Strayer,
J.:
Introduction
This
is
an
appeal
with
respect
to
the
1978
taxation
year
of
Northern
Alberta
Railways
Company
which
was
amalgamated
with
the
plaintiff
in
1980.
The
amount
in
question
is
$824,874
being
a
sum
paid
to
Northern
Alberta
Railways
in
1976
by
Canadian
Bechtel
Limited
(henceforth
"Bechtel")
on
the
occasion
of
the
termination
of
a
contract
between
those
two
companies.
This
amount
was
part
of
a
larger
sum
paid
by
Bechtel
to
Northern
Alberta
Railways
(henceforth,
"NAR")
in
respect
of
that
termination,
the
remainder
having
been
turned
over
by
NAR
to
Pe
Ben
Industries
Company
Limited
(hereafter
“Pe
Ben”),
a
subcontractor
to
NAR
in
the
provision
of
transportation
services
to
Bechtel.
The
amount
turned
over
to
Pe
Ben,
$1,152,354.60
is
the
subject
of
an
appeal
in
case
T-1583-82
which
was
tried
at
the
same
time
as
the
present
case.
Most
of
the
evidence
in
the
present
case
was
by
agreement
applied
in
the
Pe
Ben
case
as
well.
In
both
cases,
the
primary
issue
is
as
to
whether
the
sums
paid
on
termination
of
these
contracts
should
be
treated
as
income
or
capital.
The
Minister
assessed
such
amounts
as
income
in
respect
of
both
plaintiffs
and
it
is
those
reassessments
which
are
being
appealed.
While
the
plaintiff
in
each
case
primarily
asserts
that
the
sum
it
received
was
a
non-taxable
capital
amount,
in
the
alternative
it
alleges
that
such
sum
was
an
“eligible
capital
amount",
or
in
the
further
alternative
that
it
was
the
proceeds
of
disposition
of
property
(namely,
its
contractual
rights)
and
thus
taxable
only
as
a
capital
gain.
While
I
will
write
a
separate
judgment
in
respect
to
Pe
Ben,
I
will
in
it
refer
back
to
the
facts
and
law
discussed
in
the
following
reasons.
Background
Facts
Serious
development
of
the
tar
sands
north
of
Edmonton
in
the
area
of
Fort
McMurray
got
under
way
in
the
1%0's.
In
1971
the
Syncrude
project
was
proposed
and
planning
proceeded
for
its
construction.
Bechtel
was
the
general
contractor
for
the
construction
of
this
plant
and
in
1973
NAR
proposed
to
Bechtel
an
arrangement
for
intermodal
transportation,
by
rail
and
by
road,
for
moving
supplies
and
building
materials
from
Edmonton
to
Mildred
Lake,
the
site
of
the
Syncrude
plant.
NAR
had
a
railway
line
branching
off
from
its
main
line
at
Carbondale,
just
north
of
Edmonton,
and
ending
at
Waterways,
a
railway
yard
on
the
Clearwater
River
just
outside
Fort
McMurray.
From
Fort
McMurray
there
is
a
road
running
north
to
the
Mildred
Lake
site.
The
distance
from
Edmonton
to
Fort
McMurray
is
approximately
300
miles
and
from
Fort
McMurray
to
Mildred
Lake
is
about
40
miles.
At
that
time
NAR
was
owned
50
per
cent
by
the
plaintiff
in
the
present
case,
and
50
per
cent
by
Canadian
Pacific
Railway,
and
both
these
parent
companies
were
also
interested
in
the
development
of
an
arrangement
which
would
include
carriage
by
them
of
supplies
for
the
Syncrude
project
from
elsewhere
in
Canada
to
Edmonton.
NAR
first
considered
establishing
its
own
trucking
arm
to
carry
goods
from
Waterways
to
Mildred
Lake
but
by
early
1974
had
decided
to
contract
out
the
trucking
aspect.
On
April
29,
1974
NAR
invited
tenders
from
four
trucking
companies
and
in
May
1974
Pe
Ben
was
selected
as
its
subcontractor.
By
June
1974
rail
shipments
for
Bechtel
were
arriving
at
the
Waterways
yard
and
Pe
Ben
started
hauling
onward
by
road.
