Dymo of Canada Limited (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Walsh J.—Toronto, March 6;
Ottawa, March 15, 1973.
Income tax—Business income, computation of—Payments
made to get rid of burdensome sales arrangement—Whether
expense of capital or income nature.
Prior to 1962 C and W in partnership sold a United States
company's products in Canada. In 1962 appellant company
commenced manufacturing the product in Canada and there
after under an arrangement with appellant C and W sold the
product at a 40% discount. C and W did not have an
exclusive sales right to the product. In December 1963
appellant agreed with C and W for the termination of the
arrangement with them at December 31, 1963. Pursuant to
the agreement C and W ceased distributing appellant's prod
ucts, assigned their accounts receivable to appellant, sold
appellant their office furniture, advertising material and
circulars, and gave a restrictive covenant not to compete
with appellant for three years. In return appellant paid C and
W a percentage of sales for the following three years.
Payments of more than $27,500 were made by appellant to
C and Win those three years.
Held, the payments were deductible by appellant in com
puting its income for those years. The payments were made
primarily to cancel C and Ws non-exclusive agreement and
thus relieve appellant of the burden of providing them its
products at a 40% discount and enable them to sell the
products at a higher profit.
Mandrel Industries Inc. v. M.N.R. [1965] C.T.C. 233,
distinguished; Mitchell v. B. W. Noble Ltd. 11 T.C. 372;
Anglo-Persian Oil Co. v. Dale 16 T.C. 253, referred to.
INCOME tax appeal.
COUNSEL:
A. D. McAlpine, Q.C. and H. D. Stewart for
appellant.
R. B. Thomas for respondent.
SOLICITORS:
A. D. McAlpine, Q.C., Toronto, for
appellant.
Deputy Attorney General of Canada for
respondent.
WALSH J.—Appellant is a Canadian corpora
tion which carries on the business of manufac
turing, selling and distributing various products
in the marking and labelling field, including
embossing machines and tapes, addressing
machines, pressure sensitive labels and stencils
sold under the name "Dymo" and other names,
and a marking device and stencil sold under the
trade name "Sten-C-Labl". Some of these prod
ucts are purchased from its parent American
company, Dymo Industries Inc., while it manu
factures other products itself in Canada. Some
of its products are sold by its own sales staff,
and others by distributors across Canada of
which it has some 500. The only product with
which this case is concerned is Sten-C-Labl
which consists of a small sheet of stencil paper,
a sheet of carbon paper and a sheet of backing
paper, all held together with an adhesive tape at
the top. There is an applicator machine which
holds the label and feeds ink through it. An
address can be typed on the label which, when
pressed on a packing case, will then imprint this
address. Prior to 1962 two individuals, namely
F. Chapman and K. West, had been selling
Sten-C-Labl products in Canada in partnership
using the name Sten-C-Labl Company of
Canada as their business name with permission
of Sten-C-Labl Inc., an American corporation.
Sten-C-Labl had been registered as a trade mark
in the United States on April 15, 1952 and had
been used in Canada since July 1, 1946. It was
registered as a trade mark in Canada on June
17, 1960, but Messrs. Chapman and West never
became registered users under the provisions of
the Trade Marks Act. Late in 1961 appellant's
parent company acquired ownership of Sten-C-
Labl Inc. Messrs. Chapman and West had been
buying the product in question from Sten-C-
Labl Inc. in the United States, but the policy of
appellant's parent company, after acquiring
ownership of Sten-C-Labl Inc. was that all sales
of the product in Canada should be made
through its Canadian subsidiary, the appellant.
