Bcaa Insurance Company v. Minister of National Revenue, [1979] CTC 2786, [1979] DTC 668

The Assistant Chairman:—The appellant, in computing its taxable income for the 1971 taxation year, deducted from its otherwise taxable income of that year a loss-carry-forward from its 1970 taxation year of $72,245. The respondent, on assessment, disallowed that claim. The appeal to this Board is to determine whether or not the appellant had such a loss to carry forward. The issue thus becomes whether or not the appellant had an expense of $83,062 in 1970 or 1969. If it had the expense in 1969, it had no revenue against which it could claim that expense so that at the end of that year it had a loss-carry-forward of $83,062—$10,817 of which it claimed against its otherwise taxable income of 1970, and the balance of which it claimed against it, otherwise taxable income of 1971. If the expense (the amount of $83,062) were in 1970, then what it claimed in 1971 is the balance of that amount—being the loss-carry-forward from that year. The appellant claims the balance of the loss on the basis that the original expenditure was a valid revenue expense in that in either 1969 or 1970 the expense was made for the purpose of gaining or producing income from the appellant’s business. The respondent on the other hand takes the position that the outlay which ultimately produced the amount in question (really $83,062) was not a business expense of the appellant in that:

(a) the outlay was prior to the incorporation of the appellant, or (b) it was a capital expenditure.

The issue before me thus is first, whether or not the expenditure is a capital expenditure and if it is not, then was the expenditure one allowable to the appellant if it were incurred prior to the incorporation of the appellant. If it were a capital expenditure (whether made before or after the appellant was incorporated), it is not a deductible expense in either the 1969 or 1970 year and consequently there would be no loss to be carried forward to 1971 to apply against the appellant’s otherwise taxable income with the result that the appeal should be dismissed. However, were I to hold that the expenditure was not on account of capital, then I would have to determine whether or not there would be a difference in the result of this appeal if the expenditure were made prior to incorporation of the appellant. If I were of the opinion that the result would be the same regardless as to when the expenditure was made, that would end the inquiry. However, were I of the opinion that the timing did make a material difference, I would then be compelled to consider and decide when the appellant was incorporated.

Paragraphs 12(1 )(a) and (b) of the Income Tax Act prior to tax reform read as follows:

12.(1) In computing income, no deduction shall be made in respect of

(a) an outlay or expense 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 of depletion except as expressly permitted by this Part.

I am of the opinion that I must decide, in the following order, these questions:

1. Was the expenditure within the exception in paragraph 12(1)(a) of the Income Tax Act?

2. If the answer to question 1 is in the affirmative, then—Does it matter that the expenditure is before or after the incorporation of the appellant?

3. If the answer to both questions 1 and 2 is in the affirmative, then—When was the appellant incorporated?

If the answer to any of these questions is in the negative, the appeal is to be dismissed. It should be noted that all years mentioned herein are calendar years.

The appellant is a body corporate and politic incorporated pursuant to the laws of the Province of British Columbia. It is now, and since incorporation has been, a wholly-owned subsidiary of the British Columbia Automobile Association (hereinafter called “Association”). Association itself is a body corporate incorporated pursuant to the same provincial laws and for many years has been carrying on its activities in the said province. Without in any way attempting to fully delineate the activities of Association, for convenience sake let it be said that its function was to provide ser- vices to its members, which at the beginning of 1970 numbered around 85,000. One of its services was to arrange for automobile insurance for those members. This service was provided by its subsidiary BC AA Insurance Agency Ltd (hereinafter called “Agency”) as agent placing insurance for Association s members underwritten by Employers Mutual Casualty Company (hereinafter called “Employers”), a US corporation. This activity had been carried on for many years prior to 1970.

In late 1963 Association approved the incorporation of its own insurance company pursuant to a private Act of the legislature of the said province. This company to be incorporated (which turned out to be the appellant) was to be the underwriter for various types of insurance including automobile. By special Act of the said legislature, which was given royal assent on March 20, 1964, the appellant was incorporated by the “British Columbia Motorist Insurance Company Act, 1964” (hereinafter called the “Act”), which Act contained the following section:

21. This Act shall come into force on a date to be fixed by the Lieutenant- Governor in Council by his proclamation; provided that this Act shall first have been approved by a vote of not less than two-thirds of the members of the British Columbia Automobile Association who, being entitled to vote, attend and vote in person or, where proxies are allowed, by proxy at a special general meeting of the Association of which not less than 14 days’ notice has been given. Notice of the special general meeting shall be deemed to have been properly given if the same shall have been advertised in one issue of the British Columbia Gazette and in one issue of the official publication of the Association and in one issue of a newspaper circulating in each district in which the Association has an office.

