T-3197-74
Margaret Ann Frappier (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Walsh J.—Montreal, December 3;
Ottawa, February 5, 1976.
Income tax—Deductions—Plaintiff investment dealer—
Brokerage firm for which she worked going bankrupt, leaving
22 of her clients with credit balances—Plaintiff reimbursing
clients personally—Seeking to deduct total payment of
$49,029.03 as business expense—Whether for purposes of
gaining or producing income from business—Whether capital
expenditure—Whether sums expended in 1968 deductible in
1969—Whether amount paid by husband deductible—Income
Tax Act, R.S.C. 1952, c. 148, ss. 11(6), 12(1), 139(1)(m).
Plaintiff, an investment dealer, worked for a brokerage firm
which went bankrupt in 1968. She and her husband then
formed their own firm. Plaintiff personally reimbursed 22 of
her clients who had credit balances with the bankrupt firm. She
claims a total deduction of $49,029.03 as a business expense in
1969. The claim is complicated by the fact that, to the extent of
$29,217.81, reimbursement was made in 1968, and $21,811.22
of the total amount of $49,029.03 was actually paid by her
husband, of which $19,811.22 was paid during 1969. Plaintiff
claims her husband lent her this sum. She alleges that had she
not retained her clients' trust, she would have lost further
business. Defendant claims (1) that amounts were not incurred
to gain or produce income from her own business, but were
expenditures incurred to retain the goodwill of clients of her
employers; (2) that amounts were a capital expenditure
incurred to secure an enduring benefit; (3) that the sum
expended in 1968 could not be deducted in 1969; and (4) that
the amount paid by her husband was not an expenditure made
by her.
Held, the deduction is allowed. (1) Plaintiff was a freelance
salesperson; the clients were hers, not those of either brokerage
house. Plaintiff comes within provisions of section 11(6)(c) and
(d), and probably (b). And, if there is doubt as to whether
deductions can be allowed under section 11(6), they can be
under section 12(1)(a). (2) The reimbursements were made
with a view to producing income according to section 12(1)(a),
and were not a payment on account of capital under section
12(1)(b). (3) The payments are not clearly attributable to the
earning of income in any given year, and plaintiff chose to
deduct them in 1969 on the basis that not until then could she
finally determine that there would be no reduction in the
amount she could claim for these expenses as a result of any
distribution to creditors arising out of the bankruptcy. The
expenditures were taken into account in computing the profit
from the business for the year in which plaintiff recognized that
the loss had occurred. (4) The voluntary reimbursement should
not be affected by manner of payment. If her husband paid on
her instructions and behalf, and she has undertaken to reim
burse him (which there is no valid reason to doubt), she should
not be prevented from claiming the expenditures herself.
St. John v. Donald [1926] S.C.R. 371; Performing
Right Society, Ltd. v. Mitchell and Booker (Palais de
Danse), Ltd. [1924] 1 K.B. 762; Canada Starch Company
Limited v. M.N.R. [1969] 1 Ex.C.R. 96; L. Berman & Co.
v. M.N.R. [1961] C.T.C. 237; Cooke v. Quick Shoe
Repair Service (1949) 30 T.C. 460; Robert Addie & Sons
Collieries, Limited v. C.I.R. [1924] S.C. 231; The Queen
v. F. H. Jones Tobacco Sales Company Limited [1973]
F.C. 825; M.N.R. v. Algoma Central Railway [1968]
S.C.R. 447; M.N.R. v. Freud [1969] S.C.R. 75; Alumi
num Company of Canada v. The Queen [1974] 1 F.C.
387; Olympia Floor and Wall Tile (Quebec) Ltd. v.
M.N.R. [1970] Ex.C.R. 274; Riedle Brewery Limited v.
M.N.R. [1939] S.C.R. 253; The Queen v. Lavigueur 73
DTC 5539 and Associated Investors of Canada v. M.N.R.
[1967] 2 Ex.C.R. 96, applied. Francon Limitée v. M.N.R.
[1973] F.C. 1029 and Consolidated Textiles Limited v.
M.N.R. [1947] Ex.C.R. 77, considered.
INCOME tax appeal.
COUNSEL:
J. C. Couture, Q.C., for plaintiff.
H. Richard for defendant.
SOLICITORS:
Ogilvy, Cope, Porteous, Hansard, Marler;
Montgomery & Renault, Montreal, for
plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
WALSH J.: The plaintiff is an investment dealer
duly licensed as such by the Quebec Securities
Commission. From 1958 to 1959, she was a regis
tered sales representative for the Champion
Mutual Fund and from 1959 to 1960 worked in
the same capacity for J. E. Desrosiers and Com
pany being remunerated on a commission basis.
