The Queen v. Jessiman Brothers Cartage Ltd., 78 DTC 6205, [1978] CTC 274 (FCTD)

Mahoney, J:—The defendant’s contract with Canada Post Office for the conveyance of mail on the service designated ‘‘Combined Urban Service” at Winnipeg, Manitoba was terminated by the Postmaster General upon completion. of the required services March 31, 1972. Thereafter those services were performed by Canada Post Office itself using the same vehicles and, by and large, the same personnel, as had previously been employed by the defendant.

Sixty trucks, equipped for the carriage of mail, were sold by the defendant to Canada Post Office and the defendant was paid $91,675. The plaintiff’s position is that that entire amount was paid as consideration for the trucks. The defendant’s position is that only $57,722 was consideration for the trucks and that the: balance was consideration for something other than property. The relevant provision of the Income Tax Act is section 68:

68. Where an amount can reasonably be regarded as being in part the consideration for the disposition of any property of a taxpayer and as being in part consideration for something else, the part of the amount that can reasonably be regarded as being the consideration for such disposition shall be deemed to be proceeds of disposition of that property irrespective of the form or legal effect of the contract or agreement; and the person to whom the property was disposed of shall be deemed to have acquired the property at the same part of that amount.

On October 7, 1971 the federal Cabinet decided that the Post Office should take over mail transportation services in a number of metropolitan centres, Winnipeg included. The decision was announced toward the end of November and the defendant was so notified by letter dated November 23, 1971, which indicated, inter alia, the Post Office’s desire (1) to implement the decision at the earliest possible date; (2) to ensure continued employment with the Post Office of the defendant’s regular employees engaged in the service; and (3) to discuss acquisition of the equipment utilized in the service. The letter went on to Say:

We recognize the serious impact which this decision will have on you and your business and you may rest assured that we are willing to discuss this matter with you in the most complete detail in order that a fair and equitable solution to any outstanding problems can be arrived at without difficulty at an early date.

Performance of the contract was by no means the defendant’s only business activity.

The defendant and other contractors similarly affected saw some difficulties, took legal advice, and a delegation met with Post Office officials, led by the Deputy Postmaster General, on January 12, 1972. Among the problems discussed was the compensation for equipment which was put, by the contractors’ written submission, in the following terms:

In basic terms the general position taken by the Post Office Department is simply that the contractors will be compensated on a fair market value basis for the trucks and other equipment . . . A settlement solely on this criteria in essence simply means that the Post Office Department is only prepared to recognize the price of assets if the contractors elected to sell them in the market place. There appears to be no element whatsoever of compensation for business loss occurring to the contractors by virtue of this type of approach.

The brief went on to suggest that a fair and equitable result would be arrived at by a compensation whereof the fair value of assets sold would be but one element. Among the other elements was loss of anticipated profits. There was an alternative suggestion which was not followed and which is presently immaterial. One decision, material to this action, was reached by the Deputy Postmaster General, namely that payment for vehicles and equipment would be based on an appraisal of their “operational value”.

I should, perhaps, indicate at this: point that I regard the evidence as to any restraints imposed on the Post Office as to what it could buy and pay for, either by the Cabinet or Treasury Board or by prior internal decisions, as entirely irrelevant in so far as this action is concerned. The issue here is what was in fact sold and paid for, regardless of authorization.

The defendant’s vice-president, Duncan McFarlen Jessiman, who was directly concerned with the transaction, has in mind that “operational value” was the value of the fleet of trucks intact to its only logical purchasei who needed it at a particular time and place, properly outfitted and immediately ready to be put to work. The defendant had such a fleet; the Post Office had such a need. The defendant concluded that the operational value of the fleet was $93,700. The appraisal commissioned by the Post Office arrived at an operational value of $91,675 which was sufficiently close to the defendant’s own figure that it did not attempt to negotiate further as to that particular item of compensation.

A purchase order, dated February 9, 1972 was issued by the Post Office and was accepted by the defendant February 12. Its body read:

Delivery shall be made on 31 March, 1972. The appendix forms part and parcel of this purchase order. Vehicles to be in acceptable operating condition.

It is sufficient to recite only the first item on Appendix A. An individual price is set opposite each of the 60 truck descriptions. The individual prices total $91,675.

I accept the evidence of Howard Tackaberry, heavy truck specialist for Ford of Canada, that the trucks had a trade-in value of $57,722 as. of March 31, 1972. That value takes no account of the special fittings needed for postal service. His appraisal was done subsequent to the sale at the request of the defendant’s auditors. They were seeking to reconcile the $91,675 received with a $65,700 figure which they had been given by the defendant in December 1971, in connection with the quantification of the defendant’s claim, then being prepared in anticipation of the presentation ultimately made by the contractors at the January 12 meeting. Tackaberry further testified that a dealer taking them in trade would expect to spend an average of $100 per truck for tires and $300 for necessary paint and body work and would expect to recover that $400 plus an average mark-up of $250 to $275 on resale.

The appraisal leading to the Post Office’s $91,675 operational value was conducted jointly by the sales manager of a Ford dealership, who did not testify, and William A Rogers, since retired, the supervisor of transportation for the Post Office’s Manitoba Postal District. They inspected each vehicle individually. Rogers’ view of the meaning of “operational value” is that it embraces the value of special fittings and equipment as well as the vehicle itself. These include a plywood lining of the van’s rear compartment to prevent the locks on heavy bags denting the metal body from inside; bag racks and holders and rear interior lighting. He estimates the cost, today, of such special fittings at $200 to $250 per truck. He was sympathetic to the defendant and thought the proper value was the price that the Post Office would have had to pay if it were buying such vehicles, ready for its use, off a lot. While expressed in different words, Rogers’ and Jessiman’s appreciation of the meaning of “operational value” appears substantially identical.

