General deductions

Income Tax Law

Sub-Nigel Ltd v CIR

The court is not concerned with deductions which may be considered proper from an accountant’s point of view or from the point of view of a prudent trader (or an economist) but merely with the deductions which are permissible according to the language of the Act.

Emphasises the interaction of all the different tests→ Holds that it is impossible to give a definition of what is expenditure of a non-capital nature which will act as a touchstone in deciding all possible cases and it would be impracticable to attempt such a definition

Port Elizabeth Tramway Company v CIR

Defines ‘losses’ → appears to mean losses of floating capital employed in the trade which produced the income

Joffe v CIR

FACTS

• TP rendered engineering services

• A workman is killed due to negligence of one of the company’s employees during compensation

• TP paid delictual damages to the widow of the workman

Holds that it is unclear whether losses really mean something different from expenditure.

Defines expenditure → “a voluntary payment of money”

• Does this not create the impression that expenditure can only occur in money?

• This is NOT what is meant by this!

Distinguishes between ‘loss’ on the one hand and ‘expenditure’ on the other hand:

• LOSS= sometimes used to signify an involuntary deprivation

• EXPENDITURE= voluntary payment of money

FORTUITOUS EXPENDITURE

• Damages paid to the widow → Damages: NOT in the production of the TP income

• Thus, did not meet the “in the production of income” requirements and thus not included and deductible in terms of the general deduction formula

• There is nothing to suggest such negligence, and the consequent liability which such negligence entailed, were necessary concomitants of trading operations of a reinforced concrete engineer; nor was it shown that the liability was incurred bona fide for the purpose of carrying on any trading operation

• Thus, the delictual damages could not meet the general deduction requirement

C:SARS v Labat Africa

FACTS

• TP acquired business, including a trademark.

  • Consideration NOT paid in cash but rather issued shares as consideration for the trademark.

  • The TP is thus not transferring any assets but rather issuing shares

ISSUE

• Did the TP incur “expenditure” when it issued shares?

DISCUSSION

• The legal nature of shares= bundle of personal rights which holder of share has in a company

• When a company issues shares to a subscriber, it creates these personal rights in the hands of the subscriber [issuing company does not transfer or give up any assets]

• One cannot have a personal right against ourself, as there is no duty in law to perform to yourself. The company thus does not own its own shares. What happens when shares are issued?

  • The personal rights represented by the shares are created by the rights of the subscriber

  • The NB distinction here is “issue” → This is the creating of a share and not the selling of a share.

DISCUSSION

• The ordinary meaning of “expenditure” is the action of spending funds; disbursement or consumption; and hence the amount of money spent …

  • Expenditure, accordingly, requires a diminution (even if only temporary) or at the very least movement of assets of the person who expends

DECISION

• Tp did not incur “expenditure”

PE Electric Tramway Company v CIR

“Actually incurred”

• Cannot mean ‘actually paid’.

• As long as the liability to pay actually has been incurred they may be deductible.

  • For instance, a trader may at the end of the income tax year owe money for [trading] stocks purchased in the course of the year or for services rendered to him.

  • He has not paid such liabilities, but they are deductible

Concentra v CIR

“During the year of assessment” = an implied requirement

FACTS

• TP = newly formed company

  • agreed that it would reimburse travel costs of its directors

    • The liability of tp’s arose when the directors travelled (not when the directors submitted their travel claims)

• Year 1+2:

  • Directors travelled, but did not submit travel claims

• Year 3

  • Directors travelled + submitted travel claims for Y1,2+3

  • Decided to postpone until year 3 (as this year the company was doing well so no longer worried about submitting these returns)

LEGAL QUESTION

• Could TP deduct the travel claims for all years in Y3?

DECISION

• No! Travel claims for Y1+2 were actually incurred during those years and thus should have been claimed as deductions in those years

  • Thus, NB as a TP, to deduct expenditure in the year that it was actually incurred

    • Cannot wait until a later year and cannot choose which year is best

• Thus, the claims lapse

Nasionale Pers

ITO fulfillment of a resolutive condition?

FACTS

• TP was a company whose YOA ended each year on 31 March.

• Company had an agreement with its employees to deliver a bonus depending on how many months they were employed

  • Such bonus was paid each year on 31 September

• Such bonus was subject to a resolutive condition: if the employee was no longer employed by the company by the end of October, then the employee had to repay the bonus

• Company wanted to claim a deduction for a portion of the bonus’s on Y1

  • Remember, the bonus’ will only be paid in September, subject to resolutive condition

ISSUE

• at the end of Y1, can one say that the bonus was actually incurred?

