The taxpayer incurred legal and accounting fees in 1997 and 1998 of approximately $1.9 million in connection with a complicated reorganization of the manner in which it financed its investment in its US subsidiaries. The end result of the reorganization was that it financed that investment through a Luxembourg subsidiary so that cash flow paid out of the US subsidiaries was subject to US withholding tax of 5% and to Luxembourg income tax of 5% - whereas if it had continued to maintaing its previous structure, such distributions would have been subject to a 30% US withholding tax rate due to an adverse change in the US tax regime.
In finding that these were capital expenses, Hershfield J noted (at para. 88) that they were paid in order to create an entirely different "pipeline" or structure for maintaining the after-tax cash flow of the taxpayer, noted (at para. 92) that in Imperial Tobacco (and similarly in Kaiser Petroleum) "that an outlay made in the course of a corporate reorganization to achieve an assurance that some end goal will be completed or achieved in a manner that will have value, will be on capital account," and that although the tax benefits of this new structure would last only three years due to impending changes in the US-Luxembourg treaty, this nonetheless represented an enduring benefit becasue more than the current period was benefited (para. 98).
In finding that the expenditures satisfied the income-producing purpose test in the definition of a eligible capital expenditure, Hershfield J stated (at para. 108):
...expenditures incurred to improve the efficiency of the investment to enable better exploitation of its own business by increasing its debt service capability and increasing its funding of Canadian operations are expenditures incurred for the purpose of earning income.