Cullen,
J.:
—
This
is
an
appeal
by
way
of
an
action
pursuant
to
subsection
172(2)
of
the
Income
Tax
Act,
S.C.
1970-71-72,
c.
63
as
amended,
from
an
income
tax
reassessment
made
by
the
Minister
of
National
Revenue
respecting
the
plaintiff’s
1973
taxation
year.
In
computing
its
1973
income
tax,
the
plaintiff
corporation
claimed
an
amount
of
$2,850,000
as
a
gift
to
the
Manitoba
Hydro-Electric
Board
as
a
“donation
to
the
Crown”
pursuant
to
paragraph
110(1)(b)
of
the
Income
Tax
Act.
This
deduction
was
disallowed
by
the
Minister
who
reassessed
the
plaintiffs
income
for
the
1973
taxation
year
by
including
in
the
plaintiffs
income
for
tax
purposes
the
amount
of
$2,850,000
which
had
been
deducted
by
the
plaintiff
as
a
gift
to
the
Crown
in
the
right
of
the
Province
of
Manitoba.
In
addition,
the
Minister
assessed
a
penalty
of
$279,136.13
pursuant
to
subsection
163(2)
of
the
Act.
The
main
issue
here
is
whether
or
not
the
amount
of
$2,850,000
represents
a
gift
to
the
Crown.
There
is
a
secondary
issue,
i.e.
the
penalty,
whose
disposition
is
dependant
upon
the
disposition
of
the
primary
issue.
The
facts
of
this
case
are
quite
straightforward,
with
much
that
occurred
written
down
either
in
letters,
minutes
of
meetings
or
memos
to
file.
The
characterization
of
what
occurred
is
the
enigma
here.
In
May
of
1973
(Exhibit
P203),
Manitoba
Hydro
and
the
plaintiff
signed
a
letter
of
intent
which
provided
inter
alia
that
Manitoba
Hydro
would
acquire
from
Churchill
River
Power
Co.
Ltd.
(a
wholly-owned
subsidiary
of
the
plaintiff)
all
the
outstanding
shares
of
Northern
Manitoba
Power
Co.
Ltd.
(a
wholly-owned
subsidiary
of
Churchill
River
Power
Co.
Ltd.)
together
with
the
total
indebtedness
of
Northern
Manitoba
to
Churchill
for
the
price
of
$3,375,000
and
that
Manitoba
Hydro
would
acquire
from
Northern
Power
Ltd.
(a
wholly-owned
subsidiary
of
Northern
Manitoba
Power
Co.
Ltd.)
all
of
its
electric
distribution
facilities
located
in
Saskatchewan
for
the
price
of
$225,000.
The
letter
of
intent
also
contained
the
provision
that
the
plaintiff
would
make
a
non-refundable
gift
to
Manitoba
Hydro
in
the
amount
of
$2,850,000.
That,
indeed,
is
the
very
subject
of
the
dispute
between
the
parties
in
this
case.
On
behalf
of
the
plaintiff,
it
is
contended
that
the
donation
of
$2,850,000
by
the
plaintiff
to
Manitoba
Hydro
on
September
28,
1973
was
a
gift
to
Her
Majesty
in
the
right
of
the
Province
of
Manitoba
and
consequently
deducti-
ble
by
the
plaintiff
under
paragraph
110(1)(b)
of
the
Income
Tax
Act.
It
is
asserted
that
the
donation
was
voluntary,
made
freely
and
was
without
consideration.
There
were,
in
the
plaintiffs
words,
no
restrictions
on
the
use
which
Manitoba
Hydro
could
make
of
the
funds.
It
was
categorized
by
counsel
for
the
plaintiff
as
two
separate
albeit
related
transactions
where
Manitoba
Hydro
agreed
to
pay
$3.6
million
for
the
shares
and
assets
and
Hudbay
agreed
to
give
back
a
non-refundable
gift
of
$2.85
million.
On
behalf
of
the
defendant,
it
is
pleaded
that
the
payment
by
the
plaintiff
of
$2.85
million
was
not
in
the
nature
of
a
gift,
but
rather
was
part
of
the
consideration
paid
by
the
plaintiff
for
the
payment
to
Churchill
by
Manitoba
Hydro
of
$3.6
million.
What
is
clear
is
that
Manitoba
Hydro
in
the
end
only
disbursed
$750,000
for
the
shares
and
assets
of
Northern
Manitoba.
