Minister of National Revenue v. Goldsmith Bros. Smelting & Refining Co. / Minister of Nati

:- KERWIN J.:-The facts are set forth in the reasons for judgment of Mr. Justice Cameron (3) and, on those facts, as to which there is no contradiction, these appeals are covered by the decision of this Court in Minister of National

Revenue v. The Kellogg Company of Canada Ltd. (1).

There the previous decision in Minister of National Revenue v. Dominion Natural Gas Co. Ltd. (2), was distinguished, as it is distinguishable here, since in that case the

Court was concerned with money paid to preserve a capital asset. The legal fees paid by each of the respondents were necessary in a commercial sense and were wholly and exclusively laid out or expended for the purpose of earning the income (Riedle Brewery Ltd. v. Minister of National Revenue (1) and, therefore, do not fall within the prohibition contained in section 6(1) (a) of the Income War Tax Act, 1927, 97, as amended.

The appeals should be dismissed with costs.

&

The judgment of Kellock and Locke, JJ. was delivered LTD.by:- KELLOCK J.:-The question involved in these appeals, which were argued together, arises under section 6(1) (a) of the Income War Tax Act. In 1947, the respondents, both of whom carry on the business of manufacturing dental supplies, were, along with others, invited by the Commis- KerwiiJ. sioner under the Combines Investigation Act, R.S.C., 1927, c. 26, then conducting an investigation into an alleged combine in Canada in the manufacture and sale of the above materials, to make representations before him. The respondents did so and for this purpose employed solicitors. Subsequently, in 1948, a charge was laid against the respondents and others under the provisions of section 498(1) (d) of the Criminal Code. The respondents were acquitted and their -acquittal was affirmed on appeal. In making their returns of taxable income, the respondents sought to deduct from gross profits the legal expenses thus incurred in the respective years.

The Minister refused to admit the deductions but his ruling was reversed by the Income Tax Appeal Board, whose decision was, in turn, affirmed by Cameron J., in the Exchequer Court (2). These appeals now result.

The proper construction of the statute has already been considered by this court more than once. In Minister of National Revenue v. The Dominion Natural Gas Company Limited (3), Duff C.J.C., in delivering the judgment himself and Davis J., said at page 22:

The judgments of the other members of the court are to the same effect. It was held that the legal expenses of the then respondent in defending an action brought against it to restrain it from selling gas in a certain'portion of the

City of Hamilton, alleged by the appellant to be the subject of an exclusive franchise held by the latter, were not deductible.

In Minister of National Revenue v. The Kellogg Com- BM o. pany of Canada, Limited (1), the respondent company had incurred legal expenses in defending a suit brought against it for an injunction to restrain the alleged infringement of certain registered trade marks of the appellant by the respondent in the use by the latter of certain words in con- . nection with the sale of some of its products. These trade marks were, however, held invalid. The respondent subsequently sought to deduct the expense of these proceedings in ascertaining its taxable income, and it was held it was entitled so to do. In delivering the judgment of this court, the Chief Justice pointed out that, in the ordinary course, legal expenses are simply current expenditures and deductible as such and, in referring to the decision in 'the

Dominion Natural Gas Company, said at p. 60:

In the case then before the court it was held that the respondents were not relying upon "a right of property or an exclusive right of any description" as in the Natural Gas case, but "the right (in common with all other members of the public) to describe their goods in the manner in which they were describing them."

In my view the principle of these decisions has been correctly applied by the learned trial judge in the circumstances here present. In Kellogg's case the taxpayer was challenged as to his right to use a certain trade description in the selling of his goods, while in the case at bar the taxpayer was challenged as to his right to employ a certain trade practice. In each case the expense incurred in defending the challenge was, in my view, "working expenses", that is to say "expenses incurred in the process of earning the income". The income was earned in the one case by the employment of the trade description and in the other, by the employment of the trade practice.

In my opinion it makes no difference that in the one case the challenge was by a private party, while in the other it was by the Crown. It must be assumed in the case at bar, by reason of the acquittal, that the trade practices involved were not illegal, and, as pointed out by Cameron J., it is not necessary to consider the situation had the contrary been the case. The difference for present purposes is substantial.

On the argument we were referred to a number of other authorities but I do not find it necessary to refer to any of them. They are but applications of the principle in other circumstances.

In my view the expenses with which we j. are here concerned were not merely indirectly related to earning the income in question but were "wholly, exclusively and necessarily laid out or expended for the purpose of earning the income" within the meaning of section 6(1) (a).

I would dismiss the appeals with costs.

J.:-I concur in the dismissal of the appeals with costs.

Appeals dismissed with costs.