Gibson,
J.:—Ted
Davy
Finance
Co.
Ltd.
was,
at
the
material
times,
a
corporation
incorporated
under
the
Ontario
Corporations
Act
and
carried
on,
in
the
city
of
Toronto,
Ontario,
in
the
years
1953
to
1958,
the
business
of
purchasing
conditional
sale
contracts
from
the
used
car
sales
company
known
as
Ted
Davy
Ltd.,
and
from
other
motor
vehicle
and
appliance
dealers.
It
also
loaned
money
to
individuals
on
the
security
of
chattel
mortgages.
On
August
23,
1958,
it
sold
to
Industrial
Acceptance
Corporation
Ltd.
the
majority
of
its
conditional
sale
contracts
and
chattel
mortgages
but
retained
apparently
one
mortgage
loan
and
twelve
conditional
sale
contracts
because
Industrial
Acceptance
Corporation
Ltd.
did
not
wish
to
purchase
them.
It
was
a
term
of
the
contract
with
Industrial
Acceptance
Corporation
Ltd.
that
these
chattel
mortgages
and
conditional
sale
contracts
were
sold
with
recourse
in
case
of
default
to
Ted
Davy
Finance
Co.
Ltd.
The
chattel
mortgages
sold
were
accounted
for
in
the
accounts
of
Ted
Davy
Finance
Co.
Ltd.
on
what
is
known
as
a
cash
basis;
the
conditional
sales
contracts
were
accounted
for
on
what
is
sometimes
known
as
an
accrual
basis.
The
only
contract
document
evidencing
this
sale
and
purchase
from
Ted
Davy
Finance
Co.
Ltd.
to
Industrial
Acceptance
Corporation
Ltd.
is
a
letter
dated
August
23,
1958
from
Industrial
Acceptance
Corporation
Ltd.
to
Ted
Davy
Finance
Co.
Ltd.
which
was
filed
as
Exhibit
A-12
in
this
appeal.
Ted
Davy
Finance
Co.
Ltd.
credited
the
net
excess
of
monies
received
from
Industrial
Acceptance
Corporation
Ltd.
over
and
above
the
sum
equivalent
to
the
amount
owing
by
all
the
debtors
of
Ted
Davy
Finance
Co.
Ltd.,
as
of
August
28,
1958,
to
its
surplus
account
and
not
to
its
profit
and
loss
account
on
the
basis
that
this
was
a
transaction
out
of
the
ordinary
course
of
business
and
should
not
be
accounted
for
in
the
accounts
of
the
company
in
a
method
which
would
result
in
the
financial
statements
not
reflecting
a
true
criterion
of
the
earning
capacity
of
the
company.
The
appellant
submits
that
this
sum
represented
a
gain
at
the
time
of
the
sale,
subject
to
future
adjustments
by
way
of
premium
from
or
rebates
paid
to
Industrial
Acceptance
Corporation
Ltd.,
pursuant
to
the
letter
contract
dated
August
23,
1958.
All
such
adjustments,
the
appellant
submits,
should
be
made
through
its
surplus
account.
and
should
not
be.
reflected
in
the
profit
and
loss
account
of
the
company
at
the
time.
The
evidence
dealt
with
the
method
employed
by
the
Ted
Davy
Finance
Co.
Ltd.
in
accounting
for
its
earnings
on
its
chattel
mortgages
which
was
described
as
the
‘‘cash
method’’;
and
also
on
its
conditional
sale
contracts
which
was
described
as
the
“average
interest
method’’.
Exhibit
10
was
filed
which
is
a
copy
of
an
article
from
the
Canadian
Chartered
Accountant
of
July,
1962,
entitled
‘‘
Accounting
for
Finance
Charges
by
Sales
Finance
Companies’’,
wherein,
among
other
things,
the
author
of
the
article
describes
these
two
methods,
whose
opinion
was
concurred
in
by
the
witness,
Mr.
Richard
McDonald
Parkinson,
C.A.
After
this
sale
to
Industrial
Acceptance
Corporation
Ltd.,
the
Ted
Davy
Finance
Co.
Ltd.
did
enter
into
one
chattel
mortgage
contract
and
certain
other
transactions
in
respect
to
land
mortgages
but
none
of
these
transactions,
in
my
opinion,
have
any
relevance
to
the
issue
to
be
decided
here.
The
sole
issue
to
be
decided
is
whether
the
net
gain
obtained
by
Ted
Davy
Finance
Co.
Ltd.
by
reason
of
this
transaction
made
with
Industrial
Acceptance
Corporation
Ltd.,
pursuant
to
the
contract
dated
August
28,
1958,
is
capital
profit
or
income
which
should
be
included
in
computing
the
appellant’s
income
for
the
taxation
year
1958.
I
am
of
opinion
as
was
given
in
evidence,
that
there
was
a
bona
fide
intention
on
the
part
of
Ted
Davy
Finance
Co.
