CAMERON,
J.:—This
is
an
appeal
by
the
Minister
of
National
Revenue
from
a
decision
of
the
Income
Tax
Appeal
Board
dated
November
16,
1956,
allowing
the
respondent’s
appeal
from
a
reassessment
dated
December
21,
1955,
made
upon
it
for
its
taxation
year
ending
September
30,
1953.
In
computing
its
taxable
income,
the
respondent
had
deducted
$5,000
as
a
capital
cost
allowance
in
respect
of
a
so-called
‘‘franchise’’
said
to
be
for
a
term
of
ten
years,
the
deduction
being
10
per
cent
of
$50,000,
said
to
have
been
the
cost
of
the
‘‘franchise’’
to
the
respondent.
In
the
reassessment,
the
Minister
disallowed
the
deduction
in
full,
but
on
appeal
to
the
Income
Tax
Appeal
Board
the
deduction
was
allowed.
The
problem
which
I
have
to
consider
is
mainly
one
of
law,
but
before
referring
to
the
relative
provisions
of
The
Income
Tax
Act
I
shall
set
out
the
facts
which,
in
the
main,
are
not
in
dispute.
The
only
witness
heard
at
the
trial
was
L.
A.
Maurice,
now
the
president
and
the
controlling
shareholder
in
the
respondent
company.
In
1951
Mr.
Maurice
carried
on
business
as
the
sole
proprietor
of
the
Kirby
Company
of
Toronto,
and
was
engaged
in
the
sale
of
vacuum
cleaners
and
parts
thereof.
On
February
20,
1951,
the
Kirby
Company,
by
Mr.
Maurice,
entered
into
an
agreement
(Exhibit
D)
with
Gelling
Industries,
Ltd.,
of
Welland,
manufacturers
of
vacuum
cleaners
and
parts
thereof,
by
which
the
latter
company
agreed
to
sell
and
the
Kirby
Company
agreed
to
purchase
such
goods.
The
second
clause
of
that
agreement
reads:
“Upon
and
subject
to
the
terms
and
conditions
below
stated,
the
Company
hereby
grants
to
the
Kirby
distributor
(1.e.,
the
Kirby
Company
of
Toronto)
the
exclusive
right
*to
sell
or
otherwise
market
in
the
following
described
territory
the
Kirby
Sanitation
System,
said
territory
being
as
follows
:
The
County
of
York,
in
the
Province
of
Ontario.’’
It
is
common
ground
that
the
‘‘right’’
or
‘‘franchise’’
so
acquired
was
without
cost
to
the
Kirby
Company
of
Toronto.
It
exercised
its
rights
thereunder
until
the
benefit
thereof
was
assigned
to
the
respondent
company
under
the
following
circumstances:
Maurice
decided
in
September,
1952,
that
he
would
thereafter
operate
as
a
limited
company.
Accordingly,
at
his
instance
and
on
his
instructions,
an
application
was
made
for
the
incorporation
of
Kirby
Maurice
Co.
Ltd.
under
the
Ontario
Companies
Act,
as
a
private
company.
Such
letters
patent
(Exhibit
A)
were
granted
on
September
29,
1952.
The
capital
of
the
company
was
divided
into
20,000
preference
shares
of
a
par
value
of
one
dollar
each,
and
20,000
common
shares
without
nominal
or
par
value.
By
supplementary
letters
patent
dated
November
12,
1952
(Exhibit
B),
the
capital
stock
of
the
company
was
increased
by
the
creation
of
80,000
additional
and
similar
preferred
shares.
Exhibit
C
contains
the
minutes
of
the
meetings
of
the
provisional
directors,
the
directors
and
shareholders.
At
a
meeting
of
the
directors
dated
October
1,
1952,
there
was
submitted
a
draft
agreement
between
L.
A.
Maurice,
carrying
on
business
as
the
Kirby
Company
of
Toronto,
as
vendor,
and
the
newly
formed
company
as
purchaser,
providing
for
the
sale
of
all
assets
of
the
company
(i.e.,
the
Kirby
Company)
including
“franchise
worth
$50,000’’.
By-law
3(A)
was
then
passed
authorizing
the
entering
into
of
the
said
agreement.