Until at least the fall of 1969, no steps had been taken by Association to have that Act come into force. When it did come into force could be one of the issues in this appeal.

Apparently in 1968 or early 1969 it became known that the so-called “nofault insurance” would soon be the law of the Province of British Columbia. Employers, in early 1969, advised Association that after December 31,1969, it would no longer underwrite the insurance Association was providing to its members. Needless to say, this was of concern to Association as insurance, while one of many services it provided to its members, was a very important service and it took steps to consider what could be done to fill the void in the respect which, as stated, was to occur at the end of 1969. It was decided (in late summer 1969) to cause the appellant’s incorporation to be finalized so that it could be the underwriter in lieu of Employers and so ensure that Association’s members would have no disruption of service. To this end, insofar as Association was concerned, all steps were taken to comply with the Act and, on September 15,1969, the requisite material was filed with the Registrar of Companies. Following this filing, according to the evidence:

The proclamation document was scheduled to be presented to the Lieutenant- Governor in Council on September 18, 1969.

Again, according to the evidence:

September 19, 1969—Order in Council No 2959 was issued by the Lieutenant- Governor in Council proclaiming the British Columbia Motorist Insurance Company Act, 1964 in operation effective October 1, 1969.

From that day forward events occurred which cloud the issue as to when the appellant was incorporated. I think the agreed statement of facts should be reproduced and to this end, even though some has been stated previously, all paragraphs 1 to 22 shall now be set forth:

1. Prior to late 1969 a wholly-owned subsidiary of the British Columbia Automobile Association, BCAA Insurance Agency Ltd, acted as agent in placing automobile insurance underwritten by Employers Mutual Casualty Company for members of the BCAA.

2. On December 16, 1963 the members of the British Columbia Automobile Association approved the incorporation of the Association’s own insurance company by Private Act of the BC Legislature. This new company was intended to act as underwriter for various kinds of insurance risks, including in particular automobile insurance.

3. British Columbia Motorist Insurance Company was incorporated by Special Act of the BC Legislature. The ‘British Columbia Motorist Insurance Company Act, 1964’, SBC 1964, Chapter 63, received royal assent on March 20, 1964. Section 21 of the BC Motorist Insurance Act, 1964, provides as follows:

‘21. This Act shall come into force on a date to be fixed by the Lieutenant- Governor in Council by his proclamation; provided that this Act shall first have been approved by a vote of not less than two-thirds of the members of the British Columbia Automobile Association who, being entitled to vote, attend and vote in person or, where proxies are allowed, by proxy at a special general meeting of the Association of which not less than 14 days’ notice has been given. Notice of the special general meeting shall be deemed to have been properly given if the same shall have been advertised in one issue of the British Columbia Gazette and in one issue of the official publication of the Association and in one issue of a newspaper circulating in each district in which the Association has an office.’

4. September 15, 1969—a special general meeting of the members of British Columbia Automobile Association was held. The members passed an extraordinary resolution to approve the British Columbia Motorist Insurance Company Act, 1964, the validity of which was subsequently attacked.

5. A certified copy of the September 15, 1969 extraordinary resolution was filed with the Registrar of companies and a request was made for proclamation by the Lieutenant-Governor in Council of the British Columbia Motorist Insurance Act, 1964. The proclamation documentation was scheduled to be presented to the Lieutenant-Governor in Council on September 18, 1969.

6. September 19, 1969—Order in Council No 2959 was issued by the Lieutenant- Governor in Council proclaming the British Columbia Motorist Insurance Company Act, 1964 in operation effective October 1, 1969 (copy attached).

7. September 25, 1969—Brian Rudkin, a member of the British Columbia Automobile Association and president of Westco Insurance Company, issued a Writ of Summons against the British Columbia Automobile Association claiming a declaration that the extraordinary resolution of September 15, 1969 was void, and an injuction (sic) to restrain the officers and directors of the British Columbia Automobile Association from acting on that resolution, an interim injunction until trial, and the appointment of a receiver.

