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An individual ("K.C. Irving") who controlled the taxpayer and an arm's length supplier of Middle East crude ("Socal") sought to share the non-Canadian profits realized by a Bermudan company ("Irvcal") controlled equally by K.C. Irving and Socal. This was done by having Socal sell crude oil to Irvcal at Socal's cost and, then, by having Irvcal sell it to the taxpayer at a price within, but not exceeding, the fair market value range.

"Since the plaintiff did not pay in excess of fair market value, it did not unduly or artificially reduce its income." In addition "the profits realized by Irvcal outside of Canada were plainly generated by non-Canadian production and transportation of crude oil, in the main. Again, the notion of normality equably contemplates the realization of such profits outside of Canada."

Consolidated-Bathurst insured various risks with arm's length Canadian demestic insurers, who reinsured all but a small percentage of those risks with a Bermudan affiliate of Consolidated-Bathurst ("0I"). For the 1971 to 1974 taxation years, but not the 1975 taxation year, the domestic insurers were protected from loss by indemnities and guarantees of Consolidated-Bathurst.

The insurance premiums paid by ConsolidatedBathurst in its 1971-1974 (but not its 1975) taxation years were held to be non-deductible except to the extent of losses actually paid by 0I. Since the payment of the insurance premiums for the 1971 - 1974 years did not provide Consolidated-Bathurst with protection from losses, deduction of those amounts resulted in an artificial reduction in its income. However, in 1975 there was "a genuine transfer of risk".

An arrangement under which a Bermudan affiliate of the taxpayer purchased aluminium from Alcan, and then sold the aluminium to the taxpayer at a price which, after taking into account discounts that were paid by the aluminium supplier to the Bermudan affiliate, was higher than the net price paid by the Bermudan affiliate, led to an artificial or undue reduction of the taxpayer's income.

"[W]here provisions of the Income Tax Act have the obvious purpose of encouraging taxpayers to enter into an expenditure of a particular kind [here, petroleum exploration expenditures], a taxpayer who otherwise falls within the object and spirit of the relevant provisions cannot be said to unduly or artificially reduce income because he was influenced to enter into it by tax considerations."

"Where the facts reveal no bona fide business purpose for the transaction, s.[245(1)] may be found to be applicable depending upon all the circumstances of the case."

The taxpayer was not precluded from deducting capital cost allowance in respect of a portion of the purchase price paid for a motion picture film interest. In order for the taxpayer to have been prevented from claiming the deduction, the Crown would have had to show (1) that tax advantages, in the form of capital cost allowance, were the taxpayer's principal motive for entering into the transaction, (2) that the amount in issue was included in the purchase price solely to permit the taking of additional capital cost allowance and (3) that the amount bore no real relationship to the value of the share of the film that was purchased.

S.245(1) is "directed not only to sham transactions but to something less as well where the expense, although real, would unduly or artificially reduce a taxpayer's income". A partnership of three companies came within the latter test of artificiality by consistently, over an 8-year period, declaring management bonuses in one year and cancelling the bonuses so declared in the next year, with the amount of the bonuses being calculated to reduce taxable incomes to the level that was subject to a low rate of tax.

The taxpayer's president had the company pay substantial bonuses to its employees, and persuaded them to donate a large portion of the bonuses to a charitable foundation. The donated funds were immediately lent by the foundation to the taxpayer, which gave it a promissory note for the same amount bearing interest at 7%. It was found that the principal objective of these arrangements was not to reduce taxes but, rather, to maintain a loyal and efficient staff (through payment of the bonuses) and to fund a Roman Catholic mission in Brazil (through the donations).

A Bermudan affiliate of the taxpayer purchased crude oil at a price that was less than 90% of its fair market value and resold the oil to the appellant at a higher price that was still slightly below its fair market value. Because the appellant thus did not pay more than the oil's fair market value, there was no reduction of its income contrary to s. 245(1). Arguments that the purchase contract with the Bermuda affiliate was a "sham" were to no effect, because the above analysis would apply even if the appellant were seen as paying the same price to the U.S. company that exercised management and control over the Bermuda affiliate's business.