DECISION

• Payment of the bonuses subject to a resolutive condition, but same principles apply i.r.o. suspensive condition

• “Actually incurred” does not require payment

• Expenses that are “likely” to occur are not deductible

• Exp is only “actually incurred” if t/p has “absolute and unconditional liability” to pay → bonuses (and any parts thereof) were thus not “actually incurred” during YoA 1

  • Must wait until the expenditure fulfills. Only then will the expenditure have been actually incurred.

ITC 1444

FACTS:

• T/p = manufacturer

• T/p concludes unconditional contract for purchase of manufacturing material during YoA 1

• Reciprocal contract: purchase price payable against delivery (receipt of bills of lading and invoices)

• Delivery took place during YoA 2

ISSUE:

• Was purchase price actually incurred in YoA 1 (when unconditional reciprocal contract was concluded)?

DECISION & REASONS:

• No

• Here, t/p’s obligation to pay subject to “condition” that counter-party delivers [remember, ≠ condition in legal sense]

• “absolute and unqualified legal liability” only on delivery

Edgars Stores v CIR

Effect of a time clause?

• The fact that there is a time clause that says that payment will only take place at a later date has no effect whatsoever

• Thus, the TP “actually incurs” expenditure at the end of Y1

Extent of amount uncertain?

• If unconditional liability, but extent of amount is uncertain – can deduct reasonable estimate

• Note, however, s 24M (t/p acquires assets for consideration that is unquantified – deemed to be incurred only when become quantified)

CIR v Golden Dumps

FACTS

• In 1980→ the company concluded a contract with Nash to sell shares when contract becomes unconditional

• In 1981→ Nash is fired and the company then disputes liability to transfer the shares to him

• In 1985→ AD held that the company was obliged to transfer the shares

  • TP incurred loss when acquired the shares and transferred to the former employee

  ISSUE

  • When was the company’s loss in respect of shares “actually incurred”?

    DECISION + REASONS

    • 1985, when dispute was resolved

    • A liability is “contingent” if the claim is genuinely disputed and not vexatiously or frivolously for the purposes of delay

      • Such “contingent” liability is not “actually incurred”

        • Respondent obliged, in terms of a court order, to deliver shares to a former employee against payment of a stipulated sum

Telkom SA v C:SARS

S23H: Exceptions

• Facts:

  • TP paid bonus of R179m to dealer during 2012 YoA

  • Bonus was payable to dealer when it concluded subscription contract

  • Subscription contract= fixed term of 1+ years

  • TP company became entitled to monthly subscriptions

• TP argument:

  • bonus was paid for each connection made by (= subscription contract entered into) by dealer during 2012 YoA

  • benefit derived by TP from expense (bonus) was thus this connection, which was made during 2012 YoA

  • s 23H thus not applicable since full benefit was enjoyed during 2012 YoA

• Commissioner’s argument:

  • TP benefit = monthly subscription fees to which TP became entitled under fixed term of subscription contract

  • only allowed part of R179m during 2012 YoA; rest spread out over term of contract i.t.o. s 23H

• Legal question:

  • what was the “benefit” enjoyed by TP [not considered in judgment whether dealer had rendered a service to TP]

• SCA:

  • benefit = monthly subscription fees; s 23H applicable

  • Thus, TP had to spread out the deductions

PE Electric Tramway v CIR

FACTS

• 1932→ TP company rendered tram services

  • Driver of tram lost control and consequently an accident ocurred

  • Driver injured and sued the TP company for compensation in terms of workman’s compensation

  • TP company disputed liability but court held that company was liable to pay compensation to this driver

ISSUE

• This case discusses two types of expenditure but in terms of “In the production of expenditure”?

  • At the time, the driver had passed away and this is the expenditure we are assessing → the compensation paid to the driver’s widow

COURT

• Yes

• Court holds that the mere fact that one incurs expenditure does not in itself create income. It is the actions that one does with the expenditure, that does the income

  • 2 legs to this test:

    1. Is the act to which the expenditure is attached, performed in the production of income?

       = provided the act is bona fide done for the purpose of carrying on the trade which earns the income, the expenditure attendant on it is deductible

       • Ask, what was the purpose of TP when he performed the act to which expenditure was attached

       • The fact that the TP company had to employ drivers → thus, the action was the employment of the driver

    2. Is the expense so closely linked to the act identified in the 1st leg that it can be regarded as part of the cost of performing it?

