Brussels Steel Corp. v. The Queen, 86 DTC 6077, [1986] 1 CTC 180 (FCTD)

Joyal, J.:—On September 28, 1976, in Montreal, a settlement out of court was negotiated between the plaintiff herein and a Crown-owned Newfoundland Company called Newfoundland Steel Corporation (NESCO). The settlement was for damages for breach of contract. The gross amount of settlement was $478,772.91 which after legal fees represented a net payment to Brussels of $428,772.91.

The plaintiff, a trader in steel products, took the view that this settlement amount was a Capital receipt. It was compensation for the loss of a capital asset of an enduring nature. Revenue Canada was of the opinion, however, that the settlement paid the plaintiff was an income receipt arising in the normal course of its business. Revenue Canada in reassessing the plaintiff for the year 1976 added the amount of $428,772.91 to Brussels' income. Concurrently, Revenue Canada disallowed certain bonuses and business expenses in the amount of $17,455.63 covering the years 1975, 1976 and 1977. It is from these reassessments that the plaintiff appeals to this Court. The three-day trial of the action took place in Montreal on October 29, 1985.

The disallowance of certain expenses will be a matter of brief comment in the latter part of this judgment. Of greater concern is the nature of the amount of $428,772.91 received by the plaintiff in 1976. For this purpose, I should first of all provide an outline of the events which led to the litigation between the plaintiff and NESCO.

The plaintiff was incorporated on May 31, 1971. It was a partnership of two existing companies engaged in the steel business, namely Capital Steel Products Limited owned by one Irving Wiseberg and Mart Steel Corporation owned by one Issie Sacks. In the course of 1972, the plaintiff had developed a source of supply of graded reinforcing steel rods, called rebars in the trade, from NESCO. NESCO was a small steel mill owned by the Crown in right of Newfoundland. Some of the orders placed by the plaintiff were delivered. Some of the orders, although confirmed by NESCO, were not delivered.

By letter dated October 18, 1972, and by Telex dated October 19, 1972, the plaintiff was advised by the Government of Newfoundland on behalf of NESCO that outstanding deliveries of some 17,000 tons of graded rebars would not be made. The cancellation of these orders was extremely serious to the plaintiff. The competition market at that time was quite favourable to the plaintiff and it had anticipated considerable profits in the resale of these graded rebars. Plaintiff anticipated a loss of profit of some $600,000 on these orders.

Counsel for the plaintiff were retained and on October 26, 1972, a default letter was sent to NESCO claiming $600,000. Eventually, an action in damages was instituted in Montreal claiming $1,157,180 against NESCO, and concurrently, garnishee proceedings before judgment were taken against two NESCO debtors having assets in the Province of Quebec. In due course, a settlement was reached between the parties and a net amount of $428,772.91 was paid to the plaintiff. This settlement was evidenced by a Declaration of Settlement dated September 28,1976. This document contained the usual mutual release clauses but of interest to the issue before me was the following:

8. The present settlement constitutes a transaction of the claim which the Plaintiff has made against the Defendant herein and the Plaintiff represents, which representation is neither admitted nor denied by Defendant, that the amount of settlement is for the loss of Plaintiffs enduring capital trading assets in steel reinforcing bars, the loss of which said capital assets has seriously affected the Plaintiff’s capital structure and has deprived it of an enduring trading asset and Plaintiff further represents, which representation is neither admitted nor denied by Defendant, that any and all amounts paid in settlement are in no way compensation for income or replacement of income which might otherwise have been earned by Plaintiff from the said capital assets.

This clause, which I find was inserted at the behest of the plaintiff, is indicative to me that at that time, the plaintiff had already anticipated the income tax connotations of the payment and had put into the document what it felt was a good base on which to claim it as a capital receipt.

I now return to the plaintiff’s case before me and to the evidence tendered on its behalf. The evidence was mainly directed to the special relationship which had been created between the plaintiff and NESCO in the purchase and resale of graded rebars. Such a special relationship was a radical departure from traditional trading and marketing patterns developed over the years in the steel business.

There was evidence that from the steel mills to the ultimate purchaser, the pattern of trade with respect to graded rebars was particularly unique. Traditionally, a trader in steel products generally had no handle on this particular market. Steel mills would sell their graded rebars directly to fabricators who in turn would resell them on given specifications to contractors who would then incorporate them in their reinforced concrete forms. Graded rebars were certified by the steel mills as to the quality of their product and provided both contractors and consulting engineers with an assurance that the product met the design specifications for the job.

