The
Chief
Justice
(concurred
in
by
Thurlow,
J):—This
is
an
appeal
from
a
judgment
of
the
Trial
Division
dismissing,
with
costs,
an
appeal
from
a
decision
of
the
Tax
Appeal
Board
dismissing
an
appeal
from
the
appellant’s
assessment
under
Part
I
of
the
Income
Tax
Act
for
the
1960
taxation
year.
The
sole
question
involved
in
the
appeal
is
whether
the
respondent
erred
in
applying
subsection
12(3)
of
the
Income
Tax
Act
(as
applicable
to
the
1960
taxation
year)
in
computing
the
appellant’s
profit
from
a
sale
of
land
made
in
1960,
which
profit
was,
admittedly,
properly
included
in
computing
the
appellant’s
income
for
the
1960
taxation
year.
The
appellant
purchased
the
land
in
question
from
a
corporation
with
which
it
was
deemed
to
be
“not
dealing
at
arm’s
length”*
for
$174,000,
of
which
it
paid
$1,000
cash
and
agreed
to
pay
the
balance,
without
interest,
in
nine
annual
instalments
of
$17,500
and
one
further
instalment
of
$15,500.
On
July
21,
1960,
as
the
result
of
a
sale
of
some
of
the
appellant’s
shares,
the
appellant
ceased
to
be
a
corporation
“deemed”
not
to
deal
at
arm’s
length
with
the
corporation
from
whom
it
bought
the
land.
Later
on
July
21,
1960,
the
appellant
sold
the
land
for
$373,000.
The
question
is
whether
the
profit
from
that
sale
that
is
to
be
included
in
the
computation
of
the
appellant’s
income
for
the
1960
taxation
year
for
the
purposes
of
Part
I
of
the
Income
Tax
Act
is,
as
the
appellant
contends,
the
sale
price
of
$373,000
less
$174,000
(the
price
at
which
the
appellant
bought
the
land),
being
$199,000,
which
is
the
profit
from
the
sale
determined
in
accordance
with
ordinary
business
or
commercial
principles,
or
whether
that
profit
is,
as
the
respondent
contends,
the
sale
price
of
$373,000
less
$18,500
(the
amount
that,
by
the
end
of
1961,
the
appellant
had
paid
on
account
of
the
price
for
which
it
had
bought
the
land),
being
$353,500,
which
is
the
profit
as
computed
in
accordance
with
the
respondent’s
view
as
to
the
effect,
in
the
circumstances,
of
subsection
12(3)
of
the
Income
Tax
Act
as
applicable
to
the
1960
taxation
year.
Subsection
12(3)
reads
as
follows:
12.
(3)
In
computing
a
taxpayer’s
income
for
a
taxation
year,
no
deduction
shall
be
made
in
respect
of
an
otherwise
deductible
outlay
or
expense
payable
by
the
taxpayer
to
a
person
with
whom
he
was
not
dealing
at
arm’s
length
if
the
amount
thereof
has
not
been
paid
before
the
day
one
year
after
the
end
of
the
taxation
year;
but,
if
an
amount
that
was
not
deductible
in
computing
the
income
of
one
taxation
year
by
virtue
of
this
subsection
was
subsequently
paid,
it
may
be
deducted
in
computing
the
taxpayer’s
income
for
the
taxation
year
in
which
it
was
paid.
The
appellant
contends
that
subsection
12(3)
does
not
apply
in
the
circumstances
for
two
different
reasons,
viz:
(a)
it
says
that
the
price
for
which
it
bought
the
land
was
not
“an
otherwise
deductible
outlay
or
expense”
within
the
meaning
of
those
words
in
subsection
12(3),
and
(b)
it
says
that
the
price
for
which
it
bought
the
land
was
not,
in
any
event,
“payable
.
.
.
to
a
person
with
whom
[it]
was
not
dealing
at
arm’s
length”
within
the
meaning
of
those
words
in
subsection
12(3).
The
question
whether
the
price
for
which
a
trader
bought
property
for
re-sale
in
his
business
is
a
“deductible
outlay
or
expense”
for
the
purposes
of
subsection
12(3)
is
one
that,
in
my
view,
is
of
considerable
difficulty.
