Tax Court of Canada Judgments

Date: 20001206

Docket: 1999-3427-IT-I

BETWEEN:

MATT HARRIS & SON LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Rip, J.T.C.C.

[1]            The issue in these appeals by Matt Harris & Son Ltd. ("Corporation") is whether or not advertising expenses deducted by the Corporation in computing its net income for its 1995 and 1996 taxation years were incurred for the purpose of gaining or producing income from its business within the meaning of paragraph 18(1)(a) of the Income Tax Act ("Act").

[2]            Mr. Harris is president and sole shareholder of the Corporation. The Corporation operates a wood contracting and construction business in New Brunswick. The business includes logging, small construction, clearing lots, hauling gravel, among other things. The principal portion of the Corporation's business appears to be from wood contracting. The Corporation has customers in the United States, New Brunswick and Quebec. It employs as many as 40 people during its high season. In order to maintain its level of business from wood contracting, the appellant continuously is required to purchase stumpage and timberland.

[3]            The appellant does not use Crown land for its needs. Mr. Harris testified that the appellant "tries to buy stumpage on private property and will also buy the property from private people".

[4]            It is helpful in acquiring stumpage rights, according to Mr. Harris, that the Corporation's name be well known. The Corporation does not advertise in newspapers. It has sponsored a women's baseball team and has participated in community events. However, the bulk of its advertising is in stock car and snowmobile racing. During the years in issue the Corporation owned (and still owns) a stock car and snowmobile.

[5]            Mr. Harris enjoys racing stock cars and snowmobiles. He races from the beginning of May to the end of September. From soon after the New Year to March he races snowmobiles. The races are weekend events.

[6]            The races attract a lot of people, Mr. Harris declared. The "worst attendance" for a stock car race is about 2,500 people but is usually "up to 5,000 people". The average snowmobile race is watched by 1,000 to 1,500 people but a "big race" could have "about 10,000 people" attending, but Mr. Harris was "not too sure" of the exact number.

[7]            The races are reported on television and in the newspapers. Interviews of drivers are in both media. Races are held throughout New Brunswick. Mr. Harris drives the car and snowmobile; he is well known in the province as a result of racing. In Mr. Harris' view, the Corporation "gets more advertising" when he drives than from advertisements painted on the vehicle. According to Mr. Harris "people go for the driver and not the car". He drives the car "primarily because [it is of] more benefit" to him. The Corporation "gets more bang for the buck if [he] drives the car". As a successful driver, Mr. Harris is a celebrity at the racetracks. People request his autograph and he is sought out for interviews.

[8]            The Corporation's stock car and snowmobile are sponsored by other businesses as well. A car dealership pays the Corporation $5,000 a year and "one or two others" pay "a couple of thousand dollars". These sponsors have their names on the car and snowmobile. Sponsorship money and prize money are included in the Corporation's revenue. In 1996 the prize money was $4,365, according to the Minister.

[9]            As a result of racing, the Corporation also has become well known, Mr. Harris testified. "People", he said, "know your name and if they see you they feel they know you". As a result of the racing activities sponsored by the Corporation, the Corporation has been able to secure at least one advantageous situation from a person it might not otherwise obtain. Mr. Harris referred specifically to a person who knew him through racing activities who permitted the Corporation to store logs on his property during an early thaw; thus, I would infer, the Corporation reduced expenses and increased profits.

[10]          Mr. Harris stated that some of his competitors pay to place advertising on racing cars but the owners of the competitors do not race themselves; they simply sponsor the car and driver.

[11]          Approximately 99 per cent of the appellant's advertising expenses during the relevant years were for racing. According to Mr. Harris stock car and snowmobile racing represented 0.58 per cent and 0.61 per cent of annual gross income, respectively, in 1995 and 1996.

[12]          Under cross-examination Mr. Harris described the history of the appellant. He started the business 15 years ago with $3,000 and one used truck worth $17,000. He had a good credit rating and his father guaranteed loans during the first year of the business. After the first year, he "got [his father] off the note". He worked hard and business improved "leaps and bounds". By 1995 revenue was mainly from forestry.