Schedule
2
to
the
minutes
of
that
meeting
contains
an
original
of
the
agreement
of
purchase
and
sale.
It
reads
in
part
as
follows:
“1.
The
Vendor
sells
and
the
Company
purchases:
(c)
The
moneys,
bills,
notes
and
other
negotiable
instruments,
book,
and
other
debts
of
or
owing
to
the
Vendor
in
the
said
business
and
all
the
Vendor’s
rights,
claims
and
securities
in
respect
of
the
said
debts,
and
the
benefit
of
all
contracts
and
engagements
to
which
the
Vendor
is
entitled
in
connection
with
the
said
business;
provided
further
that
in
relation
to
the
agreement
made
the
20th
day
of
February,
1951,
between
Gelling
Industries,
Limited,
and
the
Kirby
Company
of
Toronto,
covering
the
exclusive
right
to
sell
and
distribute
the
Kirby
Sanitation
System
in
the
County
of
York,
in
the
Province
of
Ontario,
the
Company
shall
be
entitled
to
all
benefits,
rights
and
privileges
for
a
period
of
ten
years
under
this
agreement
and
as
between
the
parties
hereto
shall
be
regarded
and
construed
as
a
10
year
franchise.
(d)
All
other
property
and
assets,
if
any,
of
the
Vendor
in
connection
with
the
said
business.
2.
As
part
of
the
consideration
for
the
said
sale,
the
Company
shall
undertake,
pay,
satisfy,
discharge,
perform
and
fulfil
all
debts,
liabilities,
contracts
and
engagements
of
the
Vendor,
in
connection
with
the
said
business,
and
shall
indemnify
the
Vendor,
his
heirs,
executors
and
administrators
aginst
all
actions,
proceedings,
claims
and
demands
in
respect
thereof,
save
and
except
any
liability
which
the
Vendor
may
have
by
reason
of
non-payment
of
personal
income
tax.
3.
As
a
further
part
of
the
consideration
for
the
said
sale
the
Company
shall
forthwith
pay
to
the
Vendor
the
sum
of
$105,000
of
lawful
money
of
Canada.
4.
The
said
sale
shall
take
effect
as
from
the
date
hereof,
and
the
Vendor
shall
from
the
date
hereof
be
deemed
to
be
carrying
on
the
said
business
on
behalf
of
the
company
and
shall
account
to
the
Company
and
be
indemnified
accordingly.’’
It
is
in
evidence
that
the
respondent
company
paid
the
Kirby
Company
of
Toronto
the
expressed
consideration
of
$105,000
by
cheque,
and
that
by-law
3(A)
of
the
directors
was
ratified
at
a
meeting
of
the
shareholders
held
on
October
1,
1952.
The
minutes
also
show
that
at
a
meeting
of
the
directors
dated
November
12,
1952
(the
same
date
as
the
supplementary
letters
patent
were
issued),
L.
A.
Maurice
had
subscribed
for
87,000
preference
shares
at
one
dollar
per
share,
which
he
paid
for,
and
which
were
allotted
to
him.
At
the
same
meeting
Maurice
subscribed
for
17,998
common
shares.
The
Board
fixed
the
aggregate
consideration
therefor
at
$17,998
and
authorized
the
issue
of
such
common
shares
upon
payment
of
that
amount.
The
stock
ledger
sheets
show
that
they
were
paid
for
and
issued
on
the
same
date.
Mr.
Maurice
also
is
shown
in
these
ledger
sheets
to
have
received
two
additional
common
shares
on
November
13,
1952.
It
will
be
seen,
therefore,
that
his
total
purchase
of
preferred
and
common
shares
was
at
a
cost
of
$105,000,
precisely
the
same
amount
as
had
been
paid
him
by
the
company
for
the
assets
of
the
Kirby
Company
of
Toronto.
Although
the
Minister
is
here
the
appellant,
the
onus
of
proving
that
the
assessment
is
erroneous,
either
on
the
facts
or
the
law,
lies
on
the
taxpayer.
Reference
may
be
made
to
M.N.R.
v.
Simpsons
Ltd.,
[1953]
Ex.
C.R.
93;
[1953]
C.T.C.
208.