       = deals with closeness of connection (nexus/link) between the expenditure and the act

       • Includes expenditure - (a) necessary to perform operations; (b) attached to operations by chance and (c ) bona fide incurred to make operations more effective

ITO FORTUITOUS EXPENDITURE?

• There is a possible ground upon which it may be contended that the payment of compensation is not deductible - that the occurence of the expenditure is fortuitous and dependent upon an accidental injury and in that sense not sufficiently closely connected with the employment of drivers

  • Argument against this= many of company’s other expenditure stands on the same footing (ie bad weather/ chance)

  • Better argument = the potential liability is there all the time and is inseparable from the employment of drivers

OBITER STATEMENT

• The act is bona fide done for the purpose of carrying on the trade which earns the income the expenditure attendant on it is deductible

  • This statement may require qualification in one respect → if the act done is unlawful or negligent and the attendant expense is occasioned by the unlawfulness or possibly the negligence of the act then probably it would not be deductible

Genn

Sets out a subsequent formulation of the test for “in the production of income”

• whether it would be proper, natural or reasonable to regard the expenses as part of performing the operation

• The court clearly has to assess the closeness of the connection between the expenditure and the income earning operations, having regard to both the purpose of the expenditure and to what it actually affects.

Mobile Telephone Networks Holdings

Where both income and exempt income?

= Where expenditure is laid out for a dual or mixed purpose the courts in SA have, in principle, approved of an apportionment of such expenditure

• In making such apportionment, the court considers what is fair and reasonable in all the circumstances of the case

Rendle

Fortuitous expenditure

• Designed expenditure = money voluntarily and designedly expanded for the purpose of trade

• In case of fortuitous expenditure, the inquiry must be whether the chance of such expenditure being incurred [not the expenditure itself'] , is sufficiently closely connected with the business operation

Kangra Group

Contractual damages → S23(o)

OBITER

• TP company had a contract to deliver coal. The prices of coal increased sharply. TP realised that could rather sell and deliver to another party at much higher prices

• deliberately, TP decided not to honour the original contract (thus, breached contract and TP had to pay contractual damages)

• The court held that the expenditure was not in the production of income

  • Not wanting to encourage expenditure that was incurred in an unlawful manner to be deducted

ITC 815

“Negligence” in itself affords no reason why a loss caused by it should be held to be non-deductible”

Before fortuitous expenditure can be deducted, the TP must show that the risk of the mishap which gives rise to the expenditure is happening, must be inseparable from or a necessary incident of the carrying on of a particular business

WF Johnstone

FACTS

• TP was an employer and made an ex gratia payments on ad hoc basis to 4 employees on their retirement [ no prior arrangement for these payments → no contractual liability on the employer to make these payments]

• TP not legally obliged to make these payments

• TP only paid since it knew that employees would not qualify for pension

COURT

• Payment NOT in the production of TP income and not deductible

• Thus, non-deductible

Provider

FACTS

• TP was an employer

• There was an arrangement in place with employees:

  • indicated that if possible, would pay bonus on retirement if employee worked for TP for certain number of years [this was the condition]

    • The longer the employee worked, the bigger the bonus

  • No contractual duty to do so

• No binding agreement, but employees were aware of the existence of this arrangement (was communicated to the employees long before their retirement)

• In this case, TP could prove that the purpose of the agreement was to:

  • Encourage existing employees to remain in the TP service in order to qualify for bonus upon retirement

  • This resulted in a more stable work force, which made TP’s operations more efficient

    • Expenditure incurred that makes production more efficient usually meets both legs of the test

COURT

• WAS in the production of the employer’s income and thus deductible

• In the right circumstances, it is possible to deduct payment from the current and future employees but importantly, must relate to current employees.

• Must be policy arrangement in place that everyone knows about (must be communicated to the employees)

New State Areas

FACTS

• TP who had a gold mine

• The municipality had laid down pipes for sewage that led to the gold mine

• NB→ these pipes were laid down over property that was not the property of the TP

• These are referred to as the external sewers → expenditure referred to as Charge B

  • Some of the pipes went over the property to which the TP had the service rights

  • This was thus the property of the TP

    • The pipes that were laid over the property of the TP= internal sewers

    • Expenditure incurred in terms of these = Charge A

• TP had to pay both charges A and B → paid in installments

• After a while, the internal sewers would become the property of the TP

• However the external sewers would never become the property of the TP

ISSUE

• are charge A and/or B instalments of a capital nature?