[13]          Ms. Nancy Lutes, an auditor at the Canadian Customs & Revenue Agency ("Agency"), testified on behalf of the respondent. She reviewed the expenses of the appellant and its sources of income during the years in issue. Advertising costs included two amounts of $600 for the purchase of softballs for a ladies' softball team and $400 for the local Kinsmen. Ms. Lutes stated the Corporation did not own the team, as it does the stock car and snowmobiles, but provided the team with shirts with the Corporation's name. All expenses were verified and accepted, except for the expenses relating to racing. Included among racing expenses were meals and babysitting costs. (Mr. Harris has a son who was an infant in 1995 and 1996.)

[14]          Racing expenses, less prize money, claimed by the appellant in 1995 and 1996 were $17,507 and $13,663, respectively. The Minister assumed that the expenditures consisted primarily of automobile and snowmobile parts and repairs for racing. Ms. Lutes made several tests to determine the purpose of the racing costs. According to her, the "vicinity of $1,000 to $1,800" of these expenses was from petty cash and several of the petty cash vouchers, totalling $349.19 were for meals. There was no indication who consumed the meals.

[15]          There was also at least one payment in the amount of $225 to a babysitter.

[16]          As a result of Ms. Lutes' audit and after consulting with her "technical advisors", discussions with Mr. Harris and his representatives and upon reviewing documents, the Agency (or its predecessor) concluded that the racing expenses were personal expenses for Mr. Harris' benefit and were too remote from the wood and gravel business. The expenses were not incurred for the purpose of gaining or producing income from the appellant's wood and gravel business. The racing expenses were added to Mr. Harris' income. (Ms. Lutes could not advise whether Mr. Harris had objected to any tax assessment against him.)

[17]          Respondent's counsel cited the decisions of Ace Salvage Alberta Ltd. v. M.N.R.,[1] and Leffler v. M.N.R..[2] In Ace Salvage, the taxpayer corporation carried on a scrap metal business in Calgary and also owned racehorses. The taxpayer sought to deduct its horse racing expenses against income from its scrap metal business. The principal shareholder of the appellant testified he regarded the horses as advertising and business promotion for the salvage business. He claimed that a substantial portion of his customers and suppliers were racetrack fans, and through his contacts at the track the salvage business received a benefit.

[18]          The Minister argued, as in the appeals at bar, that the racing was too remote from the salvage business to have any bearing on the salvage business' profits. Instead, the Minister assessed on the basis that Ace Salvage Alberta Ltd. was in the business of farming. The Court agreed with the Minister, stating at page 572 (para 14), that:

. . . if the clear and primary purpose for an expenditure can be discerned, and that purpose, prima facie is markedly different than the normal business purpose of the payor entity, then the road to recognition that any subsidiary or ancillary benefit to the payor entity (from an income tax viewpoint) should be substituted for that reasonable, direct, and primary purpose for the expenditure is difficult indeed. Accordingly the purpose of the expenditures at issue in this matter was for purchasing, boarding, training and racing horses, not for purposes directly (perhaps not indirectly) associated with the salvage business purpose of the appellant.

[19]          The Tax Appeal Board also dismissed the taxpayer's appeal in Leffler, supra, on the basis that training and showing horses was too remote from the taxpayer's life insurance business to justify the expense of the horses, notwithstanding that the taxpayer attributed an increased volume in his sales of life insurance policies to contacts he made in the course of showing his horses. The Board referred to the reasons in H. J. O'Connell Ltd. v. M.N.R.,[3]in support of its position.

