Dubé,
J:—The
issue
to
be
resolved
is
whether
the
sum
of
$100,000
paid
to
the
plaintiff
by
Kraus
Carpet
Mills
Limited
(“Kraus”)
pursuant
to
an
out
of
court
settlement
is
income
from
the
taxpayer’s
business
for
the
1976
taxation
year
as
held
by
the
Minister
of
National
Revenue,
or
a
capital
receipt
as
claimed
by
the
plaintiff.
The
plaintiff
(“Packer”)
became
the
exclusive
distributor
in
the
Province
of
Quebec
for
carpets
sold
under
the
trade
name
and
mark
“Kraus”,
manufactured
in
Waterloo,
Ontario,
and
remained
so
from
1959
until
March
26,
1974
when
it
was
notified
by
letter
from
Kraus
of
the
termination
of
the
relationship
between
the
two
firms.
There
ensued
an
action
launched
by
Packer
in
the
Quebec
Superior
Court.
In
its
statement
of
claim,
Packer
sought
damages
for
loss
of
profits
on
sales,
inventory,
carrying
charges,
samples
and
overhead,
for
a
total
claim
of
$1,602,000.
It
was
alleged
that
the
cancellation
of
the
long
standing
agreement
was
unjustified,
arbitrary
and
disastrous
to
Packer’s
business,
and
that
the
plaintiff
was
entiled
to
at
least
one
year’s
notice
of
termination
(it
had
been
given
three
months’
notice
only).
In
its
plea,
Kraus
asserted
that
Packer
failed
to
comply
with
its
commitment
to
purchase
products
from
Kraus
for
“a
minimum
amount
of
$1,750,000
in
the
year
1969
and
at
a
yearly
increase
thereafter
of
15%”.
It
referred
to
a
market
survey
prepared
by
Currie
Lehman
&
Associates
Limited
reporting
that
Packer
had
not
shown
sales
comparable
to
the
growth
of
the
Canadian
market
in
general
and
confirming
that
plaintiff’s
“market
share
declined
from
6.3%
to
5.1%
in
the
period
between
1970
and
1973”.
In
its
answer
to
plea,
Packer
stated
that
“the
installation
of
Kraus’s
needle
punch
production
equipment
did
not
provide
Plaintiff
with
the
type
of
carpeting
required
for
the
Quebec
market
and
that,
moreover,
Defendant’s
shipping
problems
caused
Plaintiff
loss
of
contracts
and
retail
sales”.
The
declaration
of
settlement
out
of
court
recognized
that
Kraus
had
the
right
to
terminate
the
distributorship
arrangement
at
any
time
and
had
terminated
it
upon
three
months’
notice.
The
governing
paragraphs
of
the
one-
page
settlement
bear
reproduction:
3.
Whereas
Packer
recognizes
Kraus’
right
to
terminate
the
agreement
at
any
time
upon
giving
adequate
notice
but
contends
that
the
period
of
notice
given
by
Kraus
is
inadequate.
4.
Whereas
Kraus
recognizes
that
termination
of
the
arrangement
materially
affects
Packer’s
profit
making
apparatus.
5.
Whereas
Kraus
desires
to
resolve
the
matter
with
Packer
by
mutual
agreement.
THEREFORE:
Kraus
hereby
offers
to
pay
Packer
$100,000.00.
This
payment
is
not
in
respect
of
cancellation
of
the
agreement
but
is
solely
in
recognition
of
the
facts
that
Packer
contends
that
12
months
notice
should
have
been
given
instead
of
3
months
notice.
It
is
also
useful
to
reproduce
at
this
stage
a
statement
of
sales
and
profits
of
the
plaintiff
company
filed
at
the
outset
of
the
hearing
of
this
action.
