Income-Producing Purpose

The ARQ denied the deduction of the full amount of the management fees paid by the taxpayer (AK) to its wholly-owning parent (GAK) on the basis inter alia that there was no contract for management services between AK and GAK and that GAK in fact did not render any management services to AK. In allowing the deductions in full and after referring to TA s. 128 (similar to ITA s. 18(1)(a)), Richard JCQ stated (at paras. 21-22, Tax Interpretations translation):

Mr. William Vialle [a director] explained in detail the interaction between AK and its parent company, GAK, both of which are managed by the same directors.

[22] Despite the absence of a written contract, resolution or other documentation, Mr. William Vialle convinced the Court that numerous acts of management were performed by GAK for the benefit of AK, notably in the negotiation of financing, acquisition opportunities, the determination of rents and the payment of life insurance policies for its directors, of which GAK is the beneficiary.

Prior to 2002, a pharmacist (“Morin”) carried on directly and through her employees all of the operations of six pharmacies. A services agreement concluded in 2002 between her and her management company (“377”) provided that various expenses including some of the payroll expenses were incurred by her as agent for 377. At issue was the arrangements respecting the purely pharmaceutical portion of each business (the “dispensary”). It was agreed that Morin was to incur the expenses of the dispensary as they related to services provided by technicians and support staff, as contrasted to professional staff, as agent for 377 and that the gross profits from the dispensary would be split on a 30/70 basis between 377 and Morin - subject to a year end adjustment (which, in fact, never was made) based on the actual relative value of the services performed in each year. 377 sent quarterly invoices to Morin and issued credit notes for its computed share of the expenses.

Tremblay JCQ confirmed the ARQ position that the $2.5 million in management fees charged by 377 to Morin for the 2008 to 2013 taxation years regarding the dispensary operation under the above arrangement were completely non-deductible as they were not incurred for an income-producing purpose. Morin was performing exactly the same functions as before, and the sole effect of the arrangement was to reduce her income by the fee amounts. Tremblay JCQ stated (at paras. 50, 52, TaxInterpretations translation):

In so doing, Ms. Morin had no expectation of receiving any income from the management fees she paid to 377. …

It seems obvious that a reasonable businesswoman, considering only her commercial interests, would not have committed herself to such an expense.

The taxpayer, which produced and sold potash from mines in Saskatchewan, was subject to a profit tax and to the making of “base payments” under the Mineral Taxation Act, 1983 (Saskatchewan).

In finding that the base payments made in its 1999 to 2002 taxation years did not satisfy the requirement under s. 18(1)(a) of having been incurred for the purpose of producing income from the taxpayer’s business, Owen J stated (at para. 40) that an “expenditure of the income that has been determined for a taxation period cannot be incurred as part of the process of earning that income” and that it should be considered in this regard “that the base payment only arises after the conclusion of the producer’s income earning process in respect of potash subject to the base payment tax” (para. 66) given that “[t]o compute the amount of a base payment for a year, a producer must first compute its profits for that year” (para. 64) and that “Liability for a base payment will exist only in respect of potash that has been “sold or otherwise disposed of” by a producer … [i.e.,] potash … [that] is no longer capable of producing income for the producer” (para. 65). He concluded in this regard (at paras. 72-73):

[T]he base payment and the profit tax are taxes on the income of a producer from sales or other dispositions of potash mined in Saskatchewan. The Saskatchewan legislature simply chose in the case of the base payment to substitute quantity of potash as a proxy for income to ensure that a minimum amount of tax would be collected in respect of such potash even if the producer did not have profits for the year … .

Even if the base payment is not a tax on income or profit as such, that does not alter the fact that the base payment is not incurred by the Appellant for the purpose of gaining or producing income from its potash mining business; rather, it is a tax that is applied only after the conclusion of the process of earning income from that business.

A condo unit, which the taxpayer had been renting-out for many years, was vacated by the current tenant and ceased to be rentable at a reasonable rent as a result of extensive remediation to the exterior of the building that was commissioned by the condo board. The taxpayer used this as an opportunity to attend (at the beginning of 2012) to long overdue repairs to recondition the unit’s interior, which cost about 5% of the FMV of the unit. After this work, the taxpayer increased the rent by almost 50%, and was ultimately able to rent it out (at the end of 2012) at the increased rent.

In rejecting the Crown’s submission that the repair expenditures were not deductible because the unit was not rented out during that year, Masse DJ noted (at para. 23) that “a property does not need to be generating income at every stage of operation in order to be considered a source of income.” Similarly, management fees, mortgage interest, and property taxes incurred in relation to the unit while it was not rented out also were fully deductible.

The taxpayer also had a rental property in Phoenix. He and his spouse flew down to Las Vegas on a vacation, but he then rented a car so that he could drive down to Phoenix (accompanied by his spouse) so that he could attend to issues regarding the rental unit – then they flew directly from Phoenix back home (in Vancouver). CRA allowed only the car rental expense. Masse DJ also allowed the cost of air fare of the taxpayer (but not his spouse) back to Vancouver as a deduction. Accommodations and food incurred in Phoenix also were deductible.