[20]          The decisions in O'Connell, Leffler and Ace Salvage were based in no small degree on a finding that the expense was too remote from the business. The concept of remoteness is nowhere found in the Act. Any outlay or expense, to qualify as a deduction in computing income, must be made or incurred for the purpose of gaining or producing income from the business.[4] The outlay or expense, of course, must be reasonable in the circumstances.[5]

[21]          The concept of remoteness probably had its origin in the pre World War II tax legislation of Canada and England. In Canada, for example, paragraphs 6(1)(a) and (b) of the Income War Tax Act[6] provided:

In computing the amount of the profits or gains to be assessed, a deduction shall not be allowed in respect of

(a) disbursements or expenses not wholly, exclusively and necessarily laid out or expended for the purpose of earning the income;

(b) any outlay, loss or replacement of capital or any payment on account of capital or any depreciation, depletion or obsolescence, except as otherwise provided in this Act.

[22]          The English taxing statute prohibited deductions in respect of ". . . any disbursements or expenses not being wholly and exclusively laid out or expended for the purposes of the trade, profession, employment or vocation".[7] The British Courts resorted to an "income-earning process" test to determine whether or not an expense was permitted.

[23]          An early English case that set out this test is Strong & Co., Limited v. Woodifield, [1906] A.C. 448. The House of Lords was concerned with the deductibility of damages paid by a brewery to a guest injured at an inn owned by the brewery. Lord Loreburn L.C., with whose views the majority of the House of Lords concurred, summarized the English law on the subject of deductibility:

                                In my opinion, however, it does not follow that if a loss is in any sense connected with the trade, it must always be allowed as a deduction; for it may be only remotely connected with the trade, or it may be connected with something else quite as much as or even more than with the trade. I think only such losses can be deducted as are connected with in the sense that they are really incidental to the trade itself. They cannot be deducted if they are mainly incidental to some other vocation or fall on the trader in some character other than that of trader. The nature of the trade is to be considered. . . . In the present case I think that the loss sustained by the appellants was not really incidental to their trade as innkeepers, and fell upon them in their character not of traders, but of householders.[8] [Emphasis added]

[24]          The House of Lords held that the payment made by the brewery company could not be deducted, the loss not being connected with or arising out of the trade and the moneys not having been wholly and exclusively laid out and expended for the purposes of the trade.

[25]          The ratio in Strong, supra, was based on the doctrine of remoteness. A recent edition of Halsbury's Laws of England explains that to be deductible an expense must be incurred for reasons connected with the trade:

                                The Income Tax Acts do not necessarily allow as expenses or deductions all the deductions the prudent trader would make in ascertaining his profit. . . . only such expenses are allowable as are incidental to the trade, . . . Counter and indirect advantages are usually too remote to permit of the deduction of an expense connected with such advantages, and money so expended is not wholly and exclusively laid out or expended for the purpose of the trade.[9]

[26]          Also in Strong, supra, Lord Davey laid down the principle that for an expenditure to be deductible

. . ."It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade, . . . It must be made for the purpose of earning the profits".[10]

[27]          The principle laid down by Lord Davey was obviously different than the test formulated by the majority of the House of Lords as to whether the expenditure was "really incidental to the trade". It is significant to note that Lord Davey's statement, although followed in subsequent English and Canadian decisions, was in fact obiter dicta.[11]

[28]          In Robert Addie & Sons' Collieries Ltd. v. Commissioners of Inland Revenue,[12] the Lord President Clyde, at page 235, asked:

. . . What is "money wholly and exclusively laid out for the purposes 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 one's self 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? . . .

[29]          Later on in Tata Hydro-Electric Agencies, Bombay v. Income Tax Commissioner,[13] the court quoted with approval the Lord President Clyde's extract in Addie, supra, set out above.

[30]          In Canada, Duff C.J., cited the Lord President Clyde in Addie, supra and the reason for judgment in Tata, supra when delivering his reasons for judgment in M.N.R. v. Dominion Natural Gas Co. Ltd..[14] The Supreme Court held that a taxpayer's legal expenses incurred to defend itself in an application by a rival gas company to restrain the taxpayer from carrying on business was on capital account and not laid out to earn income.

