Premium Iron Ores Ltd. v. Minister of National Revenue

Premium Iron Ores Ltd. v. Minister of National Revenue
Collection
Supreme Court Judgments
Date
1966-06-28
Report
[1966] SCR 685
Judges
Abbott, Douglas Charles; Martland, Ronald; Ritchie, Roland Almon; Hall, Emmett Matthew; Spence, Wishart Flett
On appeal from
Canada
Subjects
Taxation
Decision Content
Supreme Court of Canada
Premium Iron Ores Ltd. v. Minister of National Revenue, [1966] S.C.R. 685
Date: 1966-06-28
Premium Iron Ores Limited Appellant;
and
The Minister of National Revenue Respondent.
1965: November 25, 26: 1966: June 28.
Present: Abbott, Martland, Ritchie, Hall and Spence JJ.
ON APPEAL FROM THE EXCHEQUER COURT OF CANADA
Taxation—Income tax—Sales agent of mining company—Payment of 20 per cent of income receipts paid to third party under contract for sharing financing obligation—Whether deductible expenses or capital outlay—Legal expenses incurred in resisting U.S. income tax claim—Whether deductible—Income Tax Act, R.S.C. 1952, c. 148, s. 12(1)(a), (b).
The appellant company was incorporated in Ontario to participate in the financing of the Steep Rock Iron Ore Mines Ltd. and in the marketing of the ore produced by it. Initially the financing had been undertaken by Transcontinental Resources Ltd. When it became necessary to obtain substantial additional capital, the appellant company was incorporated so as to have all the financing and marketing operations done through one agency. Thereupon, by contract dated January 15, 1943, the appellant became the exclusive sales agent for Steep Rock and became entitled to a commission of 2 per cent of the value of all ores sold. The agreement also provided for the appellant to purchase shares of Steep Rock and to lend it money. Eighteen days later, the appellant entered into an agreement with a Mr. Carr, president of Transcontinental Resources Ltd., whereby the appellant agreed to pay over to him 20 per cent of the moneys received from Steep Rock. In that agreement, Mr. Carr had waived his right to be appointed sales agent for Steep Rock. Additional funds were soon needed, and another agreement, dated December 29, 1944, was entered into whereby the appellant agreed to take 267,000 shares of Steep Rock for $600,000, of which 100,000 shares were to be taken by Transcontinental Resources Ltd. in its role as a continuing participant in the financing. The appellant covenanted at that time to pay to Transcontinental Resources Ltd., from the 2 per cent commission on Steep Rock Iron Ore sales, the 20 per cent which it had previously undertaken to pay to Carr.
The first issue under appeal was the question as to whether the appellant could deduct from its taxable income the 20 per cent paid in the years 1951 and 1952 to Transcontinental Resources Ltd. The Minister refused to allow the deduction. The Tax Appeal Board allowed the deduction but its decision was reversed by the Exchequer Court.
The second issue under appeal involved the question as to whether legal expenses incurred by the appellant in 1951 and 1952, in successfully contesting a claim asserted by the United States tax authorities, were deductible as business expenses. The Minister disallowed these expenses and his decision was supported by the Tax Appeal Board and by the Exchequer Court. The taxpayer appealed to this Court on both issues.
Held (on the first issue): The appeal should be allowed.
Held (on the second issue) (Ritchie and Abbott JJ. dissenting): The appeal should be allowed. [AS TO THE FIRST ISSUE]
Per Curiam: There is no doubt that agreements are to be construed in accordance with the plain and ordinary meaning of the words which they contain, and that the words used in a written agreement are to be construed in the light of the circumstances under which it was concluded. In the present case, it was apparent that from the time of its incorporation the appellant company was engaged with Transcontinental Resources Ltd. in the joint venture of financing Steep Rock and that the 20 per cent represented Transcontinental's share in the venture. Therefore, the appellant was never beneficially entitled to retain more than 80 per cent of the commissions which it received from Steep Rock, and the remaining 20 per cent could not be said to form a portion of its taxable income.