It
was
soon
realized
that
the
Waterways
yard
could
not
be
used
very
long
for
this
kind
of
operation,
as
it
was
immediately
adjacent
to
residential
areas
in
Fort
McMurray
and
road
access
suitable
for
heavy
trucking
was
limited.
NAR
looked
for
another
site
for
a
yard
suitable
for
such
an
intermodal
operation
and
by
July
1974
had
started
construction
of
a
yard
at
Lynton,
not
far
from
Fort
McMurray
and
adjacent
to
its
existing
track.
It
leased
the
land
for
the
yard
from
the
government
of
Alberta
and
that
government
constructed
a
road
connecting
the
yard
with
the
nearest
highway.
This
yard
commenced
operation
in
December
1974,
after
it
had
been
cleared,
drained
and
graded
and
the
necessary
tracks
and
unloading
ramps
had
been
built.
As
yet
no
contract
had
been
signed
between
NAR
and
Bechtel
or
between
NAR
and
Pe
Ben.
In
fact,
the
contract
was
not
signed
between
NAR
and
Bechtel
until
November
17,1975
although
it
was
made
effective
April
1,
1974.
The
evidence
shows
that
while
it
had
been
made
clear
to
Bechtel
from
the
beginning
that
NAR
would
want
a
commitment
for
a
certain
tonnage
to
be
shipped
as
a
minimum
throughout
the
life
of
the
contract,
by
October
1974
the
volumes
of
tonnage
shipped
under
the
intermodal
arrangement
had
peaked
and
that
thereafter
it
became
increasingly
apparent
that
it
was
unlikely
Bechtel
would
meet
the
full
commitment
to
ship
at
least
250,000
tons
(the
figure
put
in
the
written
contract
signed
on
November
17,
1975)
during
the
life
of
the
contract.
What
in
fact
happened
was
that
Bechtel
appears
to
have
discovered
that
it
was
cheaper
to
have
supplies
and
equipment
carried
directly
from
Edmonton
by
road
rather
than
using
the
inter-
modal
means
offered
under
the
NAR
contract.
This
arose
in
part
because
Bechtel
found
that
many
components
for
the
Syncrude
plant
could
be
assembled
more
cheaply
at
a
site
in
Edmonton
before
being
transported
to
Mildred
Lake,
and
once
the
components
had
been
taken
off
railway
cars
for
this
purpose
it
was
cheaper
simply
to
load
them
on
trucks
and
haul
them
directly
to
Mildred
Lake.
It
appears
that
concern
was
expressed
about
this
practice
many
times
by
Pe
Ben
to
NAR,
and
by
NAR
both
on
its
own
behalf
and
on
behalf
of
Pe
Ben,
to
Bechtel.
By
December
1976,
the
situation
had
deteriorated
to
the
point
where
Pe
Ben's
solicitor
had
written
to
NAR
threatening
suit
under
its
contract
with
that
company
because
of
the
shortfall
in
the
tonnage
being
shipped,
and
NAR
was
in
turn
pressing
Bechtel
on
this
matter.
As
of
December
17,1976
Bechtel
had
shipped
only
85,025.29
tons
of
its
total
commitment
of
250,000
tons.
On
that
day
Bechtel
by
letter
to
the
General
Manager
of
NAR
terminated
the
agreement
and
paid
(after
some
adjustments)
the
sum
of
$1,957,463.25
as
what
was
described
in
its
letter
as
“liquidated
damages".
Of
this
amount
NAR
paid
$1,152,354.60
to
Pe
Ben
and
retained
for
itself
$824,873.55.
The
various
contractual
terms
under
which
these
payments
were
made
will
be
discussed
below.
The
amount
of
$824,874
retained
by
NAR,
although
received
in
1976,
did
not
affect
its
income
tax
position
until
1978
because
of
a
carry
forward
of
losses
until
this,
its
first
profitable
year
during
the
period
in
question.
Relevant
Legal
Principles
There
is
much
jurisprudence
on
the
question
of
whether
compensation
paid
on
the
occasion
of
the
termination
of
some
business
arrangement
is
capital
or
income.
