THURLOW,
J.:—The
issue
in
this
appeal,
which
is
from
a
re-assessment
of
income
tax
for
the
year
1958,
is
the
liability
of
the
appellant
for
tax
in
respect
of
a
sum
of
$38,213.00
representing
the
balance
of
amounts
known
in
the
appellant’s
business
as
core
deposits
which
the
Minister,
in
making
the
reassessments,
included
in
the
computation
of
the
appellant’s
income.
Two
questions
arise
in
connection
with
these
deposits
the
first
being
that
of
whether
they
must
be
included
in
the
computation
of
the
appellant’s
income
and
the
other,
whether,
if
the
deposits
must
be
included,
the
appellant
is
entitled
to
a
deduction
in
respect
of
its
liability
to
repay
them.
The
circumstances
in
which
the
amounts
in
question
arose
are
as
follows.
The
appellant
since
early
in
1955
has
carried
on,
under
a
franchise
arrangement
with
the
Ford
Motor
Company
of
Canada,
an
operation
which
consists
of
rebuilding
worn
engines
and
certain
other
parts
for
Ford
cars
and
trucks
and
distributing
the
rebuilt
engines
and
parts
to
Ford
dealers
in
the
Atlantic
provinces.
To
carry
on
this
operation
successfully
a
constant
supply
of
used
engines
and
parts
of
the
types
or
models
for
which
the
demand
is
active
is
required
for
use
as
the
raw
material
to
be
processed.
Some
of
these
used
engines
and
parts
are
purchased
outright
from
persons
offering
them
for
sale
but
the
great
bulk
of
them
is
obtained
and
the
necessary
supply
thus
assured
in
transactions
with
the
Ford
dealers
to
whom
the
rebuilt
products
are
delivered.
Throughout
the
year
1958
the
appellant
delivered
its
products
on
the
basis
of
a
model
for
model
exchange
but
upon
terms
which,
besides
requiring
the
dealer
to
deliver
to
the
appellant
a
rebuildable
engine
or
part
of
the
same
model
as
that
delivered
by
the
appellant
and
to
pay
a
price,
also
required
the
dealer
to
pay
a
core
deposit
the
whole
of
which
was
refundable
to
the
dealer
upon
delivery
to
the
appellant
of
the
rebuildable
engine
or
part.
The
term
requiring
payment
of
a
core
deposit
had
not
been
in
effect
prior
to
1957
but
was
adopted
by
the
appellant
in
that
year
as
a
device
to
coerce
the
dealers,
who
otherwise
tended
to
be
slow
about
it,
into
making
prompt
delivery
of
used
rebuildable
engines
or
parts.
In
the
ordinary
case
there
would
be
some
delay
on
the
part
of
the
dealer
in
delivering
a
rebuildable
engine
or
part
and
it
is
not
difficult
to
understand
that
if
the
engine
to
be
replaced
by
the
rebuilt
engine
was
not
in
rebuildable
condition
or
was
not
available
by
reason
of
its
having
been
sold
to
a
competitor
of
the
appellant
some
considerable
time
might
elapse
before
an
engine
of
the
required
model
became
available
for
delivery
to
the
appellant.
In
this
situation
the
appellant
deliberately
set
the
core
deposits
for
various
models
at
amounts
greatly
in
excess
of
the
prices
at
which
rebuildable
engines
and
parts
of
the
particular
models
could
be
purchased
on
the
open
market.
In
general
the
value
of
the
used
engine
or
part
was
but
30%
of
the
amount
at
which
the
core
deposit
was
set.
While
the
terms
of
the
transaction
required
payment
of
both
price
and
deposit
within
30
days
no
time
limit
was
fixed
within
which
delivery
of
the
used
engine
or
part
was
required
and
there
was
no
provision
for
forfeiture
of
the
deposit
or
for
applying
it
in
discharge
of
the
dealer’s
contract
to
deliver
an
engine.
On
the
other
hand
when
a
used
engine
or
part
of
the
required
model
was
delivered
by
the
dealer
either
prior
to
or
at
the
time
of
delivery
of
the
rebuilt
engine
or
part
by
the
appellant
no
core
deposit
was
imposed.
