It
would
be
unusual,
if
it
were
a
bonus,
that
they
should
be
permitted
to
dispose
of
and
relinquish
their
rights
thereto
when
they
were
bound
to
continue
their
services
to
the
company
until
August
13,
1980.
The
agreement
of
November
19,1975
(p
105,
paragraph
F)
obliges
the
company
to
pay
each
employee
a
retiring
allowance
of
$25,000
in
recognition
of
their
long
services
to
the
company
up
to
the
date
of
this
amending
agreement.
This
is
not
entirely
consistent
with
the
company
paying
them
at
approximately
the
same
time,
a
bonus
of
$325,000
each.
The
payment
is
nonrecurring
and
was
made
at
the
time
that
Toromont
was
attempting
to
acquire
all
shares
of
the
plaintiff
company
with
the
full
cooperation
of
the
latter’s
officers.
Such
a
large
payment
also
indicates
an
item
of
capital
structure.
In
British
Insulated
and
Helsby
Cables
Limited
v
Atherton,
[1926]
AC
205
at
213
and
214,
it
is
stated:
When
an
expenditure
is
made,
not
only
once
and
for
all,
but
with
a
view
of
bringing
into
existence
an
asset
or
an
advantage
for
the
enduring
benefit
of
a
trade,
I
think
that
there
is
a
very
good
reason
(in
the
absence
of
special
circumstances
leading
to
an
apposite
conclusion)
for
treating
such
expenditure
as
properly
attributable
not
to
revenue
but
to
capital.
For
these
reasons,
the
appeal
should
be
dismissed
with
costs.
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