True,
it
paid
$3.6
million
to
Churchill
but
received
$2.85
million
from
the
plaintiff
which
amounted
to
a
net
disbursement
of
$750,000.
Is
this
transaction
involving
three
entities
indicative
of
a
scheme
to
reduce
“artificially”
the
plaintiff's
income?
Obviously,
where
something
is
given
in
return
for
some
benefit
or
advantage
it
is
not
a
true
gift.
In
Bert
Kay
Litchfield
v.
M.N.R.,
7
Tax
A.B.C.
196
at
198,
it
was
held
that:
For
there
to
be
a
gift,
there
must
be
a
transfer
of
property,
there
must
be
a
donor
who
gives
something
gratuitously
and
there
must
be
a
donee
who
received
the
property
given.
[Emphasis
is
mine.]
Background
The
first
paragraph
of
the
statement
of
claim,
the
facts
of
which
are
agreed
to
by
the
defendant,
reads
as
follows:
The
Plaintiff
(herein
called
“Hudbay”)
is
a
corporation
incorporated
under
the
laws
of
Canada
and
in
1973
inter
alia
operated
a
mining
complex
in
the
Flin
Flon
area,
in
the
Provinces
of
Manitoba
and
Saskatchewan.
In
1973,
Churchill
River
Power
Company
Limited
(herein
called
“Churchill”),
a
corporation
incorporated
under
the
laws
of
Canada,
was
a
wholly
owned
subsidiary
of
Hudbay
and
supplied
power
generated
from
its
power
plant
at
Island
Falls
on
the
Churchill
River
in
Saskatchewan
to
the
Hudbay
mining
operations.
In
1973,
Northern
Manitoba
Power
Company
Limited
(herein
called
“Northern
Manitoba”),
a
corporation
incorporated
under
the
laws
of
Manitoba,
was
a
wholly
owned
subsidiary
of
Churchill
and
purchased
power
from
Churchill
for
distribution
to
residents
of
the
communities
of
Flin
Flon
and
Snow
Lake
in
Manitoba.
Prior
to
September
30,
1973
Northern
Power
Limited
(herein
called
“Northern”),
a
corporation
incorporated
under
the
laws
of
Saskatchewan,
was
a
wholly
owned
subsidiary
of
Northern
Manitoba
and
purchased
power
from
Northern
Manitoba
for
distribution
to
the
residents
of
Flin
Flon
in
Saskatchewan
and
to
the
communities
of
Creighton
and
Denare
Beach
also
in
Saskatchewan.
The
electrical
transmission
and
distribution
systems
operated
by
Hudbay
and
its
subsidiaries
are
hereinafter
called
“the
Hudbay
System.”
Hudbay,
through
its
subsidiary,
Churchill,
held
a
licence
from
the
Saskatchewan
government
to
generate
power
in
Saskatchewan
at
Island
Falls
which
are
fed
by
water
from
Reindeer
Lake.
The
licence
had
been
in
existence
since
1931
and
was
to
expire
in
1981.
Hudbay
had
constructed
generating
facilities
at
Island
Falls
which
had
the
capability
of
generating
96
megawatts
of
power.
The
electricity
generated
at
Island
Falls
was
transmitted
by
a
steel
tower
double
transmission
line
southeasterly
to
a
point
in
Saskatchewan
near
the
Manitoba-Saskatchewan
border
where
another
single
transmission
line
supported
by
wooden
poles
interconnected
with
the
main
line
and
extended
easterly
to
the
community
of
Snow
Lake
in
Manitoba
and
beyond.
The
main
line
continued
to
Flin
Flon.
The
capacity
of
the
main
line
was
about
104
megawatts.
The
capacity
of
the
line
to
Snow
Lake
was
20
megawatts.
Subsequently
after
interconnection
with
the
Manitoba
Hydro
system,
the
capacity
became
48
megawatts.
The
electricity
generated
at
Island
Falls
was
used
by
Hudbay
to
supply
power
to
its
mine
sites
in
both
the
Flin
Flon
and
Snow
Lake
areas,
its
smelter
in
Flin
Flon,
its
zinc
plant
in
Flin
Flon
and
other
plant
facilities.
It
also
was
used
to
supply
electricity
for
sale
for
domestic
purposes
to
residents
of,
inter
alia,
the
towns
of
Flin
Flon
and
Snow
Lake
which
were
basically
communities
comprised
of
employees
of
Hudbay.
The
power
used
by
Flin
Flon
in
1973
at
peak
was
about
seven
and
one-half
megawatts
and
by
Snow
Lake
about
one
megawatt.
