T-1424-73
Day & Ross Limited (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Dubé J.—St. John, New Bruns-
wick, September 27 and 28; Ottawa - , October 18,
1976.
Income tax—Deductions--Appeals against re-assess-
ments—Difference between notification and assessment—
Whether money set aside for insurance premiums reserve or
deductible expense Whether fines deductible expense—
Public policy—Income Tax Act, R.S.C. 1952, c. 148, as am.
ss. 12(1)(a) and (e), 27(1)(e) and 46(4).
Crown counsel claims that notices issued by the Minister are
not assessments within the meaning of section 46(4) of the Act
and at the outset of the trial plaintiff's counsel agreed. The
matters to be decided were: whether money set aside to meet
the premiums of a complex insurance policy were a reserve, as
alleged by the Crown, or accounts payable as claimed by the
plaintiff on the grounds that the events to which they related
had taken place; and whether fines could be booked as an
expense for the purpose of producing income without a breach
of public policy.
Held, the plaintiffs appeals against the alleged re-assess
ments of the notices issued by the Minister for the 1966, 1967,
1968, 1969 and 1970 taxation years are quashed. The plaintiffs
appeal is allowed in respect of the exemptions claimed for
insurance premiums and fines. The term "reserve" connotes the
setting aside of an amount to meet a contingency and whereas a
standard insurance premium would obviously be an expense,
the complex formula by which the plaintiffs premiums were
established raises difficulties. However, the amounts entered as
an expense were definitely owing and payable, were in fact paid
and were an outlay incurred in accordance with the ordinary
principles of commercial trading, properly entered as an
expense and incurred for the purpose of producing income. As
to the fines, they resulted from the day to day operations of the
plaintiffs business and were paid as a necessary expense. The
legality or illegality of the activity to which the expense relates
is irrelevant in interpreting the Income Tax Act.
The Royal Trust Company v. M.N.R. 57 DTC 1055;
Fagnan v. Ure [ 1958] S.C.R. 377; Time Motors Limited v.
M.N.R. [1969] S.C.R. 501; M.N.R. v. E. H. Pooler and
Company Limited 62 DTC 1321 and The Commissioners
of Inland Revenue v. Alexander Von Glehn & Co., Ltd. 12
T.C. 232, discussed. J. L. Guay Ltée v. M.N.R. 69 DTC
490, [1971] F.C. 237, [1972] F.C. 1441, 75 DTC 5094,
distinguished. The Queen v. Gary Bowl Limited [1973]
F.C. 1052, [1974] 2 F.C. 146; Rolland Paper Company
Limited v. M.N.R. [1960] Ex.C.R. 334 and M.N.R. v.
Eldridge [1965] 1 Ex.C.R. 758, followed.
INCOME tax appeal.
COUNSEL:
E. N. McKelvey, Q.C., and L. Burnham for
plaintiff.
N. W. Nichols and C. T. A. MacNab for
defendant.
SOLICITORS:
McKelvey, Macaulay, Machum & Fair-
weather, Saint John, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
DUBÉ J.: These are appeals from re-assessments
made by the Minister of National Revenue for the
taxation years 1966, 1967, 1968, 1969, 1970 and
1971.
The plaintiff is a New Brunswick company with
head office at Hartland engaged in the trucking
business in Eastern Canada. It claimed insurance
premiums, amounts payable for cargo and acci
dent damages, and fines, as expense incurred for
the purpose of producing income. The Minister
considered these amounts to be additions to reserve
in each of the taxation years (and the deduction of
fines to be contrary to public policy) and disal
lowed the deductions.
In the statement of defence, the Deputy Attor
ney General of Canada submitted that this Court
ought to quash the appeals of the plaintiff in
respect of its 1966, 1967, 1968, 1969 and 1970
taxation years on the ground that the notices
issued by the Minister that no tax was payable for
those years were not assessments within the mean
ing of subsection 46(4) of the Income Tax Act',
but only notifications.
At the outset of the trial, in view of this Court's
decision in The Queen v. Gary Bowl Limited 2 ,
counsel for plaintiff agreed that these appeals be
R.S.C. 1952, c. 148 and amendments thereto.