If the product run from any individual mill did not meet the quality tests, it was sold to traders, fabricators and wholesalers as ungraded rebars which would then be resold to any middleman or end-user as such.

Again, according to plaintiffs evidence, a most interesting development took place in 1971. It will be remembered that the plaintiff, incorporated in May of 1971, constituted a partnership of both Mr. Wiseberg and Mr. Sacks through their respective companies, Capital Steel and Mart Steel. Both had been traders in steel for some time. Capital Steel was involved in “secondary” steel products i.e. steel that the mills would reject but which could still be used in structural or other work where design requirements were lower or where quality was not so important. The market for a steel trader for this product would be service centres, wholesalers and the like. Fabricators, on the other hand, would not be interested.

Mart Steel was a service centre buying its products from Capital Steel. Bars and shapes, flat-roll products and ungraded reinforcing bars were the usual things. These in turn would find their way to builders, contractors and other end-users. The interesting development which surfaced in 1971 was NESCO. This steel mill, according to the plaintiffs evidence, was looking for a marketing area for their rebars. Mr. Wiseberg spoke to a Mr. Shields, Manager of Sales of NESCO, in early 1971 for the purposes of establishing a long-term arrangement for selling rebars milled by NESCO. It would be a very profitabled business. It represented high volume tonnage of graded rebars. The market in Quebec was some 200,000 tons annually and there was no doubt that the plaintiff would be able to obtain a respectable portion of this market. NESCO was agreeable.

According to the evidence the plaintiff, under the name of Brussels Steel, was incorporated. More than that it was incorporated for that purpose. It was the intention of Mr. Wiseberg in so doing to devote his full time and energy to trading in graded rebars purchased from NESCO. The five-year agreement which was contemplated by the parties assured continuity and the prices quoted by NESCO assured profitability.

Some seven months later, i.e. January 7, 1972, the plaintiff addressed the following letter to NESCO:

Newfoundland Steel Company Limited

P.O. Box 1698

St. John’s,

Newfoundland.

Attention: Mr. Bill Shields,

President

May we take this opportunity to thank you for visiting with us.

It is indeed a pleasure to find a Canadian Steel Mill willing to supply us.

As mentioned to you we have been importing approximately 10,000 tons of steel annually.

You can rest assured that we will be placing our orders with you on a continuing basis.

Please advise when our initial contract will be shipped. We remain,

Cordially yours,

BRUSSELS STEEL CORPORATION

(Signed: I. Wiseberg)

I. Wiseberg

On January 14, 1972, NESCO sent the following letter to the plaintiff:

Mr. I. Saacs,

President,

Brussels Steel Corporation,

10015 Bruxelles,

Montreal North 459,

Quebec

Dear Mr. Saacs:

Marketing of Nesco Reinforcing Bars In Provinces of Quebec & Ontario

The items and procedures listed below summarize the agreements reached over the past few weeks following various meetings held between our two companies.

We hope the spirit of co-operation demonstrated by both parties and the procedures worked out will prove effective in developing and maintaining a long association. We recognize that changes will have to be considered from time to time in connection with marketing developments, but feel certain these can be resolved satisfactorily if close contact is maintained.

Agreed Procedures for Supply of Nesco Reinforcing Bars to Brussels Steel Corp.

1. Nesco agrees to appoint Brussels Steel Corporation as their main distributor in the Province of Quebec and also Ontario.

2. Brussel (Sic) Steel Corporation agrees to purchase the majority of their reinforcing steel from Nesco.

3. Brussel (Sic) Steel agrees to purchase a minimum of 10,000 tons per calendar year for Provinces of Quebec and Ontario excluding Sept Iles and Quebec North Shore and other customers already established by Nesco.

The price structure for 1972 will be as follows:

$124 per ton fob Wharf Montreal for interhard grade for sizes 6 - 11. Usual Canadian size extras for numbers 4 & 5.

$130 per ton fob Wharf Montreal for grade 60. These prices will remain fixed for 1972 but will be subject to a probable price increase of $6 per ton for 1973 in line with anticipated increases of Canadian Steel Mills.

5. Nesco guarantees that all reinforcing steel delivered will conform to all applicable CSA and ASTM standards. Mill certificates will be issued accordingly.