From 1960 to 1967 she worked for another broker
age house, Lévesque and Beaubien on commission
sales for the first two or three years and subse
quently for about four years became a salaried
employee managing their Mutual Funds Depart-
ment, before reverting again to being a sales agent
on a commission basis. Even while on a salary with
the Mutual Funds Department she maintained her
registration with the Quebec Securities Commis
sion. She explained that because of the regulations
of the Commission a registered securities salesman
cannot sell on his own but has to be employed by a
brokerage firm. The brokerage firm also requires
to be licensed as such. From 1967 to 1968 she
worked for Ord, Wallington and Co. Ltd., a
Toronto brokerage firm which had a branch office
in Montreal. Her husband, Jean Louis Frappier
managed their Montreal operation and had been
doing so for several years before she herself left
Lévesque and Beaubien to go to work with that
company. There were also approximately 6 other
agents working for them primarily selling mutual
funds. She and her husband decided to form their
own brokerage house and incorporate it as the firm
of Frappier and Holland Inc., Holland being her
maiden name, but the company did not secure the
necessary licence and did not commence operating
until July 1968. While she is President of it she
works exclusively on a commission basis as she did
for Ord, Wallington, receiving no salary or
dividends.
During the 17 1 / 2 years that she has worked as a
salesperson in the securities field, specializing in
mutual funds she has built up an enviable reputa
tion in the Montreal area. In 1969 she was the first
woman to be elected as a member of the Canadian
Stock Exchange and in January 1974 gained a seat
on the Montreal Stock Exchange. Over the years
she had built up her customers' confidence gradu
ally, largely on the basis of referrals from other
clients resulting from the good service which she
gave them. In 1968 she had between 200 and 300
clients and now has between 500 and 600. Her
commission income in 1968 was $27,000, in 1969.
$64,000, in 1970 $25,000, in 1971 $30,400, in
1972 $65,000, in 1973 $60,000 and in 1974
$65,400. She explained the drop in income in 1968
and in 1970 and 1971 as resulting from very weak
stock markets commencing in mid 1968 until 1970
before prices gradually moved up again and pro-
duced a chart indicating this. Despite this she
apparently did very well in 1969.
In 1968 while working for Ord, Wallington and
Co. she did not have to report on any daily basis or
keep any regular hours. She carried on business as
previously when working for other brokers, merely
handling her sales through them. The company
had a small second floor office in Montreal and
paid for the rent, a secretary, the phones and
stationery, but her husband who also managed the
office had to pay personally for the quotation
machines and the Dow Jones machine as well as
for a personal secretary. She and the other sales
men did not have individual offices but merely
came in from time to time, to bring in cheques
from clients and handle the necessary paper work.
No direction or supervision was given from the
head office in Toronto. She made her appointment
calls from home and saw her clients either at their
place of work or their home and sometimes in the
evening. She received 60 per cent of the commis
sion on mutual funds sales with Ord, Wallington
receiving 40 per cent. On bonds she would receive
50 per cent. She paid all her own expenses for
entertaining, telephone and so forth without any
reimbursement from Ord, Wallington or any
allowance for travel expenses nor was there any
employee's pension fund. She would turn the
cheques received from clients for their purchases
over to Ord, Wallington and once a month they
would pay her the commissions due to her. Ord,
Wallington made no deduction from these pen
sions for income tax, the only deduction being for
her Quebec Pension Plan contribution. She deduct
ed her own expenses in her personal income tax
returns and they were regularly allowed.
In the spring of 1968 Ord, Wallington went into
bankruptcy and in April lost its licence as a result
of this. She could not foresee the bankruptcy and
if she had she would have stopped forwarding
clients' cheques to them to avoid any loss by these
clients. Her husband had for some time been
dissatisfied with his relations with the Toronto
directors of the company which is why plaintiff
and her husband had incorporated their own com
pany and obtained its licence in March 1968.
When the lease of Ord, Wallington for the Mon-
treal premises expired at the end of April they were
then planning to sever their connection with them
and commence operating their own brokerage
house from the beginning of May. What actually
happened is that they took over the lease and
themselves engaged most of the salesmen who had
formerly worked with Ord, Wallington to work for
them at the same premises.
At the date of the bankruptcy 22 of her clients
had credit balances in cash or securities with Ord,
Wallington so in order to retain their goodwill and
confidence in her she undertook to reimburse them
and in due course she did so, although in some
cases the cheques were issued by her husband. Her
claim for this reimbursement which amounted in
total to $49,029.03 was deducted by her as a
business expense in 1969 and this led to the
present litigation. The manner in which she pro
ceeded was to write a form letter to each of these
clients on June 10, 1968. The specimen of one of
these letters addressed to Mrs. Louise Holloway
read as follows:
June 10, 1968
Mrs. Louise Holloway
181 Kenton Ave.
Beacon Hill
Beaconsfield, P.Q.
Dear Louise:
Due to the difficulties at Ord, Wallington & Co. Limited,
they have been unable to deliver the 325 shares Mutual Growth
Fund owing to you.
Until they settle with you, I have taken personally the
responsibility to pay you their debt.
(1)—As a result, so that you will not be inconvenienced or put
in a position to take any financial loss, I enclose a certificate for
325 shares Mutual Growth Fund registered in your name.