8. September 29,1969—date of hearing before Judge Hinkson in British Columbia Supreme Court Chambers.

9. September 30, 1969—Order in Council No 3125 was issued by the Lieutenant- Governor in Council stating that it superseded the proclamation referred to in Order in Council No 2959 and proclaiming the British Columbia Motorist Insurance Company Act, 1964 into force as of November 1, 1969 (copy attached).

10. October 6, 1969—Judge Hinkson grants interim injunction (until trial of the Action) restraining British Columbia Automobile Association, its officers, directors and employees, from acting in pursuance of the September 15, 1969 special resolution.

11. October 16, 1969—British Columbia Automobile Association files Notice of Appeal from the judgment of Judge Hinkson.

12. October 28, 1969 Brian Rudkin issues Statement of Claim in support of his action against BCAA.

13. October 30, 1969—Order in Council No 3392 issued stating that it superseded the proclamation referred to in Order in Council No 3125 and proclaiming the British Columbia Motorist Insurance Company Act, 1964 into force as of December 1, 1969 (copy attached).

14. October 31, 1969 and November 1, 1969—British Columbia Automobile Association advertises Notice of Meeting calling new special general meeting on November 20,1969 of the members of British Columbia Automobile Association to approve the British Columbia Motorist Insurance Company Act, 1964 (and to make incidental amendments to the Constitution of British Columbia Automobile Association).

15. November 6 and 7, 1969—Brian Rudkin publishes advertisements to constitute notice of six extraordinary resolutions to be presented by him to November 20, 1969 special general meeting of British Columbia Automobile Association. These resolutions provide, inter alia, for the removal of all directors of British Columbia Automobile Association and replacement by Brian Rudkin and three of his associates.

16. November 19, 1969—Rudkin places full page advertisement in Vancouver Sun and Vancouver Province newspapers attacking British Columbia Automobile Association and its proposal to approve the British Columbia Motorist Insurance Company Act, 1964.

17. November 20,1969—special general meeting is held at Hotel Vancouver but is adjourned to November 27,1969 because of the overwhelmingly large crowd which is unable to be accommodated in the Main Ballroom of the Hotel Vancouver. The meeting is adjourned to the Pacific Coliseum which has seating capacity of over 16,000 people.

18. November 26, 1969—Order in Council No 3695 issued by the Lieutenant- Governor in Council stating that it superseded the proclamation referred to in Orders in Council Nos 3125 and 3392 and proclaiming the British Columbia Motorist Insurance Company Act, 1964 into force as of December 15, 1969 (copy attached).

19. November 27, 1969—British Columbia Automobile Association special general meeting (adjourned from November 20, 1969) is held with a turnout in excess of 2,000 members. The members approve by special resolution the British Columbia Motorist Insurance Company Act, 1964.

20. December 8,1969—Order in Council issued by Lieutenant-Governor in Council stating that it rescinded the proclamation referred to in Order in Council No 3695 of November 26, 1969 (copy attached).

21. On December 12, 1969 Judge Hinkson hears Rudkin’s action against the British Columbia Automobile Association and on December 16, 1969 a consent judgment is entered granting Rudkin the injunction he claimed with respect to the September 15, 1969 resolution as a complete disposition of the action (copy attached).

22. December 18, 1969—Order in Council No 4063 issued by the Lieutenant- Governor in Council stating that it proclaimed the British Columbia Motorist Insurance Company Act, 1964 into operation as of December 18, 1969 (copy attached).

(The attachments are not being quoted.)

