Cases
Fédération des Caisses Populaires Desjardins de Montréal et de L'Ouest du Québec, 2002 DTC 7413, 2001 FCA 27
The employees of the taxpayer earned vacation leave during a reference period running from May 1 to April 30 of each year. The Minister assessed on the basis that because premiums were required to be contributed by the taxpayer under statutory benefits legislation (and, in some cases, to a private pension plan and a private group insurance plan) only at the time the vacation pay was paid, the corresponding expense for such premiums was not incurred by the taxpayer until the year of payment of the vacation pay.
In finding that the premiums and contributions were deductible on an accrual basis, Desjardins J.A. found that there was an obligation for the premiums and contributions at the time the vacation leave was earned notwithstanding that the time at which premiums or contributions would be required to be paid was uncertain. In particular, the obligation was not one with a suspensive condition.
Wawang Forest Products Ltd. v. The Queen, 2001 DTC 5212, 2001 FCA 80
If the taxpayer paid a logging contractor in full upon delivery to it of cut wood, it would be subject to liability to the workers' compensation board to the extent of unpaid workers' compensation contributions of the contractor. Accordingly, pursuant to terms in its contracts with the contractors, the taxpayer withheld from the payments made to them amounts (e.g., $0.50 per metric tonne of cut wood) that were estimated to be at least equal to the contribution liabilities of the contractors.
Reassessments that treated the portions of contract payments that had been held back as not being deductible until paid, were ordered to be reversed. Sharlow J.A. noted (at para. 9) that:
Generally, a taxpayer incurs an expense when it has a legal obligation to pay a sum of money. In most situations, the legal obligation exists upon the fulfilment of the contractual obligations to which the payment relates.
Further, she noted that a "contingent liability" cannot be an expense "incurred" within the meaning of s. 18(1)(a), and stated (at para. 16):
the correct question to ask, in determining whether a legal obligation is contingent at a particular point in time, is whether the legal obligation has come into existence at that time, or whether no obligation will come into existence until the occurrence of an event that may not occur.
Applying theses principles, she found that a legal obligation to pay the full contract amounts came into existence when the contractual obligation (delivery of wood) had been performed. Before noting the evidence that in some cases contractors never claimed the holdback amounts, she stated (at para. 15) that "an obligation to pay a certain amount does not become a contingent obligation merely because events may occur that result in a reduction in the quantum of the liability", and later also indicated (at para. 30) that (notwithstanding statements of Desjardins J.A. in the Newfoundland Light case to the contrary), a "legal obligation to pay an amount may exist even if there is some risk that the actual payment may be set off against potential counter claims".
Buck Consultants Ltd. v. The Queen, 2000 DTC 6015, Docket: A-527-96 (FCA)
The taxpayer sought to deduct during a rent-free period a portion of the rent payments that would become payable for subsequent rental periods. The Court applied The Queen v. Burnco Industries Ltd., 84 DTC 6348, to find that no such deduction was permitted because the taxpayer had no obligation to pay any rent during the rent-free period.
The Queen v. Robinson, 98 DTC 6232, Docket: A-8-96 (FCA)
A medical partnership comprised of 18 doctors leased its medical premises from a nominee corporation holding for a co-ownership of the doctors. The co-ownership paid a tenant inducement payment to the partnership, which it treated as a capital receipt but which was deducted by the co-owners on a pro rata basis over a period of 19 years . In finding that these payments were non-deductible, Robertson JA stated (at pp. 6235-6236):
In support of the proposition that a payment to oneself cannot give rise to a tax deduction, the Minister could have also relied on the common law rule against contracting with one's self. …
[T]he fact is that the same eighteen persons who formed the Partnership were the very same persons who comprised the Co-Tenancy. …[T]he agreement to pay the tenant inducement payment of $1.2 million was of no legal consequence and.. it cannot be considered an outlay or expense made for the purpose of gaining or producing income… .
Placer Dome Inc. v. The Queen, 91 DTC 5261 (FCTD), rev'd 92 DTC 6402 (FCA)
When an employee of the taxpayer with more than one year's service elected to contribute up to 6% of his salary for the year to a trustee who was appointed to administer a stock purchase plan for the benefit of employees, the taxpayer made a contribution to the trustee equal to 1/2 of the employee contribution. On a monthly basis the trustee used the funds received by it first to purchase shares of employee members of the plan who wished to sell their shares, and used the balance, if any, to purchase shares from treasury, in both cases, at market prices. An employee could direct the trustee to give delivery of his shares or the cash proceeds thereof.