The individual taxpayer (“Raich”), who was a senior tax partner of a Montreal law firm, sought and received reimbursement from the firm’s management company (Spiegel Sohmer Inc, of which Raich was the largest shareholder) for 97/218 of the $169,000 cost of the Montreal wedding of Raich’s daughter in 2012. This amount was calculated by him on the basis that 97 of the 218 guests at the reception were clients, business contacts or partners of Raich. In maintaining that the reimbursed amount was deductible in computing its income, Spiegel Sohmer Inc. submitted that such expenses were incurred “in order to solidify the professional and commercial relations of Mr. Raich with his clients” (para. 30, TaxInterpretations translation).

In finding that the reimbursed expenses were non-deductible, and that their reimbursement gave rise to a taxable benefit to Raich, Bourgeois JCQ noted that no former partner of Raich had testified as to what discussions had occurred regarding the expense reimbursements and the business opportunity arising from the marriage of Raich’s daughter, and stated that it accordingly was impossible for the Court “to determine if such event presented an important promotional aspect to the firm” (para. 43).

A taxpayer used U.S.$82M that had largely been indirectly financed by Twentieth Century Fox to fund, as partner, prints and advertising expenses (“P&A expenses”) respecting a film that Fox allegedly had sold to the partnership for US$128.3M, but with Fox having an alleged option to repurchase the film. The second related taxpayer, engaged in a quite similar transaction.

In denying the claimed losses, Hogan J stated (paras. 243-244):

[T]he options were shams designed to mask the parties’ agreement that Fox would reacquire the films prior to their commercial release.

Consequently, the P&A expenses allegedly borne by the partnerships were not incurred for the purpose of earning income.

A retired member of Nova Scotia bar was permitted to deduct $1200 of annual storage fees for client files notwithstanding that her practice had ceased two years’ previously. After noting that retention of the client files was professionally recommended, Bocock J stated that deductibility was “consistent with the notion of unavoidable expenses necessarily expended in future years referable to previous income contemplated in … Poulin, Raegele and Langille.”

The taxpayer, a self-employed dental surgeon, received benefits totalling over $600,000 under three Great-West policies during a two-year period of illness. Two of the policies provided coverage for her monthly general professional expenses, and the third policy, styled as professional sickness insurance, provided monthly amounts in the event of her illness. After affirming the Minister’s assessment, which treated the amounts paid out to the taxpayer under the first two policies as s. 9 income, Favreau J went on to indicate (at para. 33) that the premiums under the two policies (which the taxpayer had not deducted in computing her income) were deductible.

The corporate taxpayer agreed with the City of Chandler that it would no longer use any loan repayment proceeds received by it from a City-owned corporation - that had failed in an costly attempt to restart a paper mill close to the City – to invest in a prospective replacement economic-development LP to be sponsored by the City, but would instead make a “gift” of the loan repayment proceeds (which ended up totalling $9.3 million) to the City, for which it received charitable receipts. Ouimet J found that there was no “gift” and, thus, no s. 110.1(1)(a) deduction, as the taxpayer had received valuable consideration for its $9.3 million payments, being a release of “its obligation to negotiate in good faith to create [and fund] a limited partnership” (para. 46).

In also rejecting the taxpayer’s argument, in the alternative, that deduction of the $9.3 million was not prohibited by s. 18(1)(a), he found (at para. 58) that the funds had been paid in order to leave to the City the task of using the sums to economically develop the region and to avoid involvement in the proposed LP and not “with the purpose of re-establishing its reputation in the Gaspe region following its involvement in the unsuccessful relaunching of the mill,” so that the amounts were not paid for the purpose of earning business income.

The taxpayer requested, at the trial's opening, to amend its pleadings to claim, in the alternative, that donations made by it to U.S. charities, which it had claimed as charitable deductions under the Taxation Act, were deductible as business (promotional) expenses. In affirming the denial below of this request, the Court stated (at para. 11, TaxInterpretations translation):

[T]he TA provides a complete and specific code of rules regarding the deduction of gifts to charities subject to certain limits and restrictions, notably regarding the maximum permitted amount and the obligation of the charity to be registered with the Minister. The specific tax treatment provided in the TA respecting gifts must prevail similarly to the pronouncements of the Supreme Court in Symes... .The Court specified there that child care expenses could not be deducted as business expenses under the applicable tax principles, in the face of a specific and complete regime for child care expenses provided in section 63 of the Income Tax Act. The same reasoning should be favoured in addressing the treatment of gifts. The Supreme Court further commented in discussing Olympia ... and Impenco Ltd…: “If a specific provision exists which limits deductibility in respect of that purpose, then that should be the end of the matter.”

In the appeal before him by five limited liability partnerships (the “LLPs”) respecting the disallowance of expenditures as trading losses, Nugee J indicated (at para. 6) that he was content to proceed on the basis of a simple example provided by the LLPs’ counsel using the figure of 100 to represent sums contributed to an LLP by individual members.

The members contributed 20 from their own resources and borrowed 80 from a bank. The LLP paid 5 as an advisory fee, and paid the remaining 95 to the principal exploitation company (“Shamrock”). Shamrock paid 90 to the company which was responsible for producing the end product (e.g., a book). This production company simultaneously agreed to acquire a share of revenues from the exploitation of the product from Shamrock for a price of 80, with the effect that it was left with a net of 10, and Shamrock held 85. Shamrock applied 80 of the 85 as collateral for a letter of credit. The interest on the deposit was used by Shamrock to pay an income stream to the LLP, that matched the interest payments which the LLP members were required to pay on their bank loan. The deposit also was used to pay the LLP the “Final Minimum Sum,” due from Shamrock to the LLP, which ensured repayment of the principal.