6. The agreement is to be effective for a period of 5 years from date of this letter.

Enclosed is an extra copy which should be signed and returned to Nesco immediately. On receipt of signed copy, the contract will be considered to be in force.

Yours very truly,

NEWFOUNDLAND STEEL (1968) COMPANY LIMITED

(Signed: W. J. Shields)

W. J. Shields,

President.

Orders and deliveries took place in the early months of 1972. Although the January 14, 1972 letter imposed a minimum purchase of 10,000 tons on Brussels, orders shortly reached 21,000 tons. Based on current prices, each ton would yield approximately $15 of clear profit. As the experience of the market for steel products unfolded, this profit per ton would have increased to $20 by the end of 1972 and by reason of an acute steel shortage in 1973-1974 would have escalated to $200 per ton.

The relationship between the plaintiff and NESCO was short-lived. It was aborted by NESCO on October 18, 1972 and I reproduce hereunder the full text of the letter written to the plaintiff cancelling outstanding orders:

Mr. I. Wiseberg,

Brussels Steel Corporation,

10015 Bruxelles,

Montreal North 459,

Quebec.

Dear Mr. Wiseberg:

You may be aware that Messrs. Lundrigan Limited who was the Manager of the Steelyard at Octagon Pond has relinquished all rights of managership and control with effect from September 7th, 1972.

On examining various papers and correspondence duly delivered or left by Messrs. Lundrigan Limited, we found that exchanges may have passed between you and the former Manager concerning the purchase and delivery of a quantity of steel. Indeed, there are papers which disclose that this quantity may amount to approximately 17,000 tons.

If indeed any order has been requested by you for such quantity, you will appreciate that in order to deliver that amount of steel, the Yard would have to work at almost full production for a period ranging from six to nine months.

We have examined the minutes of the Board of Directors which were duly surrendered at the time Messrs. Lundrigan Limited vacated the premises and we find no reference to any agreement of the nature specified above, although we are aware that certain deliveries of steel have been effected in the past by virtue of earlier orders of a much smaller nature.

We are assuming that the correspondence and papers which make reference to this huge order, if indeed any such order exists, were made without due authority of the Board of Directors of the former Manager, on which Board provision was made for the seating of a Government Director. The fact of the matter is that under the Agreement between this Government and the new Manager, no provision is made for implementing past orders of such size. We are however cognizant of the fact that you may be relying upon the exchange of correspondence in order to make future private commitments of your own and accordingly, we feel it our duty to inform you as early as possible that in the light of lack of proper authority neither the Government nor the Crown Corporation can regard such correspondence as binding on either of them.

It may be that the exchange of letters referred to did not reach the stage which may be regarded by you as an offer duly accepted. Until we do hear from you, you will appreciate that we are unable to consider delivering the steel which may be referred to in the said exchange.

Yours truly,

(Signed: H. R. V. Earle)

H. R. V. EARLE, Minister of Economic Development

I also reproduce the default letter sent to NESCO by plaintiffs counsel and dated October 26, 1972:

Newfoundland Steel (1968) Co. Ltd.

P.O. Box 1968

St. John’s Newfoundland

Attention: Walter Oake

Sales Manager

Dear Mr. Oake:

RE: Brussels Steel Corporation

vs: Newfoundland Steel (1968) Co. Ltd.

We act as attorneys for Brussels Steel Corporation, which has retained us concerning its relations with your Company and has submitted to us its entire file respecting those contracts entered into with your Company from the beginning of 1972 to date.

Our client’s purchase orders numbers 1002, 1005, 1008, 1017, 1089, 1091, 1095, 1096 and 1099 were all acknowledged, accepted and confirmed by your company under your order acknowldgements, as well as Telex communications.

Your Telex communication of the 19th October 1972, as well as Minister Earle’s letter of the 18th October 1972 received by our client on the 23rd October 1972, has, as a consequence, caused our client the greatest shock, necessitating these presents.

We are fully satisfied that as a result of your above-noted communications, your Company is in breach of contracts, and it is our client’s intention to adopt each and every legal proceeding available to cure the breach or hold you liable in damages as a result thereof.