The
power
consumed
by
Hudbay
in
its
own
operations
was
in
excess
of
80
megawatts
at
peak.
The
generating
station
and
the
power
generated
at
Island
Falls
and
the
double
transmission
line
to
Flin
Flon
were
owned
by
Churchill.
The
transmission
line
to
Snow
Lake
was
owned
by
Hudbay.
The
distribution
systems
in
the
Manitoba
part
of
Flin
Flon
and
in
Snow
Lake
were
owned
by
Northern
Manitoba
Power.
Northern
Power
owned
the
distribution
systems
which
supplied
power
generated
at
Island
Falls
to
certain
communities
in
Saskatchewan
including
an
area
known
as
the
boundary
area
which
was
that
portion
of
Flin
Flon
located
in
Saskatchewan.
Northern
Manitoba
Power
and
Northern
Power
purchased
power
from
Churchill
for
resale
to
their
residential
customers.
The
Hudbay
system
was
an
isolated
system
because
it
was
not
connected
with
either
the
system
of
Manitoba
Hydro
or
the
system
of
Saskatchewan
Power
which
served
most
of
the
power
consumed
in
the
provinces
of
Manitoba
and
Saskatchewan.
Through
the
use
of
steam
turbines,
Hudbay
could
generate
seven
more
megawatts,
and
by
1973
Hudbay
had
developed
a
plan
to
instal
a
15
megawatt
steam
turbine.
Hudbay
also
had
to
obtain
an
oil-fired
boiler
to
supplement
the
steam
from
the
smelter
to
drive
this
turbine
which
eventually
gave
the
Hudbay
system
a
total
generating
capacity
of
117
megawatts.
With
the
exception
of
an
operation
in
Winnipeg,
Hudbay
was
the
only
private
electric
utility
company
operating
in
Manitoba.
It
can
be
said
that
the
generation
and
sale
of
power
to
the
residents
was
really
incidental
to
Hudbay's
main
business
—
a
mining
and
metallurgical
operation.
The
residents
were
primarily
employees
of
Hudbay,
and
these
residents
had
power
supplied
to
them
at
very
low
rates
because
the
cost
of
producing
power
at
Island
Falls
was
0.2¢
per
KWH
as
compared
with
Manitoba
Hydro's
cost
of
0.5¢
in
1973.
Although
incidental
to
its
mining
operation,
the
Hudbay
system
made
on
average
before
taxes
a
profit
of
approximately
$460,000.
In
1973
we
are
told
that
figure
was
$540,000.
Despite
some
concerns
in
late
1968
and
early
1969
about
low
water
levels
due
to
reduced
precipitation,
and
also
concerns
about
its
single
wooden
pole
transmission
line
which
led
to
earlier
negotiations
with
Hydro,
it’s
fair
to
say
the
evidence
of
the
plaintiff's
witnesses
indicated
the
Hudbay
system
was
able
to
generate
sufficient
electric
power
to
meet
its
requirements
and
the
requirements
of
residents
both
private
and
commercial.
If
any
difficulty
arose,
Hudbay
had
“considerable
flexibility
because
of
large
consumption
of
electricity
by
its
zinc
plant.”
Why
Any
Deal?
On
the
face
of
it,
one
might
wonder
why
Hudbay
would
wish
to
sell
its
electric
power
system
given
that
the
average
annual
profit
of
the
Hudbay
system
was
$400,000
($540,000
in
1973),
and
an
ability
to
supply
all
the
power
needed
for
its
operations
and
that
of
the
residents.
And
why
would
Manitoba
Hydro
wish
to
buy
when
it
could
foresee
the
day,
i.e.
1981,
when
Hudbay's
franchise
would
probably
end
and
electric
power
in
Saskatchewan
would
be
generated
by
the
system
of
Saskatchewan
Power?
The
Snow
Lake
agreement
provided
that
it
could
be
acquired
through
a
12-months
notice
to
Hudbay.
The
first
set
of
negotiations
resulted
from
Hudbay’s
concern
that
small
amounts
of
precipitation
had
lowered
lake
levels
in
Reindeer
Lake,
thereby
limiting
the
amount
of
power
that
could
be
generated
at
Island
Falls
and
therefore
the
need
for
standby
power.
However,
over
the
time
frame
of
these
negotiations
water
levels
rose,
sufficient
power
could
be
generated
and
the
need
for
standby
power
abated,
although
still
a
plus
if
available.