Appellant had commenced business in the
spring of 1961, originally importing tape writers
and tape, another product of the parent compa
ny, from the United States. In 1962 they moved
to larger premises and started assembling these
machines there, adding about fifteen people to
their staff when they commenced this. In July
or August 1962, after a visit to the parent com
pany, Mr. Harold Staines, who was Secretary
and Manager of appellant at the time, decided
that the Sten-C-Labl could be manufactured in
Canada and he approached Messrs. Chapman
and West advising them that they could no
longer purchase their supplies through the
United States' company. He offered to buy their
stock on hand, and advised them that hence
forth appellant would supply their needs at a
40% discount, shipping them direct to the cus
tomers themselves. No exclusive agency was
given to Messrs. Chapman and West. Mr. Chap-
man moved the partnership's business address
to appellant's premises in September 1962, Mr.
West having been inactive in connection with
the Sten-C-Labl business for some time, and
appellant provided him with stenographic and
bookkeeping assistance. All orders were
shipped directly by appellant and at the end of
each month the total of sales was tabulated and
the Sten-C-Labl partnership was billed by appel
lant for 60% of this total. This was a somewhat
different arrangement from that normally adopt
ed by appellant with distributors who would buy
from it at a discount and resell at whatever price
they chose. Mr. Staines considered Mr. Chap-
man more as an agent for the company than as a
distributor, although at that time he was not in
the company's employ. In due course, about
September 1963, he reached the conclusion that
Mr. Chapman was not aggressive enough nor a
good organizer so decided to terminate the
arrangement but felt that some payment on ter
mination should be made to the partnership,
since they had been selling Sten-C-Labl for
some time, even using the trade name as part of
the partnership name and were the only people
selling Sten-C-Labl in Canada at the time. It was
decided to pay them, by payments spread over a
period of four years, an amount of not less than
$18,000 which it was estimated would be the
approximate sum earned by the partnership as a
result of the 40% discount over a six-month
period. An agreement was drawn up dated
December 27, 1963, which provided that the
partners (designated as distributors) would con
tinue to collect their trade accounts receivable
up to December 31, 1963, and would then sell
these to appellant at their face value, less rea
sonable allowance for bad debts, and that a
further adjustment would be made within a
three-year period for any accounts with respect
to which appellant could not collect the amount
paid by it to the distributors. Clause 2 of the
agreement read:
2. The Distributors shall deliver to Dymo all their lists of
customers of the products, all unfilled orders for the sale of
the products and all data and records pertaining to the sale
of the products and samples and advertising material.
Clause 3 provided for paying the distributors a
descending percentage on Dymo sales of Sten-
C-Labl products in Canada during the years
1964, 1965 and 1966 with a minimum total of
$18,000. Other clauses provided that the dis
tributor would cease to act as a distributor for
Dymo as of December 31, 1963, and that the
distributor would sign a restrictive covenant.
The restrictive covenants - which were added,
according to the evidence of Mr. Staines, at the
suggestion of appellant's attorneys were signed
individually by Mr. Chapman and Mr. West on
January 3, 1964 and it was agreed that for three
years they would not personally, in partnership
or through any firm or otherwise, engage in or
carry on the sale of products to compete with
the products presently sold or distributed by
appellant, nor would they permit their names to
be used in such connection.
As a further step in carrying out the agree
ment the accounts receivable of the Sten-C-Labl
partnership in the amount of $11,308.31 were
assigned to appellant on January 3, 1964. On
December 31, 1963 certain office equipment in
the amount of $330 was sold to appellant. This
agreement also stated:
In respect to the Sten-C-Labl products; all lists of custom
ers, all unfilled orders, all data and records pertaining to the
sale of products and samples and advertising material.
but no value was assigned to this. Also, as of
December 27, 1963, by letter appellant engaged
Mr. Chapman at a salary of $1,000 a month for
the months of January, February and March
1964, it being stated:
The intent of this agreement is that you will cooperate
with us fully in calling on customers and in expediting an
easy transition to ensure that we will obtain the maximum
benefit from your personal contact with customers as our
distributor.
He was also to be reimbursed for travelling
expenses and it was provided that for purposes
of income tax deductions he would be treated as
an employee but would not be regarded as an
employee for other purposes, such as the com-
pany's pension plan.