S.66 provided favourable treatment for the deduction and taxation of capital amounts in order to encourage taxpayers to put money into resource properties and keep it there. Accordingly, "a transaction that clearly falls within the object and spirit of section 66 cannot be said to unduly or artificially reduce income merely because the taxpayer was influenced in deciding to enter into it by tax considerations."

A partnership of two dentists determined that the value of administrative services performed by them was $20,000, and 'by means of' appropriate journal entries paid that sum to a service company that was equally owned by them. There was no change in the services that they performed after they commenced to make payments to the company, there was no genuine business purpose to the transaction, and the deduction of $20,000 by the partnership accordingly was found to be prohibited. In addition, the bulk of the administrative services were performed by them in their capacities of partners, rather than of employees of the company.

"A disbursement or expense made or incurred" does not include capital cost allowance.

A fee of $61,317 which a subsidiary paid to its parent for services that the parent (primarily in the person of its shareholder and officer) performed in connection with taking the parent public so as to obtain funds to expand the subsidiary's business, was found to be reasonable, notwithstanding that (1) the amount of the fee equalled what otherwise would have been the net loss of the parent for the fiscal year in question, (2) the principal shareholder of the parent received relatively small amounts for the services he performed as officer for the subsidiary and (3) the absence of a written agreement.

A company made contributions to a pension plan toward the current and past services of certain of its employees (mainly the company's principal shareholder and his wife) and the trustee used the proceeds to purchase preferred shares of the company. Later, the company re- purchased its shares from the trustee.

The contributions, which were otherwise deductible under the predecessor of s. 20(1)(q), did not artificially reduce the company's income. "There is nothing reprehensible in seeking to take advantage of a benefit allowed by the law. If a taxpayer has made an expenditure which, according to the Act, he may deduct when calculating his income, I do not see how the reason which prompted him to act [e.g., tax avoidance] can in itself make this expenditure non-deductible."

"The word 'disbursement' in common parlance means 'money paid out, an expenditure' and the word 'expense' also in common parlance means 'money out of pocket'". S.245(1) accordingly did not apply to an arrangement that was intended to defer the recognition of gain on the sale of land through the use of a s. 20(1)(n) reserve.

The taxpayer, which carried out seismic surveys primarily on its own account and then sold the information so obtained to other companies, was permitted to deduct a payment of $60,000 to a bankrupt company for the purchase of seismic data and payments of $214,000 made to its U.S. parent for the purchase of digitalized well logs in order that the taxpayer could commence the marketing of digitalized well log data (which latter expenditure was treated as a deferred charge for accounting purposes). If "the expenditure is a reasonable one for legitimate income-earning and business purposes, and not in its true light a vehicle primarily to minimize tax, then no matter how drastically income may be diminished, I do not think the transaction can, or ought to be, at the same time characterized as an unreasonable reduction of income, or an unreal or unnatural reduction".

The taxpayer acquired depreciable assets for a price less than their fair market value as part of a series of dividend-stripping transactions that enabled the vendors to realize their proceeds on a tax-free basis. (This characterization of the taxpayer's part in the transactions resulted from a finding that a "figurehead" company that acquired an option to the depreciable properties for $1.00 did not do so as agent for the taxpayer despite its full knowledge of the transactions.) Since the taxpayer paid no more than full value for the assets for use in its business, the subsequent deduction of capital cost allowance did not result in an artificial or undue reduction of its income. Addy, J. stated obiter "that a disbursement or expense, as mentioned in section 137(1), includes a claim for depreciation".

The taxpayer hotel company, in order to soak up losses in a sister company ("Vernon") transferred an employee who had been washing cars on the premises of the hotel to Vernon, which then purported to continue the car washing operation. No assets were transferred. The deduction of fees paid by the taxpayer to Vernon, which were calculated by multiplying $2.00 by 80% of the number of customers at the hotel, regardless of the degree of actual use of the car wash, was held to come within the scope of what then was subsection 137(1).

A cash-basis farmer purchased cattle from a cattle company at the end of his taxation year on the understanding that the cattle company would repurchase the cattle for the same amount (minus its commission) at the beginning of the following taxation year. Cattanach, J. stated obiter that the allowance of these deductions was forbidden by s. 245(1).

A 15% management fee paid by a law firm to its related administrative services company was deductible in light of a finding that genuine business reasons existed for payment of the management fee.