[AS TO THE SECOND ISSUE]
Per Martland and Spence JJ.: While the legal expenses were not made solely for the purpose of earning income, they were made with a view to protecting the income earning capacity of the appellant. Had the claim of the U.S. government been established, it would have created a liability in relation to the appellant's income. The expense incurred here was for the purpose of resisting the demands of a foreign taxing authority which, had it succeeded, would have substantially depleted the income of a Canadian company. A claim of that kind is a claim by a third party. It mattered not, so far as the Canadian authority was concerned, that the nature of the claim was one for income tax. In so far as the Canadian taxing authority was concerned, there was no difference in principle between an expenditure in the form of legal fees paid by a railway company to defend a damage claim by a passenger, and thus protect the company's income, and the expenditure for legal fees paid by the appellant to resist a foreign tax claim and thus to protect its income. A payment made for legal services in an attempt to protect income against encroachment by a third party is in principle properly deductible on the authority of The Minister of National Revenue v. The Kellogg Co. of Canada, [1943] S.C.R. 58 and Evans v. The Minister of National Revenue, [1960] S.C.R. 391.
Pe Hall J.: The working capital of the appellant and its profit earning potential were preserved by the successful resistance of the unjustified U.S. claim for income tax. The majority judgment in Smith's Potato Estates Ltd. v. Bolland, [1948] 2. All E.R. 367, is not the correct statement of the law as applied to the provisions of the Canadian Income Tax Act. The "income" means the net receipts over disbursements in the taxation year in the totality of the taxpayer's business as an on-going concern, other than capital expenditures, gifts and the like. There is no reason to regard legal expenses as differing from other expenses. No distinction is to be drawn between proper legal expenses and other business expenses. The expenditures in this case were ones which under sound accounting and commercial practices would be deducted as expenditures for the year in determining the profit, if any, of the company for that year.
Per Abbott and Ritchie JJ., dissenting in part: The reasoning in the majority judgment in Smith's Potato Estates case, supra, applies to the present case. The cost of ascertaining the true amount of tax to be paid is not an expense made in order to earn profits but rather for the purpose of preserving profits already earned. There is no material distinction between a payment made to resist income tax demand abroad and one to resist a similar demand at home.
Revenu—Impôt sur le revenu—Représentant d'une compagnie minière—Paiement de 20 pour-cent des sommes reçues à une tierce personne en vertu d'un contrat pour partager une obligation de financement—Ce paiement est-il une dépense déductible ou un déboursé en capital—Dépenses légales encourues lors de la contestation d'une réclamation pour impôt provenant des États-Unis—Ces dépenses sont-elles déductibles—Loi de l'Impôt sur le revenu, S.R.C. 1952, c. 148, art. 12(1)(a), (b).
La compagnie appelante a été incorporée dans l'Ontario dans le but de participer au financement de la compagnie Steep Rock Iron Ore Mines Ltd. et de mettre sur le marché le minerai produit par cette dernière. Au début, la compagnie Transcontinental Resources Ltd. avait entrepris ce financement. Lorsqu'il devint nécessaire d'obtenir un capital substantiel additionnel, la compagnie appelante fut incorporée pour que le financement et les opérations de marché puissent passer par les mains d'une seule agence. Conséquemment, en vertu d'un contrat en date du 15 janvier 1943, l'appelante est devenue le représentant exclusif de Steep Rock avec droit à une commission de 2 pour-cent de la valeur du minerai vendu. En vertu du contrat, l'appelante devait se porter acquéreur d'actions de Steep Rock et devait lui avancer des fonds. Quelque dix-huit jours plus tard, l'appelante et un monsieur Carr, président de Transcontinental Resources Ltd., signèrent un contrat en vertu duquel l'appelante s'engagea à payer à monsieur Carr 20 pour-cent des argents reçus de la Steep Rock. Dans ce contrat, monsieur Carr a renoncé à son droit d'être nommé représentant de Steep Rock. Des fonds additionnels ayant été requis, un autre contrat, en date du 29 décembre 1944, fut signé par les parties. Par ce contrat, l'appelante devait se porter acquéreur de 267,000 actions de Steep Rock pour une somme de $600,000. De ces actions, 100,000 devaient être acquises par Transcontinental Resources Ltd. en vertu de son rôle de participant continuel au financement. L'appelante s'engagea alors à payer à Transcontinental Resources Ltd. à même le 2 pour-cent de commission sur les ventes de Steep Rock, le 20 pour-cent qu'elle s'était engagée préalablement à payer à monsieur Carr.