To
a
large
extent
each
case
turns
on
its
own
facts.
It
appears
to
me
that
there
are
two
aspects
which
a
court
must
consider
in
examining
such
a
situation
retrospectively:
was
the
purpose
of
the
payment
to
replace
capital
or
income;
and,
whether
or
not
the
purpose
can
be
reliably
determined,
was
the
effect
of
the
payment
to
replace
capital
or
income?
It
appears
to
me
to
be
a
dual
test
because
the
purpose
may
not
be
discernible,
or
it
may
not
be
reliably
discernible
in
the
sense
that
parties
to
settlements
should
not,
by
misstating
the
real
purpose,
determine
the
tax
consequences
of
the
receipt
of
such
compensation.
It
is
therefore
necessary
to
look
at
both
purpose
and
effect.
With
respect
to
purpose,
the
essential
question
is
to
determine
what
the
compensation
—
whether
paid
pursuant
to
a
contract,
a
court
award
of
damages,
or
otherwise
—
is
intended
to
replace.
In
some
cases
the
contract
providing
for
compensation
may
be
clear.
The
measure
employed
for
calculating
compensation
is
not
always
determinative:
potential
lost
income
may
be
taken
into
account
in
calculating
a
capital
sum
to
be
paid.
Nor
on
the
other
hand
does
the
fact
that
an
amount
is
paid
as
damages
for
breach
of
a
contract
necessarily
make
it
a
capital
sum
and
not
income.
On
the
contrary
it
appears
to
me
that
whatever
the
source
of
the
legal
right
to
the
compensation,
be
it
the
contract
or
the
law
of
damages,
the
substantive
issue
is:
what
is
this
amount
intended
to
replace?
.
With
respect
to
the
effect
of
the
termination
of
the
business
arrangement
and
the
role
of
compensation
in
respect
thereto,
I
believe
the
two
possibilities
are
well
expressed
in
the
judgment
of
Lord
Russell
in
the
Fleming
case.
.
.
.
When
the
rights
and
advantages
surrendered
on
cancellation
are
such
as
to
destroy
or
materially
to
cripple
the
whole
structure
of
the
recipient's
profit-making
apparatus,
involving
the
serious
dislocation
of
the
normal
commercial
organisation
and
resulting
perhaps
in
the
cutting
down
of
the
staff
previously
required,
the
recipient
of
the
compensation
may
properly
affirm
that
the
compensation
represents
the
price
paid
for
the
loss
or
sterilisation
of
a
capital
asset
and
is
therefore
a
capital
and
not
a
revenue
receipt.
.
.
.
On
the
other
hand
when
the
benefit
surrendered
on
cancellation
does
not
represent
the
loss
of
an
enduring
asset
in
circumstances
such
as
those
above
mentioned-where
for
example
the
structure
of
the
recipient's
business
is
so
fashioned
as
to
absorb
the
shock
as
one
of
the
normal
incidents
to
be
looked
for
and
where
it
appears
that
the
compensation
received
is
no
more
than
a
surrogatum
for
the
future
profits
surrendered-the
compensation
received
is
in
use
to
be
treated
as
a
revenue
receipt
and
not
a
capital
receipt.
It
will
be
noted
that
to
apply
such
criteria
it
is
necessary
to
make
value
judgments
as
to
the
severity
of
the
impact
on
the
taxpayer
of
the
termination
of
certain
business
activities
in
respect
of
which
compensation
has
been
paid.
Conclusions
Looking
first
at
the
purpose
of
the
compensation
paid
to
NAR
one
must
seek
enlightenment
in
the
terms
of
the
contract
itself.
The
contract
was
to
run
until
90
days
after
start-up,
or
readiness
for
start-up,
of
the
Syncrude
plant,
but
in
any
event
to
terminate
no
later
than
April
30,
1979
(subsection
8.06(1)).
During
the
life
of
the
contract
Bechtel
undertook
to
ship
a
minimum
of
250,000
tons
of
traffic
via
NAR
to
the
Syncrude
plant.
This
will
be
referred
to
hereafter
as
the
“traffic
commitment”.