In affirming the finding below that the 80 was not an expense incurred wholly and exclusively for the purposes of the LLP’s trade, Nugee J stated (at para. 85:

[T]he 80 was not paid for exploitation at all. It was not needed by Shamrock, who only needed to spend 10 of the 15 to secure the production… . Shamrock…found it a nuisance. It was not in any sense used by Shamrock in fact for exploitation. That last point of course does indeed look at what the recipient does with the money, but in circumstances where this is to the knowledge of, and indeed intended and required by, the payer. …There is no commercial difference between the members paying 15 for Shamrock’s services without having borrowed 80 and without any rights to guaranteed repayment of the 80, and the members paying 95, of which they have borrowed 80 and are guaranteed to be repaid 80… .

Graham J found that the taxpayer's legal expenses incurred in the course of his separation from his former spouse were not deductible as a business or property expense. Payors of child support have never been entitled to any such deductions (para. 8).

At the trial's opening, the taxpayer requested an amendment to its pleadings to argue in the alternative that donations made by it to U.S. charities, which it had claimed as charitable deductions under the Taxation Act, were deductible as business (promotional) expenses. Before denying the charitable deduction claims, and in finding that the additional claim should not be entertained, Pokomandy JCQ stated (at paras. 66-67, 71):

The amendment implicitly changes the nature of the disbursement… .

This new position is difficult to reconcile with the original claims which Starflex appears to have not renounced. One cannot claim to have donated a sum and alternatively to have expended it in earning income from a business.

…[T]he Notice of Objection…contains no mention of the possible qualification of these expenditures as business expenses.

The dental practice of the taxpayer paid fees of approximately 70% of its revenues to a services company (which was wholly-owned by the dentist through a holding company) pursuant to annual contracts which (in an apparently back-dated Appendix) provided for the provision of management and health services to the practice by the services company. Gouin JCQ stated (at para. 34, TaxInterpretations translation) that "the evidence…demonstrates clearly that [the services company] had no employees and did not purchase any supplies for eventual use in management or health services."

Before confirming ARC's denial of the deduction of the fees in toto under TA, ss. 128 and 140 (similar to ITA, ss. 18(1)(a) and 67), Gouin JCQ stated (at para. 30) that "it is necessary to prove that the management expenses constitute genuine expenses and not a sham in the sense that the concluded agreements represented genuine transactions between the parties," and then quoted with approval the statement in Fillion v. The Queen, 2004 FCA 135, at para. 72 [clumsy official translation below] that:

In order to claim an expense, it is not enough to make an accounting entry backed by a vague invoice [and]… it must be established that the evidence was real, fully supported and justified and, moreover, that the expenditure was incurred in order to produce business income… .

Hogan J found that the fact that the taxpayer often took his children along on his prospecting trips did not change that the prospecting activities constituted a business. The prospecting activities were carried out in a commercial manner, and ultimately lead to the discovery of gold deposits.

Each taxpayer bought units in a limited partnership, which was to acquire a large yacht to be used for catered vacation charters. However, the capital raised was grossly insufficient for accomplishing the marketed objectives, and Rossiter ACJ characterized the arrangements as a "Ponzi-like scheme [which] was set to collapse eventually" (para. 344).

After finding that "the Limited Partnerships did not carry on a genuine business which constituted a source" (para. 389), Rossiter ACJ went on to find that most of the claimed expenses giving rise to partnership losses were fictitious, and that "expenses that were not fictitious or phony were incurred as window dressing for the purpose of perpetuating a fraudulent scheme" (para. 392), so that they did not satisfy s. 18(1)(a) even if they had been incurred in the course of a business.

The taxpayer's teenaged daughter and her friends (all without a driving licence) took the taxpayer's Jeep without his permission and got into an accident, as a result of which the taxpayer incurred over $15,000 in repair expenses. After stating (at para. 72) that "what I must do is to determine what use was being made of the vehicle when it was stolen, not when it was actually in the accident," Graham J found that as the taxpayer had not authorized this use, the taxpayer could deduct a portion of the repair expenses based on the percentage of business use of the vehicle prior to the day of the accident.

The taxpayer bought a 10-room inn and lived in it. He started a company ("La Zénon) to operate the inn, which had a restaurant and bar.

Paris J found that inn was not a source of income to the taxpayer, and hence not a source of business losses. The taxpayer charged La Zénon $2000 per month for rent, which was not enough to cover insurance, taxes and maintenance. The taxpayer therefore had no reasonable expectation of profit.

The taxpayer held two corporations ("Tesla" and "Orion"), and Tesla Packaging held 55% of the shares of another corporation ("Phoenix"). Tesla and Phoenix were both in the business of manufacturing and marketing stretch wrap packaging equipment, while Orion was in the business of car racing. The taxpayer and all of the corporations were directed and administered by the same individual ("Mucha"), who was also the taxpayer's only shareholder and Orion's only driver. Phoenix had never paid dividends to Tesla, which in turn had never paid dividends to the taxpayer.