2 [1973] F.C. 1052, reversed [1974] 2 F.C. 146.
quashed, with the result that the only assessment
with respect to which this Court may grant relief is
in respect of the 1971 taxation year, which assess
ment allows a determination of the issues for the
1966, 1968 and 1971 taxation years, as the losses
incurred by the plaintiff in its 1966 and 1968
taxation years may be applied to the 1971 taxation
year within the meaning of paragraph 27(1)(e) of
the Income Tax Act.
Counsel for both parties agreed that the figures
appearing in paragraph 8 of the statement of
defence for the year 1971 set out the situation
accurately. The paragraph also reflects the Minis
ter's assumptions and bears reproduction in toto:
8. With respect to paragraphs 9, 10, 12 and 13 of the State
ment of Facts of the Re-Amended Statement of Claim he says
that the Minister of National Revenue assessed or adjusted, as
the case may be, the said returns of income referred to in
paragraph 7 hereof so as to disallow as deductions from income
with respect to the amounts therein set out the amounts of
$11,538.46, $103,461.54, $68,560.33, and $40,995.34, for the
1968, 1969, 1970, and 1971 taxation years respectively which
amounts were considered by the said Minister to be additions to
reserves in each of the said taxation years determined in the
following manner:
Accident
Cargo Claims Claims
Indemnités de
transport de Indemnités
marchandises d'accident
1968
1969 $46,837.00
1970 $52,275.00 $32,292.60
1971 89,265.00 35,363.06
and in assessing or adjusting as he did he acted upon the
following assumptions:
(i) the amounts set aside at the end of each taxation year as
insurance premiums payable were amounts in the nature of a
reserve set up by the Plaintiff to meet its estimated liability
to Lloyd's of London which liability was estimated on the
likely settlement of insurance claims in unascertainable
amounts at uncertain dates;
(ii) the amounts set up at the end of each taxation year as
Claims Payable (Cargo or Accident) were amounts in the
nature of a reserve set aside by the Plaintiff to meet the
settlement of expected insurance claims in unascertainable
amounts at uncertain dates; and
otherwise he does not admit the said paragraphs.
I shall first address myself to the issue of insur
ance premiums. They were payable to Lloyd's,
London, England, under a complex three year
policy, from May 1, 1967 to May 1, 1970. The
coverage included cargo claims, collision damage
to tractors and trailers, and public liability and
property damage. The calculation of premiums is
based on a rather complex method which takes
into account the total incurred losses actually paid
during the year, plus an amount established by
Lloyd's as being its probable liability for claims
arising during that year but unpaid. The formula
is set out as follows in Endorsement No. 1 to the
policy:
It is further agreed that this insurance is granted in consider
ation of the payment of an annual deposit premium of $60,000
payable in quarterly instalments at the inception of each quar
ter. The final premium to be paid by the Assured shall be 100
times the total incurred losses as hereinafter defined, divided by
65, provided that in no event shall the final premium be less
than that developed by the following minimum rate nor greater
than that developed by the following maximum rate:
Minimum Rate Maximum Rate
$1.20 per $100 of $2.40 per $100 of
total gross receipts total gross receipts
The words "total incurred losses" as used herein, shall mean
actual paid losses, allocated loss expenses including legal fees
and the reserves, as estimated by the Insurers for unpaid losses,
outstanding at the time of adjustment and final re-adjustment.
Adjustment of the premium as provided herein shall be made at
each anniversary date.
The premium so calculated is therefore subject
to a minimum rate and a maximum rate and
involved the setting up by Lloyd's of a reserve for
unpaid liabilities. Relying on their own calcula
tions, Lloyd's claimed the maximum during each
year, whereas the plaintiff contested Lloyd's fig
ures, established its own premiums payable in the
years in question and entered the amounts in its
books as accounts payable, not as a reserve.
At the end of each taxation year, the plaintiff
determined that its outstanding liabilities to
Lloyd's for premiums required to be paid were as
set out in paragraph 8 of the statement of defence
(supra) under the heading "Premiums". These
sums are claimed by the plaintiff as deductions in
computing its income for each taxation year. The
defendant says that these amounts set aside at the
end of each taxation year were in the nature of a
reserve to meet its estimated liability to Lloyd's.