Le premier point sous appel était celui de savoir si l'appelante pouvait déduire de son impôt taxable le 20 pour-cent qui avait été payé durant les années 1951 et 1952 à Transcontinental Resources Ltd. Le Ministre a refusé de permettre la déduction. La Commission d'Appel de l'Impôt a permis la déduction mais sa décision fut renversée par la Cour de l'Échiquier.
Le second point sous appel était celui de savoir si les dépenses légales encourues par l'appelante en 1951 et 1952, lorsqu'elle contesta avec succès une réclamation d'impôt présentée par le gouvernement des États-Unis, étaient déductibles comme dépenses d'affaires. Le Ministre n'a pas permis ces dépenses et sa décision a été supportée par la Commission d'Appel de l'Impôt et par la Cour de l'Échiquier. Le contribuable en appela devant cette Cour sur les deux points.
Arrêt (sur le premier point): L'appel doit être maintenu.
Arrêt (sur le second point): L'appel doit être maintenu, les Juges Ritchie et Abbott étant dissidents. [SUR LE PREMIER POINT]
La Cour: Il n'y a aucun doute que les contrats doivent être interprétés conformément au sens clair et ordinaire des mots qu'ils contiennent, et que les mots dont on se sert dans un écrit doivent être interprétés à la lumière des circonstances en vertu desquelles l'accord a été conclu. Dans le cas présent, il était évident qu'à partir du moment de son incorporation la compagnie appelante était engagée avec Transcontinental Resources Ltd. dans une opération en commun pour le financement de Steep Rock et que le 20 pour-cent représentait la part de Transcontinental Resources Ltd. dans l'opération. En conséquence, l'appelante n'avait jamais eu droit de garder plus que 80 pour-cent de la commission qu'elle recevait de Steep Rock, et on ne peut pas dire que le 20 pour-cent qui restait formait une partie de son impôt taxable.
[SUR LE SECOND POINT]
Les Juges Martland et Spence: Quoique les dépenses légales n'avaient pas été faites seulement en vue de produire un revenu, cependant elles avaient été faites en vue de protéger la capacité de l'appelante de gagner un revenu. Si la réclamation du gouvernement des États-Unis avait été établie, ceci aurait créé une charge sur les revenus de l'appelante. La dépense avait été encourue en vue de résister à la demande venant d'une autorité étrangère qui, si elle avait réussi, aurait substantiellement réduit le revenu d'une compagnie canadienne. Une telle réclamation est une réclamation par une tierce partie. En autant que l'autorité canadienne était concernée, cela n'avait pas d'importance que la réclamation en soit une pour impôt sur le revenu. En autant que l'autorité canadienne était concernée, il n'y avait aucune différence en principe entre une dépense pour frais légaux payés par une compagnie de chemin de fer pour se défendre contre une réclamation d'un passager, et ainsi protéger le revenu de la compagnie, et la dépense pour frais légaux payés par l'appelante pour résister à une réclamation pour taxe étrangère, et ainsi protéger son revenu. Un paiement fait pour services légaux dans le but de protéger le revenu contre les empiétements d'une tierce partie est en principe déductible en vertu de l'autorité des causes The Minister of National Revenue v. Kellogg Co. of Canada, [1943] R.C.S. 58 et Evans v. The Minister of National Revenue, [1960] R.C.S. 391.
Le Juge Hall: La contestation de la réclamation non justifiée des États-Unis a eu pour effet de conserver le capital d'exploitation de l'appelante ainsi que son potentiel de gagner un revenu. Le jugement de la majorité dans la cause Smith's Potato Estates Ltd. v. Bolland, [1948] 2 All E.R. 367, ne reflète pas la loi qui doit s'appliquer aux dispositions de la Loi de l'Impôt sur le revenu du Canada. Le mot « revenu » signifie les reçus nets après déboursements durant l'année de taxation dans la totalité des affaires du contribuable, autres que des dépenses de capital, donations et autres semblables. Il n'y a aucune raison de considérer que les déboursés légaux comme étant différents des autres déboursés. On ne peut établir aucune distinction entre des dépenses légales et des dépenses d'affaires. Les dépenses dans le cas présent étaient de celles qui, en vertu des principes de comptabilité et de commerce, seraient déductibles comme dépenses pour l'année dans la détermination du profit d'une compagnie pour ladite année.