By
subsection
(1)
(a)
of
Section
11,
a
taxpayer
is
allowed,
in
computing
income,
to
deduct
‘
such
part
of
the
capital
cost
to
the
taxpayer
of
property,
or
such
amount
in
respect
of
the
capital
cost
to
the
taxpayer
of
property,
if
any,
as
is
allowed
by
regulation”’.
For
the
respondent
it
is
submitted
that
the
deduction
here
claimed
is
allowed
under
paragraph
(c)
of
subsection
(1)
of
Regulation
1100,
which
reads
as
follows:
‘
‘1100.
(1)
Under
paragraph
(a)
of
subsection
(1)
of
section
11
of
the
Act,
there
is
hereby
allowed
to
a
taxpayer,
in
computing
his
income
from
a
business
or
property,
as
the
case
may
be,
deductions
for
each
taxation
year
equal
to
(c)
such
amount
as
he
may
claim
in
respect
of
property
of
Class
14
in
Schedule
8
not
exceeding
the
lesser
of
(1)
the
aggregate
of
the
amounts
for
the
year
obtained
by
apportioning
the
capital
cost
to
him
of
each
property
over
the
life
of
the
property
remaining
at
the
time
that
the
cost
was
incurred;
or
(ii)
the
undepreciated
capital
cost
to
him
as
of
the
end
of
the
taxation
year
(before
making
any
deduction
under
this
subsection
for
the
taxation
year)
for
property
of
the
class.”
And
then
Class
14
reads:
“14.
Property
that
is
a
patent,
franchise,
concession
or
licence
for
a
limited
period
in
respect
of
property
.
.
.”
It
is
not
suggested
that
the
property
in
respect
of
which
the
deduction
is
claimed
falls
within
any
other
regulation.
Unless,
therefore,
it
is
within
Class
14,
the
appeal
must
be
allowed.
It
is
said
that
the
agreement
with
Gelling
Industries,
as
assigned
to
the
respondent
company,
was
a
franchise
for
a
limited
period,
namely
ten
years,
and
that
as
its
cost
to
the
respondent
was
$50,000,
a
capital
cost
allowance
of
10
per
cent
thereof
may
be
written
off
annually.
For
the
Minister
it
is
submitted
(1)
that
the
property
in
respect
of
which
the
deduction
is
claimed
is
neither
a
franchise,
concession
or
licence,
and
quite
clearly
it
is
not
a
patent;
(2)
that
even
if
it
be
a
franchise,
concession
or
licence,
it
is
not
for
a
limited
period;
(3)
that
in
any
event,
as
the
sale
or
assignment
of
the
exclusive
right
to
sell
the
Kirby
Sanitation
System
in
the
county
of
York
by
Maurice
to
the
respondent
company
was
not
a
transaction
at
arm’s
length,
the
rule
provided
in
paragraph
(a)
of
subsection
(2)
of
Section
20
is
applicable.
In
view
of
the
conclusions
which
I
have
reached
on
other
points,
I
do
not
find
its
necessary
to
reach
any
concluded
opinion
as
to
whether
the
property
in
question
was
or
was
not
a
franchise,
concession
or
licence.
For
the
purpose
of
this
case,
I
am
prepared
to
assume—but
without
deciding—that
it
was
a
franchise.
But
not
all
franchises
are
within
Class
14
;
only
those
that
are
“for
a
limited
period’’
are
within
the
class.
The
intention
of
Parliament
in
using
these
words
‘‘for
a
limited
period’’
seems
to
me
to
be
quite
clear.
Unless
the
duration
of
the
franchise
is
definitely
ascertained
and
limited
there
is
no
yardstick
by
which
the
value
of
the
franchise
can
be
ascertained.
Further,
it
would
be
impossible
to
ascertain
the
life
of
the
property
or
franchise,
a
matter
which
must
be
known
in
order
to
make
the
computation
required
in
paragraph
(i)
of
subsection
(c)
of
Section
1
of
Regulation
1100,
namely
:
“By
apportioning
the
capital
cost
to
him
of
each
property
over
the
life
of
the
property
remaining
at
the
time
the
cost
was
incurred.”
