Strayer
J.T.C.C.:
—
Relief
Requested
This
is
an
appeal
and
a
cross-appeal
from
the
judgment
of
the
Tax
Court
of
Canada
of
January
31,
1995
in
which
the
Court
referred
back
to
the
Minister
of
National
Revenue
for
reconsideration
and
reassessment
the
assessments
made
in
respect
of
the
appellant.
Facts
The
facts
are
set
out
in
more
detail
in
the
judgment
of
the
Tax
Court.
In
the
late
1960s
or
early
1970s
the
appellant
adopted
a
deliberate
and
elaborate
scheme
for
defrauding
the
Canadian
revenue
by
falsifying
the
value
of
goods
imported
by
it
into
Canada.
In
the
period
in
question
in
this
proceeding,
namely
March
26,
1974
to
January
28,
1980,
it
is
not
disputed
that
the
appellant
Amway
undervalued,
for
duty
and
excise
tax
purposes,
goods
it
imported
to
the
amount
of
$84,295,461.33
(hereinafter
“$84.3
million”)
thereby
avoiding
the
payment
of
customs
duties
and
excise
taxes
in
the
amount
of
$28,825,708.39
(hereinafter
“$28.8
million”).
I
will
summarize
briefly
the
statutory
provisions
relevant
to
the
imposition
and
enforcement
of
customs
duties
and
excise
tax.
It
is
common
ground
that
the
relevant
statute
is
the
Customs
Act
in
force
at
the
time
of
these
events,
as
any
applicable
excise
tax
would
be
enforceable
under
the
provisions
of
the
Customs
Act.
Various
provisions
require
importers
of
goods
to
declare,
and
declare
correctly,
the
value
of
those
goods
upon
their
entry
into
Canada.
By
way
of
enforcement
of
these
requirements,
paragraphs
192(l)(b)
and
(c)
provide
that
if
any
person
presents
a
fraudulent
invoice
or
in
any
way
attempts
to
defraud
the
revenue
by
avoiding
the
payment
of
any
part
of
the
duty
on
goods
Such
goods,
if
found
shall
be
seized
and
forfeited,
or
if
not
found
but
the
value
thereof
has
been
ascertained,
the
person
so
offending
shall
forfeit
the
value
thereof
as
ascertained....
The
“value”
of
any
goods
is
defined
by
section
2
of
the
Customs
Act
as
meaning
the
“duty-paid
value”,
it
being
common
ground
that
this
includes
the
customs
duties
and
excise
tax
which
would
have
been
payable
on
the
goods
had
they
been
declared
at
their
proper
value.
In
the
definition
of
“seized
and
forfeited”,
“liable
to
forfeiture”,
or
‘subject
to
forfeiture”
reference
is
made
to
“the
penalty
of
forfeiture”,
forfeiture
being
treated
as
a
penalty.
By
subsection
249(1)
all
penalties
and
forfeitures
may
“in
addition
to
any
other
remedy
provided
by
this
Act
or
by
law”
be
sued
for
and
recovered
in
the
Federal
Court
or
any
other
superior
court.
There
is
a
special
procedure
for
dealing
with
forfeitures
provided
in
section
160
and
immediately
following
sections
of
the
Act.
Section
161
requires
that
a
notice
be
served
on
the
owner
of
the
goods
as
to
the
forfeiture.
Section
163
provides
for
the
Minister
remitting
some
portion
of
the
forfeiture
after
the
owner
has
had
an
opportunity
to
make
submissions.
There
is
a
separate
provision
in
the
Customs
Act
with
respect
to
the
collection
of
the
customs
duties
themselves
(equally
applicable
to
excise
taxes).
Section
102
says
that
the
true
amount
of
duties
payable
on
goods
imported
into
Canada
constitutes
a
debt
due
and
payable
upon
that
importation,
which
debt
may
be
recovered
by
Her
Majesty
by
suit
in
any
court
of
competent
jurisdiction.
It
is
then
necessary
to
summarize
briefly
the
enforcement
action
actually
taken
in
this
case.
In
1979
and
1980
Revenue
Canada
served
notices
of
seizure
and/or
ascertained
forfeiture
on
Amway
and
its
U.S.
parent
in
a
total
amount
of
$155,925,432.90.
