Urie, J:—This is an appeal from a judgment of the Trial Division which dismissed the appellant’s appeal from the decision of the Tax Review Board in respect of a reassessment of the appellant’s taxable income for 1971 arising from losses carried forward from the 1969 and 1970 taxation years. The respondent’s reassessments disallowed two outlays claimed by the appellant as expenses: (1) a $20,000 payment made in 1969 to obtain releases from certain commitments and, (2) a series of payments totalling $108,000 made in 1970 to terminate a franchise agreement.
1. The $20,000 Payment
The pertinent facts are these.
John Long controlled three companies — Pakall Limited, Pakall Manufacturing Limited and Pakall Compaction Equipment Limited. For the sake of convenience they and Long will be referred to herein, jointly and severally, as “Pakall”. Pakall was in the business of manufacturing and sale of earth compaction machines. By a bulk sale agreement entered into on April 29, 1969, Pakall sold its plant, inventory, equipment, supplies, engineering and other drawings, patterns, dies and other equipment to Com-Pakall Equipment Limited (“Com- Pakall”) which had been recently incorporated for the purpose of purchasing and carrying on Pakall’s business. It was owned to the extent of 80 per cent by Bopparder Maschinenbaugesellschaft MbH-Bomag (“Bomag Germany”), 10 per cent by Long and 10 per cent by one Kuettner. Com-Pak entered into an agreement dated April 30, 1969 with Pakall whereby it retained Pakall as a consultant and sales agent. Pakall agreed to employ Long and to make his services available to Com-Pakall on a full-time basis until December 31, 1969 and “as required” until April 30, 1970.
The applicable paragraph of the agreement relating to the retention of Pakall as a consultant is paragraph 1 which reads as follows:
1. The Company hereby retains Pakall as a consultant to advise the Company in the manufacture of compaction equipment and to assist in the sale of the product throughout North America for a period commencing on the 1st day of May 1969 and ended and fully to be completed on the 30th day of April, 1970.
That part of the agreement relating to Pakall as a sales agent is contained in paragraph 4, the relevant portions of which read as follows:
4. PAKALL is hereby retained to act as a sales agent for the product of the Company upon the following terms:
(a) Pakall shall have no defined territory within North America but shall have the right to sell the product of the Company to anyone in North America but not on an exclusive basis and shall not be able to sell to the ultimate user in a territory in which the Company may now or in the future have an exclusive dealer, in which case the sale shall be made by Oakall through the dealer and the commission hereinafter mentioned shall be at the sale price to the dealer and not to the ultimate user;
(b) It is agreed that in the case of the five machines listed by type and serial number in Schedule “A” annexed hereto and the first five machines manufactured by the Company, or any person, firm, corporation, partnership, company or other legal entity on behalf of the Company, that special conditions with regard to commission only shall apply. A commission of TWO THOUSAND DOLLARS ($2,000.00) shall be paid to Pakall when each of the said machines is sold by the Company. If however any one of the said machines is sold by Pakall for less than THIRTY THOUSAND DOLLARS ($30,000.00) the commission payable to Pakall for such machine shall abate dollar for dollar as the sale price shall reduce
(c) In all cases other than as set out in the foregoing sub-clause Pakall shall be paid a commission of FOUR PER CENT (4%) on all sales effected by Pakall which commission shall be calculated on the sale price which the purchaser shall agree to pay, fob the manufacturing facilities of the Company. ...
With respect to the April 30, 1969 agreement the learned Trial Judge had this to say:
... Taking the April 30 agreement as a whole, it is apparent that the $2,000 per machine for the specified ten machines was intended to be payable to Pakall regardless of whether Pakall had done anything to effect their sale and independent of Pakall’s performance of any of its other obligations under that payment. It was, in fact and substance, part of the consideration for the initial acquisition by Com-Pakall, its payment contingent only on the sale of the specific machines.
It is important to note as well at this stage I think, that the full-time consultant and sales agency arrangements were for a period of only eight months and the part time arrangement for only a further four-month period. That is, the retention of Pakall’s services, particularly as a sales agent, was for only one year in all. The significance of that fact will be considered later herein.