Our client’s preliminary calculation of its damages totals $600,000.00, and therefore our client’s cheque dispatched to you in the amount of $32,395.41, prior to receipt of your 19th October 1972 Telex, has been stopped with respect to payment thereof. A further payment to you in the amount of $35,131.75 has become due on the 23rd October 1972. As these sums total $67,527.16, which is substantially inferior to the preliminary damage calculation as aforesaid, our client is compelled to adopt protective measures to ensure payment in due course of the damages and losses resulting from your default.

You will therefore find annexed hereto a letter from our client’s bankers denoting that the said sum is on deposit with them and shall be remitted to you in accordance with the conditions therein specified.

You must understand that your actions have left our client no alternative and we urge you to reconsider your position and advise us immediately in writing of your intention to honor your contractual obligations and to provide adequate guarantees in support thereof. If we fail to receive such advice and guarantees from you by return of mail, we shall on behalf of our client adopt the appropriate measures, without any further notice or advice to you.

Yours truly,

CAMPBELL, SAND & TRUESDELL

Per: (Signed: Brahm L. Campbell)

I finally reproduce extracts from the plaintiffs statement of claim in its action for damages instituted against NESCO:

4. THAT during the course of such relations, the Plaintiff did purchase and the Defendant did confirm such orders with respect to nine purchase order contracts of Plaintiff, which contracts in large part were never discharged by Defendant, and moreover, Defendant through its agent did advise Plaintiff that it had no intention of discharging its obligations, and indeed, since the beginning of this year, the Defendant has closed its said steel mill, and has ceased operations, and offered the mill for sale;

6. THAT on the 19th October 1972 Plaintiff was advised by the Defendant that the Steel Company of Canada would assume management of the mill on the 1st November 1972, and consequently, order numbers P1089-91-95-96-99 would not be delivered “for the time being,” a copy of which notice is herewith produced to form part hereof as Plaintiff’s Exhibit P-10;

14. THAT the Defendant did discharge in part its obligations under purchase orders P1002, P1005, P1008, and P-1017, but never discharged its obligations at all in purchase order numbers P-1089, P1091, P1095, P1096 and P1099;

17. THAT Plaintiff calculates that if the Defendant had discharged its obligations under the contracts as aforesaid it would have sold the steel in question for a net profit gain of $1,157,180.00;

It will be evident from the allegations contained therein that the action was exclusively based on failure to fulfil confirmed orders for the delivery of rebars to plaintiff. The damages claimed were for the expected or probable loss of profits on the resale of the products.

In argument, counsel for the plaintiff urged me to find:

1. that the plaintiff, as taxpayer, was incorporated solely for the purpose of trading in graded rebars milled by NESCO;

2. that the relationship between plaintiff and NESCO was contractual and long term;

3. that the plaintiff was devoting all of its human and financial resources on this single and exclusive source of supply for which there was a ready and lucrative market;

4. that NESCO’s repudiation of the January 14, 1972 agreement was a devastating blow to the plaintiff and knocked the bottom out of its operations and marketing projections;

5. that the repudiation of this long-term supply agreement was not an operational loss on some half-dozen confirmed orders but a loss of a very important capital asset of an enduring nature;

6. that the amount received from NESCO in settlement of the claim constituted a capital and not an income receipt;

Counsel for the Crown, in defence of the reassessment, adduced evidence relating to the arrangement entered into between the plaintiff and NESCO. The letter of January 14, 1972 from NESCO required the plaintiff to accept it. No such letter, properly endorsed by the plaintiff, could be found. In this connection, a solicitor for the Department of Justice of Newfoundland and who became Corporate Secretary of Crown-owned NESCO early in 1974 had never come acros an original or copy of the duly-executed agreement of January 14, 1972. In fact, he did not know anything about that document until an unexpected copy was shown to him by an officer of the defendant some time in August 1984.

NESCO’s officer further testified that at no time, to his knowledge, in the course of the negotiations between the plaintiff and NESCO leading to a settlement was there any reference to the January 14, 1972 letter or to any allegation that a five-year distributorship agreement between the parties existed. The one and exclusive ground for the plaintiffs claim was for nondelivery of some 17,000 tons of graded rebars. A thorough search through NESCO files failed to disclose the letter or, for that matter, any reference to It.

The witness also stated that the original draft of section 8 of the Declaration of Settlement of September 28, 1976 was at the plaintiff’s urgings. The plaintiff wanted both parties to recognize the settlement as payment in satisfaction of a loss of capital asset. NESCO had finally agreed to incorporating section 8 in the Declaration on condition that NESCO add a full disclaimer to the section.