The
core
deposit
requirement
was
very
effective
and
over
a
three
year
period
resulted
in
delivery
of
used
engines
by
dealers
equal
in
numbers
to
96%
of
the
number
of
rebuilt
engines
delivered
by
the
appellant
to
them.
That
the
nature
and
substance
of
these
transactions
was
as
I
have
described
them
is
to
my
mind
fully
established
by
the
evidence
including
in
particular
Exhibits
1,
2,
6,
and
7.
Exhibit
1
is
a
catalogue
and
price
list
of
the
appellant
which
sets
out
terms
and
prices
similar
to
those
on
which
the
appellant
distributed
its
products
during
1958
and
page
4,
among
other
items,
contains
the
following
:
“core
DEPOSIT—
At
time
of
shipment
a
core
deposit
will
apply
on
all
assemblies
shipped
by
Engine
Rebuilders
Ltd.
(refer
to
price
list).
This
amount
is
refundable
upon
receipt
of
the
complete
rebuild
able
used
engine
in
the
original
shipping
crate.
’
’
On
a
typical
page
among
those
dealing
with
prices
one
finds
at
the
top
of
the
page:
‘
1
Model
for
Model
Exchange
Engine
price
list”
and
below
in
several
columns
the
core
deposits,
suggested
retail
and
trade
prices
and
dealers
net
prices
in
respect
of
various
models
of
engines.
Exhibits
2,
6
and
7
are
typical
invoices
used
by
the
appellant
in
each
of
which
in
the
column
headed
“item”
are
the
printed
words
‘‘Rebuilt
Motor
Exchange’’.
Moreover,
the
whole
course
of
conduct
of
the
appellant’s
business
as
described
by
the
witnesses
and
in
particular
the
witness,
Richard
Douglas
Bannon,
indicates
that
the
nature
and
substance
of
the
transactions
was
that
of
an
exchange
of
engines
with
a
money
payment
to
represent
the
difference
in
values
but
requiring
as
well
a
deposit
to
ensure
that
the
dealer
would
honour
his
part
of
the
contract
to
exchange
engines
by
delivering
a
rebuildable
used
engine
or
part.
I
emphasize
this
interpretation
of
the
transactions
because
of
the
insistence
by
counsel
for
the
Minister
on
his
submission
that
the
substance
of
the
transactions
was
that
of
an
outright
sale
at
a
price
composed
of
both
price
and
core
deposit
and
a
subsequent
repurchase
by
the
appellant
from
the
dealer
of
a
used
engine
at
a
price
equal
to
the
core
deposit.
In
my
view
such
a
conclusion
is
not
warranted
by
the
evidence
and
I
reject
it.
Several
further
features
of
the
transactions
which
appear
to
me
to
be
established
should
also
be
mentioned.
(1)
When
a
rebuilt
engine
was
delivered
by
the
appellant
to
a
dealer
the
consideration
therefor
was
the
price
plus
a
rebuildable
engine
of
the
same
model.
(2)
The
amount
of
the
core
deposit
was
not
part
of
the
consideration
for
the
rebuilt
engine
delivered
by
the
appellant.
(3)
When
a
core
deposit
was
paid
by
a
dealer
a
corresponding
obligation
to
repay
it
arose
and
existed
throughout
the
period
during
which
the
deposit
was
held
by
the
appellant
though
such
obligation
did
not
become
due
or
recoverable
by
the
dealer
until
he
had
delivered
a
rebuildable
used
engine
of
the
model
in
question.
(4)
The
acceptance
by
a
dealer
of
a
rebuilt
engine
on
the
terms
which
I
have
mentioned
raised
a
contractual
obligation
on
his
part
to
deliver
a
rebuildable
used
engine
of
the
same
model
which
obligation
remained
in
effect
until
it
was
performed
or
was
discharged
by
agreement.
The
fact
that
in
practice
the
appellant
did
not
enforce
this
obligation
by
suing
for
damages
but
employed
the
technique
of
retaining
a
deposit
of
much
greater
value
than
that
of
the
engine
is
not
in
my
view,
inconsistent
with
the
existence
of
the
obligation.
