Wrights' Canadian Ropes Limited v. The Minister of National Revenue

Wrights' Canadian Ropes Limited v. The Minister of National Revenue
Collection
Supreme Court Judgments
Date
1946-01-24
Report
[1946] SCR 139
Judges
Rinfret, Thibaudeau; Kerwin, Patrick; Hudson, Albert Blellock; Kellock, Roy Lindsay; Estey, James Wilfred
On appeal from
Canada
Subjects
Taxation
Decision Content
Supreme Court of Canada
Wrights' Canadian Ropes Limited v. The Minister of National Revenue, [1946] S.C.R. 139
Date: 1946-01-24
Wrights' Canadian Ropes Limited Appellant;
and
The Minister of National Revenue Respondent.
1945: October 9 1946: January 24.
Present: Rinfret C.J. and Kerwin, Hudson, Kellock and Estey JJ.
ON APPEAL FROM THE EXCHEQUER COURT OF CANADA
Income Tax—Income War Tax Act (R.S.C. 1927, c. 97, and amendments)—Deductions in computing income—Sums paid by taxpaying company to another company as commissions for performance of obligations assumed by latter under agreement—Disallowance in large part by Minister of National Revenue of such sums as deductions—Whether Minister acted under, and applicability of, s. 6 (1) (i) or s. 6 (2) of Act—Whether Minister's discretion under s. 6 (2) properly exercised—Complaint that report of local inspector of taxation to Minister was not shown to taxpayer or transmitted to be filed in Exchequer Court—Whether function falling upon Minister was within his power of delegation to Deputy Minister of National Revenue for Taxation.
Appellant, a company incorporated under the Dominion Companies Act, 49·86 per cent. of whose shares were held by a certain English company, made an agreement with the English company in 1935, whereby, in consideration of performance of obligations assumed by the latter (not to sell in Western Canada, to transmit to appellant orders received from that territory, to select and test products supplied to appellant, to furnish information and technical knowledge, and to advise), appellant agreed to pay to the English company a commission of 5 per cent. upon all cash received in respect of the net selling price of certain products both manufactured and sold by appellant after the date of the agreement. Pursuant to the agreement, appellant paid to the English company in 1940, 1941 and 1942, commissions of $17,381.94, $29,325.85, and $39,480.91, respectively, for which it claimed deductions in computing its income under the Dominion Income War Tax Act. The sums were disallowed as deductions except as to the sum of $7,500 in each year. From such disallowance, as affirmed by the Minister of National Revenue (acting by the Deputy Minister of National Revenue for Taxation), appellant appealed to the Exchequer Court. Its appeal was dismissed ([1945] Ex. C.R. 174); and it appealed to this Court. It contended (inter alia) that the commissions were an obligation imposed by a valid contract; that on the evidence they were reasonable and there was no evidence to the contrary; that s. 6 (1) (i) of said Act governed and that as the English company did not control appellant, no disallowance was warranted; that s. 6 (2) was not applicable; and that in any case the Minister's discretion was not properly exercised; that a report to the Minister from the local inspector of taxation should have been before the Exchequer Court, to give opportunity to appellant to controvert any statements therein; that the function falling upon the Minister was not within his power of delegation to the Deputy Minister. Held (Kerwin J. dissenting): The appeal should be allowed and the matter referred back to the Minister to be dealt with by him according to the reasons of the majority of the Court.
Per the Chief Justice: In view of an admission, binding respondent, as to the proportion of shares in appellant held by the English company, appellant must be taken not to be controlled directly or indirectly by the English company, and therefore the disallowance of the deductions was not authorized under s. 6 (1) (i) of the Act, the provisions of which were applicable to the case, and the Minister could not act under s. 6 (2) in contravention of what was prescribed under s. 6 (1) (i); further, there was evidence, uncontradicted, that the advice and services of the English company were worth the amounts paid; further, s. 6 (2) did not apply to the facts: the sums claimed as deductions were not "expenses" within the meaning of s. 6 (2) (which contemplates expenses in the ordinary course of business); they were the price or consideration of the contract and of the due performance by the English company of its obligations; without them there would have been no contract and appellant would not have been in business. (The opinion was expressed that the assessment should be set aside to all intents and purposes, but, in view of conclusions by Hudson, Kellock and Estey JJ. that the matter should be referred back to the Minister, such disposition was agreed to).