On the basis of this evidence, counsel for the defendant urged me to find:

1. The plaintiff’s business was totally wrapped around the buying and selling of steel products. Its owners had themselves been in that business for years. The company operated out of a small office which consisted of two people. As a trader, the plaintiffs sole interest was in buying steel products and selling them at a profit. It really didn't matter to the company if such products were flat-rolled steel bars and shapes or reinforcing rebars, graded or ungraded.

2. The damage action instituted by the plaintiff against NESCO was founded on non-delivery of goods, not on breach of a long-term distributorship contract. This objective and palpable evidence was of greater probative value than the self-serving assertion of intentions made by the plaintiff.

3. I was urged to find that as neither a duly endorsed original agreement of January 14, 1972 nor a copy thereof could be found in NESCO's files, it could not have any evidentiary value in establishing the plaintiffs case.

4. The history of the company's operation before the so-called agreement of January 14, 1972, its operations through to October 18,1972 and its operations subsequent thereto indicated a business of trading in steel products generally. The pattern of the company's relationship with NESCO did not establish any kind of lasting capital asset.

In rebuttal evidence, plaintiff moved to file an affidavit of current date as to the execution of the agreement of January 14, 1972. The affiant, Mr. Issie Sacks, stated that he was hospitalized and was unable to testify in person. He further stated that he had seen the letter of January 14, 1972, had endorsed it and had duly mailed it back to NESCO. I allowed the affidavit to be filed.

The issue before me is a mix of fact and intention. I suggest that when a Court, especially in income tax matters, is faced with a mix of fact and assertions, a common sense rule should be applied: if an assertion is directly or indirectly confirmed by or is consistent with overt and objective fact, the two together make for persuasive if not conclusive evidence. When, however, an assertion is directly or indirectly contradicted by or is inconsistent with such overt and objective fact, it seems to me that, in the absence of anything else, the latter should prevail.

The plaintiff's case has been to establish two essential points, first that it was incorporated for the singular purpose of dealing in graded rebars supplied by NESCO and secondly, that there existed a five-year distributorship agreement with its supplier, the cancellation of which resulted in the loss of a substantial capital asset.

I am not convinced that the incorporation of the plaintiff in May 1971 was for the intention as stated. There is no objective evidence by way of correspondence or other documentation of any relationships having been undertaken between the plaintiff and officers of NESCO in the early part of 1971. The only objective evidence is found in NESCO's letter to the plaintiff dated January 14, 1972 the text of which is found earlier in these reasons. The letter refers to “agreements reached over the past few weeks following various meetings." The plaintiff's earlier letter of January 7, 1972 states “May we take this opportunity to thank you for visiting with us.” In the course of the period of May 1971 to the end of December 1971, there is no evidence of any orders from the plaintiff to its supplier nor of deliveries from NESCO to its purchaser during that time. There is evidence, however, of business transactions by the plaintiff during 1971 involving various steel products and in which NESCO would not appear to have been involved.

I will concede that it is not essential to the plaintiff's case that such a purpose in incorporating the plaintiff company be established. It does not really matter what the purpose was. The facts before me, however, are that prior to the agreement with NESCO, there was no way a trader like the plaintiff or its corporate partners had ever been able to obtain graded rebars directly from steel mills. The market in this particular product was closed to them. It appears a mite strange to me that a company would be incorporated for the exclusive purpose of dealing in that product without having at that time any assurance of supply.

The letter of January 14, 1972 from NESCO to the plaintiff should be analyzed. The plaintiffs evidence is that it interprets this letter as a firm and quasi-exclusive five-year agreement between the parties for the purchase and sale of a minimum 10,000 tons a year of graded rebars. Yet, it will be noted that nowhere in that letter is there any covenant obligating NESCO to supply. It seems to me that if the intention of the parties was to fix a distributorship agreement as such is commonly known, the agreement would have set out in greater detail the various facets of the relationship between the parties, the detailing of their respective and mutual rights and obligations and provisions relating to breaches for default, insolvency, assignment and the like. Furthermore, it might be observed that the longterm agreement in which NESCO was purportedly entering into is not even under corporate seal.

Again, I will concede that my own critical analysis of the substance of that agreement is not necessarily a bar to the plaintiff’s case. If the intent of the parties was to enter into a firm and long-term distributorship agreement, it doesn't really matter if the agreement were reduced to a memorandum in writing of a dozen pages or to a few scribbled notes on the back of a dinner menu.

