Incurring of Expense

On June 30, 1999, a trust of which the taxpayer was a beneficiary had a 40% (later reduced to 2%) interest in a syndicate (that entered into an agreement to purchase an aged care facility in consideration for a “Settlement Amount” of $1.74 million to be paid on the settlement date (being the date of completion of a contemporaneous purchase of the business at the facility, slated to be October 31, 1999), with provision being made for further post-settlement amounts totalling $14.5 million. S. 8-1 of the Income Tax Assessment Act 1997 (Cth) provided:

You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

The Court referred inter alia to the statement in Commissioner of Taxation v Raymor (NSW) Pty Ltd (1990) 24 FCR 90 (at 101) that:

Once … it is appreciated that an outgoing may be deductible notwithstanding that it may be defeasible, there can be no logical reason why an outgoing pursuant to a contract may not be deductible notwithstanding that the ultimate price payable upon delivery of the goods the subject of a contract may be varied upwards or downwards to reflect the increased cost of the goods.

In finding that the trust’s share of the Settlement Amount was incurred by it on June 30, 1999, the Court stated (at paras. 103, 110):

[T]he Tribunal [below] relied on the fact that, under the Contract of Sale, the Glendale Property Syndicate was entitled to terminate the contract if an insolvency event occurred in relation to [the purchaser] as a basis for concluding that “it was not known whether the Contract of Sale would proceed” …. However, the cases discussed above do not suggest that, without more, this type of contingency is enough to conclude that an outgoing is not incurred upon execution of a contract. …

Neither approval [by the Department of Health and Aged Care] of the Purchaser as an Approved Provider nor approval of the transfer of the Approved Places from Prime Life Corporation to the Purchaser was a condition for payment of the balance of the purchase price. The obligation to pay the balance of the purchase price was not expressed to be conditional upon these matters.

A Florida corporation (“iTransit”) served as a vehicle procurement arm for a second Florida corporation (“Gameday US”), which was in the business of providing transportation and traffic logistics for large sporting events. iTransit was owned 30% by the sole individual Florida-resident shareholder of Gameday US (“Vitrano”) and 70% by another Florida resident (“Pouncey”) who had procurement expertise. In 2008, Vitrano entered into a contract with the Vancouver Olympics organizing committee (“Vanoc”) on behalf of a new Canadian subsidiary of Gameday US (“Gameday Canada”) to provide transit bus services at the 2010 Winter Olympics, for fees payable by Gameday Canada to the taxpayer. Pouncey incorporated the taxpayer, which employed an individual (”Hill”), who had past experience in operating a coach company and in operating in past Olympic games. The taxpayer also entered into an agreement (the “iTransit Agreement”) prepared and executed late in 2010 but backdated by approximately two years pursuant to which it purportedly agreed to pay iTransit US$2,500,000 for support services and as a “commission” for securing the contract with Gameday Canada.

Pizzitelli J found (at para. 28) found that, at most, only approximately US$2.17 million of the amount was paid, and that this amount did not qualify as being deductible (other than the U.S.$400,000 portion conceded by CRA to relate to support services provided by iTransit), stating (at paras. 46, 47-48, 49):

[The iTransit Agreement was] an afterthought, something to legitimize the payment of amounts that had been made to iTransit for over two previous years to fund its operations… .

…[A]bsolutely no documentary evidence by way of receipts, vouchers , credit card statements or other supporting documentation was tendered in support of any expenses for which iTransit was seeking reimbursement.

Finally, the said agreement does not break down what portion was contemplated for support services versus what portion was for its assistance in securing the Gameday Canada contract… .

[E]ven if I accept payment can be made for past services, there must at least be some agreement as to the quantum or calculation of such fee or commission in advance in the context of business in order to characterize such payments as such. It is in the very nature of these types of payments that they are calculable on some objective basis and not merely discretionary… .

Finally, the evidence indicated that Pouncey had secured the contract with Gameday Canada on behalf of the (to-be incorporated) taxpayer rather than on behalf of iTransit.

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."

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.

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.

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".

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.

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).

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.

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.

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.

At 477:

"'To incur' means 'to render oneself liable to'."

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.

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.

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.