For several reasons which need not be gone into here, the arrangement did not work out so that for the purpose of further distancing itself from Pakall, in July 1969, Bomag Germany caused the appellant (herein sometimes referred to as “Bomag Canada’’) to be incorporated. It was owned to the extent of 90 per cent by Bomag Germany and to the extent of 10 per cent by Kuettner. Effective October 1, 1969 Bomag Canada assumed Com-Pak’s external business operations. The relations with Pakall having further deteriorated, in November 1969, Com-Pakall (not the appellant) paid to Pakall the sum of $20,000 for which it received a general release from all claims against Com-Pakall. The release was executed by Pakall and John Long personally. The recitals in the release made reference to the April 29 bulk sale agreement and the April 30 consultant and sales agency agreement and the operative part of the document released Com- Pakall, but not the appellant, from all claims, past, present or future “‘arising out of the said recited Agreements or otherwise”.
Another agreement between Com-Pakall and the appellant, dated February 2, 1970 in paragraphs 2 and 3 stated:
2. Bomag and Com-Pakall acknowledge that Bomag has advanced money to pay John Long the amount of $20,000.00 in lieu of commission and to terminate his contract and accordingly Bomag has obtained the advantage of selling the compaction equipment formerly sold by John Long and Com-Pakall.
3. This Agreement confirms the verbal arrngement made between the parties and the course of conduct of the parties with regard to the matters mentioned herein.
The learned trial judge held “That is, of course, an entirely self-serving document, created after the event and of no probative value”. I agree. He also found that the interchangeable roles of Com-Pakall and Bomag Canada were reasonably explained so that nothing turned on the fact that Com-Pak actually paid the $20,000 to Pakall. However, he also disposed of the contention that the $20,000 payment having been made in lieu of commission and to terminate Pakall’s contract, so that the appellant obtained the advantage of selling the equipment formerly sold by Pakall and Com-Pakall, in the following way:
The $20,000 was, under the April 30 agreement, a deferred obligation on account of the initial purchase price of the assets purchased from Pakall. Its character was not altered by terming it a “commission”. It was payable whether Pakall did anything to- earn it or not. That there was valuable consideration for its prepayment did not alter its character either. It was a capital outlay and not deductible. The appeal as to the $20,000 payment will be dismissed.
This, then, is the finding from which the appeal is taken with respect to the disallowance of the deduction of $20,000 claimed by the appellant as a revenue expense in respect of its 1969 taxation year, for the purpose of computing its 1971 taxable income taking into account its loss carried forward from 1969.
It should be noted that in lieu of viva voce evidence in the Trial Division, the parties filed the transcript of the evidence adduced before the Tax Review Board and the exhibits produced there. Only one witness, Walter Kuettner, the appellant’s general manager, had testified. That being so there is no question of credibility in issue and this Court, in this case, need not feel inhibited by the advantages, which normally accrue to a trial judge not normally available to an appellate court, by his having had the witnesses before him and thus being able to better assess the weight of their evidence and draw appropriate inferences therefrom.
The appellant contended that the $20,000 payment was for the purposes of terminating a contract of agency and commissions, so that it 1s a deductible expense. Counsel argued that the payment was simply a commutation of the $2,000 payments it was required to make to Pakall on the sale of each of the ten machines referred to in the April 30 agreement. Each of these payments, it was said, would have been deductible as expenses for commissions paid to effect the sales. There was, thus, no reason for the commuted payment to be treated differently when the oral and documentary evidence disclosed that the $20,000 represented immediate payments of commissions rather than payments made after the actual sales.