Les Juges Abbott et Ritchie, dissidents en partie: Le raisonnement de la majorité de la Cour dans la cause Smith's Potato Estates, supra, s'applique au cas présent. Le coût de la détermination du montant véritable de taxe à être payé n'est pas une dépense faite en vue de gagner un profit mais plutôt en vue de conserver des profits déjà gagnés. Il n'y a aucune distinction matérielle entre un paiement fait pour résister à la demande pour impôt sur le revenu venant d'un pouvoir étranger et un paiement fait pour résister à une demande similaire domestique.
APPEL d'un jugement du Juge Cattanach de la Cour de l’Échiquier du Canada[1], dans une matière d'impôt sur le revenu. Appel maintenu, les Juges Abbott et Ritchie étant dissidents en partie.
APPEAL from a judgment of Cattanach J. of the Exchequer Court of Canada[2], in a matter of income tax. Appeal allowed, Abbott and Ritchie JJ. dissenting in part.
Hazen Hansard, Q.C., and D. O. Mungovan, Q.C., for the appellant.
D. S. Maxwell, Q.C., and B. Verchère, for the respondent.
The judgment of Abbott and Ritchie JJ. was delivered by
RITCHIE J. (dissenting in part):—This is an appeal from two judgments of the Exchequer Court of Canada1 based on a single decision rendered by Cattanach J. whereby he allowed the appeal of the Minister of National Revenue from a decision of the Tax Appeal Board and thereby approved a reassessment of the present appellant's taxable income for the years 1951 and 1952 adding thereto amounts of $46,532.56 and $45,192.03 which were described by the Minister of National Revenue as "Commissions paid pursuant to agreement of December 29, 1944 with Transcontinental Resources Limited" and whereby he also dismissed the present appellant's cross appeal from a decision of the Tax Appeal Board disallowing a deduction from its taxable income for the years 1951 and 1952 of $20,832.51 being the total amount paid in those two years as legal expenses incurred in respect of a disputed claim for income tax by the United States Internal Revenue Service.
The appellant company was incorporated in Ontario in November 1942 for the purpose of undertaking, in co-operation with other Canadian and United States interests, the financing of the development of an iron ore deposit at Steep Rock Lake in northwestern Ontario and for the further purpose of marketing the ore produced from that deposit and the question raised by this appeal with respect to the payment of commissions must, in my view, be considered in light of the circumstances surrounding the early stages of this important mining development.
The ore deposit in question was discovered in 1938 on property owned by Steep Rock Iron Ore Mines Limited (hereinafter called "Steep Rock") and the financing of the very considerable operation necessary to extract the ore from under the Lake was initially undertaken by a Canadian group consisting of Mr. Arthur Carr, the President of Transcontinental Resources Limited and his associates in that Company. Large sums of money were expended in sinking a shaft and running drifts under the Lake in an effort to mine the ore but this proved unsuccessful and it was decided that the only alternative was to embark on the extensive and very costly task of pumping over 100 billion gallons of water out of Steep Rock Lake.
In order to obtain the substantial additional capital necessary to finance this difficult operation, contact was made with Mr. Cyrus Eaton and the Otis Company of Cleveland, Ohio, of which he was the President. It was originally contemplated that the financing would be arranged by Steep Rock issuing $7,500,000 worth of first mortgage bonds of which $1,500,000 were to be marketed in Canada through Mr. Carr and Transcontinental Resources Limited (hereinafter referred to as "Transcontinental") and the balance in the United States through Otis and Company; Steep Rock, however, found it more convenient to deal through one agency and it was for this reason that after discussing the matter with Otis and Company and Transcontinental it was decided that the appellant company should be incorporated. The way in which this decision was made is perhaps best described in the evidence of Mr. William R. Daley, who is now President of Otis and Company and Chairman of the Board of Directors of the appellant company and who was the only witness called in these proceedings. In this regard he said:
Q. In your previous testimony when you have referred to Mr. Carr and his associates, we must imply that you referred to Transcontinental as being the principal associate? A. Yes, I am. We ran into some complications in that Steep Rock wanted to deal with one agency. So in the ultimate—I guess it is a long time before we got to the ultimate setup, but we then agreed we would form one agency, which would be a Canadian company—Premium Iron Ores Limited, which would have a branch company in the United States. Arthur Carr and his associates would have a contract to distribute the iron ore that was being sold in Canada. Steep Rock wanted to deal with one agency, so it was finally agreed that Premium Iron Ores Limited itself would have exclusive agency and that it would have the co-operation of Arthur Carr and his associates both in the financing and in the sale of the iron ore.