As a result of these agreements payments
were made to the partnership in the amounts of
$7,030.31 in 1964, $11,467.71 in 1965, and
$9,026.21 in 1966, making a total of $27,524.23
(excluding, of course, the salary paid to Mr.
Chapman). These amounts were deducted as
expense items in appellant's tax returns for the
years in question and were disallowed by the
Minister as being capital expenditures. Subse
quently, the Minister did allow $2,000 for the
1964 taxation year as being consideration for
the transfer and sale of samples and advertising
material to the appellant, reducing the Minister's
claim for that year to tax on an additional
amount of $5,030.31. It is the classification of
these payments to the partnership by appellant
which is the issue in the present case and the
Court has to determine whether they were cur
rent and normal expenses arising out of the
termination of the partnership's contract, and,
as such, laid out to produce income for appel
lant or whether, on the other hand, they were
expenditures of a capital nature laid out to
secure an enduring benefit for the business.
Commencing in January 1964 appellant hired
two salesmen and appointed an agent in Van-
couver and by about March 1964 had fifteen
distributors for Sten-C-Labl products. Sales of
Sten-C-Labl increased dramatically from
$58,804 in 1963 to $118,501 in 1964, $170,603
in 1965, $242,345 in 1966 and $285,129 in
1967 and appellant no longer had to pay the
40% discount. On December 31, 1963 appellant
acquired the Elliott Business Machine Company
which sold a machine operating with a paper
stencil which is quite extensively used. It had a
plant in Lachine and a sales office in Toronto
and the Elliott company in the United States
was a subsidiary of appellant's parent company.
Elliott sold directly to the retail trade so had a
staff of salesmen of its own and in April 1964
the Sten-C-Labl sales were turned over to Elli-
ott to handle through them. Mr. Staines insisted,
however, that when he decided to terminate the
arrangement with the partnership this had noth
ing to do with the acquisition of the Elliott
Business Machine Company. They wanted to
retain the knowledge of Mr. Chapman and his
familiarity with selling the Sten-C-Labl product,
as appellant, at that time, had no experience in
selling to the retail trade and wished his assist
ance during the transition period.
On these facts appellant argued that although
the partnership was the sole distributor of Sten-
C-Labl products until appellant itself entered
into this field after the acquisition of Sten-C-
Labl Inc. by its parent company, the partnership
had nevertheless never been given an exclusive
agency and there was nothing to prevent appel
lant from selling the product directly or appoint
ing other distributors or agents as it chose. On
the basis of equity, however, and in line with
the jurisprudence on this, for example the
Ontario case of Robinson v. Galt Chemical
Products Ltd. [1933] O.W.N. 502, it was rea
sonable to make some payment to the partners
on termination of the business relationship with
them and this was the primary reason for the
payments made by appellant. Other arrange
ments, such as taking over the accounts receiv
able of the partners, buying their office equip
ment, advertising material and circulars and
customers' lists and requiring a restrictive cove
nant not to compete for three years during
which the partners would still be drawing pay
ments from appellant, were merely incidental to
this primary objective. With respect to the cus
tomers' lists, it never actually received any as
such nor did it require them since Mr. Chapman
had, since August 1962, been working on appel
lant's premises with stenographic and account
ing help furnished to him by appellant who
shipped the merchandise orders directly to the
customers. After a year and one-half of this
method of operation appellant was well aware
of who the customers were and did not require
this information from the partners nor was any
specific sum allocated out of the amount paid to
pay for any such lists. The fact that Mr. Staines
had recorded the payment in the company's
book as a payment for customers' lists cannot
alter the true nature of the matter. See The
Seaham Harbour Dock Company v. Crook
(H.M. Inspector of Taxes) 16 T.C. 333 where
Lord Hanworth stated at page 347:
... the mere mode of payment or method of accounting
does not alter the character of the sums received;
and again at page 345 where he stated:
We are therefore compelled to look at the substance of
the matter... .
