A W Prociuk (orally: March 19, 1975):
1 The appellant, Cuddy Foods Limited, appeals from the respondent's Notice of Reassessment dated August 28, 1972 for the taxation year 1971 wherein an expense item of $40,000, characterized at one time as promotional expenses paid to its wholly-owned subsidiary, Riverside Poultry Limited, was disallowed on the grounds that it was not an outlay or expense made for the purpose of gaining or producing income within the meaning of paragraph 12(1)(a) of the Income Tax Act, as it was then in force, but constituted a payment on account of capital and, as such, deduction of same is prohibited by paragraph 12(1)(b) of the Act. The relevant paragraphs read 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,
(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,
2 The appellant, at all material times, was in the turkey hatchery business in a very substantial manner specializing in a particular strain of turkeys. Much evidence was adduced by the principal shareholder and president, Alfred M Cuddy, regarding the operation of the said business. Apart from the very informative and interesting information and evidence, coupled with some humour, the crux of the matter appeared to be the problem of selling tom- poults to growers. They are more difficult to raise than hen-poults and when fully grown are huge birds in the figure of 25 pounds more or less and only seasonally marketable, mainly during the Christmas season. Poultry processors are reluctant to buy these birds in the same quantity as hen-turkeys for obvious reasons.
3 Riverside Poultry Limited was a processing firm. In 1952, Mr Leo Goodman, who had years of experience in the poultry business, joined this firm. It soon became a viable enterprise and I gather from observing Mr Goodman on the stand and listening to his evidence that it was largely through his personal efforts as a principal shareholder and manager.
4 Cuddy Foods Limited became a minority shareholder of Riverside in late 1958 or 1959 and through its other subsidiary, Cuddy Foods Limited became the sole shareholder of Riverside in about 1966.
5 In 1967 Riverside embarked on what it termed a further processing project in respect of tom-turkeys to ensure a year-round operation and hopefully to increase the sale of tom-turkeys.
6 Mr Goodman stated that in the first year of operation of the further processing plant the financial returns were very satisfactory. However, in the taxation year 1968 Riverside sustained a serious loss and it was at this time that Mr Goodman spoke to Mr Cuddy about the future of this enterprise. Mr Cuddy agreed to subsidize or underwrite the loss in 1969 to the extent of 50 per cent of same or to a maximum of $40,000, whichever amount was the lesser.
7 Mr Cuddy explained that while the appellant would not share in any profit that Riverside might make, the appellant would benefit financially by being able to sell a greater number of tom-poults to growers who, in turn, would be anxious to raise them for sale to Riverside.
8 There is nothing in writing concerning the loss, as stated earlier. Mr Goodman states that this is the way he and Cuddy did business, by word of mouth. However, what is being overlooked is that these were two separate legal entities and in the absence of some tangible evidence to indicate that Riverside was in fact an agent or partner in a joint venture, the payment of losses incurred by Riverside is not deductible as an expense; that is, this payment of losses incurred by Riverside and paid in whole or in part by Cuddy is not deductible as an expense by the appellant.
9 It was indicated in evidence by Andol Tooming on behalf of the respondent that Riverside had a tax loss position in the year 1969. This may well have been the motive for the transfer of the $40,000 from the appellant to Riverside, a wholly-owned subsidiary but that, in itself, does not settle the issue of deductibility.
10 In reviewing the evidence and the case law presented by both counsel, I have come to the conclusion that the said $40,000 could not be deducted as payment for a business loss incurred by another legal entity as a promotional expense for the purposes of generating income to the appellant. There is absolutely no evidence of what was being promoted that would excite or interest turkey growers to increase their purchases of tom-poults. In fact, the evidence is quite the contrary.
11 In the result I am of the opinion that the respondent was correct in his assessment of the appellant's income for the said taxation year and the same should not be vacated. Accordingly, the appeal is dismissed.
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