The italics are my own.
In the result, by reason of wartime conditions the Canadian Minister of Finance refused to permit the marketing of these bonds in Canada and therefore the major portion of the financing had to be arranged by way of a loan from the United States Reconstruction Corporation. This loan was granted on the understanding that the appellant would undertake to procure firm purchasing contracts for the delivery of 10,000,000 tons of ore during a period of the next ten years, not less than 500,000 tons of which was to be delivered in each year, and upon a further undertaking by the appellant to furnish additional funds up to $1,000,000 if the actual cost of bringing the mine into production proved greater than the then estimate of $7,500,000.
In furtherance of these arrangements an agreement was entered into between Steep Rock and the appellant on January 15, 1943, wherein it was recited that Steep Rock had appointed the appellant the exclusive selling agent in respect of the iron ore to be mined and produced and the appellant agreed to procure firm purchasing orders for 10,000,000 tons of ore in the manner aforesaid and to render financial assistance up to $1,000,000 if the same were required. The terms of this agreement which most directly concern the issues in this appeal are contained in paragraphs 5, 9, 10 and 11.
Paragraph 5 contains an express covenant by Steep Rock
…subject as herein provided, to pay Premium for services referred to herein an amount equal to two percentum (2%) of the value of all Steep Rock ores sold by Premium and Steep Rock during the life of this agreement, whether such ores are delivered within the life of this agreement or not. and by paragraphs 9, 10 and 11 the appellant undertook to provide on demand additional financing for Steep Rock of $1,000,000 by way of a loan against promissory notes to be issued and further undertook to deposit voting trust certificates representing 800,000 shares of Steep Rock in trust with an approved trust company by way of assurance to Steep Rock of its ability to make such a loan. It was also agreed by paragraph 18 that 1,437,500 shares of Steep Rock would be allotted to Premium forthwith at a price of 1 cent per share.
Eighteen days after the execution of the last-mentioned agreement, i.e., on February 2, 1943, an agreement was entered into between the appellant and Arthur W. Carr wherein it was recited that Carr had agreed to waive his right to be appointed sales agent by Steep Rock and whereby the appellant covenanted and agreed
…that in each year hereafter during the lifetime of the Agency Contract it will pay to Carr a sum equal to Twenty Per Centum (20%) of all monies paid to it by Steep Rock or its successor during such year by way of commission or other compensation under the terms of the said Agency Contract.
As an indication of the continuing participation of Transcontinental in the financing of the Steep Rock Project, it is to be noted that on May 29, 1943, it entered into an agreement with the appellant whereby it agreed to contribute voting trust certificates representing 200,000 of the 800,000 shares of Steep Rock which the appellant had agreed to deposit under the terms of the agreement of January 15th.
In the latter part of 1944 it became apparent that the $7,500,000 which had been estimated as the cost of bringing the mine into production was not enough and Steep Rock accordingly called on Premium Iron Ores to put up part of the $1,000,000 which it had agreed to furnish but in accordance with the contracts existing between Steep Rock and the Reconstruction Finance Corporation, the form of the advance had to be approved by the latter body with the results which are described in the following evidence of Mr. Daley:
When Steep Rock and Carr and myself reached Washington and took the matter up with Mr. McCartney, who represented the R.F.C. at that time, after a discussion with his associates he said the R.F.C. was not willing to let Steep Rock undertake any further obligations to pay out money. We pointed out, of course, to Mr. McCartney that R.F.C. had agreed to the provision in the Steep Rock/Premium Contract whereby it was to be represented, the advances were to be represented by an obligation of Steep Rock up to a maximum of six percent, as I recall it, for up to a five-year period.
Mr. McCartney said in spite of that they were not willing to let Steep Rock assume any more debt but that they would agree if Steep Rock desired to do it, to let them issue stock at the market price for the amount that was needed.