Per Hudson J.: S. 6 (1) (i) of the Act did not exclude the exercise of the Minister's discretion under s. 6 (2) under which he proceeded. The sums for which appellant claimed deductions could not be considered as part of its "net profit or gain" under s. 3, and there should be special reasons to support the disallowance. The Minister's ruling did not disclose reasons. The Court should know the reasons, so as to decide whether or not they are based on sound and fundamental principles. The report of the local inspector should have been before the Court under s. 63 (g) of the Act; appellant was entitled to see it and reply to it. The matter should be referred back to the Minister for reconsideration.
Per Kellock J.: Having regard to the matters for which the commissions were paid, s. 6 (1) (i) did not apply; and the Minister did not purport to act under it but expressly acted under s. 6 (2). His discretion under s. 6 (2) should be exercised on proper legal principles. Appellant had a statutory right to have deducted, in the computation of its net profits or gains, "expenses wholly, exclusively and necessarily laid out or expended" for the purpose of earning those profits or gains. For the Minister to disallow any excess over what was reasonable or normal for appellant's business, he first had to determine what was reasonable or normal. His formal decision threw no light as to the grounds upon which it rested. He could not ignore the agreement between appellant and the English company nor its legal consequences; and there was nothing before the Court upon which it could be said that there was any unreasonableness attaching to the commissions or to the agreement to pay them. What evidence there was, was to the contrary. The ground of the Minister's decision was unexplained and his decision was made to appear as a purely arbitrary one. Whether the local inspector's report disclosed grounds for the Minister's decision the Court had no means of knowing. Therefore it was the duty of the Court to refer the case back to the Minister. Further, s. 63 (g) of the Act made the report of the local inspector evidence, and appellant was entitled to have it produced to him before the assessments were made and to have an opportunity to meet whatever it contained; and his not having been accorded this right was in itself a ground for setting aside the assessments and sending the case back for further consideration.
Per Estey J.: The Minister acted under s. 6 (2) of the Act, as stated in his decision and the correspondence; also s. 6 (1) (i) was inappropriate, in view of the matters for which the commissions were paid; moreover, there was no evidence before the Minister upon which he could determine by whom appellant was controlled "directly or indirectly" within the provision in s. 6 (1) (i). The Minister's discretion under s. 6 (2) is a judicial discretion, to be exercised on proper legal principles. Apart from the local inspector's report, which was not produced before the Court, there were no facts before the Minister which provided a basis upon which a discretionary determination could be made that the items in question were excessive within the terms of s. 6 (2). The said report, admitted by the Deputy Minister to have contained representations from the taxpayer, was "relative to the assessment" and should have been filed as required by s. 63 (g) of the Act. As it was not so filed, and also as further information might well have been requested from and given by appellant, the case should be referred back to the Deputy Minister as provided under s. 65 (2) of the Act.
Per Kerwin J., dissenting: On the evidence it could not be said definitely that appellant was not "controlled directly or indirectly" by the English company within the meaning of s. 6 (1) (i) of the Act; in any event, s. 6 (2) (enacted in its present form subsequently to the enactment of s. 6 (1) (i)) conferred upon the Minister a power which he might exercise even if appellant had been able to bring itself within s. 6 (1) (i), and that power is a purely administrative one. Even if it were held to be of a quasi-judicial nature, appellant was given a fair opportunity to be heard and to make its representations, and there was nothing to indicate that the discretion was not exercised on proper legal principles. Appellant's payments to the English company fell within the term "expense" in s. 6 (2). As the substantial matter in the appeal to the Deputy Minister (acting for the Minister) was the same as what was involved in the exercise of his discretion, the decision in Local Government Board v. Arlidge, [1915] A.C. 120, not only justifies but requires a decision that he was not obliged to produce any report from the local inspector.