(5)
When
a
rebuildable
used
engine
was
delivered
by
the
dealer
pursuant
to
the
contract
it
was
delivered
in
discharge
of
this
obligation
and
the
consideration
for
it
was
the
rebuilt
engine
which
the
appellant
had
already
delivered
to
him.
(6)
The
refunding
of
the
deposit
was
not
the
consideration
for
the
engine
which
the
dealer
so
delivered.
Of
the
charges
for
core
deposits
made
by
the
appellant
during
the
year
1956
in
transactions
of
this
nature
$51,020
remained
unredeemed
by
the
delivery
of
engines
or
parts
at
the
end
of
the
year.
Of
this
$44,307.97
had
been
actually
received
by
the
appellant
during
the
year
and
the
remaining
$6,712.03
was
made
up
simply
of
unpaid
charges
in
the
customer’s
accounts.
In
the
ordinary
course
of
business
most
of
this
would
be
refunded
or
re-credited
within
a
few
months
as
the
used
engines
were
delivered.
In
computing
its
income
for
the
year
1958
for
the
purposes
of
the
Income
Tax
Act,
R.S.C.
1952,
e.
148,
the
appellant
credited
its
core
expense
account
with
an
amount
of
$5,485
which
amount
represented
all
such
unredeemed
deposits
with
respect
to
engines
as
had
been
charged
more
than
seven
months
before
the
end
of
the
year
together
with
$1,000
representing
unredeemed
deposits
in
respect
of
smaller
parts.
In
so
doing
the
appellant
acted
on
the
assumption
that
in
view
of
the
delay
it
was
unlikely
that
these
deposits
would
ever
be
redeemed
and
in
effect
brought
them
into
income.
It
also
credited
to
the
same
account
a
sum
of
$7,322
which
it
calculated
to
be
the
value
to
it
of
the
engines
the
delivery
of
which
was
secured
by
the
remaining
deposits,
thus
in
effect
bringing
their
value
into
income
as
well,
but
it
did
not
credit
or
include
either
such
remaining
deposits
or
the
amount
by
which
they
exceeded
the
value
so
attributed
to
the
engines
and
parts
the
delivery
of
which
was
secured
by
them.
The
difference
of
$38,213
between
the
amount
of
such
remaining
deposits
and
the
value
of
the
engines,
delivery
of
which
was
so
secured,
was
thus
in
no
way
included
in
the
appellant’s
computation
and
it
was
the
Minister’s
action
in
adding
this
amount
to
the
appellant’s
declared
income
and
assessing
tax
accordingly
which
gave
rise
to
the
present.
appeal.
The
Minister’s
case
for
including
the
unredeemed
core
deposits
in
the
computation
was
based
first
on
Section
85B
of
the
Act
and
in
particular
on
subsection
(1)(b)
thereof
on
the
basis
of
their
having
been
“amounts
receivable
in
respect
of
property
sold
in
the
course
of
the
[appellant’s]
business
in
the
year”
which
are
specifically
required
by
that
subsection
to
be
brought
into
the
computation
and
alternatively
on
the
contention
that
these
deposits
were
in
any
event
trading
receipts
which
apart
altogether
from
Section
85B
must
under
established
principles
be
taken
into
account
when
computing
income
from
the
appellant’s
business
within
the
meaning
of
Sections
3
and
4
of
the
Act,
R.S.C.
1952,
c.
148.
From
this
position
counsel
went
on
to
submit
that
the
appellant
was
not
entitled
to
any
deduction
in
respect
of
its
liability
to
repay
the
deposits
as
the
liability
was
in
his
submission
at
most
a
contingent
liability
which
would
come
into
existence
only
upon
delivery
by
the
dealer
of
a
used
engine
or
part
and
any
deduction
in
respect
thereof
was
prohibited
by
Section
12(1)
(e)
of
the
Act.
Sections
3
and
4
and
paragraphs
(a)
and
(b)
of
subsection
(1)
of
Section
85B
provide
as
follows:
“3.
The
income
of
a
taxpayer
for
a
taxation
year
for
the
purposes
of
this
Part
is
his
income
for
the
year
from
all
sources
inside
or
outside
Canada
and,
without
restricting
the
generality
of
the
foregoing,
includes
income
for
the
year
from
all
(a)
businesses,
.
..
4.