It
will
be
noted
that
while
Packer
was
the
exclusive
distributor
of
Kraus
in
Quebec,
it
did
sell
carpets
procured
from
other
manufacturers
and
also
related
products
such
as
floor
undercoverings,
glue,
and
other
accessories
not
produced
by
Kraus,
for
instance,
for
the
year
1973,
that
is
the
full
year
preceding
the
discontinuation
of
the
dealership,
Packer’s
total
sales
amount
to
$5,666,000,
while
sales
of
Kraus
products
amounted
to
$3,111,000.
|
1969
|
1970
|
1971
|
1972
|
1973
|
1974
|
|
'000
|
'000
|
’000
|
'000
|
’000
|
’000
|
Total
Sales
|
4062
|
4023
|
4780
|
5096
|
5666
|
5905
|
Kraus
Sales
|
2390
|
2304
|
2576
|
2658
|
3111
|
2175
|
Sales
of
Other
Carpets
|
152
|
201
|
263
|
220
|
409
|
1382
|
Gross
Profit:
|
24.1
|
25.6
|
22.1
|
20.9
|
22.6
|
19.9
|
Net
Profit
Before
Tax
|
11.4
|
11.4
|
8.9
|
3.1
|
9.3
|
5.1
|
|
1975
|
1976
|
|
1977
|
1978
|
1979
|
|
|
'000
|
'000
|
|
'000
|
'000
|
'000
|
|
Total
Sales
|
5379
|
5789
|
|
6702
|
7834
|
9940
|
|
Kraus
Sales
|
130
|
68
|
Kr
|
22470
m
|
27840
m
i
|
23010m
|
|
2660
m
|
|
Sales
of
Other
Carpets
|
3485
|
3518
|
|
2583
|
2672
|
5358
|
|
Gross
Profit:
|
19.3
|
19.1
|
|
19.6
|
20.1
|
20.5
|
|
Net
Profit
Before
Tax
|
1.1
|
(1.0)
|
|
0.8
|
2.7
|
3.0
|
|
I
will
return
to
the
statement
of
sales
after
a
review
of
the
jurisprudence
in
the
matter.
First,
the
English
authorities
and
then
the
more
recent
Canadian
cases.
In
Glenboig
Union
Fireclay
Co
Ltd
v
CIR
(1922),
12
TC
427,
the
House
of
Lords
held
that
an
amount
received
for
compensation
in
respect
of
fireclay
left
unworked
was
not
a
profit
earned
in
the
course
of
the
Company’s
trade,
but
was
a
Capital
receipt,
being
a
payment
made
for
the
“sterilisation
of
a
capital
asset”.
Lord
Wrenbury
said
at
465
that
the
sum
“was
the
price
paid
for
sterilising
the
asset
from
which
otherwise
profit
might
have
been
obtained”.
In
Van
Den
Berghs
Limited
v
Clark
(1934),
19
TC
390
two
companies
bound
themselves
to
work
in
a
friendly
alliance
and
one
cancelled
the
agreement
some
years
later.
The
House
of
Lords
held
that
the
payment
of
£450,000
was
for
the
cancellation
of
the
appellant
company’s
future
rights
under
the
agreements,
which
constituted
the
capital
asset
of
the
company
and
was
accordingly
a
capital
receipt.
Lord
Macmillan
found
(at
431)
that
“the
cancelled
agreements
related
to
the
whole
structure
of
the
appellants’
profit-making
apparatus”.
Three
years
later,
in
1938,
in
Kelsall
Parsons
&
Co
v
CIR
(1938),
21
TC
608
the
appellants
entered
into
several
agency
agreements
on
a
commission
basis
for
the
sale
in
Scotland
of
the
products
of
various
manufacturers.
One
of
the
agreements
was
terminated
in
consideration
of
the
sum
of
£1,500.
The
Court
of
Session
held
that
the
sum
was
a
taxable
profit.
The
Lord
President
(Normand)
said
at
619:
.
.
.
That
was
a
contract
incidental
to
the
normal
course
of
the
Appellants’
business.
Their
business,
indeed,
was
to
obtain
as
many
contracts
of
this
kind
as
they
could.
.
.
.