It was held (per Kerwin, Hudson, Kellock and Estey JJ.; the Chief Justice not expressly dealing with the matter) that the Minister's duty in this case came within his power of delegation under s. 75 (2) of the Act.
APPEAL from the judgment of the Honourable Mr. Justice Cameron, Deputy Judge of the Exchequer Court of Canada[1], dismissing the present appellant's appeal from the affirmance by the Minister of National Revenue (acting by the Deputy Minister of National Revenue for Taxation) of the assessment made against the appellant in respect of income tax and excess profits tax for the years 1940, 1941 and 1942, which assessment disallowed (except as to the sum of $7,500 for each year), as deductions in computing the appellant's taxable income, sums paid ($17,381.94 in 1940; $29,325.85 in 1941; and $39,480.91 in 1942) by the appellant to Wrights' Ropes Limited, of Birmingham, England, as commissions pursuant to the provisions of an agreement dated 12th September, 1935.
The material facts of the case and the questions involved in the appeal are sufficiently stated in the reasons for judgment in this Court now reported.
By the judgment of the Court (Kerwin J dissenting), the appeal was allowed with costs, and the matter was referred back to the Minister to be dealt with by him according to the reasons of the majority of the Court. (The matter of costs in the Exchequer Court, overlooked when the reasons were first given, was later spoken to, and the Judges forming the majority of the Court decided that there be added to their reasons a holding that the appellant was entitled to its costs in the Exchequer Court).
H. R. Bray K.C. for the appellant.
R. Forsyth K.C. and H. H. Stikeman for the respondent.
The Chief Justice.—The Appeal Case states the present litigation as follows:—
(1) This is an appeal by the appellant from the judgment of the Honourable Mr. Justice J.CA. Cameron delivered on the 3rd day of August, 1945, on an appeal by the appellant from the decision of the Honourable the Minister of National Revenue affirming the assessment made against the appellant under the provisions of The Income War Tax Act in respect of its taxable income and in respect of Excess Profits Tax for the years 1940, 1941 and 1942.
(2) Pursuant to the provisions of an Agreement made between the appellant and Wrights' Ropes Limited of Birmingham, England, dated September 12, 1935, the appellant has made certain annual payments to Wrights' Ropes Limited.
* * *
(12) From the said judgment the appellant appeals to the Supreme Court of Canada. The reasons for appeal as given in the notice of appeal from the assessment, were as follows:
(1) That the commissions paid by the appellant to Wrights' Ropes Limited were an obligation imposed on the appellant by a valid contract.
(2) That the opinion of the Minister herein was not based on a consideration of the facts.
(3) That the opinion of the Minister herein was unreasonable and was not formulated in accordance with the law.
(4) That no opportunity has been given to the appellant to refute any material that may have been laid before the Minister of National Revenue or the Commissioner of Income Tax relative to the said assessment and which may be prejudicial to the interests of the appellant.
The decision of the Minister of National Revenue was that, having duly considered the facts and having exercised his discretion under the provisions of subsection 2 of section 6 of the Income War Tax Act, he affirmed the assessment and disallowed the sums already mentioned paid to Wrights' Ropes Limited of Birmingham, as expenses or deductions for the purposes of the said Act. "Therefore, on these and related grounds and by reason of other provisions of the Income War Tax Act and Excess Profits Tax Act," said assessment was affirmed.
Subsequent to the filing of a Notice of Dissatisfaction, the case was carried to the Exchequer Court of Canada, where the judgment was that the appeal failed and should be dismissed with costs.
The appellant is incorporated under the Dominion Companies Act.
The sections of the Income War Tax Act having to do with the issues raised are as follows:—
Section 6 (1):
In computing the amount of the profits or gains to be assessed, a deduction shall not be allowed in respect of
* * *
(i) any sums charged by any company or organization outside of Canada to a Canadian company, branch or organization, in respect of management fees or services or for the right to use patents, processes or formulae presently known or yet to be discovered, or in connection with the letting or leasing of anything used in Canada, irrespective of whether a price or charge is agreed upon or otherwise; but only if the company or organization to which such sums are payable, or the company in Canada, is controlled directly or indirectly by any company or group of companies or persons within or without Canada, which are affiliated one with the other by the holding of shares or by agreements or otherwise; provided that a portion of any such charges may be allowed as a deduction if the Minister is satisfied that such charges are reasonable for services actually rendered or for the use of anything actually used in Canada.