This
sum
was
made
up
of
over
$118,000,000
in
the
entire
value
of
the
goods
imported
and
over
$37,000,000
in
duties
and
taxes
payable
on
those
goods,
the
total
being
therefore
the
duty-paid
value
of
the
goods
within
the
meaning
of
“value”
as
referred
to
in
subsection
192(1)
which
forfeits
that
duty-paid
value
to
the
Crown
in
the
circumstances
of
this
case.
(This
total
was
later
corrected
downward
to
$148,018,478.48).
As
Amway
provided
no
deposits
in
respect
of
the
payment
of
these
forfeited
sums
Her
Majesty
then
commenced
four
actions
in
the
Federal
Court
in
1980.
These
actions
collectively
covered
the
periods
from
May
6,
1977
to
January
28,
1980.
In
each
case
the
statement
of
claim
recited
the
amount
of
the
duty-paid
value
for
the
period
covered
by
that
statement
of
claim
and
stated
that
there
was
a
forfeiture
in
that
amount.
Each
statement
of
claim
also
noted
that
the
defendants
were
also
liable
to
Her
Majesty
for
the
additional
duties
and
taxes
payable
pursuant
to
section
102
of
the
Customs
Act.
However,
in
each
case
the
prayer
for
relief
specifically
asked
only
for
the
amount
of
the
duty-paid
value
“by
way
of
forfeiture”
while
also
including
the
usual
request
for
“such
further
and
other
relief
as
to
this
Honourable
Court
may
seem
just”.
In
1984
Her
Majesty
commenced
a
further
action
in
the
Federal
Court
in
respect
of
the
period
March
26,
1974
to
January
10,
1977
in
which
it
specifically
sued
for
payment
of
the
debt
due
under
section
102
for
“customs,
duties
and
sales
taxes
shortpaid”
in
the
precise
amount
of
the
unpaid
duty
and
sale
taxes
on
goods
imported
during
that
period.
That
amount
was
$7,882,096
(hereinafter
“$7.9
million”).
The
different
subject-matter
of
these
various
actions
flowed,
it
appears,
from
the
different
limitation
periods
applicable
to
suits
for
forfeiture
under
section
249
and
suits
for
debt
under
section
102.
Years
of
interlocutory
proceedings
then
ensued
including
various
appeals
to
this
Court
and
one
to
the
Supreme
Court
of
Canada.
The
decisions
will
be
referred
to
later.
On
August
21,
1984,
the
Minister
of
National
Revenue
specifically
used
his
power
under
section
163
(which
relates
to
the
remission
of
penalties
or
forfeitures,
not
of
duties
and
taxes)
to
remit
a
portion
of
the
forfeiture,
leaving
a
balance
of
$105,234,808.71
unremitted
and
owing.
The
unremitted
portion
was
calculated,
as
I
understand
it,
by
adding
to
the
actual
undervaluation
of
some
$84.3
million
the
duties
and
taxes
that
would
have
been
payable
on
that
amount,
some
$20.9
million.
This
remission
did
not
resolve
the
problem
nor
lead
to
payment
of
any
sum
by
Amway.
After
many
interlocutory
proceedings
in
the
five
actions
and
lengthy
negotiations
a
final
settlement
was
reached
in
1989,
set
out
in
the
terms
of
a
letter
of
September
13,
1989
from
the
Department
of
Justice
to
counsel
for
Amway.
This
letter
has
as
its
reference
line
the
court
numbers
of
these
actions
and
opens
with
the
words
We
have
been
instructed
to
make
the
following
settlement
proposal
in
relation
to
the
aforementioned
five
Federal
Court
actions
brought
against
Amway
Corporation
and
Amway
of
Canada,
Limited....
This
settlement
proposal,
which
was
agreed
to
by
Amway,
provided
for
Amway
paying
Her
Majesty
the
sum
of
$45,000,000.
Upon
payment
of
that
amount
Her
Majesty
undertook
to
discontinue
the
specific
five
actions
referred
to
above.
Amway
had
to
undertake
to
withdraw
certain
Tariff
Board
proceedings.
No
mention
was
made
of
any
possible
section
102
proceedings.
The
only
other
relevant
term
for
present
purposes
was
an
undertaking
by
Her
Majesty
to
execute
and
deliver
a
release
in
a
form
attached
to
the
settlement
offer
with
Amway
being
obliged
to
execute
a
form
of
release
also
attached.