(2)—I wish you to remain on the books of Ord, Wallington as a
creditor. For this reason, you have already signed a letter to
Ord, Wallington & Co. Limited stating your claim for 325
shares Mutual Growth Fund. When Ord, Wallington have
settled with you, you will repay to me the entire amount of
their settlement. This may not be the total amount owing to
you. As a result of this arrangement with you, any loss involved
will be taken by myself.
Please sign this letter and return to me in the enclosed
self-addressed stamped envelope, as your acknowledgement of
the above personal agreement between us.
We are sorry for the trouble this has caused all of us.
Sincerely yours,
MF/gb (Mrs.) Margaret Frappier
26 Laurier Court
Beaconsfield, P.Q.
This will acknowledge the above agreement.
Date June 12th, 1968
Mrs. Louise Holloway
Plaintiff testified that at that date it was not
possible to determine whether anything would be
recovered from the Ord, Wallington bankruptcy
and accordingly she settled in full with each of her
clients subject to their undertaking to file their
claim against Ord, Wallington and, of course, to
repay her any amounts they received as a result of
this. In the case of some of her clients some shares
had already been bought but not yet registered in
their names. She herself then purchased an equiva
lent number of shares for them, while in the case
of other clients the reimbursement was made by
cheque. In some cases United States funds were
involved and the exchange on these reimburse
ments has been included in her claim to arrive at
the total of $49,029.03. The claim for deduction of
this amount by her as a business expense in 1969 is
however complicated by the fact that, to the extent
of $29,217.81, reimbursement was made in 1968
either by cheque or purchase of securities, and
furthermore by the fact that of the amount of
$49,029.03 the sum of $21,811.22 was actually
paid by her husband Jean Louis Frappier of which
$19,811.22 was paid during 1969. Plaintiff
explained that although some cheques were signed
by her husband he was really lending the money to
her in order that she could settle with her clients as
soon as possible. While she admits that she has
never repaid this loan there is some corroboration
for this evidence in that in a personal balance sheet
as of December 31, 1969, prepared on November
22, 1971 and filed with Mr. Ronald Belisle of the
Federal Tax Department and Mr. Claude Couture,
Q.C. her counsel, she shows as a liability loans
owed to J. L. Frappier in the amount of
$29,000.00. Since she was not assessed for addi
tional tax as a result of the disallowance of the
claim of $49,029.03 for business expenses in 1969
until March 16, 1972, it would appear that at least
some evidence of loans by her husband to her had
been recorded before the assessment, although the
fact that her counsel also received a copy of it
might indicate that there had been some discus
sions with the assessor or a request for additional
documentation before the assessment was made.
Of the 22 clients with whom settlement was
made, 19 of them have done further business with
her since 1968, and several of them have referred
relatives and friends to her. Six of the people on
the list are Air Canada employees and she has a
number of clients in that company. Plaintiff con
tends that had she not retained the confidence of
these clients by personally reimbursing their losses
to them she would not only have lost their further
business but also referrals that might have been
made by them to her. She testified that she
claimed the expense in 1969, because it was not
until then that it was clear that nothing would be
recovered from the bankruptcy. Ord, Wallington
was not a member of the Stock Exchange so there
was no contingency fund to cover losses of clients,
which applies to member firms. Since that time
brokerage houses are now required to join in a
national contingency fund for this purpose.
Certain other evidence required some explana
tion from her. The list of reimbursements made
totalling $49,029.03 was headed:
Mrs. Margaret Frappier
"Payments made for establishing business"
She testified that this was merely a list prepared
for her by her accountant in order to establish the
total and she paid little attention to the heading
which he gave to it. It is now her contention of
course that these disbursements were not of a
capital nature but were made for "the purpose of
gaining or producing income from a business"
within the meaning of section 12(1)(a) of the
Income Tax Act in effect at that time.
One of the clients to whom the form letter was
sent, one Jean Bushkes, replied on December 10,
1969, but addressed her letter to J. L. Frappier,
Frappier and Holland, Inc. stating:
Further to your letter of December 8, I am returning herewith
both copies of the transfer authorization, which have been
signed and witnessed.
I would like to take this opportunity to thank both you and
Mrs. Frappier for your concern and help in this matter, which
was greatly appreciated.
Unfortunately the letter of December 8, 1969,
which this answers, is not available and it is not
clear what Mrs. Bushkes was referring to,—that is
to say whether what she signed and returned was
merely the form letter assigning to Mrs. Frappier
any claim she might have in the bankruptcy of
Ord, Wallington or whether it dealt with a transfer
form to enable securities registered in her name to
be disposed of. While there is nothing in the letter
to indicate that it has anything to do with any
reimbursement made to her it probably relates to
the payment to her by Mr. Frappier (allegedly on
behalf of plaintiff) on that date of $4,956.00, being
the amount due to her. This appears to have been
made in securities of this value by the purchase for
her of 689 shares of Mutual Growth Fund as no
cancelled cheque for this amount was produced.