Appellant also argued that there could be no
question of the purchase of goodwill from the
partners. Any goodwill resulting from the opera
tions of the partnership accrued to the name
"Sten-C-Labl", which as it belonged to appel
lant's parent company and not to the partner
ship, had no value to the partnership. Any per
sonal goodwill which Mr. Chapman had by
virtue of his contact with customers in the trade
was paid for by appellant when it engaged him
for three months at a salary to train its salesmen
and assist them in meeting the customers and
learning his methods of operating. This is clear
from the terms of the letter appointing him. In
any event it has been well settled that goodwill
cannot be evaluated separately for tax purposes
when a business is purchased as a going concern
even if the purchase price is broken down so as
to show an item for goodwill (see Southam
Business Publications Ltd. v. M.N.R. [1966]
Ex.C.R. 1055 and the cases referred to therein
including Dominion Dairies Ltd. v. M.N.R.
[1966] C.T.C. 1, Schacter v. M.N.R. [1962]
C.T.C. 437 and Trego v. Hunt [1896] A.C. 7).
Those cases decided that the nature of the
expense was a capital expense since the busi
nesses in question had been purchased as going
concerns, whether to carry them on or to close
them down and thereby eliminate a competitor.
In the present case, however, appellant did not
have to acquire the business of the partnership
in order to effectively close it down as it had
full control in Canada of the sale and distribu
tion of the Sten-C-Labl product which was the
sole product sold by the partnership. It would
be unrealistic, therefore, to say that the pur
chase price was paid with the view of eliminat
ing a competitor. Furthermore, the fact that
there was a restrictive covenant included in the
agreement does not alter the true nature of the
transaction, as a similar situation existed in the
case of Anglo-Persian Oil Company, Limited v.
Dale (H.M. Inspector of Taxes) 16 T.C. 253. In
that case, which appellant relied on strongly, the
company had appointed an agent for a period of
years but eventually cancelled this for a lump
sum payment when it became apparent that the
commissions being earned by the agent were
much higher than what had been anticipated. It
was held that although the payment was a large
one (£300,000) this was properly deductible for
income tax. In rendering judgment in that case,
Lord Romer stated at pages 275-76:
I can find no indication that any enduring advantage to the
Company's trade from a capital point of view was being
sought, nor was it suggested that any such advantage would
be gained in fact. It is true that the committee of directors
appointed to negotiate with Strick, Scott & Co. reported on
the 28th September, 1922, that, in addition to the large
saving to the Company that would be effected by the
cancellation of the contract with them, there would be other
material advantages, but the committee did not explain what
those advantages would be. They might well have been, and
probably were, merely revenue advantages. For myself at
any rate, I cannot see what other advantages could accrue to
the Company from the cancellation. The result would
merely be that the Company would be represented in the
East by agents other than Strick, Scott & Co., for it is
obvious that being a corporation it must have agents of
some sort out there. Those agents would no doubt be
employed on terms more favourable to the Company than
those contained in the agreement of the 6th May, 1914, and
it may well be that the Company would retain a greater
measure of control over such agents than they could over
Strick, Scott & Co. All this would lead to the economy and
saving in working expenses spoken of by Lord Inchcape. Of
any further advantage than this there is no evidence. Except
for the change of agents and for all that I know to the
contrary, the business of the Company continued exactly as
it was before the change. I cannot find that any advantage or
benefit either positive or negative accrued to the capital of
the Company by the expenditure of the £300,000. All the
advantage and benefit that it brought seems to have been
merely of a revenue character.
A similar finding was made in the case of B.W.