Subject
to
the
other
provisions
of
this
Part,
income
for
a
taxation
year
from
a
business
or
property
is
the
profit
therefrom
for
the
year.
85B.
(1)
In
computing
the
income
of
a
taxpayer
for
a
taxation
year,
(a)
every
amount
received
in
the
year
in
the
course
of
a
business
(i)
that
is
on
account
of
services
not
rendered
or
goods
not
delivered
before
the
end
of
the
year
or
that,
for
any
other
reason,
may
be
regarded
as
not
having
been
earned
in
the
year
or
a
previous
year,
or
(ii)
under
an
arrangement
or
undertaking
that
it
is
repayable
in
whole
or
in
part
on
the
return
or
resale
to
the
taxpayer
of
articles
in
or
by
means
of
which
goods
were
delivered
to
a
customer,
shall
be
included
;
(b)
every
amount
receivable
in
respect
of
property
sold
or
services
rendered
in
the
course
of
the
business
in
the
year
shall
be
included
notwithstanding
that
the
amount
is
not
receivable
until
a
subsequent
year
unless
the
method
adopted
by
the
taxpayer
for
computing
income
from
the
business
and
accepted
for
the
purpose
of
this
Part
does
not
require
him
to
include
any
amount
receivable
in
computing
his
income
for
a
taxation
year
unless
it
has
been
received
in
the
year
;
.
.
.
”
With
respect
to
the
interpretation
of
these
paragraphs
Section
85B(2)
provides
that
“85B.
(2)
Paragraphs
(a)
and
(b)
of
subsection
(1)
are
enacted
for
greater
certainty
and
shall
not
be
construed
as
implying
that
any
amount
not
referred
to
therein
is
not
to
be
included
in
computing
the
income
from
a
business
for
a
taxation
year
whether
it
is
received
or
receivable
in
the
year
or
not.’’
Section
12(1)
(e)
reads
as
follows:
“12.
(1)
In
computing
income,
no
deduction
shall
be
made
in
respect
of
(e)
an
amount
transferred
or
credited
to
a
reserve
contingent
account
or
sinking
fund
except
as
expressly
permitted
by
this
Part,’’
Having
regard
to
the
conclusion
which
I
have
expressed
as
to
the
nature
and
effect
of
the
transactions
I
doubt
that
Section
85B(1)
(b)
can
apply
to
require
that
the
deposits
in
question
be
brought
into
the
computation
of
the
appellant’s
income.
First
the
transactions
in
which
the
deposits
arose
were
not
strictly
speaking
sales
at
all
but
a
type
of
barter
or
exchange.
Secondly,
at
the
end
of
the
year,
which
I
regard
as
the
time
when
the
subsection
applies,
the
bulk
of
the
deposits
were
not
receivable
but
had
already
been
received.
Thirdly,
and
this
is
the
chief
source
of
my
doubt,
the
deposit
required
under
these
contracts
for
the
purpose
of
securing
the
performance
of
the
dealer’s
undertaking
to
deliver
a
used
engine
does
not
appear
to
me
to
be
clearly
“receivable
in
respect
of
goods
sold”
within
the
meaning
of
that
expression
in
the
subsection.
However,
in
view
of
the
conclusion
which
I
have
reached
as
to
the
treatment
of
the
deposits
for
tax
purposes
apart
from
Section
85B(1)(b)
I
do
not
regard
it
as
necessary
either
to
reach
a
firm
conclusion
on
whether
Section
85B(l)(b)
apples
or
to
consider
the
extent
of
the
changes
which
the
enactment
of
that
subsection
has
wrought
in
what
is
required
to
be
included
in
the
receipts
when
computing
the
income
of
a
business
to
which
the
subsection
applies
further
than
to
say
that
the
subsection
does
not
appear
to
me
to
permit
the
omission
of
anything
which
prior
to
the
enactment
would
have
been
required
to
be
brought
into
the
computation
as
receipts.
As
I
see
it
the
question
whether
the
deposits
must
be
brought
into
account
in
computing
the
appellant’s
income
turns
on
the
answer
to
the
question
whether
they
are
receipts
of
an
income
or
revenue
nature.
If
so
they
are
part
of
the
revenue
of
the
business
and
must
be
brought
into
the
computation.