Plaintiff's counsel admitted that she filed her
income returns on a cash basis. The sections of the
Income Tax Act' in effect at the time which are
pertinent to the determination of the present issue
are as follows:
11. (6) Where a person in a taxation year was employed in
connection with the selling of property or negotiating of con
tracts for his employer, and
(a) under the contract of employment was required to pay
his own expenses,
(b) was ordinarily required to carry on the duties of his
employment away from his employer's place of business,
(c) was remunerated in whole or part by commissions or
other similar amounts fixed by reference to the volume of the
sales made or the contracts negotiated, and
(d) was not in receipt of an allowance for travelling expenses
in respect of the taxation year that was, by virtue of subpara-
' R.S.C. 1952, c. 148 as amended.
graph (v) of paragraph (b) of section 5, not included in
computing his income,
there may be deducted in computing his income for the year,
notwithstanding paragraphs (a) and (h) of subsection (1) of
section 12, amounts expended by him in the year for the
purpose of earning the income from the employment not
exceeding the commissions or other similar amounts fixed as
aforesaid received by him in the year.
12. (1) In computing income, no deduction shall be made in
respect of
(a) an outlay or expense except to the extent that it was
made or incurred by the taxpayer for the purpose of gaining
or producing income from property or a business of the
taxpayer,
(b) an outlay, loss or replacement of capital, a payment on
account of capital or an allowance in respect of depreciation,
obsolescence or depletion except as expressly permitted by
this Part.
Defendant has four grounds of contestation:
a) the amounts claimed by plaintiff as an
expense deduction in 1969 were not incurred for
the purpose of gaining or producing income
from her own business but were expenditures
incurred to retain the goodwill of the clients of
Ord, Wallington Co. Ltd. and subsequently of
Frappier and Holland Inc. who were in both
cases her employers.
b) that in any event they constituted a capital
expenditure incurred for the purposes of secur
ing a lasting or enduring benefit and not as a
current expense which could be deducted in any
given year.
c) in any event the amount of $29,217.81 which
was expended in 1968 could not be deducted
from the 'commissions earned by plaintiff in
1969.
d) that the amount of $21,811.22 paid by plain
tiff's husband Jean Louis Frappier to her clients
was not an expenditure made by her and deduct
ible from her income.
Dealing with the first contention plaintiff claims
that she was not an employee of Ord, Wallington
and Company or subsequently of Frappier and
Holland Inc. in the sense of the definition of
employment in section 139(1)(m) of the Act which
reads:
"employment" means the position of an individual in the
service of some other person (including Her Majesty or a
foreign state or sovereign) and "servant" or "employee" means
a person holding such a position.
She was for all practical purposes a freelance
salesperson who received orders for securities from
personal clients which orders she then placed
through whichever brokerage firm she happened to
be associated with at the time, including during
the period in issue Ord, Wallington and Co. and
Frappier and Holland Inc. According to her tes
timony whenever she severed her connections with
brokerage firms her clients would follow her as is
quite customary in the trade. Certainly if she had
not reimbursed her clients for their losses they
would have blamed her for accepting their money
for the purchase of securities a few days before the
bankruptcy of Ord, Wallington & Co., rather than
blaming that company itself. Subsequently, in
dealing with the same clients, or the persons they
referred to her, she placed their orders through
Frappier and Holland Inc. but the fact that she
has an ownership interest in that company makes
no difference. She could just as readily have placed
their orders through whatever brokerage house she
became associated with following the bankruptcy
of Ord, Wallington and Co. I believe the clients
must be considered as her clients, therefore, rather
than as clients of Ord, Wallington and Co. or
Frappier and Holland Inc. This includes Mrs.
Bushkes although she did address her letter to Mr.
Frappier, probably because the securities which
she received to reimburse her for her loss were sent
to her by him. The question of whether a person is
working as a servant (or employee) or as an
independent contractor has been dealt with in
many cases. Halsbury's Laws of England, 2nd ed.,
vol. 22, page 115 states:
To distinguish between an independent contractor and a
servant, the test is whether or not the employer retains the
power, not only of directing what work is to be done, but also
controlling the manner of doing the work.
In the City of Saint John v. Donald' at page 381
Mr. Justice Anglin quoted from Performing Right
Society, Ltd. v. Mitchell and Booker (Palais de
2 [1926] S.C.R. 371.
Danse), Ltd.' at pages 765-6 in which McCardie J.
said:
... the question whether a man is a servant or an independent
contractor is often a mixed question of fact and law. If,
however, the relationship rests upon a written document only,
the question is primarily one of law. The contract is to be
construed in the light of the relevant circumstances.
McCardie J. then went on to say [at page 767]:
... the final test, if there be a final test and certainly the test to
be generally applied, lies in the nature and degree of the
detailed control over the person alleged to be the servant. This
circumstance is, of course, only one of several to be considered,
but it is usually of vital importance.