The amounts paid by the taxpayer to the trustee were part of the employees' remuneration package, and were currently deductible.
The Queen v. Nomad Sand and Gravel Ltd., 91 DTC 5032 (FCA)
The operator of a sand and gravel pit was obligated under the Pits and Quarries Control Act to pay to the Ontario government a levy of 2¢ per ton of material extracted from the pit as a deposit to be forfeited if a prescribed rehabilitation program was not carried out. In finding that the payments were not deductible, Urie J.A. stated (p. 5035):
"They do not have the characteristic of deductible expenses for tax purposes, in that they are not made once and for all, without recourse. Rather they are payments which may be refunded in whole or in part ..."
The Queen v. Ken & Ray's Collins Bay Supermarket Ltd., 75 DTC 5346, [1975] CTC 504 (FCTD)
In respect of its 1969 and 1970 taxation years the taxpayer deducted management bonuses whose quantum was not ascertained until after the end of the taxation year and which, due in part to a reduction in the taxpayer's profitability, were not paid. Kerr, J. held that in order for the taxpayer to be considered to have "incurred" an expense in the year it must have obligated itself in the year to pay the bonuses. Instead, "the decision to grant bonuses was gratuitous".
Aluminium Co. of Canada Ltd. v. The Queen, 74 DTC 6408, [1974] CTC 471 (FCTD)
Voluntary adjustments to the price of aluminium previously purchased by the taxpayer from its Jamaican subsidiary, which were made in order to placate Jamaican taxing officials, were deductible. "The authorities clearly indicate that an expenditure made as a 'gift' or as a matter of commercial morality will be allowed."
J.L. Guay Ltée v. MNR, 71 DTC 5423, [1971] CTC 686 (FCTD), aff'd 73 DTC 5374, [1973] CTC 506 (FCA), aff'd 75 DTC 5094, [1975] CTC 97 (SCC)
A general building contractor in accordance with the terms of its contracts with its subcontractors withheld 10% of the amounts invoiced on a monthly basis to it by its subcontractors. The amounts withheld became due 35 days after a completion certificate was issued by the architect. Noel, A.C.J. stated that the practice of the taxpayer in deducting amounts which were not due until a subsequent taxation year was "contrary to the rule that an expenditure may only be deducted from income for the period in which it was made".
Time Motors Ltd. v. MNR, 69 DTC 5149, [1969] CTC 190, [1969] S.C.R. 501
The taxpayer, which was a used car dealer, issued credit notes in partial payments of used cars acquired for resale. The notes were not transferrable, were valid only within a stated period of time (generally one or two years) and were good only for the purchase of a car of the taxpayer of not less than a stated value. Pigeon J. found that the issuance of the credit notes gave rise to an immediate enforceable obligation against the taxpayer notwithstanding that the merchandise to be obtained by virtue of a credit note was not specified. Accordingly, the credit notes were part of the cost of goods purchased by the taxpayer.
Rossmor Auto Supply Ltd. v. MNR, 62 DTC 1080 (Ex. Ct.)
The taxpayer made an interest-bearing loan of $50,000 to some customers (two related trucking companies) in consideration inter alia for their agreement to purchase all their tires and tubes from the taxpayer. Four years later, the taxpayer wrote off the uncollected balance of $28,846 of the loan in its accounts.
Thorson P. found that even if the loan otherwise would have met the requirements of s. 12(1)(a) of the 1952 Act, the amount of the write-off was not deductible as it did not represent an outlay or expense that was made or incurred in the year of the write-off.
See Also
Transalta Corporation v. The Queen, 2012 DTC 1106 [at 3044], 2012 TCC 86
Margeson J. accepted (at para. 101) that the stated capital (equal to fair market value) of shares which the taxpayer issued in payment of bonuses under its Performance Share Ownership Plan represented the expenditure made by the taxpayer on the bonuses. He rejected the Minister's position (at para.93) "that the Appellant incurred no expense in issuing shares under the PSOP."
Roth v. The Queen, 2005 DTC 1570, 2005 TCC 484, aff'd 2007 DTC 5222, 2007 FCA 38
The purported transfer by the taxpayer of an undeveloped project (i.e., of know-how he had developed with respect to a proposed LNG project) was not documented with any conveyance document and, in any event, "information, ideas, knowledge and/or know-how do not fall within the meaning of the word 'property'" (p. 1579). As the transferee corporation had not acquired anything from the taxpayer (know-how not being included in the meaning of the word property), a journal entry showing $370,000 owing by it to the taxpayer for the purported transfer did not represent an expense incurred by it.