According to the evidence of Mr R Leakey, who at the time of the hearing was the general manager of the appellant and had been at the time of the incorporation of the appellant a senior officer of Association, a Mr Rudkin was endeavouring to stop Association from having its own insurance company. Mr Rudkin, who was a member of Association, had his own insurance company and it was believed his court action against Association was to endeavour to gain for his company the business which the appellant would get. Associations’s automobile insurance business was strictly with its members. Westco’s business was similar, but available to all motorists; a walk-in or direct-mail business with no agent’s fee involved. Because of Rudkin’s action, as stated in paragraph 7 of the agreed statement of facts, Association had to engage legal services to proceed with the necessary steps to cause the appellant to be incorporated (if it had not been) and do all things necessary in relation thereto. It is appreciated that, because of Rudkin’s action, Association and its advisors were ensuring that everything which had to be done was properly done. As the witness for the appellant stated, all the costs incurred were incurred because of the Rudkin affair. As he stated: ‘‘We would never have incurred these expenses in my estimation had not all of this continued through.” Generalizing, the costs relate to legal expenses, the calling of the meetings, the rental of the halls, printing of ballots, newspaper and radio advertisements and other similar items. The whole affair—when the costs were incurred—was fundamentally between September and December, 1969. The bills reflecting all those costs went to Association and were paid directly by it and, later in 1970, invoiced down to the appellant. The appellant was billed by Association by invoice dated June 30, 1970. It was duly paid. The invoice read: “Charges incurred—August 1969 to May 1970 with respect to SPECIAL MEMBERS MEETINGS as per copies attached”. From the time it was decided the appellant should take over the position formerly occupied by Employers, steps were taken to engage the personnel (including interviewing the soonto-be-released staff of Employers), have appropriate forms printed, and to get a re-insurance agreement with another company so that the risks would not be too great in the early years. In general many housekeeping chores were undertaken to get the appellant in such a position that it could do business. Since policies were, in effect, expiring virtually every day and Association had to give services to its customers, rather than fight the court action to establish that the appellant was legally incorporated as they had been legally advised they could do successfully (which, of course, would have the effect of preventing the appellant from operating for a considerable period), the second meeting was called to correct any possible errors in the first meeting and to ensure that the appellant was properly incorporated so that it could commence business if it were held that the appellant was not incorporated as a result of the first meeting.

As to the expenses involved, on the one hand the effective submission was that all were deductible as claimed, and on the other hand none were deductible. As I read the evidence I am of the view that some of the expenses clearly could be deductible (eg, interviewing potential employees, their salary, preparing forms, etc). Since I know no amount for these expenses and they do not seem large, I shall consider all the expenses of one type—non-housekeeping. Association took steps to get the appellant incorporated and it was Association who rented halls, engaged a lawyer, etc and consequently I am of the view that the expenses are the expenses of Association and not the appellant. Assuming the expenses were within the ambit of paragraph 12(1 )(a), then those expenses were a deductible expense to Association, unless of course Association incurred those expenses as agent for the appellant. If it acted as the agent for the appellant, then, whether or not it billed the appellant and whether or not the appellant paid Association for those expenses, the expenses would be the expenses of the appellant and deductible by it alone. In any event, the appellant did pay Association for that outlay. Was Association the agent for the appellant? On or about September 1, 1969, the appellant was not in existence. Association, according to legislation, had the means whereby it could cause the Lieutenant-Governor in Council to issue a proclamation bringing the appellant into existence. It apparently took steps towards this goal in the late summer of 1969. Had there been no obstacle thrown into the path of that proclamation, the costs incurred would have been considerably less than the amount of $83,062, which is the alleged expense of the appellant. I do believe that the costs of causing a company to be incorporated are the costs of the company, although the person incurring the costs would normally be liable to the person providing the service. However, those incorporating costs are not a business expense but rather an expense on account of capital and so non-deductible.

As has been mentioned, even though the Rudkin action in fact was an obstacle to the certainty of the appellant’s incorporation, nonetheless, on behalf of the appellant, Association caused some things to be done for the benefit of the appellant the cost of which clearly would have been an expense of the appellant. Association paid for those housekeeping expenses so that once the Rudkin action was out of the way the appellant could immediately go into business. It must be recalled that the agreement with Employers was to expire at the end of December.

In arguing the case before me, counsel for the Minister contended that the expenses giving rise to the claim were basically incorporation expenses and the deduction of them was prohibited by paragraph 12(1)(b) of the Income Tax Act inasmuch as they were not laid out for the purpose of gaining or producing income and were capital in nature. She continued that, in the main those expenses were laid out to bring the appellant into existence and in support of that proposition referred to the cases of Atherton v British Insulated and Helsby Cables, Limited, 10 TC 155, and Vallambrosa Rubber Co Ltd v Farmer, 5 TC 529. The oft quoted portion of the former case is as follows:

But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think there is a very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.

From the latter case there is the statement:

I do not say this consideration is absolutely final or determinative; but in a rough way I think it is not a bad criterion of what is capital expenditure to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year.