COURT

• makes use of various tests→ (below)

• One has to look at the true nature of the transaction

• when one does this, the purpose is an important factor (enquires about the essential character of the expenditure)

• Found that the internal sewers were capital in nature and the external sewers were revenue in nature:

  • The internal sewers became property of TP and thus became part of its mine and equipment/ plant and machinery

    • Whereas the external sewers never became the property of the TP. When expenditure is incurred to use someone else’s property, often the case that such expenditure = non-capital. Thus, if expenditure incurred but never becomes your property = revenue in nature

Defining Floating capital?

• Goods constantly being bought and sold

  • Thus, constantly changed from goods → money → goods → money …

  • Expenditure incurred to acquire goods = floating capital

• Thus, when the capital employed in a business is frequently changing its from form money to goods and vice versa, and this is done for the purpose of making a profit: the capital employed = floating capital → revenue expenditure

Once-and-for-all test

• This test has regard only to the form and not to the essential character of the transaction and is of little value in those cases where capital expenditure is given the appearance of revenue expenditure because it is paid in instalments and where revenue expenditure is given the appearance of capital expenditure because it is commuted and paid in one lump sum

Enduring benefit test

• “enduring” = enduring in the way that fixed capital endures

  • An expenditure on acquiring floating capital is not made with a view to acquiring an enduring asset. It is made with a view to acquiring an asset that may be turned over in the course of trade at a comparatively early date.

The nature of the transaction

• Purpose → NB factor

• Capital nature: expenditure incurred as part of a cost of establishing or improving or adding to the income-producing plant or machinery

• Revenue nature: Expenditure incurred as part of the cost of performing the income-producing operations

George Forest Timber

Capital expenditure

• Floating capital is consumed or disappears in the very process of production = revenue expenditure

• Fixed capita does not, though it produces fresh wealth, it remains intact= capital expenditure

True nature/ Purpose test

• TP purchased land with a forest: the land itself was worthless, but forest on the land was extremely valuable.

  • TP could cut down the trees and sell timber: thus, the TP ends up cutting down part of the forest for this purpose

• Claimed corresponding part of purchase price as deduction

• TP argument→ entire purchase price related only to purchase of forest, not of land: argues that it must be equated to trading stock

• Court did not agree that the purchase price was trading stock → held that in this case, the purchase price was paid for the land. The forest is ceded to the land and the land was thus expenditure of capital nature

• Sets out the purpose test → distinguishing between capital and revenue expenditure:

  • Capital = Money spent in creating or acquiring an income-producting concern / source of profit.

    • It is money invested to yield future profit

  • Revenue= Money spent in working the source of profit.

    • Thus, money spent in working the concern for present production of profit

ITC 1063

Enduring benefit test

• TP paid a lump sum to obtain exclusive right to distribute gramophone records for 3 years, with the right of renewal for a further 2 years (thus could be extended to 5 years)

  • Looking at the “enduring benefit” test, this amount of time was enduring enough

• Court = capital expenditure

  • The right was granted for a substantial period of time and the fact that it is not a permanent grant is not material

C:SARS v BP South Africa

Expenses for the use of someone else’s property

FACTS

• TP is a marketer of petroleum products
  TP entered into “head-leases” (leased property from the owner and then sub-lease)

• Duration of head-lease= 20 years

• Dealing with the payment of rent

  • Usually, rent = payment to occupy space but in this case, the payment of rent was structured in very specific manner → purpose for which they paid very different to how rent is usually paid

    • TP paus lump-sum amounts upfront to secure the sites from which petrol could be sold for 20 years. Servitudes were registered to ensure that the sites would be used for this purpose after the lease was terminated

ISSUE

• were the lump-sum payments expenditure of a capital nature?

  Court

• Yes→ but an allowance was deductible under a special deduction provision [S 11(f)]

• The mere fact that an expense is called rent does not make it revenue in nature. Need to consider the particular nature of this specific payment

Considerations of the different tests

• Reference to lump sum = once-and-for-all test

• Reference to 20 years = enduring benefit test

• However, the true-nature test takes preference

A test is to ask whether the expenditure is more akin to the income-producing operations of the TP or whether it is more akin to the income-earning structure of the TP, or to ask → is the expenditure required to carry on a business or is it required to establish a business?