I now refer to the events which took place in October of 1972. The letter from NESCO to the plaintiff to which I have referred earlier deals exclusively with the outstanding and confirmed contracts for the delivery of graded rebars to the plaintiff which contracts NESCO was repudiating. There is no reference here to any distributorship agreement nor to any obligation imposed on NESCO to deliver in accordance with it. Otherwise, the letter speaks for itself.

I now must touch upon the actions of the plaintiff in response to that notice of repudiation. The plaintiff referred the matter to counsel. Counsel wrote a default letter which I have already reproduced. The claim by the plaintiff was exclusively based on contracts for the purchase and sale of steel products. No reference is made to the distributorship agreement.

Subsequently, an action was taken before the Superior Court of Quebec. The action was framed accordingly. No claim was made or advanced relating to the alleged long-term distributorship agreement. Counsel for the plaintiff in the damage action, I must note from Issie Sacks’ affidavit, was the same counsel with whom the January 14, 1972 agreement had been discussed.

The next stage deals with two elements relevant to the evidence before me. It will be recalled that the witness for the Crown testified that throughout the negotiations between the plaintiff and NESCO leading to an ultimate settlement, no reference was ever made by either party to the January 14, 1972 agreement. It was never advanced by counsel for the plaintiff in that suit nor, according to the evidence, was the defendant NESCO challenged on it. The evidence is to the effect that the corporate secretary of NESCO first took cognizance of the letter when it was shown to him in 1984 after the action before me had been instituted.

The other element touches upon the determination of the quantum element in the damage of $428,772.91 paid to the plaintiff. Again, according to the evidence, negotiations were directed not to the prejudice caused to the plaintiff by reason of the breach of a long-term contract but by the quantifiable loss of profits by the plaintiff on the resale of the products involved in the purchase contracts. By that time, admittedly, the plaintiff had more measurable indices of quantum. The market being what it was at the time of the suit, the plaintiff could now claim something close to double what had been its expected loss of profit when the breach had occurred.

Confirmation that the claim was for damages on cancelled purchase orders is found in a letter addressed by counsel for NESCO to counsel for the plaintiff dated September 10, 1974:

Messrs. Campbell & Sand,

Barristers,

1002 Tour de la Bourse,

800 Victoria Square, C. P. 85,

Montreal, Canada, H4Z 1B7

Attention Mr. Brahm L. Campbell

RE: BRUSSELS STEEL CORPORATION

vs. NEWFOUNDLAND STEEL (1968) CO. LTD. et al,

Your file: X5756

Our file: 39 756

Dear Brahm:-

Thank you for your letter of September 4th and enclosure.

Am I to understand that this method of calculation replaces the previous schedule which you provided me with at our meeting? In other words, am I to understand that you are basing your claim exclusively on the ground that the nondelivery of the steel resulted in a loss of profit to your client, such profit being calculated as the difference in the prices quoted by Brussels and the prices at which your client alleged they could have sold the steel? You have also confirmed to me that your client did not replace any of this steel by purchases through any other sources. On this basis, could you let me know the following, namely:

1. Whether any of the amounts in the column entitled “Sell” represented actual orders that your client had in hand for delivery of steel and which it was unable to supply;

2. What efforts, if any, were made by your client to obtain steel from other sources.

I am sure you will appreciate that all of this evidence can be brought out at trial. Although you indicated that you were not prepared at this time to provide me with a copy of the letter to which you refer, I am sure that this would also be available and you might reconsider providing me with a copy so that I can properly advise my client.

Yours very truly,

O’BRIEN, HALL, SAUNDERS

Per:(Signed: Jerome C. Smyth, Q.C.)

Jerome C. Smyth, Q.C.

and to the reply thereto dated September 13, 1974:

O’Brien, Hall Saunders

Barristers & Solicitors

2100 Place du Canada

Montreal, Canada

H3B 2R8

Attention: Jerome C. Smyth, Esq.

Dear Confrère:—

RE: Brussels Steel Corporation

vs: Newfoundland Steel (1968) Co. Ltd. et al,

Yours of 10 September, 1974 in the above matter is acknowledged.

The schedule annexed to ours of 4 September represents our client’s actual loss. It is our submission that the non-delivery resulted in a loss of profit and none of the steel in question could be replaced, although particular efforts were made by our client to obtain same.