The
Appellants’
business
is
entirely
different
from
the
business
carried
on
by
someone
who,
under
contract,
acts
exclusively
as
agent
for
a
single
principal.
In
1945,
that
same
court
held
in
Barr,
Crombie
&
Co
Ltd
v
CIR
(1945),
26
TC
406,
that
the
sum
paid
as
compensation
for
the
loss
of
a
shipping
management
agency
was
fundamental
to
the
appellant
company,
therefore
a
capital
payment.
The
Lord
President
(Normand)
said
at
412:
.
..
where
you
have
a
payment
for
the
loss
of
the
contract
upon
which
the
whole
trade
of
the
Company
has
been
built,
..
.
and
where
in
consequence
of
the
loss
the
Company’s
structure
and
character
are
greatly
affected,
the
payment
seems
to
me
to
be
beyond
doubt
a
capital
payment.
In
Wiseburgh
v
Domville
(Inspector
of
Taxes),
[1956]
1
All
ER
754,
the
Court
of
Appeal
held
that
the
sum
of
£4,000
paid
in
settlement
of
an
action
expressed
to
be
in
damage
for
breach
of
agreement
was
properly
assessed
to
tax
as
being
profits.
The
taxpayer
had
two
agencies,
one
was
terminated
by
the
principals
without
due
notice.
It
was
found
by
the
court
that
the
loss
of
the
agency
was
one
of
the
incidents
of
the
taxpayer’s
business,
did
not
partially
destroy
that
business,
and
thus
was
not
the
loss
of
an
enduring
capital
asset.
In
his
writ
the
taxpayer
had
asked
for
damages
for
breach
of
contract
and
also
for
an
account
of
commission
due
and
unpaid
in
respect
of
past
work.
Lord
Evershed,
MR,
said
at
757:
.
.
.
I
can
well
conceive
that
the
taxpayer
would
have
had
a
strong
case
for
saying
that
damages
would
not
be
taxable,
in
so
far
as
they
were
claimed
because
his
goodwill
as
a
sales
agent
had
been
impaired.
But
he
concluded
that:
.
.
.
On
the
face
of
it,
it
is
impossible
for
the
court
to
infer
that
this
£4,000
or
any
part
of
it
represented
damages
for
the
loss
of
the
taxpayer’s
goodwill.
I
think
the
form
of
the
damages
really
make
that
impossible.
In
CIR
v
Fleming
&
Co
(Machinery),
Ltd,
(1951)
31
TC
57,
the
Court
of
Session
held
in
1951
that
the
sum
of
£5,320
received
by
the
company
as
compensation
for
the
loss
of
one
agency
out
of
eight
was
for
loss
of
profits
and
not
for
loss
of
a
profit
earning
asset.
Lord
Russell
then
formulated
this
general
principle
at
63:
.
.
.
When
the
rights
and
advantages
surrendered
on
cancellation
are
such
as
to
destroy
or
materially
to
cripple
the
whole
structure
of
the
recipient’s
profit-making
apparatus,
involving
the
serious
dislocation
of
the
normal
commercial
organisation
and
resulting
perhaps
in
the
cutting
down
of
the
staff
previously
required,
the
recipient
of
the
compensation
may
properly
affirm
that
the
compensation
represents
the
price
paid
for
the
loss
or
sterilisation
of
a
capital
asset
and
is
therefore
a
Capital
and
not
a
revenue
receipt.
Lord
Russell’s
rule
was
followed
by
the
Canadian
Courts.
In
Parsons-
Steiner
Limited
v
MNR,
[1962]
CTC
231;
62
DTC
1148,
Thurlow
J
of
the
Exchequer
Court
(now
Chief
Justice
of
the
Federal
Court)
reviews
some
of
the
English
cases.
Parsons-Steiner
had
been
the
sole
agent
in
Canada,
since
1933,
for
Doulton
&
Co
Ltd.
The
agency
was
for
one
year,
and
thereafter
until
terminated
on
three
months’
notice.