It would appear that in the circumstances of the
present case very little if any control was exercised
over the work of plaintiff or her manner of doing
same either by Ord, Wallington & Co. or by
Frappier and Holland Inc. Certainly plaintiff
comes within the provisions of paragraphs (c) and
(d) of section 11(6) in that she was paid by
commission and did not receive any allowance for
travelling expenses. She probably also comes
within paragraph (b) in that most of her work was
done away from the employer's place of business.
She only returned to her office from time to time
to do paper work and make reports. There may be
more doubt about paragraph (a) in that some of
the expenses were paid by the employer for the
office, telephones and the secretary shared by her
in common with others. All her other expenses
were paid by her personally, and deducted in filing
her annual income tax returns, and not disallowed.
When she started working for Frappier and Hol-
land Inc. instead of for Ord, Wallington the only
other item of expense paid for her by her employer
was garage space for her car. Plaintiff contends
that the acceptance by defendant of expense
deductions claimed by her each year in her tax
returns is equivalent to an admission that section
11(6) applies to her. In any event, even if there is
some doubt as to whether the deductions claimed
can be allowed under section 11(6), I find that
they can be made by virtue of section 12(1)(a).
Plaintiff's personal reputation as a reliable securi
ties salesperson was built up over a period of 17 1 / 2
years and was a very valuable possession. The very
life blood of this business, as in the case of an
insurance agent is the continual flow of repeat
3 [1924] 1 K.B. 762.
business from satisfied clients and the acquisition
of new clients largely as a result of referrals from
them. If clients suffer a loss as a result of their
dealings with the agent, even though the loss was
occasioned by bankruptcy of her employer and was
not her fault, they will be dissatisfied and place
their future business elsewhere in this highly com
petitive field. Moreover they will recount their
experience to others and this will damage the
reputation of the agent further. Plaintiff is to be
commended for having accepted the moral respon
sibility for the losses of her clients, and by arrang
ing to make them good undoubtedly assured con
tinuation and expansion of her clientele in this
field, as is shown by the increase in the number of
clients she now serves and her continually increas
ing income from commissions on her sales. I
believe that the deduction made was therefore a
proper one unless it is considered as a payment on
account of capital within the meaning of section
12(1)(b) of the Act, which is defendant's second
ground of contestation.
Here again there has been considerable jurispru
dence. In the case of Canada Starch Company
Limited v. M.N.R. 4 President Jackett, as he then
was, had this question to consider, and after exam
ining the jurisprudence said at page 105:
... in distinguishing between a capital payment and a payment
on current account, in my view, regard must be had to the
business and commercial realities of the matter.
In the case of L. Berman & Co. v. M.N.R. 5 former
President Thorson of this Court also examined this
question in the case of a payment made by a
parent company to suppliers of a Toronto subsidi
ary whose operations had been closed, because it
was anxious to continue doing business with the
[1969] 1 Ex.C.R. 96.
[1961] C.T.C. 237.
suppliers. At pages 247-248 the learned President
states:
There is no doubt in my mind that the appellant made the
payments in question as a business person intending to continue
in business would reasonably do and that, consequently, they
were made in accordance with the ordinary principles of com
mercial trading or well accepted principles of business practice
and I am unable to find any ground in Section 12(1)(a) for
their exclusion.
Even if the appellant had not been legally bound to make the
payments that did not prevent them from having been made in
accordance with the ordinary principles of commercial trading.
There is strong authority for this statement in Usher's Wilt-
shire Brewery, Limited v. Bruce [1915] A.C. 433. In that case
the tenants of the appellants' tied houses were by agreement
bound to repair their houses and pay certain rates and taxes.
They failed to do so. The appellants, though in no way legally
or morally bound to do so, paid for these repairs and paid these
rates and taxes. They did so, not as a matter of charity, but of
commercial expediency, in order to avoid the loss of their
tenants, and, consequently, the loss of the market for their beer,
which they had acquired these houses for the purpose of
affording. It was held that, although they were not legally or
morally bound to make these payments, yet they were, in
estimating the balance of the profits and gains of their business
for the purposes of assessment of income tax, entitled to deduct
all the sums so paid by them as expenses necessarily incurred
for the purposes-of their business.
And in British Insulated and Helsby Cables v. Atherton
[ 1926] A.C. 205, Viscount Cave, L.C. said, at page 211:
It was made clear in the above cited cases of Usher's
Wiltshire Brewery v. Bruce [1915] A.C. 433, and Smith v.
Incorporated Council of Law Reporting [ 1914] 3 K.B. 674,
that 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
purpose of the trade.
On page 248 he also refers to the case of Cooke v.
Quick Shoe Repair Service 6 and Robert Addie &
Sons Collieries, Limited v. C.I.R. 7 where similar
findings were made.