The
‘‘franchise’’?
came
into
existence
by
reason
of
the
agreement
of
February
20,
1951,
between
Gelling
Industries,
Ltd.
and
the
Kirby
Company
of
Toronto.
Nothing
is
stated
therein
as
to
the
period
for
which
the
right
of
distribution
is
granted.
Not
only
is
it
silent
on
that
matter
but
specific
provision
is
made
in
Section
20
by
which
the
entire
agreement
may
be
terminated
by
either
party
by
giving
thirty
days’
notice
to
the
other
party,
and
apparently
with
or
without
cause
assigned.
In
my
view
the
right
or
franchise
thereby
acquired
was
for
an
entirely
indefinite
period,
and
not
for
a
limited
period
as
required
by
the
words
of
Class
14.
It
follows,
of
course,
that
had
the
right
been
retained
by
the
Kirby
Company
it
could
not
have
claimed
any
capital
cost
allowance
in
respect
thereof,
both
on
the
ground
that
it
was
not
for
a
limited
period,
and
also
because
it
had
paid
nothing
for
the
right
or
franchise.
It
is
submitted,
however,
that
by
the
terms
of
the
agreement
dated
October
1,
1952,
between
the
Kirby
Company
and
the
respondent,
the
original
franchise,
which
was
for
an
indefinite
and
unlimited
period,
became,
in
the
hands
of
the
respondent,
a
franchise
for
a
limited
period
because
of
the
words:
“The
Company
shall
be
entitled
to
all
benefits,
rights
and
privileges
for
a
period
of
ten
years
under
this
agreement,
and
as
between
the
parties
hereto
shall
be
regarded
and
construed
as
a
ten
year
franchise.’’
In
my
view,
this
submission
is
untenable.
I
am
quite
unable
to
see
how
a
franchise
for
an
indefinite
and
unlimited
term
can
by
the
act
of
the
holder
of
the
franchise
only,
become
one
for
a
period
of
ten
years,
or
for
any
stated
period
of
years.
It
is
of
significance
to
note
that
while
the
agreement
with
Gelling
Industries
provides
in
Section
19
that
the
contract
is
not
assignable
or
transferable
without
its
prior
written
consent,
there
is
no
evidence
that
such
consent
was
ever
given
to
the
agreement
of
sale
and
purchase
dated
October
1,
1952,
or
to
any
of
its
terms.
In
my
opinion,
the
Kirby
Company
could
not
confer
on
or
assign
to
the
respondent
something
which
it
did
not
possess.
The
rights
acquired
by
the
respondent
could
be
no
more
than
those
given
by
Gelling
Industries,
and
that
company,
under
its
agreement,
could
not
only
cancel
the
agreement
by
thirty
days’
notice,
but
by
Clause
5
could
also
change
the
territory
allotted
to
the
distributor
from
time
to
time
and
at
any
time
it
desired
by
merely
giving
notice
thereof.
In
my
opinion,
the
property,
right
or
franchise
was
that
created
by
the
original
agreement
of
February
20,
1951,
and
it
was
both
before
and
after
the
assignment
to
the
respondent
not
a
right
or
franchise
for
a
limited
period.
I
have
also
reached
the
conclusion
that
the
Minister’s
appeal
must
be
allowed
for
another
reason,
namely,
that
the
transaction
between
the
Kirby
Company
and
the
respondent
was
not
one
at
arm’s
length.
Subsection
(4)
(a)
of
Section
20
of
the
Act
is
as
follows:
“
(4)
Where
depreciable
property
did,
at
any
time
after
the
commencement
of
1949,
belong
to
a
person
(hereinafter
referred
to
as
the
original
owner)
and
has,
by
one
or
more
transactions
between
persons
not
dealing
at
arm’s
length,
become
vested
in
a
taxpayer,
the
following
rules
are,
notwithstanding
section
17,
applicable
for
the
purposes
of
this
section
and
regulations
made
under
paragraph
(a)
of
subsection
(1)
of
section
11;
(a)
the
capital
cost
of
the
property
to
the
taxpayer
shall
be
deemed
to
be
the
amount
that
was
the
capital
cost
of
the
property
to
the
original
owner
;
’
’
Then
by
Section
139(5),
it
is
provided:
‘
(5)
For
the
purposes
of
this
Act
a
corporation
and
a
person
or
one
of
the
several
persons
by
whom
it
is
directly
or
indirectly
controlled,
shall,
without
extending
the
meaning
of
the
expression
‘to
deal
with
each
other
at
arm’s
length’
be
deemed
not
to
deal
with
each
other
at
arm’s
length.”