Noble, Ltd. v. Mitchell (H.M. Inspector of
Taxes) 11 T.C. 372, where a substantial lump
sum payment of £19,500 was paid to a director
who had been appointed for life but was being
asked to resign. He also owned valuable shares
of the company and participating notes and as
part of the agreement sold the shares to the
other directors at par and surrendered his par
ticipating notes. In this case, Rowlatt J. said at
page 414:
I should not have much difficulty if this were a question of
paying a month's wages or six months' wages in lieu of
notice to an employee who, the employer had found, from
the business point of view, could not possibly be retained
because he was turning away custom. I should not have
much difficulty about that. But here we have very special
facts and very big figures, and the question is whether there
is anything in these facts that makes a difference.... It
seems to me that they paid all this sum—although the
circumstances are very peculiar—simply to get rid of the
Director. These other items came in, but they only came in
as enhancing the measure of the claim which they had to
deal with. It is true that in the agreement it is said that he
agreed with the company to transfer the shares at their face
value to his co-directors; and that he undertook to surrender
his profit-sharing certificates to the Company or as they
should direct; but I think that is only putting into the
agreement the obligation upon him, as he was being paid in
respect of these heads of damage, that he would deal with
them on the footing which formed the basis of his payment,
namely, that he should part with these pieces of property. I
do not think it can be said that there are two things in this
payment: First of all, a compensation for the loss of his
salary, and secondly, independently, a buying of the shares
and a buying of his profit-sharing certificates. I do not think
that is the view of it. I think the whole sum was a sum paid
to him to induce him to go—to get rid of him, in other
words. Therefore it seems to me that this was a business
expense.
Now comes the question of whether it was a capital
expense. I do not think the cases in which there was a
question of a lump sum payment to avoid a recurring
business expense have anything to do with this case. There
is no question here of a recurring business expense or
payment of a capital sum to get rid of it. I do not think that
is the point of view from which one approaches this case. I
do not think it is on that ground that the subject can
successfully argue that this is not a capital expense. But is it
a capital expense on any ground? As Lord Cave points oat,
again in the case of Atherton v. British Insulated and Helsby
Cables, Limited (10 T.C. at p. 192), it is a capital expense if
you buy an asset or purchase an enduring advantage. This
was not that case, or anything like it.
And again at pages 415-16:
It seems to me it is simply this, although the largeness of the
figures and the peculiar nature of the circumstances perplex
one, that this is no more than a payment to get rid of a
servant in the course of the business and in the year in
which the trouble comes. I do not think it is a capital
expense; and I have already held that it is an expense
incurred in the conduct of the business.
In the case of Johnston Testers Ltd. v.
M.N.R. [1965] C.T.C. 116, Gibson J. made an
extensive examination of the jurisprudence in
question including the leading British cases of
Atherton v. British Insulated and Helsby Cables,
Limited (supra) and Anglo-Persian Oil Compa
ny, Limited v. Dale (supra). He quotes the state
ment of Lord Cave in the former case at page
192:
But when an expenditure is made, not only once and for all,
but with a view to bringing into existence an asset or an
advantage for the enduring benefit of a trade, I think there is
very good reason (in the absence of special circumstances
leading to an opposite conclusion) for treating such an
expenditure as properly attributable not to revenue but to
capital. [Page 126.]
Rowlatt J., however, in the Anglo-Persian Oil
case pointed out that there was a fallacy in the
use of the word "enduring", and stated [at page
262] that:
What Lord Cave is quite clearly speaking of is a benefit
which endures, in the way that fixed capital endures; not a
benefit which endures in the sense that for a good number
of years it relieves you of a revenue payment.
He then held that a commutation payment
representing future earnings of the agent which
were redeemed, were made in the course of and
for the purposes of a continuing business. In the
case before Gibson J. which, unlike the present
case, dealt with the commutation of a contract
calling for payments of royalties which would
otherwise have continued on annually for some
fourteen years, he found at page 128 that the
payment was
... to get rid of an onerous annual expense in respect to a
business that it proposed to and did carry on, and such
payment was made in the course of such continuing busi
ness; and that as a result no advantage or benefit either
positive or negative accrued to the capital account of the
appellant, but instead all the advantage and benefit obtained
was of a revenue character and, therefore, the payment was
not a capital outlay within the meaning of Section 12(1)(b)
of the Income Tax Act.