You will find annexed hereto a copy of a letter received from Stelco evidencing its inability to supply the steel. We are in a position to prove at trial that other such mills were repeatedly asked to furnish the product but could not as it was in exceptionally short supply. We are obviously not prepared to reveal names of such mills, but you can accept our statement that this was indeed the case and can and shall be shown at trial. Furthermore, the Stelco people with whom you are in contact, can easily confirm these facts.

We are also in a position to readily show the Court that our client, upon each of the delivery dates, could easily have sold the steel in question at the price indicated, and this statement can be corroborated by any person involved in such affairs for the period in question.

We have also annexed hereto a copy of the body of the letter referred to in ours of the 4th September, 1974, we having removed the names for obvious reasons.

We await receipt of your position.

Yours truly,

CAMPBELL & SAND

Per:

BRAHM L. CAMPBELL

In the event, I fail to see where the settlement paid to the plaintiff falls into the category of a capital payment in realization of a capital asset of lasting benefit. I must conclude that the plaintiff, upon evidence of financial statements, mode of operation, absence of any fixed assets of any substantial value, was and continued to be throughout a trader in steel products of which graded rebars from NESCO was only a part of its ordinary trade and business. Admittedly, NESCO’s repudiation of its purchase orders was a matter of great disappointment to the plaintiff and of grievous loss of anticipated profits. The plaintiff, however, was compensated for this loss.

Admittedly also, there was in the minds of the plaintiff owners an expectation of continuing supplies of graded rebars from NESCO on which substantial profits would have been realized. I find, however that notwithstanding the interpretation the plaintiff put to the January 14, 1972 letter from NESCO, it was certainly not the interpretation advanced by the plaintiff in its suit against NESCO, nor according to the evidence, was any reference ever made to it in the pleadings or in the negotiations which led to the ultimate settlement of the claim. I can only conclude that the plaintiffs position at that time was not that a long-term distributorship agreement had been breached or repudiated but that NESCO had simply failed to deliver on confirmed purchase orders for its steel products.

In arriving at this conclusion, I must naturally depend on facts more than impressions, on hard evidence more than intentions. It is an application of the common sense rule I recited earlier. It indicates to me that the objective facts themselves have greater weight than plaintiffs appreciation or perception of these facts. Consequently, plaintiff's stated intentions in beginning its short-lived trading pattern with NESCO and directing its full time and efforts to that purpose is considerably attenuated by the plaintiff’s trading history before the NESCO experience, during the course of its existence and afterwards as well. I need only refer to the balance sheets and profit and loss statements of the plaintiff for the years 1971-1975 as evidence of this.

For the period of May 31, 1971 to September 30, 1971, i.e. a period of some four months, gross sales of the taxpayer amounted to $340,000. Over the next three months ending December 31, 1971, gross sales amounted to $220,000. By the end of the following year, December 31, 1972, gross sales reached $1,500,000 of which roughly $500,000 was sourced from NESCO rebars. Remembering that it was in the Fall of 1972 that the NESCO orders were cancelled, it is remarkable that for the year ending December 31, 1973, gross sales had escalated to more than $4 million and to close to $14 million a year later. No matter how much weight one might attach to this kind of experience, it seems to me that at least it does not confirm that the NESCO affair “destroyed the business” or “damaged it seriously” or “resulted in the surrender of its single or most important capital asset,” as these expressions have been used from time to time in the case law quoted by plaintiff's counsel. Admittedly, sales fell considerably in the years 1975 and 1976 but by that time, the incidents of 1971-72 had become pretty far removed.

In the circumstances, I must find that the amount paid to the plaintiff and which is the subject of its reassessment was received in respect of the cancellation of ordinary and current commercial contracts made in the course of the plaintiffs ordinary business. In its statement of claim against NESCO, the plaintiff described itself as “a wholesale purchaser and vendor of bulk steel products.” In my view, this is an accurate statement of the plaintiff’s business. At all material times, it was not a specialty firm dealing more or less exclusively on the basis of a firm five-year distributorship agreement, the breach of which would have been compensated by monetary damages having the character of a capital payment. That agreement was never pleaded and for that matter, was never found among the records of NESCO. Any opinion expressed as to its legality or binding nature would be pure conjectural exercise. All I can repeat here is that it was not the basis on which money paid by NESCO was received by the plaintiff.