Mr.
Watson,
counsel
for
the
respondent,
submits
that
on
the
evidence
to
which
I
shall
now
refer
the
transaction
by
which
the
respondent
acquired
the
franchise
was
one
not
at
arm’s
length,
either
(a)
because
the
respondent
company
was
indirectly
controlled
by
Maurice,
who
was
also
the
sole
proprietor
of
the
Kirby
Company,
the
vendor,
and
that
therefore
they
are
deemed
not
to
have
dealt
with
each
other
at
arm’s
length
as
provided
for
in
subsection
(5)
of
Section
139;
or
(b)
because,
in
the
transaction,
they
were
not
in
fact
dealing
at
arm’s
length,
and
therefore
the
provisions
of
subsection
(4)(a)
of
Section
20
are
applicable.
That
subsection
(5)
of
Section
139
does
not
purport
to
define
all
transactions
which
are
not
at
arm’s
length
is
made
clear
in
the
case
of
M.N.R.
v.
Sheldons
Engineering,
Ltd.,
[1955]
S.C.R.
637;
[1955]
C.T.C.
174,
where
Locke,
J.,
in
delivering
the
judgment
for
the
Court,
said
at
p.
648
[[1955]
C.T.C.
179]:
The
words
(i.e.,
to
deal
with
each
other
at
arm’s
length)
do
not
appear
in
the
Income
War
Tax
Act,
though
the
same
subject
matter
is
dealt
with
in
Section
6(1)(n)
of
that
Act.
In
addition
to
appearing
in
Sections
20
and
127,
the
term
is
employed
in
Sections
12(3),
17(1),
(2)
and
(3),
36(4)
and
125(3)
of
The
Income
Tax
Act.
Section
127(5)
does
not
purport
to
define
the
meaning
of
the
expression
generally;
it
merely
states
certain
circumstances
in
which
persons
are
deemed
not
to
deal
with
each
other
at
arm’s
length.
I
think
the
language
of
Section
127(5),
though
in
some
respects
obscure,
is
intended
to
indicate
that,
in
dealings
between
corporations,
the
meaning
to
be
assigned
to
the
expression
elsewhere
in
the
statute
is
not
confined
to
that
expressed
in
that
section.’’
The
evidence
of
Maurice
satisfies
me
completely
that
the
transaction
by
which
the
franchise
came
into
the
hands
of
the
respondent
was
not
one
at
arm’s
length.
The
Act
does
not
define
the
expression,
and
it
would
perhaps
be
unwise
for
me
to
attempt
to
do
so.
It
is
sufficient
to
state
that
in
my
opinion,
in
a
vendor
and
purchaser
matter,
an
arm’s
length
transaction
does
not
take
place
when
the
purchaser
is
merely
carrying
out
the
orders
of
of
the
vendor,
and
exercising
no
independent
judgment
as
to
the
fairness
of
the
terms
of
the
contract,
or
seeking
to
get
the
best
possible
terms
for
himself.
That
was
precisely
the
situation
here.
In
effect,
Maurice
was
both
vendor
and
purchaser,
and
while
he
was
not
actually
a
shareholder
at
the
time
the
agree-
ment
of
October
1,
1952,
was
signed,
he
had
in
fact
full
co
^trol
■koP*'
of
the
entire
operation.
As
sole
proprietor
of
the
Kirby
Company
he
made
the
decision
to
incorporate
the
respondent
company
and
to
transfer
his
assets
to
it.
He
chose
its
name
and
fixed
the
sale
price.
He
employed
the
solicitors
who
incorporated
the
company
and
were
its
provisional
directors,
and
later
its
directors
until
November
13,
1952,
the
day
following
his
purchase
of
the
vast
majority
of
the
shares,
at
which
date
he
and
his
wife
and
one
Sayer,
an
employee
(the
latter
two
each
holding
a
relatively
minor
number
of
shares)
were
appointed
directors.