Similar findings were also made by former
Associate Chief Justice Noël in the case of The
Queen v. F. H. Jones Tobacco Sales Company
Limited' in which he refers to the Supreme Court
judgment in the case of M.N.R. v. Algoma Central
Railway' which confirmed judgment of Jackett P.
6 (1949) 30 T.C. 460.
[1924] S.C. 231-235.
e [1973] F.C. 825.
9 [1968] S.C.R. 447.
in the same case reported in [1967] 2 Ex.C.R. 88.
He quotes at length from the judgment of Pigeon
J. in the Supreme Court in the case of M.N.R. v.
Freud 10 at pages 81 to 84 in which he accepted as
deductible monies advanced to a, company for the
construction of a sports car prototype which were
unfortunately used to no purpose since the venture
did not succeed. At page 837, the learned former
Associate Chief Justice states:
... the loss sustained by defendant when it was called on to act
as surety must be treated as an outlay made for the purpose of
gaining or producing income in the operation of its business
undertaking, and not as an outlay or loss on account of capital.
Later on the same page he states:
In effect, defendant sought through this guarantee to ensure
the continued growth of its sales to Tabacs Trans-Canada Ltée,
and at the same time to make certain that the latter would be
able to proceed with large orders for tobacco made.
In the case of Aluminum Company of Canada
Limited v. The Queen" Heald J. stated at page
397:
... The authorities clearly indicate that an expenditure made
as a "gift" or as a matter of commercial morality will be
allowed as a deduction in computing income. See Olympia
Floor & Wall Tile (Quebec) Ltd. v. M.N.R. [1970] Ex.C.R.
274 and Pigott Investments v. The Queen [1973] C.T.C. 693.
Subject expenditure was made in the interests of commercial
morality ....
In the case of Olympia Floor and Wall Tile
(Quebec) Ltd. v. Minister of National Revenue 12
referred to therein President Jackett followed the
authority of Riedle Brewery Limited v. M.N.R. 13
which allowed the deduction of amounts spent by
breweries following the practice of treating fre-
quenters of hotels and clubs because by following
this practice its sales would either be maintained
or increased whereas if the practice were discon
tinued its sales would decrease. See also The
Queen v. Lavigueur 14 , in which loans made to ten
ants of a commercial building by the landlord to
enable them to remain in business and continue
occupancy of the leased premises were allowed as
a deduction from income as expenses laid out to
0 [1969] S.C.R. 75.
" [1974] 1 F.C. 387.
z [ 1970] Ex.C.R. 274.
" [1939] S.C.R. 253.
14 73 DTC 5539.
produce income.
I conclude that on the facts of this case the
reimbursement of losses made to clients of plaintiff
were made with a view to producing income
according to the provisions of section 12(1)(a) of
the Act and were not a payment on account of
capital by virtue of section 12(1)(b).
Defendant's third argument is that the amount
of $29,217.81 reimbursed to clients in 1968 cannot
be claimed by plaintiff in her 1969 taxation year.
Plaintiff cites as authority for making the claim
in 1969 for disbursements made in 1968 the case
of Associated Investors of Canada v. M.N.R.
[ 1967] 2 Ex.C.R. 96, in which the appellant made
advances against commissions to its salesmen
which were shown as an asset in its balance sheet
but at the end of any year only the amount of
advances deemed irrecoverable were treated as a
business expense in that year. In 1960 and in 1961
appellant wrote off $25,000 of approximately
$85,000 which had been advanced to a certain
employee in previous years. The judgment of Pres
ident Jackett, as he then was, held that these
advances were an integral part of appellant's busi
ness operations and loss in their value must on
ordinary commercial principles be taken into
account in computing the profit of its business for
the year in which the appellant as a businessman
recognized that the loss had occurred and that
section 12(1) (a) of the Act does not limit the
deduction of outlays and expenses of business for a
year to those made or incurred in that year. In
rendering judgment the learned President stated at
pages 104-5:
The situation was therefore that, at the time that the advance
was made, the appellant had exchanged its money for a "right"
that was, from a businessman's point of view, of equal value. It
had substituted one asset in money for another of equal
amount. As of that time, therefore, the making of the advance
did not affect the overall value of the appellant's assets. The
advance cannot, therefore, as of that time, be regarded, from a
businessman's point of view, as having affected the appellant's
profit from his business. Similarly, if the advance was entirely
repaid, there was again a substitution of one asset for another
of equivalent value and there was no overall effect on the
appellant's asset position. When, however, the chose in action
depreciated in value, there was an effect on the appellant's
asset position and accordingly, at that time, for the first time,
the advance transaction resulted in the appellant having sus
tained a loss. As that loss arose out of a transaction in the
course of the appellant's current business operations, it must be
taken into account in computing the profits from the appel
lant's business or they will be overstated. In my view, it must be
so taken into account in computing the profit from the business
for the year in which the appellant, as a "businessman",
recognized that the loss had occurred. It cannot properly be
taken into account in computing the profit for a previous year.