Paragraph
6.01(5)(a)
provided
as
follows:
(5)(a)
If
the
traffic
commitment
has
not
been
met
at
the
termination
of
this
agreement
for
any
reason
other
than
that
specified
in
section
8.06,
sub-section
(3),
Bechtel
shall
pay
to
NAR,
as
liquidated
damages
and
not
as
a
penalty,
$15.00
per
ton
on
the
difference
between
the
number
of
tons
of
traffic
credited
and
the
traffic
commitment.
The
reasons
specified
in
subsection
8.06(3),
as
referred
to
above,
for
failure
to
meet
the
traffic
commitment
is
the
cessation
of
construction
of
the
plant.
Subsection
8.06(3)
provides:
(3)
If
all
construction
in
connection
with
the
plant
is
terminated
or
is
suspended
for
a
period
in
excess
of
30
days
by
Syncrude,
then
either
Bechtel
or
NAR
may
terminate
this
agreement.
In
the
event
of
such
termination:
Bechtel
shall
have
no
liablity
to
NAR
except
that
if
the
traffic
commitment
has
not
been
met
at
that
time,
Bechtel
shall
be
obligated
to
pay
to
NAR
the
fixed
cost
reasonably
incurred
by
NAR
and
its
contractors
to
establish
the
operation
contemplated
by
this
agreement
and
unrecovered
employing
accepted
accounting
practices
at
the
termination
date
plus
the
out-of-pocket
cost
reasonably
incurred
by
NAR
and
its
contractors
and
directly
attributable
to
the
termination
of
the
agreement.
If
NAR
and
its
contractors
are
making
use
of
any
facilities
affected
under
this
sub-section,
such
use
will
be
considered
when
establishing
the
unrecovered
fixed
cost
and
the
out-of-
pocket
cost
cannot
be
agreed
upon,
it
shall
be
established
by
arbitration
under
the
provisions
of
section
8.07.
Finally,
for
present
purposes,
there
was
provision
for
unilateral
termination
by
Bechtel
in
subsection
8.06(4)
as
follows:
(4)
Bechtel
shall
have
the
right
at
any
time
to
terminate
this
agreement
upon
payment
of
the
liquidated
damages
set
out
in
section
6.01
of
this
agreement
and
shall
be
relieved
of
and
have
no
further
or
other
liability
to
any
of
the
parties
to
this
agreement
save
for
the
payment
of
any
outstanding
freight
accounts
which
it
might
have
incurred
prior
to
termination.
By
December
20,
1976
only
85,025
tons
had
been
shipped.
This
was
far
short
of
the
some
200,000
tons
originally
projected
to
have
been
shipped
by
this
time
and
even
farther
short
of
the
250,000
tons
that
Bechtel
promised
to
ship
during
the
life
of
the
contract.
When
Bechtel
terminated
the
agreement
by
notice
on
December
17,
1976
effective
December
20
it
expressly
relied
on
subsection
8.06(4)
and
it
enclosed
its
cheque
for
$1,956,620.65
"representing
the
liquidated
damages"
calculated
in
accordance
with
the
formula
incorporated
by
reference
in
subsection
8.06(4).
It
is
somewhat
unclear
as
to
whether
this
payment
is
properly
referred
to
as
"damages".
The
contract
certainly
refers
to
it
as
such:
paragraph
6.01(5)(a),
which
is
part
of
a
section
dealing
with
the
“traffic
commitment",
provides
that
when
the
contract
is
terminated
“for
any
reason"
(other
than
a
specified
reason
which
is
not
relevant
here)
then,
if
at
that
time
the
traffic
commitment
has
not
been
met
and
less
than
250,000
tons
have
been
shipped,
the
sum
of
$15
per
ton
is
to
be
paid
to
NAR
for
each
ton
of
the
shortfall
"as
liquidated
damages
not
as
a
penalty".
If
that
were
the
only
contract
provision
applicable
it
would
seem
to
provide
for
damages
for
breach
of
the
contract
in
respect
of
the
traffic
commitment,
and
the
term
“liquidated
damages"
would
be
appropriate
to
describe
an
agreed
sum
per
ton
which
the
parties
would
have
fixed
in
advance
as
adequately
representing
the
damages
NAR
would
suffer
in
case
of
a
breach
of
this
nature.