See also the case of B.P. Australia, Ltd. v.
Commissioner of Taxation (Australia) [1965] 3
All E.R. 209 which referred with approval at
page 217 to the case of Mitchell v. B.W. Noble,
Ltd. (supra) and also, at page 223, to the case of
Anglo-Persian Oil Company, Limited v. Dale
(supra). With reference to that case, Lord
Pearce, who wrote the Privy Council judgment,
stated [at p. 223]:
It paid the agent company £300,000 cash in consideration of
the agency agreement being terminated. It was held by
ROWLATT, J., that this was a revenue payment, since there
was no purchase of goodwill or start of a business, but
simply the putting to an end of an expensive method of
carrying on the business which remained the same, whether
the distributive side was in the hands of the oil company
itself or its agents. The Court of Appeal affirmed this
decision. LAWRENCE, L.J., concluded that
The contract to employ an agent to manage the taxpay
er's business in Persia, however, in no sense forms part of
the fixed capital of the taxpayer but is a contract relating
to the working of the taxpayer's business, the method of
managing which may be changed from time to time.
Neither the contract itself nor a payment to cancel it
would, in my opinion, find any place in the capital
accounts of the company.
It justifies the argument that expenditure incurred in making
a radical change in the marketing arrangements of a compa-
ny's organisation need not be a capital payment. It refutes
any argument that the bigness of the amounts and the
widespread area involved and the finality and extent of the
change point automatically to a capital outlay.
In the case of Mandrel Industries, Inc. v.
M.N.R. [1965] C.T.C. 233, which respondent
principally relied on, a subsidiary of appellant
had granted an exclusive right to distribute its
products in Canada for a period of five years.
When the subsidiary was wound up and all its
assets came into the possession of the appellant,
it desired to cancel this distributorship contract
which still had three years to run and paid
$150,000 for the assignment of the distributor's
rights under it, taking over at the same time
virtually the whole staff and sales organization
of the former distributor. The headnote, which
accurately represents the findings of the Court,
held in part:
(i) That the payment, which was made by the appellant to
re-acquire the right to sell its own products and to launch
its own selling organization in Canada, was made to
secure an advantage for the enduring benefit of the appel
lant's trade, despite the brevity of the unexpired term of
the 1956 agreement, and was therefore a capital
expenditure;
In rendering judgment, Cattanach J. at page 242
referred to the case of the Vallambrosa Rubber
Co. Ltd. v. Farmer (5 T.C. 529) in which Lord
Dunedin said at page 536:
I do not say this consideration is absolutely final or
determinative; but in a rough way I think it is not a bad
criterion of what is capital expenditure to say that capital
expenditure is a thing that is going to be spent once and for
all, and income expenditure is a thing that is going to recur
every year.
Applying that dictum to the facts of the case
before him, Cattanach J. stated:
What the appellant did here was to make a payment once
and for all, with a view to bringing into being an advantage
for the enduring benefit of the trade. There is no question
that the payment was made once and for all. I also think it is
clear that what the payment brought into being was an
advantage in that the appellant could operate its own selling
operation in Canada without being in breach of its previous
ly existing exclusive sales contract with Electro-Technical
Labs. Canada, Ltd.
He goes on to say that it also acquired an
existing sales and servicing organization. He
finds that although the appellant only acquired
the right of commencing selling operations in
Canada three years earlier than it otherwise
would have, this is sufficient to constitute an
"enduring benefit" or to be of a "permanent
character", stating at page 243:
These phrases were introduced in some of the judicial dicta
on this subject to indicate that an asset or advantage
acquired must have enough durability to justify its being
treated as a capital asset and the terms are not used synony-
mously with "everlasting". There have been many instances
where an "advantage" has been held to be "enduring"
despite the fact that it had a very limited life or duration.