The
release
executed
on
behalf
of
Her
Majesty
contained
the
usual
general
terms
inter
alia
releasing
the
appellant
Amway
Of
and
from
any
and
all
claims,
demands,
actions,
suits,
causes
of
action,
obligations,
controversies,
debts,
costs,
expenses,
accounts,
damages,
judgments,
losses
and
liabilities,
of
whatsoever
kind
or
nature...arising
out
of
or
connected
with
the
importation
of
goods
into
Canada
prior
to
January
28,
1980,
including
those
issues
which
were
the
subject-matter
of
Federal
Court
actions
[citing
the
numbers
of
the
actions
previously
referred
to].
The
essential
question
arising
out
of
these
events,
for
present
purposes,
is
whether
some
part,
and
if
so
how
much,
of
the
$45,000,000
paid
by
Amway
to
the
Crown
by
way
of
settlement
represents
the
payment
of
a
penalty.
If
any
of
it
does,
then
the
further
question
arises
as
to
whether
the
cost
of
paying
a
penalty
is
deductible
from
the
business
income
of
Amway
for
the
taxation
years
in
question
of
1977
and
1978.
It
is
of
course
not
in
dispute
that
amounts
paid
as
payment
of
duties
and
taxes
are
deductible
as
business
expenses.
The
Minister
of
National
Revenue
in
assessing
Amway
for
its
1977
and
1978
taxation
years
accepted
that
$7.9
million
of
the
$45,000,000
settlement
payment
was
in
respect
of
the
payment
of
duties
and
taxes
because
it
settled
the
1984
action
which
was
specifically
brought
under
section
102
to
enforce
a
debt
arising
under
that
section
in
respect
of
duties
and
taxes
during
a
period
preceding
that
covered
by
the
four
actions
commenced
in
1980.
The
Minister
however
considered
the
remainder
of
the
$45,000,000
settlement
to
have
been
made
in
respect
of
penalties.
In
reassessing
Amway’s
income
for
1977
and
1978
he
characterized
the
1980
actions,
also
settled
by
the
payment
of
$45,000,000,
as
actions
for
the
enforcement
of
the
penalty
of
forfeiture.
Amway
appealed
that
assessment
to
the
Tax
Court
of
Canada.
Essentially
it
argued
that
the
sum
of
$28.8
million,
equivalent
to
the
total
of
all
duties
and
taxes
unpaid
by
it,
must
be
taken
to
have
been
paid
in
full
by
the
$45,000,000
settlement
and
therefore
only
the
remaining
$16.2
million
should
be
treated
as
penalty.
Further,
it
argued
that
whatever
amount
is
characterized
as
a
penalty
should
also
be
deductible
as
a
business
expense.
The
learned
judge
of
the
Tax
Court
of
Canada
allowed
the
appeal
in
part.
It
not
being
disputed
that
$7.9
million
of
the
$45
million
represented
the
duties
and
taxes
claimed
in
the
1984
action,
he
apportioned
the
remaining
$37.1
million
by
a
formula
based
on
the
assumption
that
this
part
of
the
settlement
represented
part
payment
of
the
penal
amounts
of
the
forfeitures
arising
under
sections
180
and
192
of
the
Customs
Act
as
well
as
part
payment
of
the
duties
and
taxes
enforceable
as
a
debt
under
section
102
of
the
Act.
He
reached
this
conclusion
essentially
on
two
bases.
Firstly
he
concluded
that
the
1980
actions
were
in
part
claims
for
duties
and
taxes
as
such
and
not
just
for
forfeiture
penalties.
Secondly
he
concluded
that,
because
the
release,
provided
as
a
result
of
the
settlement,
clearly
relieved
Amway
of
any
further
liability
for
the
duties
and
taxes,
the
amount
paid
by
Amway
under
this
settlement
must
be
seen
as
attributable
in
part
to
the
payment
of
any
claim
for
duties
and
taxes.
The
learned
Tax
Court
judge
thus
proceeded
to
apportion
the
remaining
$37.1
million
of
the
settlement
as
between
duties/taxes
and
penalties
arriving
at
the
figure
of
$7,387,127.57
as
the
proportion
representing
duties
and
taxes.
He
then
in
turn
apportioned
these
amounts
to
the
taxation
years
in
question,
namely
1977
and
1978.
For
reasons
which
will
become
apparent
there
is
no
necessity
for
me
to
address
more
precisely
the
trial
judge’s
mathematical
apportionments.