When
Hudbay
made
its
"offer"
to
Manitoba
Hydro
the
figure
was
clearly
set
very
high
to
discourage
any
possibility
of
acceptance
and
it
had
its
desired
effect.
Later
negotiations
on
the
part
of
Hudbay
came
about
as
a
result
of
political
pressure
from
the
mayor
and
council
in
Flin
Flon
and
an
MLA
who
felt
the
"system"
should
be
sold
to
Manitoba
Hydro
so
his
constituents
would
have
the
same
access
to
electrical
power
as
others
in
the
province.
Mr.
McKenzie,
a
senior
management
official,
also
stressed
in
evidence
that
Hudbay
did
not
want
to
be
in
the
public
utility
business.
For
its
part,
Manitoba
Hydro
wanted
to
supply
all
electric
power
in
Manitoba
to
fulfil
its
mandate,
and
here
again
the
reason
for
the
immediacy
of
its
preparedness
to
negotiate
was
political
pressure.
It
is
clear
on
the
facts
that
we
have
two
corporations,
dealing
at
arm's
length
endeavouring
to
find
common
ground
to
facilitate
a
contract
of
sale.
There
is
no
question
that
they
were
acting
independently
and
had
individual
priorities
and
concerns.
There
is
almost
a
textbook
beginning
with
an
overpriced
offer
to
sell
and
an
underpriced
offer
to
purchase,
wherein
both
sides
were
testing
the
waters
about
the
possibilities
of
a
sale.
We
heard
evidence
that
the
high
offer
was
made
to
discourage
the
sale
after
concern
about
lake
levels
no
longer
existed.
Also
the
construction
by
Manitoba
Hydro
at
its
own
cost
of
the
Ponton-Stall
Lake
line
in
1970-71
really
gave
Hudbay
the
standby
power
it
wanted.
Although
not
interconnected,
and
no
agreement
at
that
time
to
do
so,
Hudbay
felt
that
in
an
emergency
a
public
utility
could
hardly
refuse
power
and
a
connection
was
a
comparatively
easy
task.
One
witness
for
Hudbay,
I
believe
Mr.
McKenzie,
indicated
they
were
winners
all
round
because
they
had
standby
power
at
no
cost
to
them,
installed
in
the
region
they
had
hoped
for
and
lake
levels
were
rising
enabling
maximum
generating
capacity
at
Island
Falls.
This
happy
state
of
affairs,
however,
did
not
obviate
the
necessity
of
dealing
with
political
pressure,
and
of
course
Hudbay's
wish
to
get
out
of
the
public
utility
business.
Although
independent
in
their
dealings,
the
parties
were
not
free
to
do
exactly
as
they
pleased.
Manitoba
Hydro
had
embarked
on
a
monumental
capital
construction
program
and
“could
not”
go
above
$750,000
whatever
their
views
on
the
value
of
the
assets
they
wanted
to
acquire.
Hudbay
faced
different
problems,
namely:
the
franchise
from
Saskatchewan
would
end
in
1981
and
probably
not
be
renewed;
the
contract
at
Snow
Lake
could
be
terminated
on
twelve
months’
notice
by
Manitoba
Hydro;
the
company’s
wish
not
to
be
in
the
utility
business,
and
not
to
have
to
deal
with
the
ever-present
political
problems
it
entailed.
Some
reference
was
made
about
the
authority
vested
in
Manitoba
Hydro
to
expropriate.
Both
parties
conceded
it
was
there
but
neither
really
seems
to
have
given
it
much
thought.
For
Manitoba
Hydro
it
was
a
last
resort,
and
Mr.
Arnasson
was
quite
clear
that
it
had
never
been
used
as
a
lever,
and
doubted
it
had
any
bearing
on
the
negotiations.
He
was
satisfied
they
would
find
an
agreement
as
reasonable
people.
Hudbay
concedes
they
were
never
threatened
with
expropriation
and
really
saw
that
route
as
bad
public
relations
for
both
sides.
Counsel
for
the
plaintiff
suggested
Hudbay
could
get
its
price
from
expropriation
which
in
my
view
is
highly
speculative.
If
they
really
believed
that,
why
not
back
off
from
negotiation
and
wait?
