T-4128-73
Automatic Toll Systems (Canada) Ltd. (formerly
Shoup Canada Ltd.) (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Pratte J.—Montreal, November
14, 1973; Ottawa, January 3, 1974.
Income tax—Expenses incurred to discharge agency con-
tract—Whether income or capital expense—Income Tax Act,
s. 12(1)(a).
The Minister re-assessed the appellant company for the
1967 taxation year on the ground that the appellant had
improperly deducted from its income capital expenditures in
the sum of $60,000.
The appellant, a lessor of automatic toll collection equip
ment, entered into a contract authorizing as its sales repre
sentative L.S. company, controlled by B, whose influence
with the Quebec Autoroute Authority was helpful in obtain
ing business for the appellant. The influence of B ceased
with a change in the provincial government. Appellant
undertook its own negotiations with the Authority but found
itself obliged, under its contract with L.S. company, to
continue payment of commissions on business obtained. To
effect termination of the contract, the appellant made agree
ments acquiring (1) the rights of L.S. company in two leases
of equipment to the Authority and (2) all shares in M
company, a mere corporate shell incorporated at B's
instance, and to which L.S. company transferred its rights
under the contract with appellant.
Held, allowing the appeal, the sum of $60,000 expended
in these transactions was not for the real purpose of acquir
ing any assets from the companies in question, but was
merely a way of getting rid of an onerous contract.
Anglo-Persian Oil Co. Ltd. v. Dale (1929-32) 16 T.C.
253, applied.
INCOME tax appeal.
COUNSEL:
Maurice Régnier and Robert Couzin for
appellant.
André Gauthier for respondent.
SOLICITORS:
Stikeman, Elliott & Co., Montreal, for
appellant.
Deputy Attorney General of Canada for
respondent.
PRATTE J.—This is an appeal from a reassess
ment of the appellant's income tax for the 1967
taxation year. That reassessment was made on
the basis that the appellant had improperly
deducted from its income capital expenditures
totalling $60,000.00.
The appellant is a Canadian company which
carries on the business of leasing automatic toll
collection equipment.' For a while, it was not
very successful in the Province of Quebec. The
Quebec Autoroute Authority would not do busi
ness with it. The president of the appellant
heard that this situation might change if the
appellant hired one Mr. Bastien, an accountant
from Montreal, as its representative in Quebec.
Mr. Bastien was contacted and, eventually, it
was agreed that Mr. Bastien, or, rather, a com
pany of his called "Les Signaux Électroniques
de Québec Inc." (hereinafter referred to as "Les
Signaux"), would act as the appellant's repre
sentative in its dealings with the Quebec Auto-
route Authority. The conditions of this agree
ment were stated in a letter, dated April 9, 1962,
from the appellant to "Les Signaux", Mr. Basti-
en's company. Only two paragraphs of this
letter are relevant to this appeal; they read as
follows:
It is agreed that you will act as our representative in
connection with business undertaken with the Quebec
Autoroute Authority for which a commission of 10% will be
paid to you for performing the services ordinarily performed
by a manufacturer's representative. The 10% paid to you
will be based on the net price paid to and received by us on
all installations whether by sale or rental for equipment or
for maintenance for the period commencing September 1,
1961 and ending September 1, 1967, hereinafter called the
"Term", with regard to the Quebec Autoroute Authority.
The compensation paid shall be in Canadian currency.
Your right to earn compensation shall cease with the end
of the Term, and any provisions for renewal, extensions,
options, or elections to renew or to extend any contract
' The appellant is a wholly owned subsidiary of an Ameri-
can company. The president of the American company is-
also the president of the appellant. It is to be noted that
certain of the contracts to which I will refer in this judgment
were entered into by the American parent company, others
by its Canadian subsidiary. However, as nothing turns on
this distinction, I will refer to these contracts as having all
been concluded by the appellant.
made during the Term shall not be deemed to entitle you to
compensation if any of such events occur after the Term.
However, nothing herein shall be construed to prevent the
payment to you of compensation on such renewals or exten
sions pursuant to options or elections for the entire period
thereof if made during the Term.