In
1954
Doulton
discontinued
the
agency
and
in
1956
paid
the
sum
of
$100,000
in
compensation.
The
learned
judge
held
that
the
payment
was
a
capital
receipt.
He
said
at
244:
[1154]:
On
the
whole
therefore
having
regard
to
the
importance
of
the
Doulton
agency
in
the
appellant’s
business
the
length
of
time
the
relationship
had
subsisted,
the
extent
to
which
the
appellant’s
business
was
affected
by
its
loss
both
in
decreased
sales
and
by
reason
of
its
inability
to
replace
it
with
anything
equivalent.
.
..
The
payment
received
in
respect
of
its
loss
was
accordingly
a
capital
receipt.
In
1973
the
Federal
Court
heard
the
case
of
MNR
v
Import
Motors
Limited,
[1973]
CTC
719;
73
DTC
5530.
The
taxpayer,
after
having
operated
a
Volkswagen
distributorship
franchise
in
Newfoundland
for
several
years,
was
informed
that
Volkswagen
Canada
Limited
would
take
over
as
wholesaler.
The
taxpayer
agreed
to
a
payment
of
$100,000,
purportedly
calculated
in
past
sales,
but
described
as
“additional
distributor
discount”.
Urie
J,
(now
of
the
Appeal
Division)
held
that
notwithstanding
the
form
of
the
transaction,
its
business
substance
was
the
cancellation
of
the
distributorship
agreement:
thus,
the
compensation
for
the
loss
of
a
substantial
portion
of
the
business
was
a
capital
asset
which
would
never
be
recovered.
In
Courrier
M
H
Inc
v
Her
Majesty
the
Queen,
[1976]
CTC
567;
76
DTC
6331,
the
Postmaster
General
of
Canada
cancelled
two
contracts
for
the
transportation
of
mail
awarded
to
the
taxpayer
only
two
months
previously.
Compensation
in
the
amount
of
$293,015
was
given
to
the
taxpayer,
based
on
an
estimate
of
expected
proceeds
for
three
months.
I
held
that
the
compensation
represented
an
amount
received
for
the
sterilisation
of
a
capital
asset,
thus
not
taxable.
The
taxpayer
in
Pepsi-Cola
Canada
Ltd
and
Her
Majesty
the
Queen,
[1978]
CTC
801;
78
DTC
6546,
held
an
agreement
with
Schweppes
and
was
paid
$100,000
on
its
termination.
The
plaintiff
alleged
that
the
payment
was
for
“goodwill”,
but
the
trial
judge
looked
at
a
document
signed
by
Schweppes
to
the
effect
that
the
payment
was
in
full
satisfaction
for
“all
costs,
expenses
and
loss
of
income
incurred
or
to
be
incurred”
and
held
the
payment
to
be
income.
The
Federal
Court
of
Appeal
reversed
that
decision
and
held
that
the
only
reasonable
inference
to
be
drawn
from
the
evidence
of
the
only
witness
at
the
trial,
an
officer
of
the
appellant,
was
that
the
terms
of
the
receipt
prepared
by
Schweppes
did
not
contain
the
terms
of
the
termination
agreement:
the
amount
was
a
capital
payment
for
goodwill.
The
court
noted
that
for
the
purpose
of
effecting
the
transfer
of
its
established
goodwill
the
appellant
provided
Schweppes
with
a
list
of
its
customers,
and
notified
them
by
letter
of
the
changeover.
I
now
return
to
the
case
at
bar,
and
first
to
the
statement
of
sales
reproduced
earlier.
It
appears
from
the
document
that
the
volume
of
sale
of
Kraus
carpets
represents
barely
more
than
50%
of
the
total
sales
of
the
taxpayer
for
the
years
1969
to
1973
it
is
below
50%
for
1974,
the
termination
year.
Kraus
carpet
sales
plummeted
down
to
2.5%
the
following
year.