Also,
Manitoba
Hydro
was
not
in
a
position
where
it
had
to
expropriate,
and
could
point
out
it
had
already
embarked
on
a
$62
million
capital
expansion
in
Manitoba,
that
they
had
a
limited
amount
of
money
available
and
would
prefer
to
wait
until
1980
when
one
year’s
notice
could
be
given
re
Snow
Lake,
and
when
quite
probably
Hudbay's
franchise
from
the
Saskatchewan
government
would
end,
making
that
period
a
better
time
to
consider
expropriation.
I
am
satisfied
that
Manitoba
Hydro's
power
to
expropriate
played
no
significant
role
in
the
negotiations.
One
further
fact
should
be
noted
here.
Hudbay
had
made
it
quite
clear
that
it
would
not
supply
electric
power
to
the
residents
of
Flin
Flon
for
heating
purposes,
seeing
it
as
an
economic
waste
of
cheap
power
which
could
be
more
productively
used
in
its
mining
and
metallurgical
operations.
In
fact
it
was
buying
concentrates
for
its
zinc
plant
and
could
make
a
profit
because
of
the
cheap
power.
The
mayor
and
council
wanted
its
residents
to
have
this
right
to
use
electric
power
for
heating,
and
I
gather
the
MLA
wanted
the
residents
of
his
constituency
to
have
it
too.
Negotiations
The
following
negotiations
lead
to
no
other
interpretation
that
the
fact
that
we
have
one
deal
and
not
two
deals
albeit
related.
At
the
outset,
Hudbay
wanted
to
sell
for
the
reasons
given,
which
reasons
later
abated,
but
it
was
clearly
prepared
to
sell
the
Hudbay
system.
The
reasons
for
approaching
Manitoba
Hydro
having
faded,
we
have
(after
a
series
of
meetings
and
exchanges
of
letters
which
made
no
mention
of
price,
(Exhibit
D93)),
Mr.
Arnasson's
comments
to
file
indicating,
"after
considerable
discussion
we
received
a
copy
of
a
brief
statement
prepared
based
on
the
principles
contained
in
their
letter
which
indicated
their
evaluation
of
the
distribution
system
at
Flin
Flon
and
Snow
Lake
to
be
$4,248,565
.
.
.
We
immediately
indicated
to
them
that
their
proposal
was
completely
unacceptable
as
revenues
in
no
way
would
support
this
kind
of
expenditure."
One
witness,
I
believe
Mr.
McKenzie,
said,
"we
were
highballing
it"
and
Mr.
Arnasson
said
the
offer
was
received
with
"shock
and
disbelief."
A
counter
offer
of
$250,000
left
no
room
for
doubt
that
negotiations
were
at
an
end,
but
clearly
from
the
outset
it
was
intended
as
one
transaction
—
a
sale
to
Manitoba
Hydro.
In
this
early
negotiation
Mr.
Arnasson
on
March
14,
1972
(Exhibit
P113)
set
forth
the
position
of
Manitoba
Hydro
upon
which
they
"would
be
agreeable
to
consummate
an
agreement",
and
this
formed
the
basis
for
later
negotiation.
On
August
22,
1972
a
meeting
was
held
between
the
Mayor
and
his
councillors
plus
two
representatives
of
Hudbay.
A
report
was
made
on
the
breakdown
of
negotiations.
Despite
comments
in
Exhibit
P151,
Mr.
McKenzie
in
evidence
said
they
could
have
supplied
power
for
heat
but
didn't
want
to.
On
January
9,
1972
a
meeting
was
held
in
Toronto
between
officials
for
Hudbay
and
Manitoba
Hydro,
which
had
been
initiated
by
Mr.
Morrice,
president
of
Hudbay,
and
Mr.
Bateman,
president
of
Manitoba
Hydro,
to
reopen
negotiations.
Positions
were
established,
and
it
was
agreed
“to
start
with
five
conditions
to
which
both
parties
had
previously
agreed".
See
Exhibit
P102
(and
Exhibit
P113
for
conditions).
Thus,
we
have
a
continuation
of
the
first
attempt
to
deal.
It
still
boiled
down
to
a
matter
of
price.
A
committee
of
two
was
appointed
“to
negotiate
the
price
to
be
paid
by
Manitoba
Hydro".
Mr.
Dalton,
treasurer
of
Hudbay,
and
Mr.
Arnasson,
assistant
general
manager,
operations,
were
named.
On
January
16,
1973
Mr.
Arnasson
wrote
to
Mr.
Dalton
setting
forth
objectives,
namely,
five
conditions
plus
two
—
one
providing
for
Manitoba
Hydro
to
purchase
a
block
of
power
for
a
limited
period
of
time
and
the
other
an
agreement
to
assist
each
other
with
a
supply
of
standby
power
for
emergencies
and
the
interconnection
was
essential
and
beneficial
to
both.