[31]          In his reasons for judgment in Dominion Natural Gas, Crocket J. acknowledged at page 499-137 that if he

. . . were free to decide this appeal on considerations of practical business sense and equity, or to deduce from decided cases the governing rule, which should be applied in determining whether the respondent was or was not entitled, [under s. 6 of the Income War Tax Act] . . . to the deduction claimed . . . I should have no hesitation in adopting the conclusion at which the learned President of the Exchequer Court arrived and the reasons he has given therefor.

[32]          However, Crocket J. considered himself bound by the judgments of the Privy Council in Tata, supra, and the Scottish Court of Session in Addie, supra. In his view the provisions of paragraphs 6(a) and (b) of the Income War Tax Act and the analogous provisions of the English Income Tax Act were "practically identical" and "impossible to distinguish".

[33]          Five years after the Supreme Court rendered its decision in Dominion Natural Gas, supra, Thorson P. stated in Siscoe Gold Mines v. M.N.R.[15] that:

. . . Some caution must be exercised in applying an English decision in the construction of this section because of the differences between it and the section upon which the decision is based. Section 6(a) contains the word "necessarily" which does not appear in the corresponding English section; moreover, section 6(a) uses the expression "for the purpose of earning the income" while the English section contains the expression "for the purposes of the trade." . . . this difference in language may have, it is, I think, safe to say that the English section is more generous in its allowance of deductions than is the Canadian one, and it may, therefore, be said generally that, while English decisions disallowing deductions may be applicable, those allowing them are not necessarily so.

[34]          However, the Canadian courts continued to adopt the position taken by the English courts disregarding the differences in the two statutory provisions.[16]

[35]          The Judicial Committee of the Privy Council dealt with the deductibility of expenses under the Canadian Income War Tax Act in Montreal Coke and Manufacturing Co. v. M.N.R. and Montreal Light, Heat and Power Consolidated v. M.N.R.[17] in a manner similar to its application of the English statutes. Lord Macmillan, noting previous decisions by Canadian courts, stated, at pages 133-34, that:

. . . It is obvious that there can be many forms of expenditure designed to increase income which would not be appropriate deductions in ascertaining annual net profit or gain. The statutory criterion is a much narrower one. Expenditure, to be deductible, must be directly related to the earning of income. The earnings of a trader are the product of trading operations which he conducts. . . . It is not the business of either of the appellants to engage in financial operations. The nature of their businesses is sufficiently indicated by their titles. It is to those businesses that they look for their earnings. . . . [T]heir financial arrangements are quite distinct from the activities by which they earn their income. [Emphasis added]

[36]          Thus the "purpose of earning income" text in paragraph 6(1)(a) of the Income War Tax Act was not considered as important as the income-earning process test which was paramount. The latter test suggested a direct relation between the expenditure and the income; that is, all outgoings must be expended as part of a trading operation to be deductible. In discussing the income-earning process test fashioned by the Supreme Court in Dominion Natural Gas, supra, and the Privy Council in Montreal Coke, supra, Mr. Edwin C. Harris explained that it was "[n]o longer sufficient that an outlay be incurred 'for the purpose of earning the income', as the statute required; to be deductible, the outlay also must have been incurred as part of and in immediate connection, in both time and result, with the trading aspects of the business operations".[18]

[37]          In 1948 The Income Tax Act[19] ("1948 Act") did away with the requirement that "a deduction shall not be allowed in respect of disbursements or expenses not wholly, exclusively and necessarily" incurred for the purpose of earning income. An expense would be deductible if the purpose of the expense was to gain or produce income. Paragraphs 12(1)(a) and (b) [similar to present paragraphs 18(1)(a) and (b)] of the 1948 Act provided that:

In computing income, no deduction shall be made in respect of

(a) any 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) any 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.