The
trial
judge
appears
not
to
have
addressed
the
issue
of
whether
penalties
are
deductible
as
business
expenses,
but
assumed
they
were
not.
Amway
appeals
to
this
Court
arguing
that
the
$45,000,000
settlement
must
be
taken
to
represent
the
whole
of
the
$28.8
million
owing
in
duties
and
taxes
(this
latter
sum
including
the
$7.9
million
attributable
to
settlement
of
the
1984
action
for
duties
and
taxes).
In
the
alternative
Amway
argues
a
different
formula
for
crediting
it
for
past
payments
as
taxes
and
duties.
Finally
it
contends
that
whatever
amounts
were
paid
as
penalties
should
be
deductible
as
business
expenses.
Her
Majesty
cross-appeals
contending
that
no
part
of
the
remaining
$37.1
million
of
the
settlement
amount
should
be
treated
as
the
payment
of
duties
and
taxes.
In
the
alternative
the
Crown
contends
that
the
trial
judge
used
an
inappropriate
method
of
apportionment
of
that
amount
between
duties/taxes
and
penalties.
In
the
further
alternative
the
Crown
supports
the
findings
below.
Issues
There
thus
appear
to
me
to
be
two
issues
to
be
resolved:
1.
Was
any
portion,
and
if
so
what
portion,
of
the
remaining
$37.1
million
of
the
settlement
payment
attributable
to
the
payment
of
duties
and
taxes?
2.
Is
the
portion
paid
as
penalty
deductible
from
Amway’s
gross
income
as
a
business
expense?
Analysis
What
portion
of
the
$$37.1
million
if
any,
was
payment
of
duties
and
taxes?
While
the
matter
is
not
without
difficulty,
I
have
concluded
that
none
of
the
balance
of
the
settlement
payment
of
$37.1
million
represented
payment
of
duties
and
taxes.
The
position
of
the
appellant
Amway
is
bold
and
imaginative:
it
asserts
that
as
it
ultimately
paid
a
large
sum
of
money
to
the
Crown
in
1989
it
should
be
treated
for
income
tax
purposes
just
as
if
it
had
paid
in
proper
fashion
the
duties
and
taxes
required
by
law
at
the
time
they
were
due,
namely
in
the
period
from
1974
to
1980.
Unfortunately
it
did
not
do
so
and
the
payment
of
$37.1
million
which
it
did
make
in
1989
must
be
analyzed
as
to
its
essential
character
at
that
time
and
in
those
circumstances.
It
is
not
in
dispute
that
the
total
sum
of
$45,000,000
was
paid,
in
part,
to
settle
the
four
actions
commenced
in
1980
and
the
fifth
action
commenced
in
1984.
Nor
is
it
in
dispute
that
$7.9
million
of
the
total
must
be
allocated
to
the
settlement
of
the
1984
action,
an
action
clearly
and
solely
for
recovery
of
duties
and
taxes.
But
I
respectfully
disagree
with
the
learned
trial
judge
that
the
1980
actions
were
for
both
the
recovery
of
a
penalty
and
the
recovery
of
duties
and
taxes.
The
statements
of
claim
in
those
four
actions
do
not
support
this
view
as
they
contain
no
prayer
for
relief
for
recovery
of
the
duties
and
taxes
as
such.
Furthermore,
for
the
same
reasons
as
were
given
by
the
Federal
Court
of
Appeal
on
two
appeals
in
interlocutory
decisions
in
these
four
actions,
R.
v.
Amway
of
Canada
Ltd./Amway
du
Canada
Ltée
sub
nom.
Amway
Corp.
v.
R.
[1987]
1
C.T.C.
97
at
page
99,
reversed
(sub
nom.
R.
v.
Amway
Corp.)
[1987]
1
S.C.R.
21,
[1989]
1
C.T.C.
255,
56
D.L.R.
(4th)
309;
R.
v.
Amway
of
Canada
Ltd./Amway
du
Canada
Ltée
(sub
nom.
Amway
of
Canada
Ltd.
v.
R.)
[1987]
1
C.T.C.
105
at
pages
107-08,
leave
to
appeal
to
S.C.C.
refused,
(sub
nom.
Canada
v.
Amway
of
Canada
Ltd.)
86
N.R.
266
I
conclude
that
these
were
actions
for
the
recovery
of
a
penalty.
Whether
or
not
those
earlier
decisions
are
binding
on
us
in
the
present
case
they
are
in
my
view
highly
persuasive.