For
the
purposes
of
the
Income
Tax
Act,
“income”
for
a
taxation
year
from
a
business
is
the
“profit”
therefrom
for
the
year.
Profit
must
be
determined
in
accordance
with
ordinary
business
and
commercial
principles
(subject
to
any
special
direction
in
the
tax
statute).
In
the
case
of
a
trader,
leaving
aside
special
revenue
items
and
dis-
bursements,
the
profit
from
the
business
is
the
gross
profit
from
the
trading
operations
less
the
normal
operating
expenses,
such
as
salaries,
rents,
repairs,
advertising,
etc,
and
less
special
statutory
allowances
such
as
bad
debts,
interest,
capital
cost
allowances,
etc.
What
we
are
concerned
with
here
is
“gross
profit”.
“The
law
is
clear
.
.
.
that
for
income
tax
purposes
gross
profit,
in
the
case
of
a
business
which
consists
of
acquiring
property
and
re-selling
it,
is
the
excess
of
price
over
cost
..
.”
(see
MNR
v
Irwin,
[1964]
SCR
662;
[1964]
CTC
362;
64
DTC
5227,
per
Abbott,
J,
delivering
the
judgment
of
the
Court,
at
pages
664-65
[pp
364;
5228]).
Gross
trading
profit
for
a
taxation
year
may
be
obtained
by
adding
together
the
profits
of
the
various
transactions
completed
in
the
year
or
by
adding
together
the
prices
at
which
sales
were
effected
in
the
year
and
deducting
the
aggregate
of
the
costs
of
the
various
things
sold.
Either
of
such
methods
would
be
suitable
for
a
business
consisting
of
relatively
few
transactions.
In
the
ordinary
trading
business,
however,
the
practice,
which
has
hardened
into
a
rule
of
law,
is
that
profit
for
a
year
must
be
computed
by
deducting
from
the
aggregate
“proceeds”
of
all
sales
the
“cost
of
sales”
computed
by
adding
a
value*
placed
on
inventory
at
the
beginning
of
the
year
to
the
cost
of
acquisitions
in
the
year
and
deducting
a
value*
placed
on
inventory
at
the
end
of
the
year.
In
considering
what
application
subsection
12(3)
has,
there
can
be
no
doubt
that
“gross
profit”
must
be
computed
before
income
can
be
determined
and
that,
at
least
in
the
second
method
of
computing
“gross
profit”
indicated
above,
the
price
for
which
the
property
was
bought
is
“deductible”
in
its
computation.
If,
on
the
other
hand,
the
computation
of
“income”
for
a
taxation
year
is
thought
of
as
commencing
with
“gross
profit”
then
the
“cost”
of
the
property
bought
is
not
an
amount
that
is
“deductible”
in
its
computation.
When,
moreover,
one
thinks
of
applying
subsection
12(3)
to
a
trader
whose
transactions
are
so
numerous
or
of
such
a
character
as
to
dictate
the
use
of
the
proceeds
of
sales
less
cost
of
sales
formula,
then,
in
the
“computation”
of
the
“taxpayer’s
income
for
a
taxation
year”
there
is
no
deduction,
at
least
as
such,
of
the
cost
of
the
goods
that
were
sold
in
the
year.t
Presumably,
however,
subsection
12(3)
is
to
have
the
same
effect
in
relation
to
the
computation
of
a
taxpayer’s
income
for
a
year
regardless
of
the
method
that
has
to
be
used
to
compute
“gross
profit”.
With
considerable
hesitation,
I
have
come
to
the
conclusion
that
subsection
12(3)
should
be
interpreted,
in
the
case
of
business
income,
as
referring
to
the
computation
of
“income”
or
“profit”
for
a
year
from
the
“gross
profit’’
for
the
year;
and
was
not,
therefore,
applicable
in
the
circumstances
of
this
case.
In
reaching
that
conclusion,
I
am
conscious
that,
in
other
contexts,
for
more
than
a
century
the
general
statements
in
the
leading
cases
concerning
business
profits
have
treated
the
computation
of
profit
as
including
the
computation
of
gross
profit.