[38]          The courts acknowledged that the new phrase ‘gaining or producing income' was less stringent than the phrase ‘earning the income'. The Supreme Court of Canada in B.C. Electric Railway Co. Ltd. v. M.N.R.[20] first recognized that the paragraph 12(1)(a) of the 1948 Act expanded the sphere of deductibility from that of the Income War Tax Act.[21] The Court then unequivocally adopted a two-test approach in interpreting paragraphs 12(1)(a) and 12(1)(b) of the 1948 Act: "Once it is determined that a particular expenditure is one made for the purpose of gaining or producing income, in order to compute income tax liability it must next be ascertained whether such disbursement is an income expense or a capital outlay".[22]

[39]          In several earlier cases President Thorson recognized the broader scope for the deductibility of business expenses and moved away from the restrictive approach of the income-earning process test. An expenditure, to be deductible, need not be directly related to the earning of income: The Royal Trust Co. v. M.N.R..[23] See also Imperial Oil Limited v. M.N.R.[24] Mr. Harris concluded his discussion of the "marriage" of paragraphs 12(1)(a) and 12(1)(b) with the comment that "[Q]uestions of the remoteness of an outlay from the income-earning process, to the extent that they have any relevance whatever, ought to be considered only with reference to what constitute ordinary commercial outlays under section 4 and not with reference to the 'purpose' of the outlay under paragraph 12(1)(a)".[25]

[40]          The Supreme Court reviewed and analyzed the deductibility of an expense in Symes v. The Queen et al.[26] Iacobucci J. described the analysis:

Thus, in a deductibility analysis, one's first recourse is to s. 9(1), a section which embodies, as the trial judge suggested, a form of "business test" for taxable profit.

             This is a test which has been variously phrased. As the trial judge rightly noted, the determination of profit under s. 9(1) is a question of law: Neonex International Ltd. v. The Queen, [1978] C.T.C 485, 78 DTC 6339 (F.C.A.). Perhaps for this reason, and as Neonex itself impliedly suggests, courts have been reluctant to posit a s. 9(1) test based upon "generally accepted accounting principles" (G.A.A.P.): see also "Business Income and Taxable Income" (1953 Conference Report: Canadian Tax Foundation) cited in B.J. Arnold and T.W. Edgar, eds., Materials on Canadian Income Tax (9^th ed. 1990), at page 336. Any reference to G.A.A.P. connotes a degree of control by professional accountants which is inconsistent with a legal test for "profit" under subsection 9(1). Further, whereas an accountant questioning the propriety of a deduction may be motivated by a desire to present an appropriately conservative picture of current profitability, the Income Tax Act is motivated by a different purpose: the raising of public revenues. For these reasons, it is more appropriate in considering the s. 9(1) business test to speak of "well accepted principles of business (or accounting) practice" or "well accepted principles of commercial trading".

             Adopting this approach to deductibility, it becomes immediately apparent that the well accepted principles of business practice encompassed by s. 9(1) would generally operate to prohibit the deduction of expenses which lack an income earning purpose, or which are personal expenses, just as much as ss. 18(1)(a) and (h) operate expressly to prohibit such deductions. For this reason, there is an artificiality apparent in the suggestion that one can first examine s. 9(1) in order to determine whether a deduction is authorized, and can then turns to s. 18(1) where another analysis can be undertaken.

[41]          The central question in the appeals at bar is whether advertising expenses may be deducted as business expenses by the Corporation in computing its net income. The respondent characterized the expenses as "too remote" from the appellant's wood and lumber business and therefore not deductible. Not only is the concept of remoteness not present in the Act, but no court has ever set forth to test on how to determine what is remote. Remoteness, then, is in the eyes of the beholder. It may be necessary for an appellate to visit this question. I am of the view that this submission is without merit. The fact that the expenses may not have resulted in income does not prevent them from being deductible, as it is the purpose of the expenditure that must be assessed: Royal Trust, supra. Also, if the expense is incurred for the purpose of earning business income it is deductible.