On
appeal
to
the
Supreme
Court
of
Canada
the
latter
Court
was
prepared
to
assume,
without
deciding,
that
these
were
penal
actions
and
said
nothing
to
bring
into
question
that
characterization.
R.
v.
Amway
Corp.
[1989]
1
S.C.R.
21,
[1989]
1
C.T.C.
255,
56
D.L.R.
(4th)
309
at
page
33
(C.T.C.
261,
D.L.R.
318).
I
thus
believe
that
the
learned
trial
judge
erred
in
concluding
that
the
1980
actions
were
also
for
the
recovery
of
the
duties
and
taxes
as
such.
Further
I
believe
this
was
a
reviewable
error.
The
trial
judge
himself
characterized
his
decision
on
this
point
as
one
of
law.
As
such
it
is
open
to
full
review
by
this
Court.
I
therefore
conclude,
contrary
to
the
views
of
the
learned
trial
judge,
that
the
four
1980
actions
were,
as
a
matter
of
law,
for
the
recovery
of
the
penalties
based
on
forfeiture
and
to
the
extent
the
settlement
money
stands
in
lieu
of
an
award
in
those
actions
it
represents
the
payment
of
a
penalty.
A
related
question
remains,
however,
as
to
whether
the
trial
judge
was
right
in
treating
the
$45,000,000
settlement
not
just
as
being
paid
for
the
settlement
of
the
five
actions
but
also
as
being
paid
for
the
settlement
of
any
potential
actions
for
duties
and
taxes
relevant
to
the
period
covered
by
the
four
actions
commenced
in
1980.
While
it
is
true
that
the
release
signed
by
Her
Majesty
as
a
result
of
the
settlement
payment
absolved
Amway
from
any
further
claims
arising
out
of
importations
up
to
1980
that
was
not,
it
appears
to
me,
the
legal
basis
for
the
settlement.
The
terms
of
the
settlement
agreement
in
the
reference
line
and
opening
words
of
the
Department
of
Justice
letter
of
offer
refers
only
to
the
five
existing
actions.
It
goes
on
to
specify
only
the
discontinuation
of
certain
proceedings
by
both
parties,
including
the
five
actions
brought
by
Her
Majesty.
Those
included
the
four
1980
actions
brought
under
section
249
with
respect
to
enforcement
of
a
penalty,
and
the
fifth
action
commenced
in
1984
brought
under
section
102
of
the
Act
with
respect
to
collection
of
a
debt
for
duties
and
taxes.
The
release
subsequently
signed
on
behalf
of
Her
Majesty
by
its
general
language
also
precludes
any
further
action
by
the
Crown
under
section
102
to
collect
duties
and
taxes
as
such
for
the
period
of
1977-
1980
covered
by
the
four
1980
actions,
but
it
is
necessary
to
consider
what
the
parties
had
in
mind
in
signing
such
a
release.
Brunswick
of
Canada
Ltd.
v.
“Varda”(The)
[1972]
F.C.
637
at
640,
and
authorities
cited
there
(F.C.T.D.).
There
is
nothing
to
indicate
that
further
section
102
actions
were
in
anyone’s
contemplation
at
the
time
this
release
was
signed.
This
signing,
after
all,
was
over
twelve
years
after
that
period
commenced
and
no
such
action
had
ever
been
brought
for
the
recovery
of
duties
and
taxes
as
such.
Instead,
the
release
bears
all
the
marks
of
a
general
discharge
which
any
prudent
litigant
would
exact
when
paying
for
the
settlement
of
actions
already
in
existence.
Certainly
the
payment
of
$45,000,000
was
treated
by
Revenue
Canada
not
as
a
receipt
of
taxes
but
of
a
penalty.
Further
on
the
occasion
of
the
payment
of
$45,000,000
Revenue
Canada
wrote
off
$60,000,000
as
an
uncollectible
penalty,
being
the
difference
between
the
amount
received
and
the
$105,000,000
which
was
the
reduced
penalty
fixed
through
the
remission
referred
to
earlier.
In
passing
I
would
also
disassociate
myself
from
certain
views
of
the
learned
trial
judge
upon
which
he
based
his
formula
of
apportionment,
namely
that
the
$105,000,000
figure
established
as
the
result
of
the
remission
of
penalties
on
August
21,
1984
included
some
$20.9
million
in
duties
and
taxes.