Section 6 (2):
The Minister may disallow any expense which he in his discretion may determine to be in excess of what is reasonable or normal for the business carried on by the taxpayer, or which was incurred in respect of any transaction or operation which in his opinion has unduly or artificially reduced the income.
The Excess Profits Tax Act, 1940, provides as follows:
Section 8:
In computing the amount of profits to be assessed, subsections one and two of section six of the Income War Tax Act shall, mutatis mutandis, apply as if enacted in this Act * * *
The payments claimed by the appellant as deductible expenses were made pursuant to paragraph (5) of the agreement between the appellant and the Birmingham company and the evidence establishes that the payments were made in fact in accordance with said agreement. Paragraph (5) reads as follows:
In consideration of the due performance by Wrights' of their obligations under this Agreement the Canadian Company will pay to Wrights' a commission at the rate of five per centum upon all cash received in respect of the net selling price of all wire ropes both manufactured and sold by the Canadian Company after the date of this Agreement * * *
There is no dispute that the amounts paid by the appellant to the Birmingham company were an obligation imposed by a valid contract. The learned trial judge was of the opinion that the assessments were made, in so far as the matters in dispute are concerned, under section 6 (2) and not under section 6 (1) (i). He said that was clearly established by the letter of August 13, 1943, and by the decision of the Minister, dated September 26, 1944.
The contention of the appellant is that the Minister should have considered the matter under section 6 (1) (i) of the Act and should have found:
(1) That the commissions paid by the appellant to the English company were in respect of the matters mentioned in the first part of the subsection and
(2) That the appellant was not controlled by Wrights' Ropes Limited and (3) That, therefore, as the items claimed as deductions were not paid to a controlling company, they could not be disallowed, but, in fact, should be allowed in full.
The learned trial judge, however, found that the evidence was not at all clear that the appellant was not controlled by the English company.
There is, however, in the record a consent signed on behalf of both parties whereby they agreed that at all times pertinent to the issues in this appeal, Wrights' Ropes Limited held 49·86 per cent. of the shares and not 50 per cent. of the shares of the appellant.
This was an admission binding the respondent; and it seems, therefore, difficult to understand why the judgment of the learned trial judge expresses a doubt as to that fact.
It would follow that section 6 (1) (i) does apply to the case under consideration, for the appellant, as a result of the consent so filed by the parties, must be taken not to be controlled directly or indirectly by the English company. It is only when the Canadian company is controlled by the company without Canada that a deduction of the sums charged by the company outside of Canada for "services" shall not be allowed as a deduction.
Nor in my view can it be said that, irrespective of the provisions contained in section 6 (1) (i), the Minister may disallow the deduction under section 6 (2).
If the case is covered by section 6 (1) (i), with due respect, it can not come under 6 (2); it is already provided for and that is the end of it. I can not see how the Minister can act under section 6 (2) in contravention of what is prescribed under section 6 (1) (i).
I can not find any good reason for excluding section 6 (1) (i) as the learned trial judge has done and, to my mind, that would be sufficient to allow the appeal, because the sums paid by the appellant to the English company in respect of services were not paid to a company controlling the appellant, and it is of no concern to inquire what services were supplied, how frequently they were supplied or how important they were.
However, the managing director testified that the advice and services were worth the amounts paid and his evidence was not contradicted. But further and in any event, I can not see my way to apply section 6 (2) to the present case.
The section says:
The Minister may disallow any expense which he in his discretion may determine to be in excess of what is reasonable or normal for the business carried on by the taxpayer, or which was incurred in respect of any transaction or operation which in his opinion has unduly or artificially reduced the income.