Mr.
Dalton’s
position
was
if
Hudbay
sold
they
got
an
intertie
but
it
was
not
the
real
reason
for
the
sale;
however,
they
were
clearly
aware
of
the
advantage.
The
meeting
between
Mr.
Dalton
and
Mr.
Arnasson
indicates
they
were
getting
closer
to
a
deal.
Manitoba
Hydro
provided
four
formulas,
sample
calculations
for
cash
flow
purposes
and
an
approximate
$1.5
million
increasing
to
$1.68
million
if
item
4
included
(Exhibit
D109).
In
Mr.
Arnasson's
memo
re.
meeting
February
19,1973
(Exhibit
D109)
we
have
the
first
expression
by
Hudbay
to
Manitoba
Hydro
of
their
concern
“with
respect
to
the
cash
flow
situation
as
they
are
in
a
50%
tax
bracket
for
his
kind
of
transaction"
(emphasis
is
mine).
Later,
“Mr.
Dalton
indicated
his
present
position
was
a
total
cash
flow
of
$2.5
million
whereas
I
[Mr.
Arnasson]
indicated
my
position
was
$1.5
million.
Although
he
suggested
a
$2
million
figure,
I
indicated
that
the
maximum
that
I
would
intend
to
attempt
to
sell
to
the
Executive
Committee
or
to
the
Board
would
be
$1.75
million.”
It
was
clear
to
Hudbay
from
this
meeting
that
Manitoba
Hydro
would
not
supply
power
to
Hudbay
for
distribution
to
Hudbay’s
customers.
Although
Manitoba
Hydro
were
prepared
for
a
cash
flow
of
$1.5
million,
it
would
be,
as
indicated
earlier,
their
intention
to
sell
to
the
United
States
at
a
profit
and
remained
adamant
about
and
never
deviated
from
the
$750,000
figure.
As
counsel
for
the
defendant
argued,
“To
Arnasson
these
were
separate
components."
In
Exhibit
P184
Mr.
Arnasson
writes
to
Mr.
Dalton
an
offer
arising
out
of
their
February
19,
1973
meeting.
Part
A
is
the
offer
of
$750,000
for
the
purchase
of
the
distribution
systems
at
Flin
Flon
and
Snow
Lake.
The
other
“component"
provides
for
$1,008,500
payable
over
a
five-year
period
for
the
purchase
of
firm
capacity,
standby
power
and
wheeling
charges
according
to
“the
following
cash
flow"
which
cash
flow
is
spelled
out.
Mr.
Dalton
did
not
like
the
second
component
because
it
was
all
“taxable",
and
after
taxes
by
his
calculation
worth
less
than
$1
million.
These
negotiations
clearly
show
that
Manitoba
Hydro
was
aware
the
system
they
were
purchasing
was
worth
more
than
$750,000
but
they
could
not
go
above
that
price.
To
reach
a
fair
price
they
were
prepared
to
accommodate
Hudbay
with
a
purchase
of
power
they
really
didn't
need
but
would
sell
as
surplus.
The
two
gentlemen
met
on
March
23,
1973,
where
Manitoba
Hydro
was
advised
that
the
submission
did
not
solve
their
tax
problem,
and
an
alternative
was
offered
by
Mr.
Dalton
(See
Exhibit
D113):
.
.
.
retain
$750,000
net
cost
distribution
(A)
This
figure
be
expanded
as
an
all
inclusive
figure
with
non
refundable
contribution
by
Hudbay
to
net
$750,000.
[Emphasis
is
mine.]
Here
we
have
Hudbay
endeavouring
to
get
Manitoba
Hydro
to
accommodate
them
in
a
different
way.
This
alternative
envisaged
Manitoba
Hydro
making
a
total
payment
of
$4
million
during
1973
and
Hudbay
making
a
non-refundable
contribution
in
January
1974
of
$3.25
million.
There
then
followed
discussions
about
what
the
contribution
would
cover,
the
benefit
to
Hudbay
through
contribution
being
tax
deductible
of
approximately
$1,625,000
and
net
figure
of
$750,000
for
a
total
of
$2,375,000.
Can
this
really
be
said
to
be
giving
something
gratuitously?
This
meeting
clearly
indicates
the
benefit
to
Hudbay,
albeit
the
numbers
were
later
changed
when
an
agreement
was
reached.