Subsection
8.06(4),
under
which
the
payment
was
made,
relates
to
termination
of
the
agreement
for
a
particular
kind
of
reason,
namely
unilateral
notice
by
Bechtel.
While
by
subsection
(4)
this
situation
is
brought
by
reference
within
the
general
provisions
of
paragraph
6.01(5)(a)
as
calling
for
“liquidated
damages"
of
$15
per
ton,
it
seems
somewhat
inappropriate
to
describe
a
payment
made
upon
the
exercise
of
a
party's
unqualified
right
to
terminate
at
any
time
as
"damages".
This
seems
more
akin
to
a
payment
of
salary
for
the
unexpired
portion
of
a
contract
of
employment
in
accordance
with
a
contract
of
employment
in
accordance
with
a
contract
giving
the
unqualified
option
of
termination
to
the
employer
exercisable
at
any
time
during
the
contract.
Be
that
as
it
may,
I
do
not
believe
that
anything
necessarily
turns
on
whether
these
were
"damages"
or
whether
they
were
paid
"on"
termination
of
the
contract
or
"for"
termination
of
the
contract,
notwithstanding
the
arguments
of
counsel
on
this
question.
The
more
relevant
question
is,
what
was
the
purpose
of
this
payment:
to
compensate
for
loss
of
capital
or
for
loss
of
income?
On
this
the
contract
is
not
clear
either,
although
there
are
certainly
indications
that
it
was
intended
to
replace
income.
The
contract
provides
elsewhere,
in
subsection
8.06(3)
as
quoted
above,
that
in
a
particular
situation,
namely
termination
of
construction
of
the
Syncrude
plant,
Bechtel
would
be
obliged
(if
the
traffic
commitment
had
not
yet
been
met)
to
pay
to
NAR
the
“fixed
cost"
incurred
by
NAR
and
its
contractors
"to
establish
the
operation
contemplated
by
this
agreement
and
unrecovered".
Such
a
payment
would
clearly
be
of
a
capital
nature.
This
would
suggest
that,
at
the
very
least,
payments
made
other
than
in
such
circumstances
were
to
represent
something
else,
or
were
to
replace
both
income
and
capital.
Some
extraneous
evidence
as
to
the
meaning
of
the
contract
was
tendered
but
I
do
not
find
any
of
it
helpful
or
convincing.
It
was
also
argued
that
in
fact
Bechtel
was
guilty
of
fundamental
breach
of
the
contract
and
that
the
payment
which
it
made,
purportedly
under
subsection
8.06(4)
was
really
for
the
settlement
of
a
law
suit.
It
was
urged
that,
had
Bechtel
merely
intended
to
make
the
shortfall
payments
required
under
the
contract,
it
could
have
waited
until
the
natural
expiration
of
the
contract
on
April
30,
1979
thus
delaying
its
payment
and
having
the
use
of
the
money
in
the
meantime.
I
find
all
this
to
be
very
speculative.
There
is
no
convincing
evidence
that
Bechtel
felt
liable
for
fundamental
breach
of
the
contract.
As
is
well
known,
what
constitutes
fundamental
breach
and
whether
it
nullifies
an
exemption
clause
is
highly
debatable.
Further,
whether
the
provisions
for
liquidated
damages
could
be
regarded
as
an
exemption
clause
in
this
context
is
very
doubtful.
There
was
no
direct
evidence
as
to
Bechtel's
intent,
other
than
its
letter
of
December
17,
1976
making
the
payment
and
in
that
letter
it
invoked
subsection
8.06(4).
I
think
I
must
take
that
as
the
relevant
contractual
provision
under
which
payment
was
made.
I
can
only
speculate
as
to
why
Bechtel
decided
to
make
the
payment
in
December
1976
rather
than
waiting
until
April
1979,
but
it
is
quite
possible
that
it
though
it
best
to
terminate
the
contract
so
as
to
release
NAR,
and
through
it
Pe
Ben,
from
their
contractual
commitments,
either
as
a
matter
of
fairness
or
to
bring
an
end
to
their
growing
complaints
about
tonnage
shortfalls.