Of course, the discretion must be exercised on proper legal principles. (Pioneer Laundry and Dry Cleaners Ltd. v. Minister of National Revenue[2]).
Whatever may be said about the question whether the record discloses that, in the premises, the Minister exercised or not his discretion, I am distinctly of opinion that section 6 (2) does not apply to the facts herein.
What the Minister may disallow is "any expense".
The sums claimed as deduction by the appellant are not expenses within the meaning of the section, they were sums paid by the appellant as a condition sine qua non of the agreement between it and the English company. These sums were the price or consideration of the contract and of the due performance by the English company of its obligations under the agreement. No other consideration moving from the Canadian company to the English company was either contained or represented in the agreement. Without them, there would have been no contract at all. It is the essential condition of its very existence. But for the payment so agreed upon and made by the appellant to the English company, there would have been no contract; and but for that contract, the appellant would not have been in business.
The effect of the Minister's decision is really to nullify the consideration clause in the agreement and to leave the latter in a modified or amended form to which, of course, the parties never agreed.
I fail to see where in section 6 (2) the Minister found the power and authority to act as he has done.
The sums paid by the appellant were not expenses in the ordinary course of their business, and those are the expenses which are contemplated by section 6 (2).
Here, the sums which the Minister refused to allow as deductions constitute the very price and the only price paid by the appellant for the contract which they made with the English company; and I am unable to read section 6 (2) as being intended to cover a case such as this.
Both therefore for the reason that under 6 (1) (i) the appellant has been proved and indeed admitted not to be controlled by the English company and, as a consequence, the sums paid by the appellant are properly deductible and can not be disallowed, but also because, in any event, section 6 (2) does not apply to the present case, I am of opinion that the appeal should be allowed with costs and that the assessment should accordingly be set aside to all intents and purposes; but, in view of the conclusions reached by the other Members of the Court who think that the matter should be referred back to the Minister under the provisions of section 65 (2) of the Act, I will agree with them in the disposition of the present case.
Kerwin J. (dissenting).—This is an appeal by Wrights' Canadian Ropes Limited, a company incorporated under the Dominion Companies Act, from a judgment of the Exchequer Court dismissing its appeal from the respondent's affirmation of the appellant's assessments for the years 1940, 1941 and 1942, wherein commissions paid by the appellant to an English company called Wrights' Ropes Limited, Birmingham, were disallowed as deductions from income for those years, except as to the sum of $7,500 in each year.
The commissions were paid pursuant to an agreement dated September 12th, 1935, between Wrights' Ropes Limited, Birmingham, (Wrights'), Charles Hirst and Son Ltd. (Hirst's) and the appellant, which agreement was supplemental to an earlier one dated May 19th, 1931. The pertinent terms are, I think, fairly summarized in the appellant's factum and I transcribe them substantially as follows:—
(a) The English company should not sell wire rope in Western Canada (west of the Ontario-Manitoba boundary).
(b) Any orders from Western Canada received by the English company to be transmitted by it to the appellant.
(c) The English company must select and test all wire purchased by the appellant from Hirst's. (d) The English company is to place at the disposal of the appellant, at request, all its technical knowledge and generally advise the appellant on manufacture and marketing.
(e) In payment for such services and for territory, the appellant is to pay the English company a commission of 5 per cent. on all sales made by it of its manufactured product.
Pursuant thereto the following amounts were paid to Wrights' by the appellant: in 1940, $17,381.94; in 1941, $29,325.85; in 1942, $39,480.91; and these were claimed by the appellant as deductions from income in its returns for those years. On August 13th, 1943, the Inspector of Income Tax at Vancouver notified the appellant that the Minister of National Revenue was about to exercise his discretion under subsection 2 of section 6 and subsection 2 of section 75 of the Income War Tax Act in connection with these payments and invited the appellant to submit written representations for consideration. The appellant in reply forwarded the agreements of 19th May, 1931, and 12th September, 1935.