That
the
deposits
here
in
question
were
receipts
of
an
income
nature
is,
I
think,
indicated
by
the
fact
that
they
arose
from
the
appellant’s
trading
transactions
of
which
in
each
case
the
deposit
formed
a
part.
Each
deposit
secured
the
performance
of
a
specific
trading
obligation
and
if
applicable
to
any
purpose
the
purpose
was
that
of
compensating
the
appellant
for
the
loss
resulting
from
the
failure
of
the
dealer
to
honour
that
particular
trading
obligation.
In
the
meantime
however
until
the
deposit
was
refunded
or
so
applied
the
appellant
was
free
to
deal
with
it
as
its
own.
There
was
no
trust
attaching
to
the
money.
From
what
I
have
said
of
them
it
is
I
think
clear
that
these
core
deposits
did
not
have
the
dual
quality
of
both
part
payment
and
security
as
did
those
considered
in
Elson
v.
Price
Tailors
Ltd.,
[1963]
1
All
E.R.
231,
but
were
purely
security
deposits,
resembling
in
that
respect
those
considered
in
Davies
v.
The
Shell
Company
of
China
Ltd.,
32
T.C.
133,
though
at
the
same
time
differing
from
them
in
that
there
the
contracts
under
which
the
deposits
were
made
contained
provisions
as
to
their
disposition
in
certain
default
situations,
which
however
did
not
arise.
The
deposits
in
the
Shell
of
China
case
were
held
to
be
capital
rather
than
trading
receipts
but
the
deposits
in
the
present
case
appear
to
me
to
have
been
much
more
closely
related
to
the
appellant’s
trading
transactions
than
were
the
deposits
considered
in
that
case
and
in
my
view
were
receipts
of
a
trading
or
revenue
nature
within
the
principle
of
Landes
Brothers
v.
Simpson,
19
T.C.
62,
Imperial
Tobacco
Company
v.
Kelly,
25
T.C.
292,
and
Trip
Top
Tailors
Lid.
v.
M.N.R.,
[1957]
S.C.R.
703;
[1957]
C.T.C.
309.
The
deposits
as
well
as
the
value
of
the
rebuildable
engines
to
which
the
appellant
became
entitled
as
a
result
of
the
transactions
should
accordingly
in
my
opinion
have
been
included
in
the
receipts
for
the
year.
But
if
I
am
right
in
concluding
that
these
deposits
should
have
been
included
in
the
computation
as
receipts
it
seems
to
me
to
follow
inexorably
that
in
computing
the
profit
from
its
business
the
appellant
was
entitled
to
a
deduction
in
respect
of
the
liability
to
refund
the
deposits
which
arose
on
their
receipt.
These
in
my
opinion
were
not
contingent
liabilities
and
the
amount
necessary
to
provide
for
their
retirement
when
due
was
not
a
reserve,
contingent
account
or
sinking
fund
within
the
prohibition
of
Section
12(1)
(e)
of
the
Act.
They
were
in
my
opinion
presently
existing
trading
obligations
arising
from
trading
transactions
the
profits
from
which
could
not
be
computed
if
the
deposits
were
brought
into
the
account
without
an
offsetting
deduction
in
respect
of
the
obligations
which
the
receipt
of
the
deposits
had
engendered.
Jenkins,
L.J.
appears
to
have
had
the
same
concept
in
mind
when
in
posing
the
question
for
decision
in
Davies
v.
The
Shell
Company
of
China
he
said
at
page
155
:
‘‘Therefore,
as
it
seems
to
me,
the
question
here
really
resolves
itself
into
this:
On
the
facts
of
this
case,
were
these
deposits
trading
receipts
received
by
the
Company
in
the
course
of
its
trade,
and
giving
rise
to
corresponding
trade
liabilities
in
the
form
of
the
Company’s
obligation
as
to
repayment,
or
should
they
be
regarded
simply
as
loans
received
by
the
Company
and
thus
as
receipts
of
a
capital
nature
giving
rise
to
a
corresponding
indebtedness
on
capital
account
and
not
forming
part
of
the
Company’s
trading
receipts
or
liabilities
at
all?’’
The
italics
have
been
added.