Counsel for the respondent, on the other hand, argued that, as found by the trial judge, the obligation to pay the commissions on the ten machines was ‘.. . . a deferred obligation on account of the initial purchase price of the assets purchased from Pakall”. Thus, it was on capital account. It was argued that the payment was made to obtain the advantage of selling the compaction equipment formerly sold by Com-Pakall. It thus met the test of being capital in nature as propounded in the line of cases commencing with British Insulated and Helsby Cables v Atherton, [1926] AC 205 and followed in Canada Starch Co Ltd v MNR, [1968] CTC 466; 68 DTC 5320 and other cases. In the Atherton case, Viscount Cave, LC, at 213 made these pronouncements which have been quoted in tax cases countless times:
Now, in Vallambrosa Rubber Co v Farmer Lord Dunedin, as Lord President of the Court of Session, expressed the opinion that “in a rough way” it was “not a bad criterion of what is capital expenditure — as against what is income expenditure — to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year”; and no doubt this is often a material consideration. But the criterion suggested is not, and was obviously not intended by Lord Dunedin to be, a decisive one in every case; ...
But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. . . .
etc; or (b) if it is a payment in respect of a capital asset in order to pro tanto go out of business, it will be categorized as a capital expenditure, but if, (c), the commutation payment does not create a capital asset even though it is made in respect to a capital asset and the business or that part of it continues after such payment, and such payment was made for the purpose of such continuing business, then the payment will be categorized as an income expenditure.
In the final analysis, however, it would appear that no one criterion can be used universally in all cases. Instead the business purpose of a commutation payment in each case must be analyzed carefully for the object of categorization and then one or more of the various criteria may be employed to assist in determining the correct category of such payment, that is, whether the payment truly is an income disbursement or one out of capital account.
Dixon, J (as he then was) of the High Court of Australia put the characterization problem succinctly in this way in Hallstroms Pty Ltd v FCT (1946), 72 CLR 634 at 648:
Whether an expenditure is on revenue or capital account
. . . depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process.
Using Mr Justice Gibson’s analysis, it appears to me that to infer that the business purpose for the commutation payment was “in fact and substance, part of the consideration for the initial acquisition by Com-Pakall. . . .”’ requires that the evidence of Kuettner and the consulting/sales agreement be completely ignored. There are factors which might entitle the Court to depreciate the weight of that evidence and agreement. Among those factors are:
(a) the consulting/sales agreement was for a term of only eight months full- time and four months part-time, a total of one year, which is a term of short duration for an agreement of this kind particularly since there were no renewal rights;
(b) Pakall was entitled to the $2,000 commission on the sale of each of the machines whether it participated in the sales or not;
(c) none were, in fact, sold prior to the termination; and
(d) most could not have been sold during that period because they had been leased for varying periods.
The cumulative effect of those facts could lead to the conclusion that the commissions payable were “commissions” in name only and that their true nature was that they were part of the consideration for the purchase of pakall’s assets pursuant to the bulk sale agreement of April 29, deferred pending the sales of the particular pieces of equipment then in existence or to be brought later into existence.
In my opinion, however, the weight to be given to the cumulative effect of those facts cannot in the circumstances of this case displace the weight to be given to the agreement dated April 30, 1969 between Com-Pakall and Pakall, which on its face is what it purposrts to be — a consulting and sales agreement. There is nothing therein or in the evidence of Kuettner to cast doubt on its bona fides or to lead the reader thereof to conclude that its true nature was to provide Pakall with additional consideration for the sale of its assets as set forth in the bulk sale agreement of April 29, 1969. That being so, the inferences drawn from the facts to which I have earlier alluded are not of sufficient weight, in my opinion, to permit the conclusion that the commutation payment was not for the purpose of terminating a contract for agency and commissions. Therefore, on this analysis of its true nature, from “a practical and business point of view”, I conclude that it is an expense relating to the earning of income which is for tax purposes a deductible one.
I would, therefore allow the appeal in respect of the $20,000 payment and set aside the judgment of the Trial Division to that extent. The matter should be remitted to the Minister of National Revenue for reassessment on the basis that the $20,000 payment was a deductibe expense for the reasons given.
2. The $108,000 Payment
By an agreement dated January 30, 1967 Bomag Germany granted to Wet- tlaufer Equipment Limited (“Wettlaufer”) the exclusive distribution rights in Canada for certain of its products until December 31, 1970 after which date the rights continued in full force and effect, subject to termination by either party on six month’s notice. Wettlaufer subsequently, at some undisclosed date, assigned all of its rights and obligations under that agreement to Charterhouse Canada Limited (“Charterhouse”).