On October 9th, 1943, the Inspector further notified the appellant that it was proposed to recommend to the Minister that commissions paid to Wrights' (called by the Inspector "the controlling company") in 1940, 1941 and 1942 be disallowed as deductions except as to the sum of $7,500 in each year. The appellant replied on 21st October, 1943, that it had nothing further to add but on 29th October, 1943, it advised the Inspector that Wrights' did not have the controlling interest in the appellant company but held fifty per cent. of the shares, the other fifty per cent. being held by Hirst's.
The Minister by the Deputy Minister of National Revenue for Taxation exercised his discretion in the manner suggested and on 10th May, 1944, notices of assessment were mailed to the appellant, all payments to Wrights' by way of commissions on sales being disallowed as deductions except for the sum of $7,500 in each year.
The appellant gave notice of appeal on 29th May, 1944, and on 26th September, 1944, the Minister of National Revenue, acting by the Deputy Minister, affirmed the assessments. On 11th October, 1944, the appellant filed his Notice of Dissatisfaction and, by Reply dated 8th January, 1945, the Minister, again through the Deputy Minister, affirmed the assessments as levied. From that affirmation an appeal was taken to the Exchequer Court.
A formal admission in writing was filed in that Court, signed by the solicitors for both parties, that Wrights' held 49·86 per cent. of the shares referred to in the letter of October 29th, 1943, and not 50 per cent. as therein stated. It was proved at the trial that there was no relation between Wrights' and Hirst's "as far as stock interest goes." The appellant desired that these two matters be shown in order to avail itself, if possible, of subsection 1, paragraph (i), of section 6 of the Income War Tax Act. The Deputy Judge of the Exchequer Court, Cameron J., decided that it did not apply but that the discretion of the Minister, conferred on him by subsection 2 of section 6, had been properly exercised. These two enactments read as follows:—
6. In computing the amount of the profits or gains to be assessed, a deduction shall not be allowed in respect of
(i) any sums charged by any company or organization outside of Canada to a Canadian company, branch or organization, in respect of management fees or services or for the right to use patents, processes or formulae presently known or yet to be discovered, or in connection with the letting or leasing of anything used in Canada, irrespective of whether a price or charge is agreed upon or otherwise; but only if the company or organization to which such sums are payable, or the company in Canada, is controlled directly or indirectly by any company or group of companies or persons within or without Canada, which are affiliated one with the other by the holding of shares or by agreements or otherwise; provided that a portion of any such charges may be allowed as a deduction if the Minister is satisfied that such charges are reasonable for services actually rendered or for the use of anything actually used in Canada;
2. The Minister may disallow any expense which he in his discretion may determine to be in excess of what is reasonable or normal for the business carried on by the taxpayer, or which was incurred in respect of any transaction or operation which in his opinion has unduly or artificially reduced the income.
For the appellant it is argued that subsection 2 is a general provision which is inapplicable because the circumstances bring the case within the special category dealt with in paragraph (i) of subsection 1. Related to the facts of this case that paragraph, it is said, means this:—In computing profits or gains, a deduction is not to be allowed for management fees or services charged by a company outside of Canada to a Canadian company although by the proviso power is given the Minister to allow as a deduction a portion of any such fees or services; however, by virtue of the middle part of the paragraph, introduced by the words "but only", the prohibition does not apply at all if direct or indirect control of the Canadian company by the receiving company (outside of Canada) is lacking. It is said that the English company does not control the appellant directly or indirectly since it holds only 49·86 per cent. of the total issued capital stock of fifteen hundred shares. It is pointed out that it is admitted that the payments to the English company were made in pursuance of a valid contract and, therefore, it is argued, while subsection 1, paragraph (i), of section 6 is in negative terms, these payments should be allowed.