Money spent in creating an income-producing concern is capital expenditure, it is invested to yield future profit

Palabora Mining

Construction

• loss = revenue nature

FACTS

• TP= copper producer→ needed water supply

• PWB undertook to construct a barrage in river for the storage of water

• TP concerned that barrage would not be completed in time for the rainy season and that the copper production would accordingly be delayed for 8 months

  • This, TP instead build barrage for PWB, to avoid delay in stat of copper production and thus lower profits for TP

  • Barrage not t/p assets → did not get any preferential rights to water

  • TP incurred loss in the construction of the barrage

Issue

• is the loss a capital in nature?

Court

• No→ revenue in nature

  • The mare fact that it is in repsect of works situated upon the land of another that a tp has incurred expenditure does not preclude that expenditure from being of a capital nature .. Nor is the circumstance that expenditure has neither created a new asset not made an addition to an existing asset necessarily conclusive in favour of such expenditure being on revenue account ‘

• Factors that the court takes into account in finding that the expense is more related to operations than that of its structure

  • waterworks not built upon the appellants land

  • appellant has neither ownership therein nor any preferential treatment in relation to water supplied

  • The barrage and all works associated with the water scheme were going to be constructed in any event, irrespective of appellant’s intervention

True nature test

• holds that this is the most useful guide → looks at the real substance of a transaction. The least formalistic and thus weighs very heavily

  • Cannot say that this test will always trump the others but courts will often lean towards this test over and above the others

• Application→

  • Expenditure was not incurred in order to obtain a long-term supply of water but … solely with hte object of accelerating the acquisition of an adequate suppl of water in order the sooner to commence earning profits

    • The advantage which the appellant derived from the accelerated construction of the barrage was intended to be short lived .. once the 8 month period had elapsed, the purpose of the expenditure was “exhausted”

• Expenditure in issue was with the sole purpose of accelerating the earning of those profits, and it is precisely what the expenditure achieved

  • Thus, the expenditure in issue was so closely linked to the appellant’s income-earning operations … as to constitute revenue expenditure

SIR v Cadac Engineering works

Expenditure to eliminate competitor

FACTS

• TP manufacturer cookers under a license from MB, a holder of registered design

• Homegas states manufacturing similar cookers

• MP applies for an interim interdict against Homegas and refunded MB’s legal costs

ISSUE

• Is expenditure of a capital nature

COURT

• Yes, of a capital nature, thus no deduction possible.

• “object” → reference to the purpose

• Enduring benefit test= benefit gained but “not enduring” may be an indication that not a capital nature

• The argument was made that if the interdict was granted, would in any even stil be able to trade soon even if making slight tweaks and tus would not be enduring

• Authority for the principle that where TP is not acquiring a new asset or where there is not addition that is being made to an existing asset, expense may still be considered capital in nature

Goodwill = income earning structure

• Thus, because more closely related to TP income earning structure, is of a revenue nature

CIR v VRD Investments

Facts

• Competitor was eliminated

• TP= distributer of milk products; A = new competitor

• TP lost 5% of its market to A, but A unlikely to take over more of TP market

• However, A’s price-cutting policies forced TP to grant discounts to its customers, which resulted in losses for TP.

• A’s b/ness was going to collapse within 6-12 months

• Due to the losses TP was making, did not want to wait for A’s business to collapse

  • TP acquired A’s b/ness in order to close it down→ made a loss in the acquisition and closing down of A’s b/ness.

Issue: Is this loss of a cap nature?

Decision: Loss is partly of a capital nature, partly of a revenue nature

• court looks at the consequence of expenditure in addition to the purpose: court says that it is also important of the effect of the expenditure

• notes that benefit not enduring→ indication of revenue in nature

• The court held here that the expenditure had no effect on the goodwill. Thus distinguishes from Cadac Engineering.

  • leads to court holding that more direct to income producing operations rather than that of income producting structure

• Further consequence of expenditure→ regain its marketshare that it lost to A. This does relate to income producing structure and is thus capital in nature.

• Confirms that enduring benefit test is subordinate to true nature test.

• Expenditure both capital and non capital nature thus an apportionate made: must be fair and reasonable

  • decided that 25% expenditure related to regaining marketshare and thus not deductible under general deduction formula

Burgess v CIR

Carrying on a trade

• defines “trade” →

  • Should be given a wide definition

  • Not necessarily exhaustive (not a closed list)

• “venture”

  • A transaction in which a person risks something with the object of making a profit

    • Although an element of risk is included in the concept of a “venture” in its ordinary meaning, does not mean that only constitutes a “trade” if it is risky

      • Whether it would or not would depend on its own facts

      • If no risk involved, it might still be covered by giving an extended meaning to “venture” or by applying the rest of the definition of “trade” → which is in any event not necessarily exhaustive

De Beers Holdings

Gives us a general guideline:

• Usually, when enter into transaction for purposes of trade, hoping/expecting to make profit from such transaction.