As
I
view
it
one
might
analyze
the
typical
transaction
in
the
present
case
by
saying
that
on
delivery
of
a
rebuilt
engine
to
a
dealer
the
appellant
became
entitled
to
receive
(a)
a
sum
of
money
as
price
(b)
a
used
rebuildable
engine,
and
(c)
a
deposit
to
secure
delivery
of
the
rebuildable
engine.
The
trading
receipts
from
such
a
transaction
thus
consist
of
the
total
of
(a),
(b)
and
(c)
but
on
receipt
of
the
deposit
(c)
the
appellant
became
liable
to
repay
a
like
amount
to
the
dealer
some
day
not
earlier
than
the
delivery
of
the
rebuildable
engine
and
the
trading
account
must
accordingly
show
this
liability
as
well.
This
liability
in
my
opinion
was
not
one
that
arose
on
delivery
of
the
engine
but
existed
from
the
time
of
receipt
of
the
deposit.
It
became
due
and
payable
when
the
engine
was
delivered
which
in
the
ordinary
course
would
be
within
a
short
time
and
continued
to
be
an
existing
obligation
until
in
the
course
of
business
it
was
discharged
by
payment
or
was
otherwise
settled.
It
appears
to
me
that
even
in
the
case
of
the
deposits
which
the
appellant
has
treated
as
unlikely
to
be
redeemed
and
has
in
effect
brought
into
its
income
the
dealer
after
the
end
of
the
year
was
still
entitled
to
deliver
an
engine
and
claim
a
refund
of
his
deposit
and
in
view
of
the
lack
of
provision
in
the
contract
for
forfeiture
of
the
deposit
there
appears
to
have
been
no
limit
on
the
time
within
which
this
right
was
open
to
the
dealer.
But
whether
a
right
of
forfeiture
at
some
stage
existed
or
not
it
appears
to
me
that
the
appellant’s
liability
persisted
until
it
was
discharged
by
payment
or
forfeiture
or
was
released
by
agreement
and
it
would
be
only
then
that
the
liability
would
necessarily
disappear
from
its
trading
accounts.
Moreover,
when
at
length
it
did
disappear
it
would
not
be
because
the
liability
had
never
arisen
or
existed
but
because
in
a
subsequent
transaction
it
had
been
discharged
or
released
and
if
at
that
stage
a
profit
was
shown
by
reason
of
the
liability
having
been
discharged
for
less
than
the
full
amount
of
the
deposit
the
latter
transaction
in
my
opinion
rather
than
the
one
in
which
the
deposit
was
received
would
be
the
transaction
from
which
such
profit
was
realized.
I
should
add
that
the
fact
that
the
rebuildable
engines
to
be
delivered
by
the
dealers
were
to
be
used
by
the
appellant
as
inventory
in
its
business
is
in
my
view
entirely
irrelevant
and
that
the
cases
on
anticipated
losses
on
inventory
contracted
for
but
not
delivered
at
the
end
of
the
accounting
period,
which
were
cited
by
counsel
for
the
Minister,
in
my
opinion,
are
not
applicable.
Moreover,
as
the
conclusion
which
I
have
reached
by
reference
to
the
nature
of
the
transaction
is
the
same
as
it
would
be
under
the
principle
expounded
by
Lord
Radcliffe
in
Owen
v.
Southern
Railway
of
Peru,
36
T.C.
602,
it
is
unnecessary
to
deal
with
the
contention
of
counsel
for
the
Minister
that
that
case
is
inapplicable
under
the
Income
Tax
Act
because
of
the
provisions
of
Section
12(1)
(e).
It
follows
that
while
the
appellant
may
in
effect
have
understated
its
revenue
by
omitting
the
core
deposits
unredeemed
at
the
end
of
1958
it
has
in
that
event
also
understated
to
the
same
extent
its
liabilities
incurred
in
the
same
transactions.
It
also
follows
that
the
Minister
could
not
properly
add
the
deposits
to
the
appellant’s
income
without
at
the
same
time
allowing
an
equivalent
amount
as
a
deduction.
The
appeal
therefore
succeeds
and
it
will
be
allowed
with
costs
and
the
re-assessment
will
be
varied
accordingly.
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