As
the
terms
of
the
contract
as
invoked
by
the
parties
do
not
provide
a
clear
indication
as
to
the
purpose
of
the
compensation
paid,
I
must
look
to
the
surrounding
circumstances
to
see
its
effect.
It
was
variously
argued
that
the
termination
of
the
contract
had
the
effect
of
terminating
a
separate
business
(i.e.,
the
intermodal
operation)
or
of
sterilizing
an
asset
of
enduring
value
(the
“asset”
being
either
the
intermodal
arrangement
with
Pe
Ben
or
the
Lynton
Yard
itself).
I
am
not
satisfied
that
any
of
this
has
been
proven.
In
my
view
this
was
not
a
separate
business
as
contemplated
by
the
jurisprudence.
NAR
was
a
common
carrier
by
rail.
It
had
a
main
line
and
several
branch
lines
including
the
line
from
Carbondale
to
Waterways.
On
that
line
two
trains
ran
every
week
each
way,
and
as
I
understand
it
this
continued
before,
during,
and
after
the
contract
in
question.
While
it
maintained
a
separate
account
for
the
intermodal
service,
this
surely
cannot
be
determinative
of
tax
liability.
The
tonnages
involved,
each
if
the
contract
had
been
fulfilled,
would
not
have
dominated
shipments
on
this
line:
in
the
four
years
preceding
the
year
in
which
shipments
under
the
intermodal
contract
began,
total
tonnages
over
this
line
had
been
180,000
in
1970,
139,000
in
1971,
111,000
in
1972,
and
124,000
in
1973.
The
contract
itself
only
contemplated
the
shipment
of
a
total
of
250,000
tons
spread
over
about
five
years.
Nor
was
there
any
dramatic
impact
on
the
losses
of
this
branch
line
except
in
taxation
year
1976
when
the
extraordinary
payment
was
received
from
Bechtel
upon
termination
of
the
contract.
In
1973
the
branch
line
loss
was
$1,347,043
whereas
in
1974
and
1975,
years
in
which
the
contract
was
in
effect,
the
losses
were
even
larger
at
$1,529,567
and
$1,626,572.
I
accept
that
this
was
at
least
at
the
time
a
unique
arrangement
for
NAR
because
it
involved
a
long-term
contract
with
NAR's
shipper,
a
trucking
subcontract,
and
special
rates,
none
of
which
were
typical
of
its
general
freight
carriage
on
this
branch
line.
But
this
was
not
a
discrete
operation
separate
from
its
other
railway
activities.
It
is
true
that
four
employees
were
hired
or
reassigned
especially
to
this
intermodal
operation,
and
that
after
its
termination
two
of
those
employees
were
let
go.
This
can
hardly
be
seen
as
the
destruction
of
NAR's
whole
“profit-making
apparatus"
or
even
"the
serious
dislocation
of
the
normal
commercial
organization”
of
the
NAR,
to
use
the
terms
employed
by
Lord
Russell
in
the
Fleming
case.
Considering
the
contractual
arrangements
themselves,
their
termination
was
hardly
the
destruction
of
an
"enduring
asset”.
The
contracts
which
NAR
had
with
Bechtel
and
with
Pe
Ben
were
trading
contracts
of
a
relatively
short
duration.
At
most
they
would
have
run
for
five
years
and
were
terminable
at
any
time.
Nor
can
I
view
the
termination
of
the
Bechtel
contract
as
the
"sterilization"
of
a
capital
asset
dedicated
to
that
contract.
I
accept
the
evidence
presented
by
the
plaintiff
that
the
Lynton
yard
would
not
have
been
built
had
it
not
been
for
the
imminence
of
the
Bechtel
contract
(which,
however,
was
not
in
fact
signed
until
11
months
after
the
Lynton
yard
went
into
use).
But
witnesses
for
the
plaintiff
admitted
that
from
the
outset
they
had
longer
range
expectations
for
the
Lynton
yard.
Of
its
total
construction
cost
of
$706,145,
only
some
$561,386
was
wholly
applicable
to
the
Bechtel
contract.