[42]          Subsection 9(1) of the Act provides that a taxpayer's business income is the profit from the business. It was well established in Symes, supra, that the concept of profit found in subsection 9(1) authorizes the deduction of business expenses, as profit is inherently a net concept, and such deductions are allowed under subsection 9(1) to the extent that they are consistent with "well accepted principles of business practice" or "well accepted principles of commercial trading". Nevertheless, the limiting provisions found in subsection 18(1) may prohibit the expenses. The present appeal concerns paragraph 18(1)(a), which provides that, in computing taxable business income, no deduction may be made in respect of

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 the business or property.

[43]          As previously mentioned, a more generous interpretation has been adopted of the expression "expenses incurred for the purpose of gaining income from a business". Iacobucci J. illustrated in Symes, supra, the liberalization of the deduction principle in paragraph 18(1)(a) of the Act by citing Wilson J. in Mattabi Mines Ltd. v. Ontario (Min. of Revenue).[27] In that case, Wilson J. examined a tax provision similar to paragraph 18(1)(a) of the Act and drew the following conclusion:

. . . The only thing that matters is that the expenditures were a legitimate expense made in the ordinary course of business with the intention that the company could generate a taxable income some time in the future.

[44]          Mr. Justice Iacobucci went on to consider several interpretations of paragraph 18(1)(a). Of particular interest is the test referred to as the "trade/trader test". It essentially describes the requirement assigned to the income-earning process test that the expenses relate directly to the business' operations in order to be deductible, as the Privy Council affirmed in Montreal Coke, supra. With respect to the "trade/trader test", Iacobucci J. stated the following:

             A test not unrelated to this circle test is that which asks whether an expense is an expense "of the trader" or "of the trade". J.E. Hershfield, supra, ["Recent Trends in the Deduction of Expenses in Computing Income", in (Report of Proceedings of the Forty-First Tax Conference), 1989 Conference Report (Toronto: Canadian Tax Foundation, 1990) 44:1] describes how this language entered Canadian law by way of quotation in Dominion Natural Gas, supra, at p. 28 (C.T.C. 163, D.T.C. 499-138) (per Crocket, J.). Hershfield goes on to argue that part of the deductibility test must be "whether the expense was an incident of the trade - part of the business operation itself. That the ‘trader' incurred the expense to earn income from the business is not enough" (p. 44:9). Viewed one way, this might be seen as a little more than a restatement of the circle argument, since it might be difficult to distinguish between an "income-producing circle" and "the business operation itself". Viewed more charitably, however, to ask whether an expense is of the trader or of the trade may be to simply realize that the deductibility of an expense "is not to be determined by isolating it" (Hershfield, supra, at page 44:8). To the extent that this test simply requires child care expenses to be viewed in the context of the appellant's business as a lawyer, I agree with it.[28]

[45]          He then concluded:

             Upon reflection, therefore, no test has been proposed which improves upon or which substantially modifies a test derived directly from the language of s. 18(1)(a). The analytical trail leads back to its source, and I simply ask the following: did the appellant incur child care expenses for the purpose of gaining or producing income from a business?[29]

[46]          The question I must ask, therefore, is: did the appellant incur the advertising expenses for the purpose of gaining or producing income from its wood and lumber business? On the basis of Iacobucci J.'s analysis and conclusion in Symes, supra, I need not concern myself with whether the expenses are too remotely connected to the appellant's business.

[47]          I do not find the cases of Ace Salvage, supra, Leffler, supra, and O'Connell, supra, helpful to the present appeal. Iacobucci J's conclusion in Symes, supra, makes these cases irrelevant. Paragraph 18(1)(a) of the Act does not contain the words "wholly, exclusively and necessarily laid out or expended" as did paragraph 6(1)(a) of the Income War Tax Act. As the Supreme Court of Canada affirmed in Symes, supra, at page 6013:

. . . the current wording of s.18(1)(a) is sufficient justification for the view that Parliament acted to amend its predecessor section in such a way as to broaden the scope for business expense deductibility.