D'Auray J. found that, in accordance with Lyncorp, sponsorship and maintenance fees ($331,277 and $246,786 in 2005 and 2006) that the taxpayer paid to Orion to promote Phoenix were not deductible as business or property expenses. She stated (at paras. 80-81):

Simply stated, the potential receipt of dividends was too remote.

It is also difficult to understand how the payments made by Motech to Orion Racing for the race car maintenance and repairs expenses were for the purpose of gaining dividends from Tesla. There is clearly no nexus between the operating expenses of Orion Racing and the alleged dividends income from Phoenix Innotech via Tesla.

D'Auray J. also suggested that the deductions might be disallowed under s. 18(1)(h) or s. 67, but the point was moot.

V.A. Miller J. found (at para. 27) that the seizure of approximately $110,000 of proceeds of drug trafficking at the taxpayer's apartment did not give rise to a deductible business expense, as the deduction was prohibited under s. 67.6. She also found (at para. 27) that the amount would not have been deductible in any case, reiterating her position in Anjara that forfeitures are not normally incurred to gain or produce income.

The taxpayer was a U.S. limited liability corporation (LLC) which performed jazz concerts in Canada. A CRA appeals officer stated in his testimony (para. 957) "that a U.S. LLC cannot deduct for Canadian tax purposes, the salaries paid to members of the LLC because a U.S. LLC is a partnership for U.S. federal income tax purposes...."

Favreau J. stated (at para. 26) that "the long-standing position of the CRA is that a U.S. LLC is treated as a corporation for all purposes of the Act regardless of whether the LLC is treated as a corporation or a partnership for U.S. tax purposes." Therefore, salaries paid to band members were deductible from income. However, the taxpayer failed to meet its business record-keeping obligations under s. 230 so its deductions were denied on that basis.

After finding that the taxpayer was entitled under s. 126(2) to a foreign tax credit in respect of its share of US corporate income tax paid by a Delaware limited partnership of which it was a limited partner, Webb J. went on to find that such taxes were not deductible for purposes of the Act in computing the income of the partnership. He stated (at para. 61):

It seems to me that income taxes paid to the U.S. government as a result of earning income would not be made or incurred for the purpose of gaining or producing income but would be incurred as a result of gaining or producing income.

The individual taxpayer was the principal shareholder of the corporate taxpayer, a canola farm supplier with annual sales in the tens of millions. Sheridan J. found that the taxpayers' expenses in establishing and operating a snowmobile museum were deductible as business expenses and capital cost allowances, because the costs were incurred to promote the canola business. In reaching that conclusion, she noted that the individual taxpayer often used the topic of snowmobiles as a "conversational in" to build a rapport with potential customers (who, being canola farmers, were often snowmobilers themselves), and that the costs in operating the museum were small compared to the taxpayers' revenue. Moreover, given that the costs had a clear connection to earning business income, the Court could not second-guess the taxpayers' business judgment.

The taxpayer could not deduct a payment made to the Receiver General in satisfaction of his director's liability for source deductions under s. 227.1. Sheridan J. stated at para. 5: "By the time the Appellant made the payment to the Receiver General in respect of [his corporation's] source deductions, the company had long since ceased operations; from this it follows that there was no possibility of the Appellant having acquired his debt for the purposes [of producing income from business]."

The taxpayer, a lawyer, received a four-year sentence and was suspended from practising law as a result of his conviction for obstruction of justice in respect of his defence of a client. (A related conviction of the taxpayer for money laundering was reversed on appeal.) McArthur J. noted (at para. 190) that, "while it is difficult to determine the Appellant's primary motivation," his legal expenses "arose directly from his law practice." McArthur J., applying Iacobucci J.'s obiter dicta in Symes, found at para. 21 that the taxpayer's related legal expenses would not "have been incurred if the taxpayer was not engaged in the pursuit of business income [his income from the practice of law]." Accordingly, the fees were deductible in computing the taxpayer's professional income.

The taxpayers disguised a tax deferral scheme as a health plan for their employee wives. Bowie J. found that the plans had not been entered into with considered judgment as to their commercial benefit to the taxpayers' firm. Therefore, the contributions to the plans had not been made for the purpose of earning income.

Management fees paid by the taxpayer to an affiliated company which had non-capital losses were non-deductible by it given that the only evidence of services provided in consideration for the management fees was of services provided by the indirect sole shareholder of the two corporations, who had already been fully paid for his services by the taxpayer. Furthermore, the fees were paid by the taxpayer without it being legally bound to do so.

In finding that the taxpayer was entitled to deduct capital cost allowance in respect of houses situated close to the taxpayer's greenhouse operation and occupied by employee-shareholders of the corporation (all of whom had similar religious beliefs), Bowman, C.J. stated (at para. 23-24):

Once I conclude that it is a business decision to house the employees in company-owned houses and to provide other facilities in the Commons it is not up to me or the Minister to question that decision, even if I were to disagree with it, which I do not... . This case is an excellent example of the CRA seeking to substitute its business judgment for that of the taxpayer.

Bowman C.J. noted (at para. 35) that amounts that an employee may have stolen from the till of a delicatessen business would have given rise to deductible expense.