As it turned out, the amounts entered in plain
tiff's books as "accounts payable" for premiums
were inferior to the amounts they ended up by
paying Lloyd's for each and every year. After
much discussion between the plaintiff and Lloyd's,
plaintiff paid close to the maximum payable at the
end of each adjustment period.
The secretary-treasurer of the plaintiff com
pany, a chartered accountant, testified that the
amounts of premiums payable were based on their
judgment as to what the annual adjustments would
be. He set the amounts up as accounts payable and
expense, not as a reserve, because "these were
accounts payable, the events had taken place". He
insisted that "you have to match expense with
revenue".
The auditor of the plaintiff company, also a
chartered accountant, explained that he applied
proper accounting principles in approving the
entries as accounts payable, the carefully estimat
ed premiums payable being costs of doing business,
thus a proper charge.
I now turn to the claims payable. The tractor
vehicles, except those used for in-town deliveries,
are owned by independent contractors, whereas the
trailers belong to the plaintiff. Under operating
agreements, plaintiff must take out insurance for
public liability and property damage, cargo
damage and collision. The independent contractors
are responsible to the plaintiff for the first $1,000,
and the latter up to the first $5,000 to Lloyd's, in
respect of claims and damage.
On the occurrence of a liability, or loss, or
damage, the amount thereof was determined
immediately by the plaintiff on the basis of the
facts then available. To the extent that such
amount exceeded the deductible portion of $1,000
payable by the independent contractors, and up tc
plaintiff's $5,000 deductible, the amount was
recorded as an operation expense for that year.
At the end of the taxation years 1969, 1970 and
1971, the plaintiff determined that its outstanding
liabilities for claims payable to Lloyd's were as
outlined above under the headings "Cargc
Claims" and "Accident Claims", and claimed
these sums as deductible in computing its income
for those years.
According to the president of the plaintiff com
pany, each accident was promptly investigated and
"if we felt not at fault, we set nothing up in our
books. If we felt at fault, then we valued the
damages and set up the liability".
With reference to cargo claims, company offi
cials would first examine the PRO delivery
receipts to see if they were "clean" or "dirty".
Small claims were quickly processed, larger ones
were investigated. No entries were made unless
company officials were satisfied that the company
was liable. When liability was accepted, the value
of the damaged goods was duly booked as an
expense. The company president added that "we
were not making profits, so we were not interested
in boosting expenses. Our main effort was to try to
balance the books."
On occasions, misplaced cargo would later turn
up when delivered to the wrong party and returned
to the company. On the other hand, claims for lost
or damaged cargo would in some instances be filed
many days later.
The third issue is the allowance of fines, mostly
fines for violation by the plaintiff of provincial
highway weight restriction laws. Fines for speeding
or other traffic violations were paid by the respon
sible drivers themselves and are not in question
here.
Various provincial motor vehicle acts or motor
carrier acts stipulate maximum weight and other
weight restrictions, based on the number of axles
of carriers, for certain provincial highways. The
allowable weights include the weight of vehicle,
fuel and cargo.
It appears that most of the loads carried in
plaintiff's trailers are not picked up at plaintiffs
terminals, but along the way from factories, potato
farms, isolated coastal fish plants and other busi
nesses throughout Eastern Canada. There are no
scales in the trailers and plaintiff relies on the
weights declared by shippers. The government
scales are located at specific points, in some
instances at two or three hundred mile intervals,
along the highway. The driver, an independent
contractor, makes up a full load from the bills of
lading on the way. If the total weight at any scale
exceeds the limit, then an overweight fine is levied
(usually later by mail to the plaintiff) and the
carrier is allowed to proceed to its destination with
the overweight cargo.
Where only one shipper takes up the full load
and it turns out to be overweight at the govern
ment scale, then the plaintiff pays the fine and
bills his customer. Overweight permits may also be
obtained in advance at the request of a shipper. In
those instances, where there is but one shipper, the
driver may not even get to see the cargo as the
trailer may be filled and sealed in the customer's
own warehouse. Where there is more than one
shipper, then the plaintiff has to bear the loss as it
would prove difficult to identify which portion of
the shipment was overweight.