This,
it
seems
to
me,
is
a
misconception
in
law
of
the
nature
of
a
forfeiture
under
subsection
192(1),
even
as
adjusted
by
remission
under
section
163.
As
indicated
earlier,
when
there
is
forfeiture
of
a
sum
because
of
the
false
declaration
of
value
of
imported
goods,
the
forfeiture
is
of
the
“value”
which
is
the
duty-paid
value
including
not
only
the
market
value
of
the
goods
but
also
an
amount
equal
to
the
duty
and
taxes
which
should
have
been
paid
had
the
goods
been
declared
at
their
proper
value.
Just
because
the
total
penalty
is
measured
in
part
by
reference
to
the
amount
of
unpaid
duties
and
taxes
that
should
have
been
paid,
this
does
not
convert
that
part
of
the
penalty
into
duties
and
taxes.
Therefore,
it
flows
from
my
conclusions
that
the
sums
claimed
in
the
four
penal
actions
did
not
include
duties
and
taxes
per
se.
Are
Penalties
Deductible
as
Business
Expenses?
This
is
a
question
on
which
there
appears
to
be
no
authority
binding
on
this
Court
in
respect
of
the
particular
circumstances
of
this
case.
There
emerges
in
the
jurisprudence
and
the
literature
a
recognition
of
two
possible
criteria
for
deciding
whether
amounts
expended
for
the
payment
of
fines
or
penalties
should
be
deductible
as
a
business
expense.
The
first
test
is
whether
it
was
an
expense
incurred
for
the
purpose
of
earning
income.
In
essence
this
means
the
expense
must
be
deductible
within
the
meaning
of
paragraph
18(1
)(a)
of
the
Income
Tax
Act
which
provides
as
follows:
18(1)
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....
The
second
criterion
sometimes
invoked
is
that
of
public
policy:
that
is,
even
if
the
expense
was
incurred
to
produce
income
would
it
be
contrary
to
public
policy
to
allow
a
taxpayer
to
reduce
his
net
income,
and
thus
save
taxes,
by
virtue
of
having
been
obliged
to
pay
a
fine
or
penalty
for
some
wrongdoing?
With
respect
to
the
first
criterion
a
seminal
decision
was
that
of
the
English
Court
of
Appeal
in
Commissioners
of
Inland
Revenue
v.
Von
Glehn,
[1920]
2
K.B.
553.
It
involved
penalties
paid
by
an
exporter
under
customs
legislation
for
not
having
taken
adequate
care
that
its
exports
not
reach
enemy
countries
during
war
time.
The
Court
held
that
the
penalties
paid
were
not
deductible.
The
various
reasons
given
by
the
judges,
while
perhaps
not
entirely
clear,
all
conclude
that
the
penalty
imposed
under
the
customs
law
was
not
an
expenditure
“connected
with
or
arising
out
of
such
trade....”.
An
observation
made
by
Lord
Sterndale,
M.R.
is
of
interest
given
the
later
developments
in
Canadian
jurisprudence.
He
stated:
Now
what
is
the
position
here?
This
business
could
perfectly
well
be
carried
on
without
any
infraction
of
the
law
at
all.
This
penalty
was
imposed
because
of
an
infraction
of
the
law
and
that
does
not
seem
to
me
to
be,
any
more
than
the
expense
which
had
to
be
paid
in
the
case
of
Strong
v.
Woodifield
(1)5
T.C.
215
appeared
to
Lord
Davey
to
be,
a
disbursement
or
expense
which
was
laid
out
or
expended
for
the
purpose
of
such
trade,
manufacture,
adventure
or
concern;
nor
does
it
seem
to
me,
though
this
is
rather
more
questionable,
to
be
a
sum
paid
on
account
of
a
loss
connected
with
or
arising
out
of
such
trade,
manufacture,
adventure
or
concern.
This
concept
of
avoidability
of
a
penalty,
as
a
test
of
whether
its
payment
amounts
to
a
business
expense,
has
been
developed,
I
believe
correctly,
in
decisions
of
the
Federal
Court
Trial
Division.
The
first
of
these
is
Day
&
Ross
Ltd.
v.
R.,
[1976]
C.T.C.
707,
76
D.T.C.
6433
where
Dubé
J.
held
that
fines
paid
by
a
trucking
business
for
its
trucks
being
loaded
above
weight
restrictions
were
deductible
as
a
business
expense.