The Steep Rock officials and Mr. Carr and I then conferred on that proposal, which resulted in an agreement whereby Premium agreed to take 267,000 shares of Steep Rock stock for approximately $600,000.00, of which Transcontinental Resources was to take 100,000 shares with the balance to be taken by Premium Iron Ores.
A formal agreement was accordingly entered into on December 29, 1944, whereby Transcontinental in its role as a continuing participant in the financing, agreed to purchase 100,000 of the Steep Rock shares which the appellant had agreed to take up and the appellant covenanted to pay to Transcontinental from the 2 per cent commission on Steep Rock Iron Ore sales for which provision was made under the agreement of January 15, 1943, the 20 per cent which it had previously undertaken to pay to Carr under the agreement of February 2, 1943.
The sums of $46,532.56 and $45,192.03 which are now sought to be deducted from the appellant's taxable income represent the 20 per cent payable in accordance with the December 1944 agreement which were paid by the appellant in the years 1951 and 1952 respectively to one A. C. McFadyen who was the ultimate assignee of the rights of Transcontinental thereunder.
In disallowing the deduction of these amounts from the appellant's taxable income for the years in question, Cattanach J. basing his judgment upon his construction of the "plain ordinary meaning" of the words used in the agreements of January 15, 1943, and December 29, 1944, concluded that the payments were made in consideration of Transcontinental purchasing the 100,000 shares of Steep Rock and his analysis of the effect of the 1944 agreement is summarized in the following excerpt from his judgment:
On the one hand, as I view it, the respondent provides services as a sales agent to Steep Rock. On the other hand, the respondent has made an investment in Steep Rock shares. The purchase of such shares is an investment of capital and monies paid to a third party for purchasing some of those shares is equally a capital outlay and cannot be regarded as a current expense of the respondent's business. In my opinion the Minister was, therefore, right in assessing the respondent as he did and accordingly the appeal herein must be allowed with costs.
With the greatest respect it appears to me that in confining himself to the two agreements to which he refers, Mr. Justice Cattanach has failed to take into account the gradually developing chain of circumstances which led up to the mine being finally brought into production and in which Carr and his associates in Transcontinental had played a dominant role from the outset.
There is, of course, no doubt that the agreements are to be construed in accordance with the plain and ordinary meaning of the words which they contain. It is equally clear, however, that the words used in a written agreement are to be construed in light of the circumstances under which it was concluded. In this regard I accept the opinion expressed by Lord Blackburn in River Wear Commissioners v. Adamson[3], where he said:
…I shall therefore state, as precisely as I can, what I understand from the decided cases to be the principles on which the Courts of Law act in construing instruments in writing; …In all cases the object is to see what is the intention expressed by the words used. But, from the imperfection of language, it is impossible to know what that intention is without inquiring farther, and seeing what the circumstances were with reference to which the words were used, and what was the object, appearing from those circumstances, which the person using them had in view; for the meaning of words varies according to the circumstances with respect to which they were used.
The same proposition was more succinctly stated by Jessel M.R. in Cannon v. Villers[4]:
When construing all instruments you must know what the facts were when the agreements were entered into.
When the series of agreements which are exhibits in the present case are considered against the background of Mr. Daley's evidence it is, as I have indicated, apparent that the appellant was incorporated at the instance of Otis and Company and Transcontinental for the purpose of participating in the financing of Steep Rock in co-operation with the two financial groups represented by these companies and that the agreement of January 1943 was entered into as the first step in fulfilment of this purpose, while the agreements of February and May 1943 and December 1944 were entered into in recognition of the continuing participation of the Transcontinental interests in the development of a final plan for the successful outcome of a venture with which they had been closely associated from the beginning.
It is to be remembered that the 2 per cent commission payable to the appellant under the January 1943 agreement was
…two percentum (2%) of the value of all Steep Rock ores sold by Premium and Steep Rock…
and that within eighteen days of entering into that agreement, i.e., on February 2, 1943, 20 per cent of this 2 per cent commission was assigned to Carr and later made payable to Transcontinental under the agreement of December 1944 by which, to use the language of Mr. Daley, "the Carr agreement was absorbed".