Fines paid were booked by plaintiff as expense
and fines reimbursed were entered as revenue.
This category of fines also includes some (less
than 10%) fines for minor violations, such as mis
placed registration documents, lost licence plates,
missing mud flaps, etc. In view of their insignifi
cance it will be more convenient to include them
with the overweight fines.
Fines in the amounts of $254.65, $9,016.17,
$8,703.11, $15,956.00, $16,733.75 and $19,490.00
for the taxation years 1966, 1967, 1968, 1969,
1970 and 1971 respectively, paid to various provin
cial authorities, were claimed by plaintiff as
expense, but disallowed by the Minister as not
being amounts paid for the purpose of producing
income and alleged in the statement of defence to
be against public policy.
The basic issue to be determined is whether or
not these items may be deducted as expense under
section 4 and paragraph 12(1)(a) of the Income
Tax Act, or, in the case of insurance premiums
and claims, whether they are amounts credited to
a reserve and not deductible under paragraph
12(1)(e). The three relevant clauses read as
follows:
4. Subject to the other provisions of this Part, income for a
taxation year from a business or property is the profit there
from for 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,
(e) an amount transferred or credited to a reserve, contin
gent account or sinking fund except as expressly permitted
by this Part,
In order to decide whether or not an expense is
incurred by the taxpayer for the purpose of gain
ing income within the exception provided by para
graph 12(1)(a), it must first be determined wheth
er the outlay was incurred in accordance with the
ordinary principles of commercial trading or well-
accepted principles of business practice (vide The
Royal Trust Company v. M.N.R. 3 ).
No expert evidence was adduced by the plain
tiff, and consequently none in rebuttal by the
defendant, to assist the Court in defining the
accepted accounting practice to be observed in
setting out the claims in question, either as
accounts payable or as a reserve. Two chartered
accountants testified as to the practice they fol
lowed with reference to plaintiff's books, but they
3 57 DTC 1055.
could not of course be allowed to tender broad
expert opinion, as plaintiff did not qualify them as
experts. They were allowed however to give factual
evidence of the 'existence of a practice of which
they had personal knowledge and which they per
sonally applied in the circumstances of this par
ticular case (vide Fagnan v. Ure 4 ). In any event,
their expertise would not have determined the
ultimate issue of the case.
It is common ground that the payment of insur
ance premiums as a protection against business
losses is an expense made in accordance with the
ordinary principles of commercial trading, or well-
accepted principles of business practice. It must be
determined in this case if the method of recording
the insurance premiums and claims payable as
calculated by the plaintiff in the books as current
liabilities and expense for the year is in accordance
with accepted business principles.
In Time Motors Limited v. M.N.R. 5 , the
Supreme Court of Canada held that the wording
of paragraph 12(1)(e) of the Act clearly refers to
accounting practice in a business of the kind with
which one is concerned. The evidence showed that
in the appellant's accounts credit notes outstanding
(in partial payment of used cars) were treated
according to standard practice as current liabilities
until they were redeemed or expired. Pigeon J.,
said at page 506:
The wording of that provision clearly refers to accounting
practice. The only expression applicable to the present case is
not "contingent liability" but "contingent account". This
means that the provision is to be construed by reference to
proper accounting practice in a business of the kind with which
one is concerned. In the present case, the only evidence of
accounting practice is that of appellant's auditor, a chartered
accountant. His testimony shows that in appellant's accounts
credit notes are treated according to standard practice as
current liabilities until they are redeemed or expired. They are
not classed as contingent liabilities.
The terms "reserve" and "contingent account"
of paragraph 12(1)(e) connote the setting aside of
an amount to meet a contingency, an unascertain-
4 [1958] S.C.R. 377.
5 [1969] S.C.R. 501.
able and indefinite event which may or may not
occur; whereas the term "expense" in 12(1)(a)
implies a liability present and certain, an amount
definite and ascertainable. A standard yearly in
surance premium would undoubtedly fit neatly
under the generally accepted meaning of the term
"expense", and no one would think of describing it
as a "contingency" or a "reserve": the exact
amount of the premium is known, ascertainable,
admitted and payable.