Mr.
Arnasson
echoed
the
sentiments
for
Manitoba
Hydro
that
they
could
call
it
what
they
wanted
but
$750,000
was
the
net
out
figure.
The
letter
from
Mr.
Dalton
and
his
write
up
proposal
(Exhibit
P192)
leave
very
little
room
for
doubt
that
we
have
one
and
one
only
transaction
here.
$750,000
is
the
linchpin
and
whatever
“price"
is
arrived
at
it
must
net
out
to
$750,000.
In
Exhibit
P193
we
have
a
letter
of
April
13,
1973
to
Mr.
Arnasson
from
Mr.
Dalton
which
he
hopes
will
serve
as
the
basis
for
a
letter
of
intent,
and
attached
is
“pertinent
points
for
inclusion
in
letter
of
intent”
whereby
item
6
deals
with
“non-refundable
gift",
and
what
construction
the
money
is
to
be
applied
to.
There
was
therefore
a
suggestion
of
a
form
of
restriction
about
the
manner
in
which
the
money
should
be
used
so
that
at
the
outset,
the
money
paid
could
hardly
be
said
to
be
totally
free
of
any
restrictions.
In
the
final
analysis
the
$2.85
million
was
not
applied
as
suggested
for
construction
but
to
purchase
the
shares
involved
in
the
deal.
Manitoba
Hydro
was
certainly
free
to
choose
but
the
deal
only
went
through
if
documents
included
a
reference
to
a
non-refundable
gift.
Finally,
Exhibit
P203
is
the
letter
of
intent
from
Mr.
Dalton
to
Mr.
Arnasson
dated
May
2,
1973
and
signed
by
the
two
gentlemen.
Paragraph
7
provides
for
the
non-refundable
gift
of
$2.85
million,
and
again
“towards
the
cost
of
electrical
facilities
provided
or
to
be
provided
by
Manitoba
Hydro
related
to
the
distribution
of
electric
power
in
the
City
of
Flin
Flon
and
the
Local
Government
District
of
Snow
Lake".
Mr.
Arnasson,
in
evidence,
speaking
about
Exhibit
P203,
said
they
were
not
prepared
to
pay
$3.6
million,
would
only
pay
$750,000
and
would
not
tender
a
cheque
for
$3.6
million
unless
a
cheque
for
$2.85
million
was
paid
back
immediately
and
not
at
some
date
in
the
future.
Mr.
Arnasson
also
makes
the
point
that
they
never
requested
a
contribution.
If
no
$2.85
million
paid
then
no
$3.6
million
cheque.
It
is
really
like
the
boy
scout
trying
to
help
the
lady
across
the
street
who
doesn't
want
to
go.
Why
would
Manitoba
Hydro
be
concerned
with
the
value
of
the
assets
at
all,
once
convinced
that
they
were
only
going
to
pay
$750,000
and
the
value
was
Clearly
in
excess
of
that
figure
—
which
they
acknowledged
in
one
of
their
offers
to
pay
$1.5
million
over
five
years
for
power?
Once
Mr.
Dalton
raised
the
question
of
concern
about
a
50
per
cent
tax
bracket,
and
the
possibility
of
Manitoba
Hydro
agreeing
to
accept
a
non-refundable
gift,
Manitoba
Hydro
did
not
want
to
participate
in
anything
immoral
or
illegal.
The
price
had
to
be
approximately
correct
on
the
question
of
morality
and
the
legal
and
auditing
opinion
must
have
satisfied
Manitoba
Hydro
that
it
was
legal.
Suppose,
as
an
example,
Hudbay
wanted
to
donate
a
painting
of
Hudbay’s
facilities
to
Manitoba
Hydro.
Manitoba
Hydro,
knowing
it
was
a
gift,
would
also
need
an
indication
that
the
price
or
value
of
the
painting
approximated
the
figure
Hudbay
said
it
was
worth.
The
concern
about
value,
therefore,
had
to
do
with
Manitoba
Hydro's
concern
about
legality
and
morality,
and
not
about
a
second
deal/transaction.
The
Premier's
press
release
in
Exhibit
P209
mentions
only
the
$750,000
which
he
stated
was
$1.25
million
less
than
was
at
first
requested,
and
about
$500,000
more
than
first
offered.