Ltd.
to
go
out
of
the
conditional
sale
and
chattel
mortgage
business
in
1958
because
of
the
conditions
then
obtaining
in
this
business
which
no
longer
made
it
a
financially
satisfactory
business
for
the
shareholders,
of
whom
the
principal
one
was
Mr.
Ted
Davy.
The
reasons
given
by
him
for
going
out
of
this
business
were
entirely
credible,
namely
that
competition
of
other
companies
who
entered
the
Toronto
market
and
discounted
conditional
sale
contracts
and
chattel
mortgages
in
financing
the
sale
of
cars
without
requiring
that
there
be
recourse
to
the
dealer,
and
who
financed
a
most
substantial
part
of
the
total
sale
price
of
cars,
not
demanding
that
a
substantial
down
payment
on
the
purchase
price
of
motor
ears
be
made
by
purchasers
of
same,
resulted
in
this
finance
company
becoming
increasingly
a
less
attractive
business
financially.
I
am
of
opinion,
therefore,
that
this
was
intended
to
be
and
was
in
fact
a
realization
sale
by
Ted
Davy
Finance
Co.
Ltd.
and
not
a
sale
in
the
ordinary
course
of
its
business.
The
net
excess
proceeds
as
hereinafter
mentioned,
I
find
were
capital
receipts
within
the
principles
of
Frankel
v.
M.N.R.,
[1959]
C.T.C.
244.
I
am
further
of
opinion
that
Section
85F(4)
is
not
applicable
to
the
facts
of
this
case
so
as
to
require
the
inclusion
of
the
amount
referred
to
at
the
end
of
this
Judgment
in
computing
the
appellant’s
income
for
the
year
1958,
for
a
number
of
reasons.
Firstly,
in
my
opinion,
this
was
a
sale
of
a
‘‘right’’
to
receivables
and
not
a
sale
of
receivables,
and
is
therefore
a
capital
receipt.
The
principle
of
law
enunciated
in
C.I.R.
v.
Paget
(1937),
21
T.C.
677,
per
Lord
Romer
at
p.
699
is,
in
my
opinion,
applicable.
Secondly,
Section
85F(4)
refers
only
to
“cash”
basis
taxpayers
and
not
‘‘accrual
basis’’
taxpayers,
and
therefore,
insofar
as
the
conditional
sales
contracts
are
concerned
which
were
sold,
is
inapplicable.
Thirdly,
Section
85D
deals
with
the
sale
of
receivables
by
“accrual
basis’’
taxpayers.
Fourthly,
Section
85F(4),
in
my
view,
deals
only
with
“income”
receivables
and
not
receivables
representing
“capital”
loans
repayable.
I
am
also
of
opinion
that
what
was
sold
in
this
case
was
not
“inventory”
within
the
meaning
of
Section
139(1)
(w)
of
the
Income
Tax
Act.
That
definition
of
inventory,
in
my
view,
should
not
be
given
the
broadest
meaning
that
could
be
attached
to
it,
but
instead
the
whole
Act
should
be
looked
at
to
give
it
a
reasonable
and
practical
meaning,
especially
when,
for
example,
there
are
other
sections
of
the
Act
which
in
themselves
constitute
a
complete
code.
These
particular
statutory
provisions
override
this
general
provision
or
definition
(Section
139(1)
(w))
insofar
as
it
is
repugnant.
With
respect,
therefore,
I
do
not
agree
with
the
decisions
of
Kendon
Finance
Co.
Ltd.
v.
M.N.R.,
33
Tax
A.B.C.
149,
and
Cosmopolitan
Discount
Ltd.
v.
M.N.R.,
27
Tax
A.B.C.
373.
Some
examples
of
such
particular
statutory
provisions
referred
to
above,
are
as
follows.
Depreciable
assets
fit
the
description
of
“inventory”
in
the
Act,
but
cannot
be
such
because
if
classified
as
inventory,
then
Section
1102(1)
(b)
of
the
Regulations
precludes
a
capital
cost
allowance
deduction;
if
receivables
are
“inventory”
then
a
deduction
for
‘‘bad’’
and
‘‘doubtful’’
accounts
could
be
obtained
by
a
valuation
under
Section
14(2)
and
Sections
11(1)
(e)
and
11(1)
(f)
would
be
unnecessary
;
and
if
receivables
are
“inventory”
then
on
their
sale
Section
85E
sets
out
consequence
of
sale
and
both
Section
85D
and
85F(4)
of
the
Act
are
unnecessary.
In
the
result
therefore
the
appeal
is
allowed
with
costs.
Because
of
the
adjustments
that
have
been
made
between
the
appellant
and
Industrial
Acceptance
Corporation
Limited,
by
reason
of
the
wording
of
the
contract
between
them
of
August
23,
1958,
I
am
of
opinion
that
the
net
gain
in
1958,
which
is
capital
profit,
is
$68,259
and
the
appellant
does
not
have
to
include
it
in
computing
its
Income;
but
the
appellant
will
not
henceforth
be
able
to
set
up
any
future
reserves
under
the
provisions
of
Section
12(1)
(e)
of
the
Act.
Judgment
accordingly.