In 1969, Kuettner, authorized to act on behalf of Bomag Germany, approached Charterhouse with a view to terminating the exclusive distribution franchise before the expiry date of December 31, 1970. Charterhouse estimated its loss of income if the franchise were teminated at $9,000 per month. In the result, by agreement dated June 27, 1969 between Bomag Germany and Charterhouse, it was agreed, inter alia that:
2. Bomag shall pay to Charterhouse on the 1st day of each and every month in 1970 the sum of $9,000. ... .
It should be noted that the Bomag referred to is, of course, Bomag Germany and that, as at the date of the agreement, Bomag Canada had not, as yet, been incorporated. There is nothing in the record to show that the June 27, 1969 agreement was ever assigned by Bomag Germany to Bomag Canada after its incorporation. Notwithstanding this fact, upon the termination of the franchise, the appellant assumed Bomag Germany’s obligation to purchase Charterhouse’s inventory. As well, it paid the twelve monthly instalments of $9,000 to Charterhouse which Bomag Germany had obligated itself to pay during the 1970 calendar year. It is the total of these payments, $108,000, which the appellant claims to be a deductible expense rather than a capital outlay for purposes of calculation of its taxable income for its 1970 taxation year.
It should be further noted that Bomag Germany and the appellant entered into a further agreement on February 2, 1970, the relevant portions of which are reproduced hereunder:
WHEREAS Bomag Germany entered into an Agreement with Charterhouse Canada Limited dated the 27th of June, 1969 and the shareholders of Bomag Germany thereafter caused Bomag Canada to be created for the purpose of selling the products contemplated by the Charterhouse Agreement,
WITNESSETH that the parties agree as follows:
1. This Agreement confirms the verbal arrangements and course of conduct of the parties following the incorporation of Bomag Canada.
2. Bomag Canada shall have the right to all of the benefits contained in the Charterhouse Agreement and shall assume the responsibilities thereunder.
3. All payments under the Agreement shall accordingly be paid by Bomag Canada to Charterhouse for the franchise rights which Bomag Canada enjoys.
The learned trial judge found the agreement to be self-serving and of no probative value. I agree. It is obviously a document which was designed, after the fact, to put the best possible light for tax and other purposes on the transaction entered into between Bomag Germany and its subsidiary, the appellant. It may be safely ignored. The true nature of the transaction can be derived from the valid documentation and evidence adduced. As observed by the trial judge, that evidence discloses that Bomag Germany negotiated the cancellation of the franchise so that the appellant could become its distributor in Canada. The latter did, in fact, operate as the franchised distributor from January 1, 1970 although its arrangement was not committed to paper until February 1, 1971.
The trial judge analyzed the nature of the $108,000 payment in the following way:
The line of cases dealing with a once and for all payment to get rid of an onerous obligation, and from which no lasting capital benefit accrues to the payer,2 does not apply to Plaintiffs payment of the $108,000, whatever its application might have been had Bomag Germany paid the $108,000. Notwithstanding that it was Bomag Germany that was bound to make the payment, it was the Plaintiff that paid the $108,000. For purposes of this appeal, the nature of the payment is to be determined from the point of view of the Plaintiff.
It is no answer simply to say that the Plaintiff was under no legal obligation to make the payment and made it “gratuitously”.3 Although not documented there was nothing artificial or unusual in the Plaintiffs assumption of the obligations under the cancellation agreement. The Plaintiff obtained a valuable asset which it could not have obtained had the Charterhouse franchise not been terminated. It had a bona fide business reason to pay for the early termination.
The cost to a franchise of procuring the surrender of a prior franchise is a proper element of the capital cost of the franchise obtained.4 That was the nature of the $108,000 payment in so far as the Plaintiff was concerned. It was, however, a capital outlay, not an expense.