However,
other
sales
nearly
fill
the
gap
during
that
period
and
gradually
increase
in
the
course
of
the
following
years,
with
the
result
that
the
gross
profit
remains
substantially
the
same
between
1972
and
1979.
The
statement
also
indicates
that
in
1976
the
Omega
line
comes
on
stream.
The
following
year,
Omega
sales
reach
approximately
the
volume
previously
held
by
Kraus
sales.
Omega
is
but
another
name
for
carpets
manufactured
by
Kraus;
after
the
settlement
of
1976,
Kraus
had
resumed
its
relationship
with
Packer
and
supplied
it
with
Omega
carpets.
It
now
appears
from
a
samples’
salesbook
filed
at
the
hearing
that
“Tapis
Kraus
&
Cie.”
(Packer
under
another
name)
is
presently
the
distributor
of
Kraus
carpets
for
the
Province
of
Quebec.
The
doucments
filed
at
the
hearing
disclose
that
Packer
was
not
succeeding
as
well
as
Kraus
expected.
In
1973
and
1974,
the
relationship
between
the
two
companies
was
rapidly
deteriorating.
Packer
was
not
meeting
its
purchase
commitments.
There
were
reasons.
The
type
of
carpet
manufactured
by
Kraus
was
less
in
demand
in
the
Province
of
Quebec
than
elsewhere
in
Canada;
apparently
the
Quebec
clientele
preferred
nylon,
or
“shaggy
dog”
carpets,
not
produced
by
Kraus.
Moreover,
the
Government
of
the
Province
of
Quebec
was
favouring
carpets
produced
in
that
province
for
provincial
buildings.
Kraus
continued
to
apply
the
pressure.
Several
letters
prior
to
the
fateful
message
of
March
26,
1974
impart
an
increasing
degree
of
exasperation
on
the
part
of
Kraus.
The
letter
of
March
26
is
the
logical
culmination
to
previous
admonitions.
The
discontinuation
of
the
agreement
did
not
therefore
bring
Packer
to
a
halt.
It
did
not
“sterilise
its
capital
asset”.
The
plaintiff
proceeded
with
its
expansion
plans
and
moved
to
a
new
and
more
expensive
warehouse.
Those
new
expenditures
partly
explain
the
decrease
in
the
net
profit
of
the
taxpayer.
The
statement
shows
that
the
gross
profit
remains
steady,
around
20%
throughout
the
years,
whereas
the
net
profit
drops
to
5.1%
in
1974,
1.1%
in
1975
and
-1.0%
in
1976.
The
year
1974
was
the
year
of
termination
with
Kraus,
but
also
the
year
of
expansion.
Admittedly,
the
introduction
of
new
lines
of
carpets
from
new
suppliers
was
costly
and
caused
severe
problems
to
Packer.
But
I
cannot
find
that
the
discontinuation
of
the
Kraus
line
(specially
where
it
is
later
replaced
by
a
similar
Omega
line)
“materially
crippled
the
whole
structure
of
the
profit-making
apparatus”
of
the
plaintiff:
the
apparatus
clearly
continued
to
produce
about
the
same
volume
of
sale
and
the
same
gross
profit
throughout
those
years.
The
declaration
of
settlement
does
boast
a
few
judicially
magic
words,
such
as
the
“termination
of
the
arrangement
materially
affects
Packer’s
profit
making
apparatus”.
The
document
was
prepared
by
attorneys
for
both
parties
and
it
is
not
unreasonable
to
assume
that
the
words
were
put
in,
at
the
request
of
Packer’s
attorneys,
to
enlighten
future
readers.
The
conclusion
of
that
document,
however,
is
to
the
effect
that
the
sum
of
$100,000
is
paid
in
compensation
for
the
short
notice.
The
mere
use
of
magic
words
will
not,
of
course,
create
instant
paralysis,
or
materially
cripple
an
apparatus,
or
sterilise
a
capital
asset.
It
is
still
for
the
court
to
pronounce
the
final
diagnosis.