He
noted
that
it
was
virtually
impossible
for
the
business
to
ensure
that
its
trucks
were
not
overloaded
as
it
had
to
rely
on
weights
declared
by
shippers
when
loads
were
picked
up,
there
being
no
scales
immediately
available
to
verify
the
size
of
the
loads.
Violations
being
unintentional
and
fines
being
virtually
inevitable
from
time
to
time,
he
found
that
they
were
incurred
for
the
purpose
of
earning
income.
He
did
also
make
reference
to
the
public
policy
test,
observing
that
as
it
was
possible
to
obtain
special
permits
in
advance
to
carry
loads
over
the
normal
permitted
weight
the
occasional
unintended
violations
of
those
limits
were
“obviously
not
outrageous
transgressions
of
public
policy”.
This
decision
was
followed
by
Cullen
J.
in
TNT
Canada
Inc.
v.
R.,
[1988]
2
C.T.C.
91,
88
D.T.C.
6334.
The
fines
involved
there
had
been
paid
under
the
Customs
Act
and
the
Excise
Tax
Act
for
various
trucking
violations
committed
by
the
plaintiff,
a
common
carrier
by
road.
These
fines
had
been
imposed
upon
the
plaintiff
for
having
repair
work
done
on
its
trucks
in
the
United
States
and
the
purchase
of
parts
there
without
paying
Canadian
sales
and
excise
tax;
and
for
using
a
foreign
carrier
in
Canada
who
made
more
than
one
stop
in
this
country.
Cullen
J.
appears
to
have
held
that
these
expenses,
as
in
the
Day
&
Ross
case,
were
unavoidable
and
therefore
they
met
the
test
of
having
been
incurred
for
the
purpose
of
earning
income.
He
then
proceeded
to
consider
the
public
policy
criterion
which
he
held
to
be
an
additional
and
necessary
test
beyond
the
requirement
of
meeting
the
test
of
paragraph
18(1
)(a)
of
the
Act
in
order
to
establish
deductibility.
He
concluded
that
there
was
no
violation
of
public
policy
in
allowing
deductibility,
apparently
on
the
basis
that
the
taxpayer
was
not
intentionally
flouting
the
law.
He
emphasized
that
there
had
been
only
very
few
contraventions
arising
out
of
some
80,000
dispatches
of
trucks.
With
respect
to
the
first
criterion
I
believe
that
one
legitimate
test
of
whether
fines
should
be
deductible
as
a
business
expense
is
that
of
avoidability
of
the
offences.
I
believe
there
is
support
for
this
not
only
in
the
jurisprudence
mentioned,
but
by
analogy
in
a
decision
of
the
Exchequer
Court
involving
deductibility
of
damages
paid
for
a
marine
collision.
In
Imperial
Oil
Ltd.
v.
Minister
of
National
Revenue,
[1947]
C.T.C.
353,
3
D.T.C.
1090
the
taxpayer
as
a
major
petroleum
producer
operated
a
fleet
of
oil
tankers.
One
of
these
tankers
collided
with
another
vessel
while
bringing
a
cargo
of
petroleum
from
South
America.
It
was
sued
for
damages
and
eventually
settled
the
claim
out
of
court.
In
finding
that
the
cost
of
the
settlement
was
a
deductible
expense,
Thorson
P.
emphasized
that
marine
transport
of
petroleum
products
was
a
normal
part
of
the
taxpayer’s
business
and
“that
the
risk
of
collision
between
vessels
is
a
normal
and
ordinary
hazard
of
marine
operations
generally....”.
He
went
on
to
say
that
negligence
on
the
part
of
the
taxpayer’s
servants
in
the
operation
of
its
vessels
was
a
normal
and
ordinary
risk
and
incidental
to
its
business.
In
adopting
this
test
of
avoidability
of
the
offences
leading
to
fines,
and
thus
the
avoidability
of
this
particular
type
of
expense,
I
do
not
purport
to
pronounce
a
more
general
rule
concerning
the
deductibility
of
other
types
of
expense.
The
question
here
is
not:
could
the
taxpayer
have
run
his
business
more
cheaply?
It
is:
could
the
taxpayer
have
reasonably
been
expected
to
run
his
business
in
consistent
conformity
to
this
kind
of
law?