From 1961 to 1966, Mr. Bastien proved that
his influence had not been overestimated. He
succeeded in obtaining many contracts from the
Quebec Autoroute Authority. In 1966, two of
these contracts were still in force. Both were
leases of equipment. The first one, dated
December 1, 1961, was to expire on December
2, 1966; the other one, dated August 6, 1963,
was to expire on December 31, 1968. 2 In 1966,
Mr. Bastien was in the process of negotiating a
new long term lease which was to replace these
two contracts. Toward the end of the year,
though, the president of the appellant realized
that these negotiations had come to a stop. He
then learned that a provincial election had been
held in Quebec and that, as a result, Mr. Bastien
had lost his influence. The officials of the
Quebec Autoroute Authority would no longer
negotiate with Mr. Bastien. From then on, it is
the president of the appellant who conducted
the negotiations which resulted in the signature,
on June 7, 1967, of a new six-year lease which
replaced the two leases that I have already
mentioned. Before this new lease was signed,
however, the president of the appellant contact
ed Mr. Bastien: he wanted to know under what
conditions the appellant could terminate its rela
tionship with "Les Signaux". If, as was then
anticipated, the appellant succeeded in its
negotiations with the Authority and was award
ed a new contract before September 1, 1967,
the appellant, under the terms of the agreement
it had made with "Les Signaux", would then
2 As the equipment leased to the Quebec Autoroute Au
thority was supplied by the appellant, one would have
expected the appellant and the Authority to be the only
parties to these contracts. Such was not the case. These two
leases were entered into by the Authority on the one hand,
and, on the other hand, by both the appellant and "Les
Signaux". It seems that "Les Signaux" was made a party to
these contracts on the insistence of Mr. Bastien, who
wanted to have a guarantee that "Les Signaux" would be
paid its commission.
have to pay to that company a commission on
all rentals to be paid by the Quebec Autoroute
Authority under the new contract. As the new
contract would not be the result of Mr. Basti-
en's efforts, the president of the appellant felt
that "Les Signaux" should not profit by it. At
the end of 1966, Mr. Bastien agreed to the
cancellation of the agreement that the appellant
had made with "Les Signaux" provided that the
appellant would pay the sum of $60,000.00. It
was left to Mr. Bastien to determine how, in
fact, this result would be arrived at. All that the
appellant was interested in was to obtain the
cancellation of its agreement with "Les Si-
gnaux" for a price of not more than
$60,000.00.
Mr. Bastien thereafter proposed, and the
appellant accepted, that the following contracts
be made:
1. By an agreement dated December 21,
1966, "Les Signaux" transferred to a com
pany named Montrose Industries Inc., all its
rights under the agreement it had with the
appellant. This transfer was made for the
price of $29,000.00, which was paid by the
issuance to "Les Signaux" of 29,000 pre
ferred shares of Montrose.
Montrose Industries Inc. was a mere corpo
rate shell. It had been incorporated a few
years earlier at the instigation of Mr. Bastien
who owned its common stock. Apparently, it
had always been a dormant company.
2. By an agreement signed on January 12,
1967, the appellant acquired from "Les Si-
gnaux", for the price of $29,000.00, the 29,000
preferred shares of Montrose Industries Inc.
By an agreement signed on the same day,
the appellant purchased from Mr. Bastien, for
$1,000.00, the common shares of Montrose
Industries Inc.
3. By an agreement signed on January 3,
1967, "Les Signaux" sold to the appellant, for
the price of $30,000.00, all its rights and
interests in the two leases, dated respectively
December 1, 1961 and August 6, 1963, that
had been entered into with the Quebec Auto-
route Authority.
It is the deduction of the amounts paid by the
appellant under those contracts which has been
denied by the respondent.
The first submission of counsel for the
respondent was that these amounts were not
paid by the appellant to obtain the cancellation
of the agreement it had entered into with "Les
Signaux". According to counsel, these amounts
were spent for the purpose of acquiring capital
assets, namely: the shares of Montrose Indus
tries Inc. and the rights of "Les Signaux" in the
two leases of equipment. In my view, this con
tention is untenable. The evidence shows clearly
that the payments here in question were made
by the appellant for the sole purpose of being
released from its obligation to pay a commission
to "Les Signaux". The appellant never wanted
to acquire any asset from Mr. Bastien or his
companies. The various arrangements under
which the sum of $60,000.00 was paid by the
appellant were, as submitted by counsel for the
appellant, a mere machinery created for the
purpose of cancelling the contract under which
the appellant was bound to pay a commission to
"Les Signaux".
Counsel for the respondent also submitted
that the payments were not revenue expendi
tures even if the appellant had made them for
the purpose of obtaining the cancellation of its
contract with "Les Signaux". He said that the
appellant could not have continued to do busi
ness with the Quebec Autoroute Authority if it
had not severed its relationship with "Les Si-
gnaux". The $60,000.00 here in question should
therefore be considered as being the price that
the appellant had to pay to obtain a new long
term contract from the Quebec Autoroute Au
thority. This submission is not supported by the
evidence which, as I have already said, shows
that the sum of $60,000.00 was paid by the
appellant for the sole purpose of getting rid of
an onerous contract under which it was obliged
to pay a commission to "Les Signaux".
In my view the facts in this case cannot be
distinguished from those in Anglo-Persian Oil
Co. Ltd. v. Dale (1929-32) 16 T.C. 253.
For these reasons, the appeal is allowed 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.