V.A. Miller J. stated (at para. 6):

First of all, the forfeiture of the proceeds of crime was not an expense or outlay incurred by the Appellant. The proceeds of crime were the profits or net income earned by the Appellant. The forfeiture was not incurred to gain or produce income from business and did not assist the Appellant in producing income from his business of selling drugs. Justice Angers recently decided the appeal of Brizzi v. R., [2007] 4 C.T.C. 2334 ([2007 TCC 226] [Informal Procedure]), an appeal where the facts were very similar to those in the present appeal. I agree with his decision and especially in paragraph 7 when he stated the following:

... The loss incurred through the forfeiture is in my opinion a consequence of carrying on an illegal business activity and therefore certainly not an expense that assisted or resulted in producing income.

The taxpayer was permitted to deduct as a business loss amounts paid by her in settlement of claims brought by a franchisor against her bankrupt husband, who had personally guaranteed franchise obligations of companies in which they had invested. McArthur J. noted (at para. 18) that in determining the potential deductibility of damages "it is appropriate to focus on the origin of the claim" and found that the origin of the claim was a franchise agreement which was entered into by the two companies for the purpose of earning income from a hotel business. He went on to find that if the purpose of making the settlement was instead relevant, that purpose was to allow the taxpayer and her husband "to continue carrying business in the motel industry" (para. 23) and that although the settlement also preserved the assets to the corporations, this was a secondary purpose.

The taxpayer was able to deduct costs of maintaining a dog (who helped protect llamas at his farm from danger) and cats (who were useful for rodent control). Bowie J. also stated (at para. 27):

Nor do I accept the respondent's argument that the veterinary fees associated with the terminal diagnosis of cancer and the resulting euthanasia and cremation of Ryder should be disallowed on the basis that those services could not contribute to producing income. If the animal's primary purpose is connected to producing income, as I have found, then the humane treatment at the end of its life is surely an incident of that.

A fee paid by the taxpayer to Ernst & Young LLP for advice in connection with strategizing as to how to monetize his shares through a forward exchange contract were not incurred to assist him in gaining or producing income from the shares and, therefore, were not deductible.

The taxpayer, who had made a proposal to creditors, was permitted to deduct trustee's fees incurred by him in making the proposal as the proposal was made for business purposes.

A compensation payment made by the taxpayer to the taxpayer's shareholder, his wife and children, who were employees of the taxpayer, in respect of their termination of employment by an affiliated corporation was deductible.

A "management fee" paid by the taxpayer, a self-employed real estate agent, to her husband was non-deductible. There was no documentary evidence to support the deduction other than invoices generated on a "totally retrospective" basis following a Revenue Canada audit. Sarchuk J. indicated (at p. 871) that:

There is substantial merit to the Respondent's position that what existed between the Appellant and her husband was nothing more than a domestic arrangement which was not and could not be considered to have created a legally binding agreement between them.

The taxpayers were able to establish that a dental plan was available to all employees of the corporate taxpayer notwithstanding that only members of two families that owned the corporation availed themselves of the dental benefits. Accordingly, the dental premiums were deductible under s. 18(1)(a), and there was no inclusion in the individual taxpayers income by virtue of s. 6(1)(a)(i).

Expenses incurred by the taxpayer in taking seven people including him, his wife, and some Amway distributors (only two of whom were sponsored by him) to Las Vegas were not deductible given the silence in the evidence as to the role the guests played in enabling the taxpayer to earn income from his business, and given the substantial element of social entertainment in the trip.

The taxpayer had deliberately permitted a business colleague to mislead an investor ("Bhandar") into thinking that the taxpayer and his colleague had already invested significant sums in a business venture in which they were asking Bhandar to invest. After finding that damages for deceit that the taxpayer was required to pay to Bhandar were, in any event, not deductible because there was no evidence that the taxpayer's efforts to obtain Bhandar's money by deception were connected with a business or a venture in the nature of trade of the taxpayer, Rip T.C.J. went on to indicate (at p. 381):

However, even if I erred in so concluding, the actions of Mr. Bains in usurping money out of Mr. Bhandar is the egregious or repulsive breach that Iacobucci, J. states [in the 65302 case] could not be justified as being incurred for the purpose of producing income.

The taxpayer, who was a dentist, entered into an arrangement with an off-shore company under which that company would pay him 95% of all invoices rendered by him in the month and retained the excess of the amount collected over 95% for itself. On the basis of a finding that this arrangement was entered into by him in order to protect himself against collections falling below 95%, the amounts received by the off-shore company were deductible on the basis that (p. 257):

Insurance expenses incurred to replace income, for whatever reason, are deductible.

At the time of the sale of a control block of the taxpayer, it and the purchasing shareholder "granted" to the vendor a consulting contract for the services of a former executive of the taxpayer associated with the vendor. The payments made under the contract were not deductible given that it was never contemplated that the contract would be implemented and all that it provided for was the obligation to make payments irrespective of the level of services provided.

The taxpayer paid a fee to a financial advisor, calculated as 0.7% of the market value of its equity and of the amount of its long-term debt net of working capital, in consideration for advice provided in connection with considering alternatives to maximize shareholders' value, with an emphasis on merger possibilities. The transaction ultimately implemented entailed the taxpayer's shareholders selling their shares, pursuant to a plan of arrangement, to another publicly-traded oil and gas company in consideration for treasury shares of that purchaser.