Now, in the first place, the "sums charged" shall not be allowed as a deduction if either the receiving company or the paying company is controlled "by any company or group of companies or persons within or without Canada, which are affiliated one with the other by the holding of shares or by agreements or otherwise." The mere fact that Wrights' does not own a majority of the shares of the appellant and that there was no relation between Wrights' and Hirst's "as far as stock interest goes" is not sufficient to bring the appellant within the negative words of subsection 1, paragraph (i). Furthermore, it may be noted that the only other shareholders of the appellant are three residents of Canada and in the agreement of May 19th, 1931, at which time the appellant was known as William Cooke and Co. (Canada) Limited (for brevity called "Cooke's"), it was recited that "Wrights' and their nominees hold one-half of the issued share capital in Cooke's, and Hirst's and their nominees hold the other half of such issued capital." Because of these additional factors, I agree with the Deputy Judge that it cannot be said definitely that the appellant is not "controlled directly or indirectly" by Wrights' within the meaning of the paragraph. In any event, paragraph (i) was already in the Act, having been enacted in 1935, when subsection 2 was passed in 1940. It is true that subsection 2 was enacted in lieu of an earlier subsection 2 but the wording thereof is so different and the powers conferred upon the Minister by the present subsection are so greatly extended that it must be taken as a later expression of the will of Parliament. A comparison of the present wording of subsection 2 given above with the earlier enactment transcribed below, will, I think, make the matter clearer:—
2. The Minister may disallow as an expense the whole or any portion of any salary, bonus, commission or director's fee which in his opinion is in excess of what is reasonable for the services performed.
Therefore, by subsection 2 of section 6, Parliament conferred upon the Minister a power which he might exercise even if the appellant had been able to bring itself within paragraph (i), and that power is a purely administrative one. Even if it were held to be of a quasi-judicial nature, the appellant was given a fair opportunity to be heard and to make its representations, and there is nothing to indicate that the discretion was not exercised on proper legal principles. The fact that subsection 3 of section 6 concludes "The decision of the Minister on any question arising under this subsection shall be final and conclusive", and that subsection 4 ends with the sentence, "The determination of the Minister hereunder shall be final and conclusive", cannot alter the construction of subsection 2, Subsections 3 and 4 deal with entirely different matters and it will be time enough to deal with the effect of the concluding sentences therein when the occasion arises. The payments made to Wrights' fall within the term "expense" in subsection 2; if this were not so, the appellant would have difficulty in showing that they were disbursements or expenses wholly, exclusively and necessarily laid out or expended for the purpose of earning the income.
It was argued that since the sum of $7,500 was allowed in each year, although the three years differed widely in volume of sales as reflected in income, it was evident that the discretion had not been properly exercised, but the answer is that the Deputy Minister might very well consider that, whatever the volume, the amount allowed was reasonable or normal for the appellant's business.
It was contended that the Minister was not empowered to delegate his duty under section 59 of considering the appeal from the original assessment. In order to appreciate this argument, it is necessary, first of all, to refer to subsection 2 of section 75:
2. The Minister may make any regulations deemed necessary for carrying this Act into effect, and may thereby authorize the Commissioner of Income Tax to exercise such of the powers conferred by this Act upon the Minister, as may, in the opinion of the Minister, be conveniently exercised by the Commissioner of Income Tax.
In accordance therewith the Minister, on August 8th, 1940, signed the following authorization to the Commissioner of Income Tax:—
To whom it may concern:
Be it hereby known that under and by virtue of the provisions of the Income War Tax Act, and particularly section 75 thereof, and the provisions of the Excess Profits Tax Act, 1940, and particularly section 14 thereof, that I do hereby authorize the Commissioner of Income Tax to exercise the powers conferred by the said Acts upon me, as fully and effectively as I could do myself, as I am of the opinion that such powers may be the more conveniently exercised by the said Commissioner of Income Tax.
Dated at Ottawa this 8th day of August, A.D. 1940.
(sgd) COLIN GIBSON,
Minister of National Revenue.
By section 1 of chapter 24 of the Statutes of 1943-44, authority was given the Governor in Council to appoint a Deputy Minister of National Revenue for Taxation and it was provided that wherever in any statute, regulation, authorization or order there appears the expression "Commissioner of Income Tax", the said statute, regulation, authorization or order shall be read and construed as if the expression "Deputy Minister of National Revenue for Taxation" were substituted therefor. It is not disputed that Mr. C. Fraser Elliott was the Commissioner of Income Tax and is now the Deputy Minister of National Revenue for Taxation, nor is it denied, if subsection 2 of section 6 applies so as to permit the Minister to exercise the discretion referred to therein, that such discretion could be exercised by the Deputy Minister in making the original assessment. Having received notice of that original assessment, the appellant company objected to the amount thereof and duly served a notice of appeal upon the Minister. It is at this stage that section 59 may be conveniently looked, at:—
59. Upon receipt of the said notice of appeal, the Minister shall duly consider the same and shall affirm or amend the assessment appealed against and shall notify the appellant of his decision by registered post.
