If the taxpayer paid a logging contractor in full upon delivery to it of cut wood, it would be subject to liability to the workers' compensation board to the extent of unpaid workers' compensation contributions of the contractor. Accordingly, pursuant to terms in its contracts with the contractors, the taxpayer withheld from the payments made to them amounts (e.g., $0.50 per metric tonne of cut wood) that were estimated to be at least equal to the contribution liabilities of the contractors.
Reassessments that treated the portions of contract payments that had been held back as not being deductible until paid, were ordered to be reversed. Sharlow J.A. noted (at para. 9) that:
Generally, a taxpayer incurs an expense when it has a legal obligation to pay a sum of money. In most situations, the legal obligation exists upon the fulfilment of the contractual obligations to which the payment relates.
Further, she noted that a "contingent liability" cannot be an expense "incurred" within the meaning of s. 18(1)(a), and stated (at para. 16):
the correct question to ask, in determining whether a legal obligation is contingent at a particular point in time, is whether the legal obligation has come into existence at that time, or whether no obligation will come into existence until the occurrence of an event that may not occur.
Applying theses principles, she found that a legal obligation to pay the full contract amounts came into existence when the contractual obligation (delivery of wood) had been performed. Before noting the evidence that in some cases contractors never claimed the holdback amounts, she stated (at para. 15) that "an obligation to pay a certain amount does not become a contingent obligation merely because events may occur that result in a reduction in the quantum of the liability", and later also indicated (at para. 30) that (notwithstanding statements of Desjardins J.A. in the Newfoundland Light case to the contrary), a "legal obligation to pay an amount may exist even if there is some risk that the actual payment may be set off against potential counter claims".