In finding that the fee had been incurred by the taxpayer for an income-producing purpose, Bowman A.C.J. noted that the taxpayer was in a downward spiral (its assets were being sold in order to pay down a loan which, in turn, reduced its income-producing capacity and risked breach of its covenants to long-term creditors) and that retaining the advisor "was intended to improve the ability of the appellant to earn income by combining its resources with that of another entity".

The taxpayer's estranged wife obtained a court order to have the taxpayer jailed and, without authorization, took control of the taxpayer's business and arranged for all collections of accounts receivable to go into the account of her lawyer. Because she was continuing to operate the business after taking control (for example, she made payroll and source deduction payments) the money which she collected (and the taxpayer never received) reduced the taxpayer's profit from that business.

A partnership that was owned by the taxpayer and trusts for his children owned (through a second partnership that was owned by the first partnership and the taxpayer's wife) a triplex, one unit of which was rented (by the second partnership) to her. Archambault T.C.J. found that the expenses of that partnership incurred in connection with the unit rented to the taxpayer's wife (and a pro rata portion of interest on money borrowed to fund his partnership interest) were not incurred for an income-producing purpose.

The taxpayer, the operator of a wood contracting and construction business, was able to deduct the amount of racing expenses incurred by it (less prize money claimed) in respect of a stock car owned by it but driven by its sole shareholder and president, on the basis that such expenses were a form of advertising, and should not be disallowed simply because of the owner's satisfaction and interest in the activity.

A $1.4 million bonus declared by the company and never paid by it was found to have been made pursuant to a legal obligation, with the result that it was found not to be deductible.

A research program supervised by the taxpayer, who was associated with a Montreal hospital, was found to be a business in itself that was intended to produce exploitable intellectual property. Conversely, the taxpayer was not an employee of the hospital or an associated institute, notwithstanding that research grants were received by him from the institute. Accordingly, legal fees incurred by him when the institute terminated research grants were deductible.

Bowman T.C.J. stated (at p. 848):

It was argued at some length that the income earned and expected to be earned by the appellants was income from property and that the range of expenses deductible in computing income from property is more restricted than in the case of income from a business. I know of no authority that would justify a more restrictive treatment of expenses relating to the earning of property income.

The taxpayer was unable to deduct the cost of replacing the roof of premises that were rented to it because such repair was the responsibility of the landlord (its shareholder).

The taxpayer, which was a Canadian manufacturer of tool boxes and metal lockers, established an American marketing subsidiary and decided that, during the start-up period, it would pay various expenses (such as trade convention reservation fees, and travelling expenses) directly rather than charge them to the subsidiary. In finding that such expenses were deductible by the taxpayer, Dussault T.C.J. noted that each American sale made by the subsidiary also represented a sale for the taxpayer (because the taxpayer was an exclusive supplier of the subsidiary), that the taxpayer made more profits on such sales than the subsidiary and that the taxpayer's decision to absorb such expenses was a perfectly legitimate business decision analogous with the sharing of expenses for advertising, marketing or promotion by a taxpayer with its distributors.

Lamarre T.C.J. accepted the evidence of the taxpayer (a criminal lawyer) that he used his automobile 80% for business purposes (namely, visiting courthouses and police stations in order to find clients, and transporting a child to a babysitter).

After the taxpayer closed its only factory and ceased its business, it made redundancy payments to laid-off employees pursuant to a statutory formula.

In affirming a finding that s. 17(1)(b) of the Hong Kong Inland Revenue Ordinance, which prohibited the deduction of "any disbursements or expenses not being money expended for the purpose of producing such profits", did not prohibit the deduction of the redundancy payments, Lord Nolan stated (at p. 470):

The obligation to make them [the redundancy payments] was contingent, like many of the employer's other contractual or statutory obligations, but was nonetheless incurred as a necessary condition of retaining the services of the employees concerned.

In refusing to follow the decision in Godden v. A. Wilson's Stores (Holdings) Ltd. (1962), 40 T.C. 161 (CA), he noted that the taxpayer's argument -- that the severance payments were deductible because its obligation to make them arose from the terms upon which their employees had been engaged and had remained in employment -- had not been put to the Court of Appeal in that case.

The taxpayer, which provided management services to its two subsidiaries which, in turn, ran a cellular phone system and sold cellular telephones, agreed with an American cellular telephone company ("Millicom") to pay an annual fee equal to 10% of its consolidated pre-tax profits for 15 years in consideration for the supply to the taxpayer from time to time at its request with future know-how.

The Court reversed a finding of the Commissioners (which had been affirmed in the Court below) that a lump-sum payment made by the taxpayer for the cancellation of this agreement was not deductible because it was not wholly and exclusively expended for the purposes of its trade. Millett L.J. noted that if Millicom had not agreed to cancel the fee agreement, there would have been no basis on which the taxpayer could properly have required the subsidiaries to reimburse it for making available to then know-how which they had not asked for and did not need. Because the liability in question was a liability of the taxpayer alone, the cancellation of that liability was made exclusively to serve the purposes of its trade.

Rowe D.J. found that a fine that the taxpayer agreed to pay as a result in respect of a decision by one of its unsupervised employees to flush sludge that had been spilled on the ground into a nearby ditch, did not represent an amount incurred for the purpose of earning income after stating (at p. 241) that "there should have been a policy in place to allow for proper handling of such an incident which is not so rare as to not be reasonably foreseeable when dealing with 3,000 gallons of sludge per day and ultimate transport of that substance in the course of supply to consumers". He went on to find that, in any event, the fine would have been non-deductible on grounds of public policy, and noted that the Crown had allowed the deduction of associated legal fees.