The nature of any payment of this kind received by the plaintiff from NESCO has been a matter of judicial determination over the years. In Short Bros., Ltd. v. C.I.R., 12 T.C. 955, the plaintiff was in the business of building ships. On cancellation of a shipbuilding contract, a certain sum of money was paid by the customer to the company. In his judgment Rowlatt, J. had this to say at 968:

. . . These gentlemen had this shipbuilding yard; in the year in question they had a contract on their books; the contract looked to work extending over the next year or two, and payments in the next year or two. If that had gone forward, the receipts would have come into the accounts in those years. The contract might have taken longer, and the receipts would have gone into more years. It might have been accelerated by the agreement of the parties, and the receipts would have gone into shorter periods. In any case, it is still the receipts in respect of the contract. But the contract had a different history. It had a history which only lasted for a part of the first year, and then it came to an end in this way: No ship was built, but some money was received because they had entered into that contract, and I really think there is an end of it; I do not think there is any more to be said.

Rowlatt, J. came to the same conclusion in Jesse Robinson & Sons v. C.LR., 12 T.C. 1241, where a contract for the sale of yarn at a specified price was cancelled and a new contract signed upon condition of payment by the purchaser of the yarn of an agreed lump sum. That lump sum was held to be a trading receipt.

In Raja’s College v. Gian Singh & Co. Ltd. (P.C.), [1977] A.C. 312, Lord Fraser had this to say at 318:

Questions of whether sums awarded by courts are income, liable to income tax, or not, have arisen in a number of reported cases. The names given to the sums awarded have varied: “damages,” “interest,"" “compensation"" have all been used, but the court has declined to be bound by the label and has always tried to look through it and “to solve the question of substance” in the words of Rowlatt J. In Simpson v. Executors of Bonner Maurice as Executor of Edward Kay (1929) 14 T.C. 580, 592 by reference to the true character of the award.

The case of Wiseburgh v. Domville, [1956] 1 All E.R. 754, concerned an action in damages which had been instituted for breach of an agency agreement. The parties to the agreement consented to an Order of the Court whereby the defendant was called upon to pay a lump sum to the plaintiff. The plaintiff alleged that that sum constituted a capital receipt for loss of good will. Said Birkett, L.J. at 760:

. .. The whole of this statement of claim, detailed as all the complaints are, contains no breath of a suggestion of that kind. It is confined wholly to the loss of COMMISSION . . .

In that same case, Lord Evershed, M.R. noted at 757:

I think one other inference must be drawn from the form of the judgment read in the light of the pleadings — I do not forget that this is a consent order under a settlement in which no doubt both parties considered all their alleged rights and defences. 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.

It seems to me that if a payment received following an action framed in damages for loss of commission cannot be found to be a payment for loss of goodwill, similarly, a payment received by the taxpayer in the case at bar following an action framed in damages for loss of profits cannot be found to be a payment for loss of a long-term distributorship.

A similar finding was made by this Court in Packer Floor Coverings Ltd. v. The Queen, [1981] C.T.C. 506; 82 D.T.C. 6027 where Dubé, J. at 511 (D.T.C. 6030) said:

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 disconti- nuation 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 sales 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.

and at 512 (D.T.C. 6031):

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 month notice. Nowhere is there to be found a claim for goodwill. Along with Lord Evershed in the Wiseburgh case, “on the face of pleadings,” I would find it “impossible to infer” that the payment was for goodwill.

I must therefore confirm the Minister of National Revenue's determination that the sum of $428,772.91, net of all legal costs, received by the plaintiff in 1976 constituted income for that year.

Before concluding, I must refer briefly to three other items in dispute between the parties and relating to reassessments for the years 1975, 1976 and 1977. The Minister had disallowed relatively minor amounts as expenses allegedly incurred in the plaintiffs business. These amounts were as follows:

1975 —Christmas Bonus $2,225.00

	Selling expenses	2,475,94	$4,700.94
1976	—Travelling &
	Selling Expenses		$8,030.69
1977	—Travelling &
	Selling Expenses		$4,724.00

After some evidence had been led by the plaintiff with respect to these amounts, the parties agreed that a more proper, expeditious and practical solution to these issues was to allow one-half the amounts claimed and to have the Minister reassess accordingly. I so order.

Otherwise the action is dismissed with costs.

Appeal dismissed.