Now, the discretion having in fact been exercised under subsection 2 of section 6 by the Deputy Minister and the notice of assessment having been given by him on behalf of the Minister, the argument is that section 59, in enacting that "the Minister shall duly consider" the appeal, imposed a duty upon him which could not be delegated under the permission given by subsection 2 of section 75 to the Minister to authorize the person who is now the Deputy Minister to exercise "powers" conferred by the Act upon the Minister. Counsel for the appellant drew a distinction between powers and what he described as a duty under section 59. While it is true that a duty in the sense of an obligation is imposed upon the Minister by that section, it is none the less true that the powers thereby invested in him to hear the appeal must be included within the powers that he is authorized to delegate by subsection 2 of section 75.
The final contention on behalf of the appellant is that in deciding the appeal the Deputy Minister improperly received evidence not known or made available to the appellant and that no opportunity was given it to controvert the facts or statements, the subject matter of that evidence. It is made abundantly clear in the examination for discovery of Mr. Elliott, which was put in at the trial, that in hearing the appeal under section 59 he had before him nothing but what he had already considered in exercising the discretion under subsection 2 of section 6, excepting, of course, matters to which the appellant drew his attention. The material included one or more reports from the Vancouver inspector. In connection with the appeal certain remarks in The King v. Noxzema Chemical Company of Canada, Ltd.[3] maybe reiterated and emphasized. While that case was concerned with the Special War Revenue Act, reference was made to the decision of the Judicial Committee in Pioneer Laundry v. Minister of National Revenue[4], where the Income War Tax Act was in question although in connection with a decision of the Minister as to depreciation under section 5 (a) as it then stood. It was pointed out at page 185 of the Noxzema case (1) that while there was no appeal provided for in terms from such a decision, there was an appeal from the determination as to the amount of taxes to be paid. Similarly, in the present case, while there is no appeal from the exercise of discretion under subsection 2 of section 6, there is an appeal from the assessment to the Deputy Minister and ultimately to the Courts. On my construction of the relevant provisions, the substantial matter in the appeal to the Deputy Minister was the same as what was involved in the exercise of the discretion, and the decision of the House of Lords in Local Government Board v. Arlidge[5] not only justifies but requires a decision that the Deputy Minister is not obliged to produce any report from the Inspector.
This is the conclusion at which the local judge arrived in the present case, although he stated that it was not without some doubt, in view of the following extract from the speech of Lord Loreburn in Board of Education v. Rice[6]:—
They can obtain information in any way they think best, always giving a fair opportunity to those who are parties in the controversy for correcting or contradicting any relevant statement prejudicial to their view.
As the local judge pointed out, the decision in the Rice case[7] was referred to with approval by Davis J. in the Noxzema case (1).
The decisions in the Rice (5) and Arlidge5 cases must be read together. The former illustrates the principle that any power conferred upon a Government Department by statute must be exercised in strict conformity with the terms of the statute, and that any action by such department, which is not so exercised, should be treated by a court of law as invalid. Lord Loreburn's speech, including the extract copied above, was referred to in the Arlidge case[8] but all the peers had no difficulty in holding that although the appeal to the local Government Board under the Housing, Town Planning, etc., Act, 1909, required the Board to act judicially, there was no obligation upon it to produce a report made to it by one of its inspectors. This is particularly applicable in the present case when, as I have already indicated, the appeal to the Deputy Minister really involved the same matter as had come before him when exercising the discretion conferred by subsection 2 of section 6. This disposes of the last contention advanced on behalf of the appellant.
The discretion was exercised not only in connection