  • If entering into transaction knowing it was going to cause loss = red flag! (NB→ usually.. may still enter into trade where make loss)

“The normal way in which a dealer … operates is to buy [the goods] and resell them at a profit… Of course, the attainment of a profit is not necessarily the hallmark of a trading transaction. A trader may for commercial reasons be compelled to resell goods at a loss. Conceivably also he may elect to resell goods at a loss in order to gain some other commercial advantage for his business. The practice of putting on sale the so-called ‘loss leaders’ by some merchants would fall into this category...”

ITC case

An example that may occur with “profit-making purpose”

FACTS

• farmer had Swiss farmed cattle (for dairy production)

• He needed a new stud bull→ Switzerland was the place to get such. Needed to go to Switzerland to find this new bull for purposes of his trade as a farmer, decided that he might as well take his wife with and might as well take a trip while there

  • thus trip has two purposes

• Note that in this case, decided before 1992 and thus before the amendment to S23(g)

  • Pre 1992: No deduction possible ito S 23(g)

  • After 1992: apportionment possible

COURT

• Thus, the entire expenditure = Private purpose and thus not deductible

  • Farmer went to Switzerland to:

    1)buy a stud bull (= trade purpose) &

    2)holiday with wife in Europe (≠ trade purpose)

  However with amendment, may be able to make apportionment

Pick ‘n Pay Wholesalers

Problem in terms of “profit-making purposes”

Nb→ note the date: before apportionment was possible

• Facts:

  • P’nP donated money to charity (Urban Foundation)

  • Mr Ackermann = MD of P‘nP; he also on board of Urban Foundation

    • Thus, Mr A had a double role

    • This creates some unique set of facts

      • With donations, TP will often argue that the purpose = further TP trade as it is seen as indirect advertisement.

      • Problematic? Donation can also be made for philanthropic purposes- which is not necessarily to benefit TP and thus to further its own trade.

• Issues:

  1. Was donation of a cap nature (only addressed by minority – read yourselves

     • Can argue that expenditure creates an enduring benefit

     • Usually “not of a capital nature”

  2. Was donation exclusively “for purposes of trade” (as form of indirect advertisement)? Or also philanthropic purpose?

     • “solely for purposes of trade” → due to date of judgment

     • Was addressed by both the majority + minority

Decision & reasons:

1. Majority:

• Donation had 2 purposes:

• Trade (advertising) AND

• Philanthropic

• Thus not exclusively for purposes of trade

  2. Minority:

• Donation had only trade purpose (advertising)

Consider views of majority (p 469) and minority (2nd para of minority judgment) regarding whether one should consider:

• The (subj) purpose of the t/p in making the donation; and/or

• The (obj) effect of the donation?

Do these views differ? Or are they actually in agreement and therefore rather did the majority and minority merely disagreed on the application of the legal principle, rather than on the legal principle(s) itself)?

• Does this take into account the separate legal personalities of P’nP and the charity? What does the  minority say in this regard (p 473)?

• Can donations never be exclusively “for purposes of trade”?

Warner Lambert SA v C:SARS

Changes to “for purposes of trade” after the amendment to S23(g), where apportionment was possible. Also, inclusion of S18A

Facts:

• T/p = SA co with American holding company

• I.t.o. “Sullivan Code” t/p had to launch a social responsibility program

• The exp incurred in “working to eliminate laws and customs that impede social, economic, and political justice.”

• If t/p did not incur exp: t/p could have been forced to leave the group, which would have resulted in loss of income

• Two requirements were in issue:

Issues:

1. Of a capital nature?

• Court:

  • NOT of cap nature (para [17]-[18])

• Reasons:

  • No capital assets were created/improved

  • Exp was aimed at protecting the earnings (not structure), similar to recurrent payment of insurance premiums, which are revenue expenditure

1. Exclusively for purposes of trade? (also “in the prod of income”?)

• Question:

  • Was (some of) the expenditure incurred after apportionment became possible under s 23(g)? Was this argued?

• Reasons:

  • Exclusively for purposes of trade?

  • What were the t/p’s purposes according to the Commissioner? (para [10])

• Court:

  • T/p only had trading purpose, to retain status as subsidiary, which held various trading advantages for the t/p