Northwood Pulp and Paper Ltd. v. The Queen, 96 DTC 1105 (TCC), aff'd 98 DTC 6640 (FCA)
The estimated costs of reforestation work which the taxpayer became obliged to perform in future years when it harvested timber, did not form part of the cost of its log inventory. The reforestation expenditures instead were deductible as period costs only as they were actually made or incurred.
Commissioner of Inland Revenue (New Zealand) v. Mitsubishi Motors Ltd., [1995] B.T.C. 398 (P.C.)
The trial judge was satisfied on the evidence that the taxpayer could make a reasonably accurate estimate that 63% of the vehicles sold by it in a year had defects that would manifest themselves within the period of time covered by its warranty. Accordingly, the estimated amount of warranty claims could be deducted in computing income in the year of sale in accordance with s. 104 of the Income Tax Act 1976 (New Zealand) which permitted the deduction of expenditures "necessarily incurred in carrying on a business for the purpose of gaining or producing the assessable income". Lord Hoffmann noted (at p. 403) that although the jurisprudential approach to this provision "prevents one from treating an aggregate of contingent liabilities as a statistical certainty, it does not rule out statistical estimation of facts which have happened but are unknown".
Mara Properties Ltd. v. The Queen, 93 DTC 1449 (TCC), ultimately aff'd 96 DTC 6309, [1996] 2 S.C.R. 161
S.18(1)(a) could not apply to deny a loss realized by the taxpayer on the sale of inventory acquired by it pursuant to an s. 88(1) wind-up of its subsidiary because inter alia the deemed cost of the land to the taxpayer under an s. 88(1) could not be characterized as an "outlay or expense" of the taxpayer.
Coles Myer Finance Ltd. v. Federal Commissioner of Taxation, 93 A.T.C. 4214 (H.C.)
The taxpayer, a finance subsidiary, raised money through bankers acceptances (or "accommodation bills") and promissory notes having terms of no more than 180 days. In reversing a finding of the full court of the Federal Court that no portion of the discounts were deductible in the taxation year in which the money was raised because the liability was not "incurred" in such year as required by s. 51(1) of the Income Tax Assessment Act 1936-1984, the Court found that upon the acceptance of the bankers acceptances, the drawer (the taxpayer) undertook a continuing liability to pay the amount of the bill to the acceptor notwithstanding that a holder for value of the bankers acceptances was entitled to hold the acceptor (the bank) primarily liable on the bill. As for the making of a promissory note, "the obligation to pay at a future time created by such a note is clearly a present liability, there being no necessity for presentment of the note for the maker to be liable to pay out the note at maturity" (p. 4,219).
Co-operator's General Insurance Co. v. MNR, 93 DTC 303 (TCC)
Under the "experience rated" reinsurance treaties of the taxpayer, the annual premiums which it ultimately was required to bear in respect of each treaty year could not fall below a stated minimum premium amount, or above a stated maximum premium amount, with the additional premiums up to the maximum premium amount being paid to the extent that the aggregate of claims, which each exceeded a specified retention limit, also exceeded an aggregate deductible amount for the year. Given that it took between five to seven years to settle personal injury claims, it would be some time before the final premium amount could be determined. However, the taxpayer deducted the maximum premium in each treaty year because its past experience showed that the maximum premium would be reached.
In finding that the taxpayer could not deduct amounts in excess of the actual premiums payable in each year in accordance with the premium calculation formula in the reinsurance treaty, Brulé J. found that it failed to show that it was legally bound to pay the maximum premium in the years concerned to the reinsurer and that that obligation was not dependent upon future events.
ISBA Construction Inc. v. MNR, 90 DTC 1940 (TCC)
A bonus of $180,000 which the taxpayer's board of directors declared at a time that the corporation was illiquid was contingent due to the uncertainty as to the time, if any, of payment, and accordingly was non-deductible.
Lawrence v. MNR, 90 DTC 1491 (TCC)
Fees of a notary for his services rendered in connection with the development and sale of MURBs legally were payable by the vendors of the property and not by the purchasers. Accordingly, the purchasers were not entitled to deduct such expenses.
Ensign Tankers (Leasing) Ltd. v. Stokes, [1989] B.T.C. 410 (Ch.D.)