The difficulty in the present case, of course, lies
with the complex formula laid down by Lloyd's to
establish plaintiff's yearly premiums. The amounts
claimed by plaintiff as premiums payable were
amounts entered in the books as liabilities in each
year because they represent the cost of insurance
coverage for that particular year. The amounts
booked as accident and cargo claims were so
entered for that year because the specific events
leading to the claims had occurred in that year.
The accountants did not set aside approximate
amounts as "reserve" against contingencies, these
amounts were booked as definitely payable
because the premiums had been earned, the acci
dents had occurred, the claims had been filed, the
investigations had taken place, the quantum of
damage assessed, and the amounts entered.
In J. L. Guay Ltée v. M.N.R. 6 , the Tax Appeal
Board, the Federal Court Trial and Appeal Divi
sions, and the Supreme Court of Canada dismissed
appeals against the Minister's refusal to allow the
appellant building contractor to deduct the 10%
standard holdbacks from subcontractors. It was
far from certain that the amounts of the holdbacks
would be paid in full to the subcontractors. Noël
A.C.J., at pages 245-6, distinguishes deductible
expenditure for a period from amounts set aside as
a reserve:
6 69 DTC 490, [1971] F.C. 237, [1972] F.C. 1441, 75 DTC
5094.
In most tax cases only amounts which can be exactly deter
mined are accepted. This means that, ordinarily, provisional
amounts or estimates are rejected, and it is not recommended
that data which are conditional, contingent or uncertain be
used in calculating taxable profits. If, indeed, provisional
amounts or estimates are to be accepted, they must be certain.
But then it is always difficult to find a procedure by which to
arrive at a figure which is certain.
As a general rule, if an expenditure is made which is
deductible from income, it must be deducted by computing the
profits for the period in which it was made, and not some other
period.
The procedure adopted by appellant, of deducting from its
income amounts withheld by it, which it may one day be
required to pay its sub-contractor, but which the latter may not
claim until 35 days after the work is approved by the architect,
is, as we have just seen, contrary to the rule that an expenditure
may only be deducted from income for the period in which it
was made, and this would suffice to dispose of the present
appeal. However, as we have seen above, there is an additional
reason for dismissing the appeal: this is that we are dealing
with amounts withheld which are not only uncertain as to
quantum if partial damages result from badly done work, but
which will no longer even be due or payable if damages exceed
the amounts withheld. How can it be claimed in such circum
stances that a certain and current expense is involved, and that
the amounts withheld, which appellant has full enjoyment of
until it pays the amounts owing to the sub-contractor, or until
compensation becomes due, may be deducted by appellant as it
receives them from the owner.
Obviously, the holdbacks in the Guay case were
"conditional, contingent or uncertain" and "should
not be used in calculating taxable profits": their
very purpose was to ensure the payment of any
damage which might be incurred because of faulty
performance. Thus the amounts withheld were not
only uncertain as to quantum if partial damages
resulted, but would no longer be even due and
payable if damages exceeded the amounts with
held. Such is not the situation in the case at bar
where the amounts entered as expense were defi
nitely owing and payable and were in fact paid.
The judgment of Noël A.C.J. was affirmed by the
Federal Court of Appeal on the ground that the
"appellant's profit cannot be computed by taking,
on the one hand, 90% of the value of all work done
for the owner and, on the other hand, deducting
the total sums paid by the appellant to the sub
contractors for their work". The Supreme Court of
Canada gave no reason for dismissing the appeal.
I am of the view, therefore, that in the present
case, the amounts payable, for premiums and for
cargo and accident claims, constituted an outlay
incurred in accordance with the ordinary princi
ples of commercial trading, that they were proper
ly entered as expense, and were incurred for the
purpose of producing income. The Minister's re
assessment for the 1971 taxation year should
therefore be varied accordingly.
And now the fines. The first determination must
be as to whether or not the payment of the fines
constituted an outlay made for the purpose of
producing income for the plaintiff so as to meet
the requirement of the exception to the prohibition
of paragraph 12(1)(a). If the determination is
affirmative, then the argument of public interest
must be met.