It is thus apparent that from the time of its incorporation the appellant was engaged with the Transcontinental group in the joint venture of financing Steep Rock, and that before the ore deposits had been brought into commercial production, it had agreed to forego 20 per cent of its commission on their sale which represented the share of its associates in this venture. By reason of the agreement which it entered into in recognition of the part played by its associates, the appellant was never beneficially entitled to retain more than 80 per cent of the commissions which it received from Steep Rock, and the remaining 20 per cent cannot in my opinion be said to form a portion of its taxable income. In this regard I agree with the following statement made by Mr. R. S. W. Fordham in the course of his reasons for judgment rendered by him on behalf of the Tax Appeal Board:
I think too, it may be said that the appellant and Transcontinental were in a kind of joint adventure; each played an important part in making it possible for Steep Rock to acquire needed funds. The appellant—and not Steep Rock—became obligated to Transcontinental as a consequence. The monies paid to the latter were for a valued service rendered to the appellant in its fulfilment of an important part of the agency agreement with Steep Rock. Appellant was entitled to retain 80 per cent of the monies received from Steep Rock and no more. The remaining 20 per cent had become, by formal and enforceable agreement, the property of Transcontinental or its assignees. Hence, it was on the beneficial assignee that liability for tax on the 20 per cent fell and not on the appellant, which had no proprietary interest therein. I would accordingly allow the appeal with respect to the commissions paid by the appellant to Mr. McFadyen in the years 1951 and 1952 and direct that the reassessment by the Minister of National Revenue in this regard be set aside.
The legal expenses which the appellant seeks to deduct for the years 1951-52 were incurred in respect of a claim asserted by the United States tax authorities in the year 1950 relating to earnings of the appellant during the years 1943-1950 inclusive. The exact nature of the claim in respect of which the legal expenses were incurred can best be explained by somewhat lengthy reference to the evidence of Mr. Daley.
After having been questioned as to the arrangement whereby Premium Iron Ores was permitted to purchase 1,437,500 shares of Steep Rock for $14,375, Mr. Daley's examination continued:
Q. Turning to the question of the legal expenses involved in the United States and here, Mr. Daley, I did not quite understand when you said that the matter first came up in 1950 and you indicated, I think, some two or three million dollars in tax that they wanted. For what period was this two to three million dollars—how long? Was it from the beginning of operations or for the year 1950 or what?
A. I recall that Premium received this large block of shares of Steep Rock at one cent per share and while the Canadian Income Tax Department had said no tax will result from this transaction the United States government tried to assert a claim on profit for the difference between the market value on the Toronto Stock Market and the one cent.
Q. That was with respect to your capital gain between the one cent and the 1.66?
A. No, it was not. They said that was income for services.
***
Q. I am not getting into whether it is a capital gain or profit, but it represented what we might normally call the capital gain, whether it was considered profit or what it was considered. It represented the difference between the one cent and the 1.66?
A. Yes, that is correct.
Q. Was that the chief substance of what they were claiming against you?
A. From 1945 on the claim also included all of the commissions that had been received from Steep Rock.
Q. Generally it was with respect to the income from the beginning of Premium's existence; is that the idea?
A. You say 'generally'. Of course that amount was not as large as the other amount, but they did assert a claim against all of those commissions claiming that was United States' income. Mr. Daley was later asked:
Q. Can you tell me any better than you have, Mr. Daley, with respect to what precise years the United States government were claiming tax? I do not want to put words into your mouth. Was it 1943 and every year up to 1950?
A. 1943 was the most important one and it was every year up through.
Q. To the end?
A. To, I think, 1950-the time they started their investigation.
Q. Did you have accounts after the cases proceeded to court? Did you have accounts—presumably you did—from solicitors?
A. Yes.
The appellant contends that these legal expenses in the years 1951-52 were deductible as having been incurred "for the purpose of gaining or producing income" under the provisions of s. 12(1) (a) of the Income Tax Act which reads as follows:
12 (1) In computing income no deduction shall be made in respect of (a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from property or a business of the taxpayer.
The italics are my own.