Since he found for the Minister on this issue,
Cattanach J. did not find it necessary to consid
er the question of whether the payment was
made solely in consideration of the acquisition
or cancellation of the exclusive sales agency or
if the appellant received other benefits as well.
He does comment that if other benefits were
received then the appellant will have failed to
discharge the onus of proving the expenditure.
In the present case, as previously indicated, I
have reached the conclusion that any other
benefits received by the appellant were so insig
nificant as not to affect the outcome of the
issue. Primarily, the payment was made for the
cancellation of the agreement with the
partnership.
Respondent's contentions in the present case
must rest on two assumptions: (1) that the part
nership was a separate and independent busi
ness enterprise of which appellant acquired the
assets including customers' lists and goodwill, if
any, with a view to winding up this independent
enterprise and eliminating competition from it;
and (2) that the partnership had an exclusive
right to sell the products Sten-C-Labl in Canada
and that appellant therefore acquired an endur
ing benefit by the cancellation of this right. On
the facts of this case I do not believe that either
assumption is tenable. While in law the partner
ship maintained a separate corporate existence
even while Mr. Chapman was operating out of
appellant's business premises in that, although
the merchandise was shipped by appellant, it
was invoiced to the customers by the partner
ship and the appellant in turn invoiced the part
nership each month for 60% of the amounts of
its sales to customers being the amount due to it
for the Sten-C-Labl supplies sold by the part
nership after deducting the 40% discount
allowed to the partnership on such sales, this
does not alter the fact that after August 1962
when appellant commenced manufacturing the
Sten-C-Labl products in Canada and advised the
partnership that henceforth it could no longer
buy them from the American company but only
from it, the partnership was operating more or
less as an agent of appellant. There is nothing in
law to prevent a company from employing
another corporation or a partnership as an agent
so the fact of the separate existence of the
partnership does not alter the true situation. In
this respect the facts of the present case very
closely resemble those of the Anglo-Persian Oil
case (supra). Furthermore, although the partner
ship may have been the sole distributors in
Canada of Sten-C-Labl until appellant itself
commenced distributing, there is no justification
for the assumption that the partnership at any
time had an exclusive agency. In fact this was
denied by Mr. Staines and there is no evidence
to the contrary. The present case can therefore
clearly be distinguished from the Mandrel case
(supra) in which the taxpayer could only enter
into the business itself by terminating the exclu
sive agency. In the present case appellant could
commence direct sales or appoint other distribu
tors or agents at any time it chose to do so, and,
in fact, early in 1964 it did appoint an agent in
Vancouver, hired two salesmen and by March
1964 had appointed fifteen distributors. The
fact that this was not done before the agreement
at the end of 1963 does not indicate that appel
lant could not have done so earlier.
I therefore find that in the present case appel
lant by the agreement acquired no rights or
advantages of an enduring nature which it did
not already have, nor did it benefit from the
elimination of a competitor since it had at all
times the right to cancel the agreement with the
partnership which was not for a fixed term. It is
common ground that it was entirely proper to
make the payments which it did to the partner
ship and I find that these were made primarily
in order to cancel the rights which the partner
ship had in its non-exclusive agreement with
appellant, whether this is considered as an
agency agreement or not, so that appellant could
thereby earn additional income by being
relieved of the necessity of providing the mer
chandise in question at a 40% discount, and in
view of a change in its business policy whereby
it now proposed, in addition to selling to dis
tributors, to sell directly to the retail trade
which it at all times had had a right to do. It was
simply a change in the method of appellant's
business operations made with a view to earning
increased income as in the B.P. Australia case
(supra). The payments made to the partnership
as a result of this were therefore properly
deductible as an expense made with a view to
earning income. Appellant's appeal against the
decision of the Tax Appeal Board is therefore
maintained, with costs.
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.