In M.N.R. v. E. H. Pooler and Company
Limited', Thurlow J. (as he then was) of the
Exchequer Court of Canada dealt with the allow
ance of a $2,000 fine imposed by the Toronto
Stock Exchange on the respondent company for
the conduct on the part of one of its vice-presidents
which was considered detrimental to the interests
of the Exchange. The learned Judge held that
there was no conceivable way in which the pay
ment of the fine could lead to the gaining of
income. The company was liable to make the
payment, whether it continued to carry on the
business or not, and the payment had no relation
to the carrying on of the business. The vice-presi
dent was not endeavouring to earn commissions for
the company but was acting for reasons of his own.
Thurlow J. added:
In this view, apart from any broader principle which may or
may not be applicable in the particular circumstances to
exclude its deduction, the fine could not in my opinion escape
the prohibition of s. 12(1)(a) unless the inducing by Mr.
Ramsay of other members of the Exchange to open such
accounts was an act done in the course of or for the purposes of
the respondent's business. [The underlining is mine.]
The "broader principle" was not defined and the
payment of the fines was disallowed, not because it
was tainted with impurity, but because, on the
particular facts of the case, it was not incurred for
the purpose of gaining income.
7 62 DTC 1321, 1324.
The English Court of Appeal in The Commis
sioners of Inland Revenue v. Alexander Von Glehn
& Co., Ltd. 8 disallowed the deduction of a com
promise penalty paid by the respondent company
in respect of alleged infringements of the Customs
(War Powers) Act, 1915 9 . Some comments by
their Lordships are reported as follows:
Lord Sterndale M.R. said at page 238:
Now what is the position here? This business could perfectly
well be carried on without any infraction of the law at all.
It is perhaps a little difficult to put the distinction into very
exact language, but there seems to me to be a difference
between a commercial loss in trading and a penalty imposed
upon a person or company for a breach of the law which they
have committed in that trading.
Warrington L.J. said at pages 241-242:
Now it cannot be said that the disbursement in the present
case is made in any way for the purpose of the trade or for the
purpose of earning the profits of the trade. The disbursement is
made, as I have already said—and the same remark applies to
this Rule as to the other—because the individual who is
conducting the trade has, not from any moral obliquity, but has
unfortunately, been guilty of an infraction of the law.
Then Scrutton L.J. said at page 244:
I am inclined to think, though I do not wish finally to decide it,
that the Income Tax Acts are to be confined to lawful busi
nesses, and to businesses carried on in a lawful way.
Counsel for the defendant submitted that there
is a broader principle which would exclude the
deduction of a fine incurred by the taxpayer, either
in the course of business, or otherwise, and made
reference to some English decisions:
Fry L.J. of the English Court of Appeal said in
Cleaver v. Mutual Reserve Fund Life
Association 10 at page 156:
It appears to me that no system of jurisprudence can with
reason include amongst the rights which it enforces rights
directly resulting to the person asserting them from the crime
of that person.
Lord Atkin, in Beresford v. Royal Insurance
8 12 T.C. 232.
9 5 Geo. 5, c. 31.
10 [1892] 1 Q.B. 147.
Company, Limited", said at pages 596-597:
The cases establishing this doctrine have been fully discussed
by Lord Wright M.R. in his judgment in the present case. I
mention some of them in order to call attention to the fact that,
while in the earlier cases different reasons have been given for
the rule, the principle can now be expressed in very general
terms.
and at page 599:
... the absolute rule is that the Courts will not recognize a
benefit accruing to a criminal from his crime.
In The Amicable Insurance Society v.
Bolland 12 , the Lord Chancellor said at page 211:
Is it not void upon the plainest principles of public policy?
Would not such a contract (if available) take away one of those
restraints operating on the minds of men against the commis
sion of crimes? namely, the interest we have in the welfare and
prosperity of our connexions.
Learned counsel then sought to establish that
the doctrine that criminals should not benefit from
their crimes should be applied under our Canadian
income tax laws and would have fines disallowed
as deductible expense, even if incurred for the
purpose of producing income. On the other hand,
counsel for plaintiff argued very effectively that
the legality or illegality of the business to which
the expense relates is irrelevant in interpreting the
Income Tax Act.