(Exhibit
D-34).
The
remaining
expenditures
were
made
to
provide
facilities
for
loading
sulfur,
trucked
from
tarsands
plants
for
haulage
from
Lynton
by
rail.
Apart
from
this
type
of
business,
it
is
obvious
that
NAR
foresaw
a
great
future
for
itself
in
providing
transportation
services
for
this
and
many
more
anticipated
tarsands
projects:
in
a
letter
of
February
14,
1974
the
General
Manager
of
NAR
described
to
the
Chairman
of
the
Operating
Committee
(made
up
of
representatives
of
the
two
parent
companies
which
then
owned
NAR)
this
potential,
including
the
construction
of
seven
additional
tarsands
plants
by
1996.
(Exhibit
D-1).
While
he
there
predicted
the
ultimate
need
for
an
extension
of
the
railway,
he
clearly
contemplated
that
for
some
years
to
come
much
tarsands
business
would
be
handled
through
the
Lynton
yard,
even
after
the
first
Syncrude
project
was
completed.
While
of
course
developments
of
this
magnitude
have
not
occurred
the
Lynton
yard
has
nevertheless
remained
a
worthwhile
asset.
It
had
a
few
lean
years
after
1976,
but
by
1981
it
was
being
used
in
a
major
way
for
shipping
sulfur
from
a
tarsands
plant.
These
shipments
have
ranged
from
243,000
tons
in
1981
to
445,000
tons
in
1985.
Compared
with
the
traffic
commitment
under
the
Bechtel
contract
of
250,000
tons
spread
over
some
five
years,
this
use
of
the
Lynton
yard
has
proven
to
be
much
more
significant.
While
not
foreseen
in
this
precise
form,
sulfur
shipments
generated
from
tarsands
plants
were
clearly
foreseeable
in
the
planning
of
the
Lynton
yard
in
1974.
While
the
Bechtel
contract
was
the
immediate
justification
for
building
that
yard,
it
was
not,
either
in
anticipation
or
experience,
the
only
or
most
important
use
of
the
yard
in
the
long
run.
As
the
general
manager
of
NAR
said
in
a
letter
of
December
21,
1976
to
his
Operating
Committee
(Exhibit
D-24),
the
day
after
the
Bechtel
contract
was
terminated:
I
am
sorry
that
the
great
hopes
we
had
for
this
intermodal
service
were
not
realised,
but
our
efforts
were
rewarded
with
some
measure
of
success.
This
is
that
we
have
an
excellent
intermodal
yard
at
Lynton
which
will
with
the
passage
of
time
and
the
further
development
of
the
oil
sands
prove,
I
am
sure,
to
be
a
valuable
asset
.
.
.
It
is
also
significant
to
note
that
had
NAR
wished
to
have
any
kind
of
trucking
terminal
in
the
Fort
McMurray
area
associated
with
its
railway
yard,
whether
operated
by
it
or
not,
and
whether
or
not
for
the
purposes
of
transloading
goods
between
railway
cars
and
trucks
(its
own
trucks
or
trucks
under
contract
to
NAR)
in
connection
with
shipments
to
or
from
the
tar
sands
projects,
it
would
have
had
to
build
a
new
yard
somewhere
such
as
the
one
in
Lynton.
NAR
recognized
itself
in
1974
that
it
could
not
have
a
“major
trucking
terminal”
associated
with
its
Waterways
yard
because
that
yard
was
bounded
on
one
side
by
the
Clearwater
River
and
on
the
other
side
by
a
residential
area
of
Fort
McMurray.
Further,
the
streets
in
Fort
McMurray
were
not
suitable
for
truck
routes.
(See
Exhibit
D-1).
All
in
all,
then,
it
is
not
possible
to
characterize
the
Lynton
yard
as
a
capital
investment
solely
dedicated
to
the
Bechtel
contract
and
sterilized
by
the
termination
of
that
contract.
It
was
also
contended
by
the
plaintiff
that
it
had
made
substantial
investments
for
relaying
of
railway
tracks
on
the
Carbondale-Waterways
line
just
for
the
purposes
of
this
contract,
such
capital
investment
also
having
been
wasted
by
the
termination
of
the
contract
and
thus
compensated
for
by
the
payment
made
by
Bechtel.