Such trucks, bought off the lot, would not have had Tackaberry’s $400 spent on each but the usual mark-up and the cost of special fittings would have been added to the dealer’s cost. Addition of any amounts for those items in the ranges estimated by the witnesses to the trade-in value of $57,722 results in a figure not far off of $91,675.

Finally, I note that in writing the contractor’s counsel, on April 5, 1972, and dealing with the particular heads of claim propounded in the brief, the Deputy Postmaster General had this to say about the value of assets:

I believe this particular matter has been resolved to the complete satisfaction of the contractors you represent. The use of operational or ongoing value rather than a trade in or commercial value in determining the amounts to be paid to the contractors result in amounts considerably larger than they would. have obtained had any other basis been used. I do not think there is any further comment to be made under this heading.

After dealing with “A. FAIR VALUE OF ASSETS—VEHICLES, EQUIPMENT & INVENTORIES” as above, the Deputy Postmaster General went on to deal with:

B. LOSS OF ANTICIPATED PROFITS

C. PLACEMENT AND TRAINING PERSONNEL COSTS

Separation Allowances—Holiday and Severance Pay

D. PROPERTY SEPARATION COSTS INCLUDING LEASE TERMINATION EXPENSES

E. SEVERANCE NEGOTIATING EXPENSES INCLUDING LEGAL AND ACCOUNTING FEES

I have no doubt that the Deputy Postmaster General, Jessiman and Rogers were ad idem as to the meaning of the operational value of a postal truck involved in the transaction. It was the price which a vendor could reasonably expect to get from a purchaser with an immediate requirement for such a vehicle “as is”. I use the expression “as is” to embrace the thought that, as to both condition and special equipment, the trucks, owned by the defendant, had done a particular job on March 31 and were wanted, by the Post Office, to do the identical job on April 1.

It is undisputed that that price was significantly more than the defendant could have obtained from any other purchaser and substantially more than the Post Office could have obtained if it had elected immediately to resell the trucks to any but another postal service. That said, I see no merit in the proposition that the amount over and above their trade-in value was paid for something other than the trucks simply because the Post Office had an immediate need for them “as is” and was prepared to pay that extra amount to satisfy that need. I have alluded to the other heads of negotiation simply to illustrate that the sale of vehicles was apparently being dealt with on its own merits and that the evidence does not support a suspicion that their price was inflated to compensate the defendant for something else which Cabinet, Treasury Board or departmental policy precluded.

While its context was very different, the essential question here is really quite similar to that considered by Jackett, P, as he then was, in Ottawa Valley Power Company v MNR, [1969] CTC 242: 69 DTC 5166. There the taxpayer had a long-term contract to sell 25 cycle power to Ontario Hydro. Sixty cycle power was needed. It was estimated that the cost to Ontario Hydro of its own facility to convert the power would be about $2.5 million while the cost of modifying the taxpayer’s facility would be less than $2 million. The modification was done by Ontario Hydro and, in support of its claim to Ontario Hydro’s expenditure as its own capital cost for tax purposes, the taxpayer contended that it had given up, as consideration, its “bargaining position”. At page 252 [5172-3] President Jackett observed:

With great respect, it seems to me that this contention is based on a confusion of thought. I may have a good “bargaining position” when bargaining for a sale or other contract, but I do not sell or otherwise use this “bargaining position” as consideration. I use the “bargaining position” as a means of persuading the other party to give me more than he otherwise would for the property or other consideration that I have to dispose of.

The “nothings”, to adopt the jargon of tax practitioners, which the defendant argues it sold and the Post Office bought include goodwill. It admits that the Post Office neither wanted nor needed its goodwill in the peculiar circumstance but that, nonetheless, it had the goodwill, the goodwill had a value and it was entitled to be, and was in fact, paid for it. It is, I take it, res judicata that the contract was legally terminated.* [1] In any case, the contrary position was not advanced here. In that circumstance, I fail to see that the defendant had, in fact, goodwill of any value attaching to its operations under that contract as of March 31, 1972.

The other “nothing” is said to be the fact that it had a fleet in being, not just 60 individual trucks, that it had maintained its drivers and sold, in addition to the trucks regarded as so much iron, an Operating entity and that the Post Office paid for that in order to satisfy its imperative of uninterrupted service. That “nothing”, which was variously stated, was really the defendant’s bargaining position which led the Post Office to pay the operating value rather than the market value for the trucks.

I have come to the conclusion that no part of the $91,675 can reasonably be regarded as consideration for anything other than the 60 trucks and that the plaintiff’s action must succeed.

The assessment herein deals with a number of items in addition to the subject matter of this action. The other items contribute a net increase of $1,275 while the matter in issue contributes a net increase of $3,396 to a total $4,671 upward revision of the defendant’s taxable income for 1972. The increase in tax resulting from the entire reassessment is $1,683.94. While the plaintiff asks for costs and the defendant does not plead subsection 178(2) of the Income Tax Act,* [2] this does appear to be a case to which it applies. The provision is mandatory and I see no necessity for a defendant to plead it.

The appeal will be ‘allowed and the assessment restored. The defendant will be entitled to its costs as provided by subsection 178(2) of the Income Tax Act.