In disallowing the deduction sought by the appellant for these expenses, Mr. Justice Cattanach adopted the reasoning of the majority of the House of Lords in Smith's Potato Estates Limited v. Bolland (Inspector of Taxes)[5], in which it was held that under Rule 3(a) Schedule D of the English Finance Act 1940, the expense incurred for legal and accounting costs in the preparation and prosecution of an appeal to the Board of Referees was not deductible in computing the taxable income of a taxpayer on the ground that the cost of ascertaining the true amount of tax to be paid is not an expense made in order to earn profits but rather an application of profits after they had been earned. The view of the majority of the Law Lords in this case which was later followed in the unanimous judgment of the House of Lords in Rushden Heel Co., Ltd. v. Inland Revenue Comrs.[6] is epitomized in the following paragraph from the reasons of Lord Simonds to which Cattanach J. has referred:
…Neither the cost of ascertaining taxable profit nor the cost of disputing it with the revenue authorities is money spent to enable the trader to earn profit in his trade. What profit he has earned, he has earned before ever the voice of the taxgatherer is heard. He would have earned no more and no less if there was no such thing as income tax.
The appellant sought to distinguish these cases from the present one on the ground that the wording of the English Rule 3(a) differs from s. 12(1) (a) of the Income Tax Act. The English Rule reads as follows:
In computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of
(a) disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade…
It is to be noted, however, that the reasons of the majority in the Smith's Potato Estates Ltd. case were predicated on an acceptance of the interpretation placed on Rule 3(a) by Lord Davey in Strong & Co. v. Woodifield[7]. In that case Lord Davey, in commenting on the words "wholly and exclusively laid out or expended for the purposes of the trade" as they occur in Rule 3(a), had this to say:
These words… appear to me to mean for the purpose of enabling a person to carry on and earn profits in the trade.
Viewed in this light I am of opinion that the reasoning employed in the Smith's Potato Estates Ltd. case applies to the interpretation to be placed on s. 12(1) (a).
It was not until 1964, twelve years after the last payment of legal expenses had been made by the appellant in the present case that Canadian taxpayers were afforded relief from the effect of the Smith's Potato Estates Ltd. case, supra. In that year Parliament enacted section 11(1) (w) of the Income Tax Act, the relevant portions of which read as follows:
11(1) Notwithstanding paragraphs (a), (b) and (h) of subsection (1) of section 12, the following amounts may be deducted in computing the income of a taxpayer for a taxation year:
(w) Expenses of objection or appeal.—amounts paid by the taxpayer in the year in respect of fees or expenses incurred in preparing, instituting or prosecuting an objection to, or an appeal in relation to, an assessment of tax, interest or penalties under this Act.
It has been suggested that the decision of this Court in the case of Evans v. Minister of National Revenue[8] affords some support for the contention of the appellant on this branch of the appeal, but that was not a case in which the taxpayer was seeking to deduct legal fees paid in respect of a dispute as to tax liability. There the taxpayer had incurred legal expenses in respect of an originating notice to the Supreme Court of Ontario for the opinion, advice and direction of the Court as to whether she was entitled to be paid income for life under the will of the father of her first husband. It was ultimately decided in the Ontario Court that she was so entitled and the very considerable legal fees were deducted by the trustee of the will out of the income to which she would otherwise have been entitled for the taxation year in question. The question at issue was whether in computing her income for that year the taxpayer was entitled to deduct those fees. The main question to be determined was whether the life interest to which the taxpayer was found to be entitled was a capital asset or whether it was income, and Cartwright J. who delivered the reasons for judgment on behalf of the majority of the Court held that it was income to which the taxpayer was entitled but the payment of which could not have been obtained without the expense of litigation, and he therefore allowed the deduction. It will be seen that these circumstances are very different from those in the present case, and I find it to be clearly distinguishable.
It is, however, argued on behalf of the appellant that even if it be accepted that such legal expenses are not deductible when they have been incurred to dispute a claim of the tax authorities of the taxpayer's own country, entirely different considerations apply when the outlay is made in order to determine the taxpayer's position in relation to a claim by a foreign government. In this regard, like the learned judge in the Exchequer Court, I am persuaded that the reasoning of the House of Lords in Inland Revenue Commissioners v. Dowdell O'Mahoney & Co., Ltd.[9] applies to such a claim. That was a case in which a company resident in Eire carried on business at two branches in England. The whole of its profits, including those arising from business in England, were subject in Eire to income tax and the company sought to deduct a proportion of the Eire taxes in computing the profits of the business in England for assessment of excess profits tax. In the course of his reasons for judgment disallowing the deduction, Lord Radcliffe appears to me to have come to the heart of the matter when he said at p. 543:
But, once it is accepted that the criterion is the purpose for which the exp