The
evidence
did
not
convince
me
of
this.
It
appeared
that
while
the
relaying,
replacing
old
track
with
heavier
trackage,
may
have
been
accelerated
on
this
line
because
of
the
Bechtel
contract,
it
did
not
begin
nor
end
with
that
contract.
Mr.
Tinston,
Regional
Controller
for
the
plaintiff,
confirmed
in
his
evidence
that
the
relaying
of
track
was
not
just
for
the
purposes
of
the
contract
as
heavier
traffic
generally
was
anticipated
because
of
the
tar
sands
development.
As
noted
earlier,
heavier
traffic
has
in
fact
ensued
since
the
termination
of
the
contract.
Indications
in
the
contract
itself
that
the
compensation
was
for
lost
profits
is
reinforced
by
evidence
of
the
effect
of
termination
and
the
relationship
of
the
compensation
thereto.
No
enduring
asset
in
the
sense
of
a
distinct
business
or
long-term
contract
was
destroyed,
nor
was
any
tangible
asset
rendered
useless
by
the
termination
of
the
contract.
The
compensation
paid
was
not
in
fact
used
to
reduce
the
capital
costs
of
the
yard
or
of
relaying,
according
to
Mr.
Tinston.
In
fact,
of
the
total
cost
of
the
yard
of
$706,145,
some
$495,000
was
paid
through
subsidies
of
the
Canadian
Transport
Commission
in
compensating
NAR
for
losses
including
depreciation
on
this
yard.
Quite
apart
from
the
fact
that
no
asset
was
destroyed,
it
would
be
difficult
to
relate
to
any
such
asset
the
“compensation”
paid
as
prescribed
by
the
contract.
According
to
that
contract,
if
Bechtel
had
never
shipped
a
ton
of
freight
according
to
its
traffic
commitment
but
instead
elected
to
pay
the
"liquidated
damages",
NAR
would
have
been
entitled
to
$1,250,000.
This
is
in
excess
of
the
total
cost
of
the
yard
of
$706,000
but
would
not
have
paid
for
the
relaying
of
track
undertaken
during
the
term
of
the
contract.
If
it
has
any
rational
base
it
would
appear
to
be
a
rough
estimation
of
"return
on
investment"
just
as
NAR's
general
manager
so
described
the
purpose
of
a
"suitable
reimbursement
clause”
involving
a
traffic
commitment
of
250,000
tons,
in
a
letter
he
wrote
prior
to
the
drafting
of
the
contract
(Exhibit
D-4).
Thus
I
conclude,
as
was
said
in
the
Fleming
case,
that
this
compensation
provision
in
the
contract
was
in
purpose
and
effect
to
enable
NAR
to
"absorb
the
shock
as
one
of
the
normal
incidents
to
be
looked
for"
and
that
the
compensation
received
was
"no
more
than
a
surrogatum
for
the
future
profits
surrendered".
Therefore
that
payment
should
be
treated
as
income.
It
follows
from
this
conclusion
that
the
sum
could
not
have
been
a
capital
gain.
Nor
can
it
be
treated
as
an
“eligible
capital
amount".
For
reasons
which
I
will
elaborate
in
the
Pe
Ben
decision,
the
money
when
paid
by
Bechtel
was
for
the
purpose
of
gaining
or
producing
income
—
to
pay
an
operating
expense
or
an
amount
in
lieu
thereof
—
and
the
plaintiff's
relationship
to
it
must
be
tested
by
that
measure.
As
such
it
would
have
been
a
deductible
expense
if
actually
paid
by
the
plaintiff
instead
and
this
excludes
it
from
characterisation
as
an
“eligible
capital
amount"
by
the
criteria
as
they
then
were
in
subsections
14(1)
and
(5)
of
the
Income
Tax
Act."
Also
as
the
money
when
received
by
the
plaintiff
was,
as
I
have
found,
on
income
account
it
could
not
come
within
section
14
in
any
event.
The
appeal
is
therefore
dismissed.
Appeal
dismissed.
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