This
Premier's
news
conference
makes
the
point,
"I
would
also
like
to
announce
that
jointly
—
in
fact
with
the
President
of
Hudson
Bay
Mining
and
Smelting
—
agreement
has
been
reached
in
principle
for
purchase
by
Manitoba
Hydro
of
the
Hudson
Bay
Mining
and
Smelting
Company's
hydro
electric
facilities
in
Flin
Flon
and
Snow
Lake.”
If
Hudbay
really
felt
they
had
made
a
“gift”
to
Manitoba
Hydro,
and
did
so
to
benefit
its
employees,
residents
and
customers
—
wasn't
this
the
place
to
announce
it
as
an
excellent
public
relations
gesture?
But
they
were
silent
then
and,
I
suspect,
silent
always
about
this
gift.
I
daresay
the
good
citizens,
the
Mayor,
the
councillors,
nor
for
that
matter
anyone,
were
told
about
a
so-called
gift
to
Manitoba
Hydro.
Only
Hudbay
officials,
Manitoba
Hydro
officials
and
ultimately
the
tax
department
ever
really
had
any
information
on
the
$2.85
million.
We
had
no
evidence
of
any
public
announcement
by
Hudbay
of
this
"gift",
I
suspect
because
there
was
in
fact
no
announcement.
In
Exhibit
P247
Mr.
Carpenter,
vice-president,
secretary
and
general
counsel
of
Hudbay,
writing
to
Mr.
Purdy
Crawford,
partner
of
the
law
firm
of
Osler,
Hoskin
&
Harcourt,
writes:
“It
was
thought
better
to
handle
these
items
separately
so
as
to
give
them
the
appearance
at
least
of
being
independent
transactions."
(Emphasis
is
mine.)
It
is
quite
clear
that
all
of
these
negotiations
can
be
characterized
as
one
deal,
one
transaction
with
no
"gift"
pursuant
to
paragraph
110(1)(b)
of
the
Act,
and
so
this
portion
of
the
appeal
is
dismissed
with
costs.
With
the
penalty,
I
have
considerable
difficulty
in
acceding
to
the
defendant's
position.
Here
is
a
reputable
firm
given
an
opinion
by
its
auditors
and
a
legal
opinion
from
its
outside
counsel
that
it
is
possible
to
give
a
non-refundable
gift
to
a
provincial
Crown
corporation
and
that
the
circumstances
in
this
instance
warrant
such
an
interpretation.
Further,
no
attempt
was
made
to
hide
it
from
the
Minister
of
National
Revenue.
The
“gift”
is
found
in
the
income
tax
return,
and
the
tax
benefit
is
claimed.
There
is
no
obligation
to
seek
a
tax
ruling
from
the
Department
and
failure
to
do
so
is
hardly
an
attempt
to
hide
the
matter.
The
Manitoba
Hydro
Board
made
it
clear
they
would
not
proceed
if
the
transaction
was
immoral
or
illegal.
The
Board
didn't
care
what
Hudbay
called
it
—
their
only
interest
was
$750,000
but
I
expect
they
were
satisfied
that
it
was
all
right
to
proceed
in
this
way
due
to
reasons
given
by
Mr.
Dalton,
the
Treasurer.
Whether
a
gift
or
partial
consideration,
is
really
a
legal
characterization
to
be
determined
by
the
Court.
As
counsel
for
the
plaintiff
put
it,
“The
Ministry
would
have
a
distinct
advantage
if
he
could
levy
a
penalty
everytime
it
disagrees
with
a
taxpayer?'
Each
case
must
be
looked
at
carefully
to
determine
if
there
is
an
omission
or
a
false
statement
upon
which
to
base
a
penalty.
That
is
not
the
case
here.
Something
more
than
mere
disagreement
must
be
determined:
a
false
statement
by
a
taxpayer,
as
an
example,
or
gross
negligence,
or
a
finding
by
the
tax
department
that
an
error
was
made
deliberately.
I
do
not
believe
there
is
the
criminal
onus
of
proving
beyond
a
reasonable
doubt,
however.
One
cannot
fault
the
plaintiff
for
putting
the
best
possible
light
on
the
situation,
including
the
suggested
two
deals,
as
long
as
the
main
feature
is
not
hidden.
I
cannot
find
gross
negligence
here,
or
any
attempt
to
bury
information
from
the
prying
look
of
the
Ministry.
Even
on
a
“balance
of
probabilities"
burden,
the
defendant's
case
fails.
The
appeal
with
respect
to
the
imposition
of
a
penalty
is
allowed
with
costs
to
the
plaintiff.
Appeal
allowed
in
part.
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