The taxpayer, owned and operated by Mr. Mullen, invested in shares and made non-interest bearing loans to a number of corporate ventures to which Mr. Mullen provided management services free of charge by him or the taxpayer. The significant expenses of a private jet which were incurred primarily in connection with Mr. Mullen making visits to the offices of these ventures were deducted in computing the taxpayer's income. The Minister denied these deductions.
Miller J. allowed only the expenses related to a business carried on directly by the taxpayer. In respect of its investments described above, he concluded that the related flight expenses were not incurred for the purpose of earning income from either a business or property. He noted (at para. 75):
The [taxpayer] was, in effect, giving its business ventures several hundred thousand dollars, neither by way of debt or equity but simply by providing free services towards the operation of the business ventures' businesses... . This generosity was neither a loan nor an equity investment by the [taxpayer]. It might best be described as an agreement to pay someone else's expenses. Equity investments yield dividend income. Debt investments yield interest income. Free services, with no obligation to repay, yield only hope. This is not a deductible expense.
Miller J. also noted that, because the debts were interest-free, they could not have an income-producing purpose even though they were issued in anticipation of subsequent dividend income from the business ventures. "The dividend income does not arise from the debt. Put in tax terms, the debt is not the source of dividend income" (para. 67).
The Court of Appeal affirmed the reasoning given at the Tax Court (and in particular adopted para. 75) and rejected the further submission that, under the ultimate purpose test in Byram, the taxpayer could deduct an expense under s. 18(1)(a) provided that it were incurred to increase the profitability of the corporations for the purpose of receiving dividend income. Evans J.A. stated (at para. 14):
Byram is relevant in that it recognizes that the connection between an expense incurred by a taxpayer and anticipated dividend income cannot be tenuous or remote.