2 eg Johnson Testers v MNR, [1965] 2 Ex. CR 243
3 Berman v MNR 61 DTC 1151
4 Crystal Springs Beverages v MNR, [1965] 1 Ex. CR 702 at 709
I think that both the analysis of the transaction and the conclusion reached are correct. No useful purpose would be achieved in endeavouring to turn them into my own words or to elaborate upon them. Suffice it to say, that both the evidence and the jurisprudence amply support those conclusions. They ought not to be disturbed. The appeal on the characterization of the $108,000 payment ought, therefore, to be dismissed.
3. Capital Cost Allowance
There remains only the question as to whether, with respect to the $108,000 payment, capital cost allowance deductions were permissible pursuant to paragraph 1 l(l)(a) of the Income Tax Act, as amended and Regulation 1100(1)(c) and Schedule B, Class 14 of the Income Tax Regulations.
Paragraph 11( l)(a) of the Income Tax Act as it read in 1970, 1s as follows:
(1) Notwithstanding paragraphs (a), (b) and (h) of subsection (1) of section 12, the following amounts may be deducted in computing the income of a taxpayer for a taxation year:
(a) 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.
Income Tax Regulation 1100(l)(c) did permit a taxpayer, in computing his income from a business or property, deductions for each taxation year in respect of various classes of property set out in Schedule B. Class 14 of that Schedule read as follows, so far as is relevant for this branch of the appeal:
Property that is a patent, franchise, concession or license for a limited period in respect of property but not including .. .” [Emphasis added]
None of the exclusions are applicable in the circumstances of this appeal. There is no doubt that what Charterhouse had was a “franchise” if that term is given the meaning usually accorded to a contract by which one party gives to the other exclusive distribution rights to ceertain products for a given territory. Did the contract, however, give the franchise for a limited period? The learned trial judge found no difficulty in holding that it did not. The term of the Charterhouse agreement is set for in paragraph 15 and reads as follows:
15. This agreement shall remain in force until December 31, 1970. Thereafter it will run and operate as an agreement which may be terminated by either party on 6 months notice.
The term, by agreement, was, of course, terminated as of December 31, 1969 by the terms of the settlement. That settlement was negotiated on June 27, 1969 so that at least until December 31, 1969 the term was limited to a term certain, the right of automatic renewal terminable on three months notice having implicitly vanished by the terms of settlement. Had it been that franchise which the appellant purchased, I would have concluded that what it purchased was a franchise for a limited period. Thus it would have been property within the meaning of Class 14, Schedule B and the owner would have been entitled to claim capital cost allowance. The Charterhouse franchise was not assigned to the appellant. In fact, by its terms it was not assignable without the consent of Bomag Germany which consent was not given.
However, like the trial judge, I am unable to accept that the result of the transactions was that the appellant purchased the Charterhouse franchise. That franchise had terminated by effluxion of time as a result of the settlement agreement. The payment made was one to terminate the exclusive distributorship of Bomag Germany’s products in Canada. The new franchise was obtained by the appellant from Bomag Germany, not by assignment of the Charterhouse franchise. It differed in its terms substantially from the latter. The termination clause in the agreement appointing Bomag Canada as Bomag Germany’s wholesaler (in effect a franchise agreement) dated February 1, 1971 reads as follows:
19. Termination
This Agreement may be terminated as to one or more Products, or as to a part of Territory, or in its entirety, by either party by written notice, effective six months from the date of mailing such notice. This Agreement may be terminated at any time for a breach by giving written notice of the failure or neglect to perform or of any other breach of agreement effective sixty (60) days after mailing such notice, unless the breach is cured within said sixty (60) days.
That clause shows that the Bomag Germany wholesale agreement was unquestionably one for an indefinite term subject to termination on six months notice. It was clearly not for a limited period so that the property that was a franchise was not Class 14 property eligible for capital cost allowance.
The result of all of the foregoing is that:
(a) with respect to the $20,000 payment the appeal should be allowed and the reassessment for the appellant’s 1971 taxation year should be varied by the said $20,000 payment, to accord with these reasons for judgment;
(b) with respect to the other two attacks on the judgment of the Trial Division, the appeal should be dismissed; and
(c) the appellant having been partially successful should be entitled to one third of its taxable costs both here and below.