What
has
brought
me
to
the
opposite
conclusion
in
the
interpretation
of
subsection
12(3)
is
the
necessity
of
giving
such
meaning
to
that
subsection
as
will
operate
with
consistency
in
the
different
circumstances
to
be
encountered
in
the
normal
course
of
events.
I
turn
to
the
question
whether,
for
the
purposes
of
applying
subsection
12(3)
in
the
circumstances
of
this
case,
it
can
be
said
that
the
price
payable
by
the
appellant
for
the
land
was
“payable
.
.
.
to
a
person
with
whom
[it]
was
not
dealing
at
arm’s
length”.
In
that
connection
it
is
to
be
noted
that
subsection
12(3)
lays
down
a
rule
which,
if
it
applies
at
all,
applies
“In
computing”
the
appellant’s
income
for
its
1960
taxation
year
and,
in
particular,
it
applies
in
the
computation
of
the
gross
profit
accruing
to
the
appellant
from
a
sale
of
land
in
that
year.
In
my
view,
the
question
whether
the
“otherwise
deductible
outlay
or
expense”
was
payable
by
the
appellant
to
“a
person
with
whom
he
was
not
dealing
at
arm’s
length”
must
be
determined
as
of
the
time
of,
or
after,
that
transaction.
Prior
to
the
sale,
the
cost
of
the
land
was
not
deductible
because
there
was
no
sale
price
to
deduct
it
from.
It
is
only
from
the
moment
of
the
sale
on,
therefore,
that
the
cost
of
the
land
could
conceivably
be
described
as
“an
otherwise
deductible
outlay
or
expense”
but,
from
that
moment
on
it
could
not
be
described
as
“payable
by
the
taxpayer
to
a
person
with
whom
he
was
not
dealing
at
arm’s
length”
because,
before
that
time,
the
appellant
had
ceased
to
be
related
to
the
payee
and
was,
therefore,
no
longer
“deemed”
not
to
deal
at
arm’s
length
with
that
company.
It
follows,
in
my
view,
that
subsection
12(3)
does
not
apply
in
respect
of
the
cost
of
the
land
that
was
the
subject
of
the
sale
that
gave
rise
to
the
profit
in
question.
Either
of
the
aforesaid
grounds
would
be
sufficient
for
my
conclusion
that
subsection
12(3)
was
not
applicable
in
the
circumstances
of
this
case.
I
am
therefore
of
opinion
that
the
appeal
should
be
allowed
with
costs
in
the
Trial
Division
as
well
as
in
this
Court,
the
judgment
of
the
Trial
Division
should
be
set
aside,
and
the
assessment
of
the
appellant
under
Part
I
of
the
Income
Tax
Act
for
the
1960
taxation
year
should
be
referred
back
to
the
respondent
for
reassessment
on
the
basis
that
subsection
12(3)
of
the
Income
Tax
Act
has
no.
application
in
respect
of
the
cost
of
the
land
that
was
the
subject
of
the
sale
that
gave
rise
to
the
profit
that
is
the
subject
of
the
assessment.
Pratte,
J:—I
do
not
wish
to
express
any
opinion
on
the
question
of
whether
the
price
for
which
a
trader
bought
property
for
re-sale
in
his
business
is
a
deductible
expense
or
outlay
within
the
meaning
of
subsection
12(3)
of
the
Income
Tax
Act.
However,
I
share
the
view
expressed
by
The
Chief
Justice
that,
on
the
facts
of
this
case,
subsection
12(3)
did
not
preclude
the
appellant,
in
computing
its
profit
from
the
sale
of
the
land
here
in
question,
from
deducting
the
purchase
price
of
that
land.
That
purchase
price,
assuming
it
to
be
an
“outlay
or
expense”,
clearly
did
not
become
“otherwise
deductible”
until
the
land
was
sold
by
the
appellant
and,
at
that
time,
it
was
no
longer
payable
to
a
person
with
whom
the
appellant
was
not
dealing
at
arm’s
length.
For
these
reasons,
I
would
dispose
of
this
appeal
as
proposed
by
The
Chief
Justice.