On
the
same
date
Maurice
was
appointed
president,
his
wife
was
appointed
a
director
and
secretary-treasurer,
and
Mr.
Sayer
became
a
director
and
vice-
president.
On
January
18,
1953,
Maurice
was
appointed
man-
aging-director.
Mr.
Maurice
said
that
he
made
the
decision
as
to
placing
a
value
of
$50,000
on
the
franchise;
that
when
the
agreement
of
October
1
was
entered
into
the
three
directors
were
acting
entirely
on
his
behalf
and
carrying
out
his
instructions,
and
not
exercising
an
independent
judgment
in
the
matter.
At
one
point
he
said
he
was
present
at
all
the
meetings
held
on
October
1,
but
later
said
that
as
he
was
not
a
shareholder
he
was
not
present
at
the
shareholders’
meeting
which
affirmed
the
directors’
by-law.
It
is
apparent,
too,
that
in
some
way
he
had
control
of
that
meeting
as
well,
for
he
said
that
if
the
price
had
been
questioned
his
decision
would
have
carried.
From
these
bald
admissions
it
is
apparent,
therefore,
that
Maurice
made
all
the
decisions,
both
on
behalf
of
the
Kirby
Company
as
vendor
and
the
respondent
company
as
purchaser.
Mr.
Lyon,
on
behalf
of
the
respondent,
relies
on
the
Sheldons
Engineering
Company
case
(supra),
stressing
the
fact
that
when
the
agreement
of
October
1
was
approved,
Maurice
was
not
a
shareholder
of
the
repsondent
company,
and
that
is
so
according
to
the
records.
Therefore,
it
is
said,
the
control
of
the
company
was
in
the
hands
of
the
shareholders
who
were
the
three
solicitors
acting
on
his
behalf—his
wife,
and
Sayer,
his
employee.
In
view
of
his
admission
that
he
did
in
fact
control
their
actions,
the
matter
of
shareholding
in
this
case
becomes
of
little
importance.
The
Sheldons
Engineering
case
is
clearly
distinguishable
on
its
facts.
The
transaction
there
included
the
sale
of
the
assets
of
the
old
company
to
the
new
company,
and
the
question
there
also
was
whether
the
transaction
was
one
at
arm’s
length.
It
was
held
that
at
the
time
the
sale
of
the
depreciable
property,
in
respect
of
which
the
capital
cost
was
claimed,
was
made,
the
old
company
was
completely
controlled
by
the
bank
which
had
made
advances
and
taken
certain
securities.
In
the
circumstances,
it
was
held
that
subsection
(2)
of
Section
20,
and
subsection
(5)
of
Section
127
had
no
application,
and
the
parties
were
at
arm’s
length
within
the
commonly
accepted
meaning
of
that
expression.
In
my
view,
Sheldons
case
affords
no
assistance
to
the
respondent.
My
conclusion,
therefore,
for
the
reasons
stated,
must
be
that
on
the
proven
facts
Maurice
did
indirectly
control
the
respondent
corporation
on
October
1,
1952,
that
therefore
they
are
deemed
not
to
have
been
at
arm’s
length
under
subsection
(5)
of
Section
139.
I
am
also
satisfied
that
the
transaction
was
between
persons
not
dealing
at
arm’s
length
and
that
consequently
the
provisions
of
subsection
(4)
(a)
of
Section
20
apply.
It
follows,
therefore,
that
the
capital
cost
of
the
property—the
franchise—
to
the
taxpayer
is
deemed
to
be
the
capital
cost
of
the
property
to
the
original
owner,
namely,
the
Kirby
Company.
As
that
cost
was
nothing,
the
respondent
is
not
entitled
to
any
capital
cost
allowance
in
respect
of
the
property,
namely,
the
‘‘franchise’’.
For
these
reasons
the
appeal
of
the
Minister
will
be
allowed,
the
decision
of
the
Income
Tax
Appeal
Board
set
aside,
and
the
reassessment
affirmed.
The
Minister
of
National
Revenue
is
entitled
to
costs
of
this
appeal
after
taxation.
Judgment
accordingly.