In
the
Kelsall
Parsons
case,
the
Lord
President
(Normand)
described
the
sum
paid
(at
620)
as
“really
and
substantially
a
surrogatum
for
one
year’s
profits”,
as
there
was
one
more
year
remaining
to
the
agreement.
In
the
Fleming
case,
Lord
Russell
said
(at
64)
that
the
payment
for
the
loss
of
that
agency
—
terminable
at
will
—
was
no
more
than
“a
surrogatum
for
the
loss
of
future
profits”.
Lord
Keith
added
(at
65)
that
since
the
agency
was
at
will
“it
is
difficult
to
see
how
it
could
be
given
any
goodwill
value
and
there
is
no
suggestion
that
it
had
any
goodwill
value
in
the
company’s
books”.
He
concluded:
“Compensation
in
lieu
of
notice
would
in
my
opinion
quite
clearly
be
a
revenue
receipt”.
In
the
Wiseburgh
case,
the
termination
of
the
agency
without
notice
led
to
a
consent
order.
Lord
Evershed,
MR
concluded
at
757)
that
“on
the
face
of
it,
it
is
impossible
for
the
court
to
infer
that
this
£4,000
or
any
part
of
it
represented
damages
for
the
loss
of
the
taxpayer’s
goodwill.
I
think
the
form
of
the
pleadings
and
the
amount
of
the
damages
really
make
that
impossible”.
Another
pronouncement
of
Lord
Evershed,
MR
(at
758)
applies
equally
well
to
the
instant
matter:
.
.
.
The
business
has
suffered
something
perhaps
of
a
disaster
by
reason
of
this
quarrel
with
a
valuable
customer.
But,
beyond
that,
it
seems
to
me
it
is
not
right
to
say
that
the
taxpayer
had
his
undertaking
as
a
sales
agent
partially
destroyed
or
taken
away.
In
the
Parsons
case,
where
it
was
held
that
the
sum
of
$100,000
was
paid
for
goodwill
and
for
a
capital
asset
of
an
enduring
nature,
the
product
was
“a
line
of
figurines
which
alone
accounted
for
a
considerable
portion
of
the
business
and
which
was
unique
in
the
trade”.
And
the
taxpayer
accommodated
Doulton
by
introducing
Doulton’s
staff
to
the
customers
and
by
transferring
two
of
its
seventeen
employees
to
Doulton
on
the
termination
of
the
agency.
In
the
Pepsi-Cola
case
as
well,
the
taxpayer
delivered
its
list
of
clients
to
Schweppes
and
notified
them
to
buy
their
products
directly
from
Kraus.
To
the
contrary,
Packer
went
all
out
to
establish
other
lines.
It
will
also
be
recalled
that
the
plaintiff's
statement
of
claim
in
the
Quebec
Superior
Court
claimed
for
loss
of
profit
resulting
from
the
short
three
months’
notice.
Nowhere
is
there
to
be
found
a
claim
for
goodwill.
Along
with
Lord
Evershed
in
the
Wiseburgh
case,
“on
the
face
of
the
pleadings’,
I
would
find
it
“impossible
to
infer”
that
the
payment
was
for
goodwill.
The
sole
witness
at
the
trial,
the
Vice
President
of
Packer,
very
honestly
pointed
out
that
the
name
Packer
was
not
important.
The
name
sold
and
publicized
was
“Kraus”,
not
Packer.
There
could
therefore
be
no
goodwill
attached
to
the
name
Packer.
Again,
the
declaration
of
settlement
recites
that
the
payment
“is
solely
in
recognition
of
the
fact
that
Packer
contends
that
12
months’
notice
should
have
been
given
instead
of
3
months
notice’.
As
Lord
Keith
said
in
the
Fleming
case,
“Compensation
in
lieu
of
notice
would
in
my
opinion
quite
clearly
be
a
revenue
receipt”.
Under
the
circumstances,
the
appeal
is
dismissed
with
costs.*