Penalties payable by the taxpayer (which operated gasoline stations) as a result of its failure to remit federal sales and excise taxes on some of its sales were found to be deductible given that the principals of the business were surprised by the failure of the controller (an experienced chartered accountant) to pay such taxes. Bell T.C.J. stated (at pp. 1764-1765):

The acts of a servant of the company cannot constantly be monitored nor should they be in situations like those of the Appellant where a man with expertise was engaged to attend, among other things, to the very matters giving rise to the imposition of the penalty.

An indirect shareholder of the taxpayer requested his son, the general manager of the taxpayer, to return from Australia to Canada five days prior to his scheduled return in order to handle certain difficulties which had arisen in the negotiations of the purchase of the Millcroft Inn located near Toronto. O'Connor T.C.J. accepted evidence that the return was required for valid business reasons, with the result that the cost of the ticket was deductible. (The terms of the ticket for the scheduled return did not permit a refund.)

Expenses incurred by the corporate taxpayer as a result of inviting business guests to a wedding reception held in honour of the daughter of a shareholder were found by Garon T.C.J. to have been incurred by it for the purpose of gaining or producing income from its business. The decision in Fingold v. MNR, 92 DTC 2011 was distinguished on the basis that in this case, the invitations to the business guests were sent through the corporate taxpayer and those guests were well aware that they were guests of the taxpayer company.

In rejecting a finding of special commissioners that agreements for the licensing or other distribution of a film had not been entered into by a corporation in the course of its trading activities because the agreements, themselves, were not expected to produce profits, Vinelott J. stated (at p. 246):

That in my judgment is not sufficient by itself to found the conclusion that the distribution agreements were not entered into in the ordinary course of its business. It is not difficult to conceive of cases in which a trader may be very pleased to enter into a long-term contract which covers or nearly covers its overhead costs leaving him to make a profit if he can sell the same product to others at a price above the marginal cost of production.

A consortium of oil companies including the taxpayer installed a manifold, loading lines and buoy over an off-shore oil field under a license that required their removal when exploitation of the field was completed. On this basis, Vinelott J. accepted the Crown's concession (p. 392):

that given that the obligation to remove the [equipment] was imposed by the license and that acceptance of it was in substance part of the consideration given by the consortium for the right to win oil from the North Sea, the expenditure when incurred will be expenditure wholly and exclusively incurred for the purpose of the company's trade even if on the abandonment of the Argyll Field the company's trade comes to an end.

A debt to the taxpayer from a non-resident corporation, which arose because of the taxpayer's inadvertent failure to withhold from interest payments made to the non-resident and which the taxpayer was unable to collect, was not deductible and did not relate to a deductible expenditure.

The taxpayer was unsuccessful in his submission that the sum of $159,347 which he was ordered by the Supreme Court of British Columbia to pay as damages for fraudulently inducing clients to purchase condominiums from him and his relatives at a substantial profit, were amounts that arose "as a result of matters that were incidental to the practice of the taxpayer's profession". Accordingly, such amount was not deductible on income account.

Kickback payments made by the taxpayer to purchasing agents employed by its customers were made for the purpose of generating sales and therefore were deductible.

Before finding that an expenditure by the taxpayer was non-deductible on other grounds, Bowman J. stated (p. 1468):

Risky enterprises sometimes succeed and become taxable. Where they fail it would be unconscionable for the entrepreneur to be penalized because the Minister, basing his decision on the wisdom of hindsight, concludes that the project was not commercially viable.

Losses suffered by a corporation, resulting from a senior vice-president fraudulently having cheques issued to him and charged to cost of goods, were deductible. "[I]t is a risk in operating a business that dishonest people may be employed."

A management consulting company provided money on an annual basis to a trust fund which purchased the company's own shares and shares of a holding company to be held for the benefit of the professional staff. These payments were deductible because the company's objective was to obtain the goodwill of its staff and to ensure that control of the company would remain in their hands (their independence being important to the welfare of the company's trade).

The taxpayer was reassessed for unpaid federal sales taxes plus a penalty of 8% per annum. In finding that the penalty was non-deductible, Frost FCA stated:

As the business of the appellant could have been carried on without any infraction of the law, the penalty is not an outlay made for the purpose of producing income ...

The taxpayer was resident in the United Kingdom but carried on the business of a large retail store in Buenos Aires. The taxpayer was liable in Argentina to a tax known as the "substitute tax", which was exigible on 1% of the capital of companies which carried on business in Argentina through a permanent establishment. In finding that the payment of this tax met the requirement for deduction under the Income Tax Act, 1952 (U.K.) that it be "money wholly and exclusively laid out or expanded for the purposes of [its] trade", Lord Justice Diplock stated:

Liability to the tax does not depend upon whether profits are made or not. It is a payment which the company is compelled to make if it has a business establishment in Argentina at all, and it must have a business establishment if it is to carry on its trade. I can see no relevant difference between this tax and rates upon its business premises.

The 1% capital tax accordingly was deductible in computing the taxpayer's income for English income tax purposes.