Counsel for the appellant, anticipating a position which would be taken by the respondent stated: “We say that fundamentally what’s going on here is, through this form, an attack on the business that’s being carried on by the appellant company as and from October 1, 1969’’. In support of such a position reference was made to several cases as follows:

Southern v Borax Consolidated, Ltd, 23 TC 597;

Algoma Central Railway v MNR, [1967] CTC 130; 67 DTC 5091;

Toohey’s Ltd v Commissioner of Taxation (NSW), [1922] NSWSR 482;

Kellogg Company of Canada Limited v MNR, [1942] CTC 51; 2 DTC 548;

Hudson’s Bay Company v MNR, [1947] CTC 86; 3 DTC 968;

Morgan v Tate & Lyle Ltd, 35 TC 406;

Asamera Oil (Indonesia) Limited v Her Majesty the Queen, [1973] CTC 305; 73 DTC 5274;

MNR v P P Drilling Ltd, [1976] CTC 58; 76 DTC 6028.

As to the first five above-mentioned cases, counsel’s submission was that those cases stand for the proposition that the costs of defending the trade are deductible. The Morgan case, in his submission, showed that an expense incurred by a company to ward off the nationalization of its business was a deductible expense. In M P Drilling the expenses involved in that appeal were held to be expenses laid out for the purpose of earning income as they were made when the company was in business and not simply bringing the business into existence.

As I view the evidence and as previously indicated, there clearly appears to be some housekeeping expenses of an unknown amount which, while incurred and paid for by Association, were really operating expenses of the appellant. However, as I view the bulk of the expenses and as I have indicated, I am treating all the expenses as though they were in the category of expenses which Association incurred because of the action of one Rudkin against it. As the appellant’s witness stated (and I quote from the transcript of the hearing), the expenses were:

primarily legal expenses that dealt with consulting expenses, the calling of the meetings

Q. These are the extra meetings you had

A. Yes, that’s right.

The Order of the Supreme Court of British Columbia which was given by that court on Friday, December 12, 1969, bore the style of cause:

BETWEEN:

BRIAN RUDKIN

PLAINTIFF

AND:

BRITISH COLUMBIA AUTOMOBILE ASSOCIATION

DEFENDANT.

All the costs incurred (excepting the housekeeping costs) were incurred by Association in my view for one of two reasons: either to cause the appellant to be duly incorporated, or to defend the action by Rudkin (and in the former of these two reasons I include the possible second incorporation). That step was taken, at least by Association, ex abundante cautela as the deadline for insurance was fast approaching and Association had to ensure that it was in a position to be able to service its clients. I cannot see how these expenses can be considered in the same category as the expenses which were under consideration in the M P Drilling case. In this respect I would refer to the reasons of Urie, J in that case at 62:

As I understand it, it is basic to the appellant’s submissions that the expenditures incurred by the respondent in 1964,1965 and 1966 were for the purpose of creating or acquiring a business structure. In appellant counsel’s submission its activities during those years were preparatory to or for the initiation of a business and were not outlays made for the purpose of gaining or producing income from a business. If this submission were accepted the payments would have been on account of capital, falling within paragraph (a) of Jackett, CJ’s test propounded in the Canada Starch case (supra).

In my view this argument does not withstand scrutiny in that it ignores the fact that the business structure per se came into existence in late September when the respondent commenced its business operations by continuing the marketing negotiations, supply negotiations and technical studies through its consultants until June of 1964 when it opened its own office and engaged the services of its first employees, utilizing for such purposes funds advanced by its principal, Mr Bawden, or other companies controlled by him.

It also ignores the fact that in the early summer of 1964 Mr Van Wielingen joined the respondent as a full time general manager and chief operational officer. His duties at that time were, according to his testimony, firstly, to develop a market for the product, secondly, to negotiate with actual and potential suppliers of liquid petroleum gases and, thirdly, to consider the technical aspects of production, Storage, transportation and the like.

In short, the company was then in existence and was engaged in doing the normal things that any new business must do to bring its wares to the market place, hopefully with profitable results.

I cannot see where these expenses (except the housekeeping expenses) had anything to do, in the words of Urie, J, ‘‘to bring its wares to the market place.’’ Those expenses were either for incorporating the appellant and ensuring the appellant was properly incorporated or defending the action by Rudkin. If the former, it is a payment on account of capital and, if the latter, it is an expense of Association and, consequently, in either case it is not an expense within the exception in paragraph 12(1)(a) of the said Act. Because of this finding, it is not necessary to determine the other questions.

Since I cannot delineate in quantum between the housekeeping expenses and the incorporating expenses as mentioned previously, all shall be considered as one with the result that judgment shall go dismissing the appeal.

Appeal dismissed.