At 477:
"'To incur' means 'to render oneself liable to'."
Dibro Investments Ltd. v. MNR, 87 DTC 210 (TCC)
Although the taxpayer was obligated to pay fees of 10% of its revenues to its franchisor, it withheld these payments in the taxation years in question in order to put pressure on the franchisor to enter into negotiations for a rate reduction. Such negotiations commenced after the taxation years in question, and ultimately resulted in a fee reduction for the taxation years in question.
In finding that the taxpayer was entitled to deduct the accrued amounts owing to the franchisor without rate reduction, Bonner TCJ found that in the years in question, the liability for those amounts was fixed and certain.
Edmonton Liquid Gas Ltd. v. The Queen, 84 DTC 6526, [1984] CTC 536 (FCA)
MacGuigan JA rejected the position of the Minister that amounts paid to a drilling operator in 1974 for drilling work to be performed in 1975 did not represent an "expense incurred in drilling...an oil or gas well" in respect of the taxpayer's 1974 taxation year. He stated (at pp. 6530, 6531) that the word "incurred"
has always had the meaning of 'to become liable for or subject to'. ... [T]he proper test for defining expenses incurred by a taxpayer in a particular year must be cast in terms of the absoluteness of the transactions in which he engaged during that year: are the transactions absolute, with no contingencies as to disposition, use or enjoyment?
Here, the taxpayer had no refund rights with respect to the 1974 payment, so that it was incurred by it in 1974.
Canada Packers Ltd. v. MNR, 68 DTC 682 (TAB)
Because the taxpayer's fiscal year ended in the last Saturday in March of each year, it was possible for it to pay holiday pay for two Good Friday's in a fiscal year, or for none at all (as in the case in the taxation year in question). The taxpayer calculated the beginning of each calendar years total liability for holiday pay and charged to operating expense for each week in the calendar year's a fixed percentage of the total liability.
In finding that the taxpayer was not able to deduct any portion of this accrual that related to a Good Friday that occurred after the fiscal year end, Mr. Weldon found that this amount had not been incurred by the taxpayer in the year.
Administrative Policy
14 February 2012 Memorandum 2012-0435241I7
escalating rents are not deductible by the tenant on a straight-line basis given that "the taxpayer is under no legal obligation to pay the increasing rent until later periods."
16 June 2009 Memorandum 2009-031285 -
Escalating lease payments, which were deductible under GAAP on an average basis, would not give rise to a deduction for taxation purposes (to the extent of the excess of the average payment over the amount actually paid or payable in the taxation year) notwithstanding that such excess amount was credited to a liability account in the taxpayer's balance sheet, and was then assumed by a partnership on a transfer of a business division by the taxpayer to the partnership.
27 April 1995 TI 950168 (CTO "Deductibility of Rent Expense")
Where, prior to the expiration of the original term of the lease, a renegotiated lease agreement is entered into which provides for a reduced rate of rent for a period which comprises the balance of the original lease term plus a 5-year extension, the treatment recommended by the Emerging Issues Committee of the CICA will not be followed for tax purposes because rent at the original (high) rate no longer is being incurred by the tenant.
11 April 1995 TI 941473 (CTO "Deductibility of 'Net Smelter Return'")
Discussion of whether net smelter return royalties paid under a mining lease are deductible.
93 C.P.T.J. - Q.42
Reclamation costs are recognized for purposes of the Act in the year they are incurred.
18 November 1992 Memorandum 921979 (December 1993 Access Letter, p. 407, ¶C9-286)
A reserve for vacation pay benefits earned by employees in the year that are reasonably expected to be taken in the following year represents amounts that can be estimated with a reasonable amount of accuracy and whose recipients are known and, therefore, is an amount that has been incurred in the year.
16 May 1991 TI (Tax Window, No. 3, p. 30, ¶1258)
Whether a "management fee" paid by a partnership to one of its corporate partners is an expense or a profit distribution is a question of fact, as to which the fact that the fee was based on partnership profits is not necessarily conclusive.
28 March 1991 TI (Tax Window, No. 1, p. 9, ¶1175)
Where a public corporation, which has made interest-free loans to its employees to enable them to acquire shares, subsequently forgives the loans in an amount equal to the decline in value of the shares, the amount of the forgiveness will be deductible under s. 9(1) provided that the reasonableness test in s. 67 is met. However, if the benefit involved was conferred on the individual in his capacity of shareholder rather than employee, the corporation will not be entitled to a deduction.