Before finding that the taxpayer was permitted to deduct expenses which it incurred in opposing a nationalization of its business that would have entailed a successor entity acquiring its assets in continuing to carry on its trade, Lord Reid stated (p. 57):

It is not difficult to suppose a case where a trader is shortly to be succeeded in his trade by another person and where he spends money the benefit of which will accrue in whole or in part to his successor. It could not be said that for that reason the money was not wholly and exclusively laid out for the purposes of the trade.

The taxpayer, which was the subsidiary of a non-profit fruit growers' non-share corporation, and whose business involved the marketing of fruit products of its parent and, to a lesser extent, of third parties, agreed that for each fiscal year it would pay to its parent the excess of the total receipts of its business over its total operating expenses. Thorson P. found that this arrangement was effective to reduce the taxpayer's income to nil.

The agreement for the sale of the shares in the capital of the taxpayer provided that the purchaser would cause the taxpayer to pay compensation for loss of office to directors of the taxpayer. The finding of the Commissioners that such compensation payments were not money "wholly and exclusively expended for the purposes of the trade" of the taxpayer, was not reversed.

A barrister had chambers in London where he carried on his practice but resided at Whipsnade where he maintained a library and worked on professional matters during the evenings and weekends in term time, and throughout the weekdays as well during the long vacation. He unsuccessfully claimed expenses in respect of travelling between his residence and his chambers both in term time and during the vacation. Somervell L.J. noted (at p. 462):

that Whipsnade as a locality has nothing to do with Mr. Newsom's practice ... If he had found a house that suited him in Hertfordshire or Oxfordshire, everything would have gone on in precisely the same way.

Denning L.J. stated (at p. 464) that the taxpayer's "home was no more a base of operations than was the train by which he travelled to and fro." [C.R: 18(1)(h)]

Damages which a sugar broker paid as a result of maliciously libelling a business rival were non-deductible notwithstanding that successully injuring the reputation of the rival might have increased his profits. Macnaghten J. stated (p. 206):

The loss fell upon the Appellant in this case in the character of a calumniator of a rival sugar broker. It was only remotely connected with his trade as a sugar broker.

The purchaser of the shares of a corporation undertook as part of the arrangement that the acquired corporation would pay for the cancellation of service agreements with the manager and members of the family group that previously had controlled the corporation. Lawrence J. stated that it followed from this "that the Company's payment was not wholly and exclusively laid out for the purposes of the Company's business, because it was really laid out on account of the obligation which had been undertaken by [the purchaser]" (p. 738).

The taxpayer agreed to pay 20% of its net profits to other corporations in consideration for their provision of managerial services and advice on technical matters. In finding the payments by the taxpayer to be deductible as "money wholly and exclusively laid out or expended for the purposes of the trade", Sir Greene, M.R. noted that although where a person purchases a share of profits, a payment of profits to that person will not be deductible, here "it is not cash that passes in exchange for these profits; it is services, and the badge of such a contract is remuneration for services ..." (p. 546).

In acquiring the business of managing hydro-electric companies from a predecessor corporation, the taxpayer assumed the obligation to pay a commission equal to 25% of the management fees earned from the hydro-electric companies. The commission payments did not constitute "any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits or gains" for purposes of s. 10(2) of the Indian Income-tax Act because "they did not arise out of any transactions in the conduct of their business" and:

The obligation to make these payments was undertaken by the appellants in consideration of their acquisition of the right and opportunity to earn profits, that is, of the right to conduct the business, and not for the purpose of producing profits in the conduct of the business.

In finding that damages paid by an Australian newspaper for libel actions were deductible by it, the Court stated (p. 171):

None of the libels or supposed libels was published with any other object in view than the sale of the newspaper. The liability to damages was incurred, or the claim was encountered, because of the very act of publishing the newspaper. The thing which produced the assessable income was the thing which exposed the taxpayer to the liability or claim discharged by the expenditure.

Although the taxpayer, which was an insurance and reinsurance broker, had cause to dismiss one of its directors, and to require him to transfer his valuable shares to the other directors for their nominal par value, the taxpayer did not dismiss him out of a concern that the matter might become public and adversely affect its reputation. A substantial sum (payable over five years) that was made in order to secure the retirement of the director was found to have been incurred "wholly and exclusively ... for the purposes of the trade" within the meaning of Rule 3(a) given that the taxpayer agreed to the sum in order to maintain its profitable trade.

Before going on to find that a substantial lump sum contribution by the taxpayer to an employee pension plan was a non-deductible expenditure, Viscount Cave found that its deduction was not prohibited by the prohibition against the deduction of expenses not "wholly and exclusively laid out or expended for the purposes of such trade" (p. 212):

A sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade ... [T]he payment was made for the sound commercial purpose of enabling the company to retain the services of existing and future members of their staff and of increasing the efficiency of the staff... .

The taxpayer was unable to deduct penalties which it agreed to pay to the Attorney-General as a result of being unable to establish that goods which it exported from Britain during the First World War to neutral countries would not be used by the enemy, and also was unable to deduct related legal fees. Scrutton, L.J. stated (p. 244):

Were these fines made or paid for the purpose of earning the profits? The answer seems to me obvious, that they were not, they were unfortunate incidents which followed after the profits had been earned.