[48]          The case law that interpreted the restrictive language in the Income War Tax Act to mean that the expense must be incidental to the earning of profits in order to be deductible is no longer followed. Further, this requirement ignores the clear statutory "purpose test" affirmed by the Supreme Court of Canada in Symes, supra. Paragraph 18(1)(a) of the Act, in my view, does not support a remoteness requirement.

[49]          The appellant incurred the advertising expenses for the purpose of gaining and producing income from its business. The decision to advertise was a business decision made in order to realize income. The purpose of the expenses was to increase the appellant's business through new contacts and leads for the benefit of the wood and lumber business.

[50]          The tax authority has no business telling a businessperson how to run that person's business. Advertising expenditures take many forms: radio, television, newspapers (local, provincial, national), sponsorship or ownership of sports teams, tournaments, community events . . . the list is endless. A form of advertising that is beneficial to one business is not necessarily favourable to another business or even a business' competitor. Each business must have the freedom to choose its own form of advertising.

[51]          A business may opt to advertise an activity in which its owner (or principal shareholder of the corporation owning the business) has a keen interest or a degree of personal satisfaction. There is no reason why the expense of a particular form of advertising should be disallowed by the fisc solely because of the owner's interest, satisfaction or, as in the appeal at bar, participation in the advertising or remoteness from its business. The fact that an owner of a business (or a director of a corporation) may experience a vicarious satisfaction from the form of advertisement does not necessarily lead to the conclusion that the cost of the advertisement should be disallowed. If the expense of the advertisement, whatever it is, is incurred by the taxpayer for the purpose of gaining or producing income from its business and the expense is reasonable in the circumstances, the expense ought to be deductible in computing income. This is what the Act dictates.

[52]          However, when the form of advertising has a significant personal element, the taxpayer has a greater than normal onus to establish that the expense was truly incurred for the purpose of earning income from the business. It is quite possible that an expense may serve the needs of both the business and the shareholder and, in such a case, one may have to determine the primary purpose of the expense or, perhaps, apportion the expense among the business and the shareholder. This was not raised in the pleadings or at trial and I need not consider whether the Act would support such an approach.

[53]          I believe that I may take judicial notice that automobile racing is a popular worldwide sport and that many major corporations, some of which are resident in Canada, pay great sums to sponsor such races.[30] For example, tobacco companies as well as international telecommunications carriers have sponsored racing teams in the past. It is generally accepted today that this form of advertising is a well accepted business practice. Why, then, may not a small business also undertake such advertising? Mr. Harris, president of the appellant, testified as to the popularity of stock car and snowmobile racing in New Brunswick. He made a decision that the Corporation sponsor stock car and snowmobile races. Once it is established the expense is incurred for the business, the fact that Mr. Harris is the driver of the stock car and snowmobile and enjoys racing should be no more a factor, all things being equal, than the vicarious enjoyment officers of sponsors of major car racing teams have before, during and after the races.

[54]          The Corporation should succeed in its appeals. The appellant's expenses in general were incurred for the purpose of gaining or producing income from a business and were reasonable in the circumstances. It is well established that it is immaterial whether the advertising produces income or not. It is the purpose that counts. What is taken into consideration is whether the advertising is done for the purpose of gaining or producing income. It is clear, that the advertising expenses were made by the appellant for the purpose of gaining or producing income from its business. The appellant's purpose was to promote the name of its business and to increase its wood and lumber business through contacts and in so gaining or producing income from the business.

[55]          However, a portion of the expenses claimed as advertising expenses by the appellant, were personal and not deductible. The precise amounts were not adduced in evidence. I am allowing the appeal since it appears the bulk of the advertising expenses were laid out for business purposes and are deductible in computing income. The assessments, will be referred back to the Minister for reconsideration and reassessment to delete from the racing expenses those expenses that are personal to Mr. Harris, such as babysitting expenses, for example, and allow the balance. The Corporation shall be entitled to its costs, if any.

Signed at Ottawa, Canada, this 6th day of December 2000.

"Gerald J. Rip"

J.T.C.C.

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