This judgment also referred to the Supreme Court
case of Riedle Brewery Limited v. M.N.R. (supra)
in which Kerwin J. stated at pages 263-4:
There remains the question as to whether the money was thus
laid out for the purpose of earning the income, that is, the
income for the 1933 taxation period. In any consideration of
this question, a certain degree of latitude must, I think, be
allowed. For instance, in the case of a manufacturing company
employing travellers to solicit business, meticulous examination
of the latter's expense accounts might easily disclose that sums
expended towards the end of one taxation period were not
productive of orders or of the filling of the orders or of the
payment for the goods supplied, in the same period. That
result should not prevent the company deducting such expenses
in its returns under the Act. The statutory provisions may be
given a reasonable and workable interpretation by holding that,
as long as the disbursements fulfil the requirements already
discussed, the taxpayer expended them "for the purpose", i.e.,
with the object and intent that they should earn the particular
gross income reported for the period.
Plaintiff contends that it was not until 1969 that
she could be sure that no recovery would be made
as a result of the assignment to her of the claims of
her clients against the bankruptcy estate of Ord,
Wallington & Co., so it was only at that time that
the amount of the loss could be determined.
Defendant on the other hand states that in the
present case the payments made to the clients were
a once in a lifetime matter and not a continuing
payment made from year to year as in the case of
the advances to salesmen in the Associated Inves
tors case, or the treating of customers in the
Riedle Brewery case, and that plaintiff must have
realized, (especially as her husband had been with
Ord, Wallington for several years, and was manag
er of their Montreal office, and should have been
aware of the financial position of the company)
that very little if anything could be recovered as a
result of the claims made in the bankruptcy.
Defendant further relies on the cases of L.
Berman & Co. Ltd. v. M.N.R. (supra), and Fran-
con Limitée v. M.N.R. 15 In the former case, Thor-
son J. then President, refused to permit appellant
to deduct from what would otherwise have been its
taxable income for 1956 certain payments made
by it in September and December, 1955, although
he had found that these payments were properly
deductible under section 12(1)(a) of the Act as
expenditures laid out for the purpose of producing
income. He referred to the reasoning in his earlier
judgment in the case of Consolidated Textiles
Limited v. M.N.R. 16 In that case at pages 81-82 he
stated:
Moreover, there is a fallacy inherent in the appellant's
contention that because the 1938 expenses were laid out or
expended for the purpose of earning the 1939 income they are
deductible from it. It is not a condition of the deductibility of a
disbursement or expense that it should result in any particular
income or that any income should be traceable to it. It is never
necessary to show a causal connection between an expenditure
and a receipt. An item of expenditure may be deductible in the
year in which it is made although no profit results from it in
such year; Vallambrosa Rubber Company, Limited v. Inland
Revenue (1910) 47 Sc.L.R. 488 and even if it is not productive
of any profit at all: Commissioners of Inland Revenue v. The
Falkirk Iron Co. Ltd. (1933) 17 T.C. 625. The reason for the
deduction of an item of expenditure is quite a different one.
Under the provision of the United Kingdom Act corresponding
to section 6(a) the test of deductibility was laid down by the
Lord President (Clyde) of the Scottish Court of Sessions in
Robert Addie & Sons' Collieries, Limited v. Commissioners of
Inland Revenue [1924] S.C. 231 at 235, as follows:
What is "money wholly and exclusively laid out for the
purpose of the trade" is a question which must be determined
upon the principles of ordinary commercial trading. It is
necessary, accordingly, to attend to the true nature of the
expenditure, and to ask oneself the question, Is it a part of
the, Company's working expenses; is it expenditure laid out as
part of the process of profit earning?
and again at pages 82-83 he stated:
... it follows that an item of expenditure becomes a deductible
one when and as soon as it meets the requirements of the test,
that is to say, that it is deductible in the year in which it
becomes a working expense and part of the process of profit
making. The appellant's 1938 operating expenses became its
working expenses and part of the process of profit making or, to
15 [1973] F.C. 1029.
16 [1947] Ex.C.R. 77.
use the words of section 6(a), 17 part of the process of earning
the income in 1938, and, therefore, deductible in that year; that
being so, they were not deductible in 1939.
In my opinion, section 6(a) excludes the deduction of dis
bursements or expenses that were not laid out or expended in or
during the taxation year in respect of which the assessment is
made. This is, I think, wholly in accord with the general scheme
of the Act, dealing as it does with each taxation year from the
point of view of the incoming receipts and outgoing expendi
tures of such year and by the deduction of the latter from the
former with a view to reaching the net profit or gain or gratuity
directly or indirectly received in or during such year as the
taxable income of such year.