On
the
facts
of
the
present
case
it
would
have
been
impossible
for
the
trial
judge
to
have
concluded
that
this
deliberate
and
fraudulent
scheme
to
avoid
payment
of
higher
duties
and
taxes
to
the
revenue
of
Canada
was
an
unavoidable
incident
in
the
operation
of
Amway’s
business
of
importing
goods
and
selling
them
in
Canada.
There
was
nothing
to
suggest
that
this
was
other
than
an
intentional
and
cynical
scheme
to
mislead
Canadian
customs
officials
as
to
the
value
of
the
goods,
a
scheme
which
was
well
documented
in
agreed
statements
of
fact
filed
in
the
Ontario
court
before
Evans
C.J.
in
the
course
of
the
conviction
of
Amway
for
fraud
in
respect
of
the
same
activities.
Nor
was
any
evidence
brought
to
our
attention
that
the
nature
of
the
taxpayer’s
business
was
such
that
chronic
undervaluation
of
its
goods
for
importation
purposes
was
unavoidable.
With
respect
to
the
public
policy
criterion,
it
has
been
argued
with
some
force
by
learned
commentators
that
undefined
notions
of
public
policy
should
not
preclude
the
application
of
the
simple
principle
that
income
tax
is
owing
only
on
the
net
income
of
a
taxpayer.
These
arguments
are
premised
on
the
assumption
that
in
a
given
case
the
fine
or
penalty
was
incurred
for
the
purpose
of
producing
income.
As
I
have
concluded
above,
a
fine
or
penalty
cannot
be
considered
to
have
been
incurred
for
the
purpose
of
producing
income
unless
in
all
the
circumstances
the
incurring
of
the
fine
or
penalty
must
be
seen
as
an
unavoidable
incident
of
carrying
on
the
business.
Secondly,
in
my
view
it
is
contrary
to
public
policy
to
allow
the
deduction
of
a
fine
or
penalty
as
a
business
expense
where
that
fine
or
penalty
is
imposed
by
law
for
the
purpose
of
punishing
and
deterring
those
who
through
intention
or
a
lack
of
reasonable
care
violate
the
laws.
In
a
case
such
as
the
present
the
penalties
are
fixed
by
statute
(albeit
that
the
Minister
first
remitted
about
one
third
of
the
penalty
and
ultimately
settled
for
less
than
one
third
of
the
total
penalty
owing
under
statute).
It
would
frustrate
the
purposes
of
the
penalties
imposed
by
Parliament
if
after
paying
those
penalties
exigible
by
law
a
taxpayer
were
then
able
to
share
the
cost
of
that
penalty
—
and
the
higher
his
marginal
rate
of
taxation
the
more
he
could
share
—
with
other
taxpayers
of
Canada
by
treating
it
as
a
deductible
expense
and
thus
reducing
his
taxable
income.
Such
a
result
would,
I
believe,
clearly
be
contrary
to
public
policy.
Suggestions
that
instead
a
court
imposing
a
penalty
can
augment
it
in
anticipation
of
the
accused
being
able
to
deduct
the
fine
from
his
taxable
income
are
not
applicable
to
a
situation
such
as
this
where
the
penalties
are
specifically
defined
by
statute.
Nor
do
I
believe
that
sentencing
courts
should
be
required
to
anticipate
the
value
of
an
income
tax
deduction
to
a
penalized
party.
For
this
reason
I
think
that
the
deductibility
of
penalties
set
by
courts
exercising
their
discretion
should
be
subject
to
the
same
rules
as
I
have
elaborated
above
in
respect
of
a
penalty
set
by
statute.
Disposition
The
appeal
should
therefore
be
dismissed
and
the
cross-appeal
be
allowed
on
the
basis
that
the
judgment
below
be
set
aside
and
the
reassess-
ment
by
the
Minister
be
confirmed
to
the
effect
that
the
balance
of
$37,117,904,
remaining
after
the
deduction
from
the
total
settlement
of
$45,000,000
of
the
sum
of
$7,882,096
attributable
to
the
settlement
of
the
1984
action,
be
regarded
as
the
payment
of
a
penalty
and
not
deductible
from
gross
income
as
an
expense
incurred
for
the
purpose
of
gaining
or
producing
income.
Costs
should
be
awarded
to
the
respondent
in
the
Tax
Court,
and
in
this
Court
in
both
the
appeal
and
the
cross-appeal.
Appeal
dismissed;
cross-appeal
allowed.
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