The Exchequer Court of Canada held in Rol-
land Paper Company Limited v. M.N.R. ", that
legal expenses incurred by the appellant in defend
ing itself against a charge of illegal trade practice
under the Criminal Code were deductible, under
the provisions of section 12(1)(a) as expenses
incurred for the purpose of gaining or producing
income. These expenses were incurred in accord
ance with sound accounting and commercial prac
tice, they were incurred to defend and preserve the
appellant's system that produced its income. Four-
nier J. had this to say before he quoted Lord
Haldane at pages 338-339:
" [1938] A.C. 586.
12 (1830) 4 Bligh N.S. 194, 5 E.R. 70.
13 [1960] Ex.C.R. 334.
That being the case, it becomes necessary to determine if
unlawful acts committed in earning income from the operations
of a business or trade are to be considered in computing the
income of a taxpayer. The Act clearly states that the income of
a taxpayer is his income from all sources. It is a sweeping and
positive statement and it has been constantly held that income
tax is a tax upon the person measured by his income and that
the source of his income should not be looked at when comput
ing a taxpayer's taxable income.
In the case of Minister of Finance and Smith, [1927] A.C.
193 [1 DTC 92], wherein it was held that upon a literal
construction of the Act the profits in question, though by the
law of the particular province they are illicit, come within the
words employed in s. 3(1), Lord Haldane in his remarks said
(p. 197, in fine):
... There is nothing in the Act which points to any intention
to curtail the statutory definition of income, and it does not
appear appropriate under the circumstances to impart any
assumed moral or ethical standard as controlling in a case
such as this the literal interpretation of the language
employed ....
Four years later, the Exchequer Court held that
the profits of the operator of a call girl organiza
tion were subject to tax and that she may deduct
the expenses incurred for the purpose of earning
income, including legal fees and commission on
bail bonds, Cattanach J. stated at page 766 14 :
At this point I would mention it is abundantly clear from the
decided cases that earnings from illegal operations or illicit
businesses are subject to tax. The respondent, during her
testimony, remarked that she expressed the view to the officers
of the Taxation Division that it was incongruous that the
government should seek to live on the avails of prostitution.
However, the complete answer to such suggestion is to be found
in the judgment of Rowlatt, J. in Mann v. Nash (1929-1932)
16 T.C. 523, where he said at p. 530:
It is said again: "Is the State coming forward to take a
share of unlawful gains?" It is mere rhetoric. The State is
doing nothing of the kind; they are taxing the individual with
reference to certain facts. They are not partners; they are not
principals in the illegality, or sharers in the illegality; they
are merely taxing a man in respect of those resources. I think
it is only rhetoric to say that they are sharing in his profits,
and a piece of rhetoric which is perfectly useless for the
solution of the question which I have to decide.
In my view, the fines paid by the plaintiff in the
case before me resulted from the day-to-day opera
tion of its transport business and were paid as a
necessary expense.
In the absence of constant control by the plain
tiff over the exact cargo weight carried in its
14 [1965] 1 Ex.C.R. 758 (M.N.R. v. Eldridge).
trailers, and the uncontradicted evidence would
suggest that such a tight control would be imprac
tical if not impossible in a very highly competitive
road transport industry, then unintentional viola
tions of weight restrictions would seem to be inevi
table. Plaintiff's method of bookkeeping, with fines
paid entered as expense and fines recovered from
customers booked as revenue, would also indicate
that the payment of fines was very much a current
item in the operation of plaintiff's business. The
ready availability of advance overweight permits
at the request of a shipper would also tend to show
that weight restrictions can be easily overcome and
that violations thereof are obviously not outra
geous transgressions of public policy.
The Minister's re-assessments with reference to
fines should therefore be varied accordingly.
Plaintiff's appeals in respect of its 1966, 1967,
1968, 1969 and 1970 taxation years are quashed.
Plaintiffs appeal is allowed in respect of its 1971
taxation year allowing losses sustained in the five
preceding taxation years under paragraph 27(1)(e)
of the Act. Costs to the plaintiff.
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