In the Francon case, also relied on by defendant,
the appellant had transferred certain securities to
some of its customers and in return it received
amounts of money due under a contract which
should have been held back and paid in the year
they were certified as becoming due, and would
normally have been paid then. When the Minister
added the amounts so received in the earlier year
to appellant's taxable income, appellant objected
saying that they were not income but had been
made under an agreement whereby interest pro
ducing securities were substituted for the amount
of the holdback that was to become due at a later
date. In the Federal Court of Appeal it was held
that the appellant must include in its income the
amount of the immediate holdback it received, but
that it was also entitled to deduct as an expense
the amount which it had to pay out in the year to
obtain the immediate payment of the holdback. It
also followed that the appellant would be required
to add to its income for some subsequent year an
amount received under such a revenue transac-
tion—namely, the holdback payable under the
construction contract in the year of certification.
Defendant contends that the same practice should
have been followed here with the plaintiff deduct
ing the amounts paid to clients in 1968 from her
commission income in that year, and in the event
that she received some recovery as a result of the
assignment of their claims in the bankruptcy, the
amounts received as a result of this recovery would
then be added back to her income in the subse-
17 This section corresponds with section 12(1)(a) with which
we are dealing in the present case. It has been found that the
latter section is somewhat broader and more liberal in the
deductions it allows (See Berman case, supra, at pages 245 to
247). This would not have altered the finding in the Con
solidated Textiles case, however.
quent year when they were so received. This would
certainly seem to have been a preferable method of
proceeding. It should be noted, however, that
plaintiff may have had good reason for making the
deductions in 1969 rather than in 1968 since in
1968 her income from Ord, Wallington & Co. Ltd.
was only $3,673.15 and from Frappier and Hol-
land Inc., $23,381.00, whereas in 1969 her income
from Frappier and Holland Inc. was $65,544.86.
What makes the decision on this point some
what difficult in the present case is the nature of
the payments made in that they are not clearly
attributable to the earning of income in any given
year despite the fact that I have found, not without
some hesitation, that they were not in the nature of
a capital expense. Certainly plaintiff in making
certain payments to her clients in the latter months
of 1968 to reimburse them for their losses did not
anticipate an immediate rush of new orders from
them in that year, but was looking to future busi
ness from them and their friends. It is more a
matter of chance than of design that some clients
were repaid their losses in 1968 and some not until
1969, as funds became available to make the
payments and the payments made in 1968 were
more likely to produce additional income for plain
tiff in 1969 and the following years than in the few
remaining months of 1968 after the payments were
made. Furthermore, although she might well have
dealt with these payments in the 1968 and 1969
taxation years in the manner suggested by the
Francon Limitée case, (supra), she chose to deduct
them all in the 1969 taxation year on the basis that
it was not until then that she could finally deter
mine that there would be no reduction in the
amount she could claim for these expenses as a
result of any distribution to creditors arising out of
the bankruptcy. Only the 1969 taxation year is
before the Court and under these circumstances it
might be appropriate to apply the Associated
Investors case, (supra), and to conclude that the
expenditures "be so taken into account in comput
ing the profit from the business for the year in
which the appellant as a businessman recognized
that this loss had occurred". (See also the Riedle
case, supra.)
I conclude, therefore, that the disbursements
made in 1968 with a view to producing income can
be claimed in 1969 the year in which the final
amount of same could be determined and it could
be concluded that there would be no recovery to
reduce same.
Defendant's final argument remains to be dealt
with namely that the payments by plaintiff's hus
band in the amount of $21,811.22 of which $2,000
was made in 1968 and $19,811.22 in 1969, cannot
be claimed by her as a deduction. This depends
largely on the question of credibility of her evi
dence. She and her husband were the controlling
shareholders of Frappier & Holland Inc. and
apparently they operated as a team. Both testified,
however, that the clients in question were her
clients whom she had formerly had when working
with Ord, Wallington & Co. and in many cases
before that, and she was now merely placing their
orders through the new company, Frappier and
Holland Inc. The voluntary reimbursement by
plaintiff to them of their losses should not be
affected by the manner in which the payment was
made. Plaintiff's husband in lending her the money
which he allegedly did to enable her to make some
of these reimbursements, and especially those
made in 1969, could easily have written a cheque
in her favour for sufficient funds to cover these
payments, and she could then have issued her
personal cheques to the clients, or she herself have
bought the replacement securities for them. The
fact that instead of this they were paid by cheques
signed by Mr. Frappier or securities purchased by
him should not affect the situation if this was
being done on her instructions and on her behalf.
Unless her story of the loan is disbelieved, there
fore, (and it is at least in part corroborated by the
information furnished in the statement given to the
Department of National Revenue before the
assessment was made disallowing the expenses
claimed in 1969) she should not be prevented from
claiming these expenditures herself, even though
they were actually made by her husband, if in fact
she has undertaken to reimburse him for them as
she claims. In the absence of any evidence to the
contrary there is no valid reason for disbelieving
her testimony as to the loan, even though this
evidence may be of a self-serving nature, and the
loan has not yet been repaid.
For the above reasons defendant's various
defenses fail and plaintiff's action should be main
tained with costs and a re-assessment should be
made of her taxation for the year 1969 on the basis
of allowing her $49,029.03 as a deduction in com
puting her taxable income for that year.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.