MNR v. Import Motors Ltd., 73 DTC 5530, [1973] CTC 719 (FCTD)

Urie, J:—This is an appeal from the decision of the Tax Appeal Board dated May 27, 1970 with respect to an assessment dated January 3, 1968 for the respondent’s 1965 taxation year, whereby the appellant in computing the respondent’s income for the taxation year 1965 included the sum of $100,800 received by the respondent in 1965 from Volkswagen Canada Limited (hereinafter called “Volkswagen”) upon the termination of the respondent’s distributor agreement with Volkswagen.

The respondent was incorporated under the laws of the Province of Newfoundland on December 7, 1956 and on February 22, 1957 entered into an agreement with Volkswagen whereby it was appointed the exclusive distributor for the sale of Volkswagen motor vehicles and spare parts and for servicing Volkswagen vehicles on the Island of Newfoundland for a period from the date of the agreement until midnight December 31, 1957. The agreement (hereinafter called the “distributor agreement”) provided for automatic renewal from year to year on a calendar year basis and that either of the parties to the agreement might terminate the agreement or any renewal thereof on December 31 in any year by notifying the other party of its intention so to do. It should perhaps be said that during the period from 1954 to February 1957 the Volkswagen distributor franchise for Newfoundland had been held by Auto Service Co Limited, a company in which the managing director, and ultimately controlling shareholder of the respondent, Douglas D Tucker, had a substantial interest.

The distributor agreement, inter alia, imposed obligations on the distributor in respect of sales, service, organization and the appointment of dealerships within the territory. The following excerpt from one of the provisions of the agreement has relevance in this action, namely:

Neither party shall be liable to the other for any damages or losses of any kind whatsoever, directly or indirectly or remotely sustained by reason of or resulting from the termination of this agreement.

This clause is contained in a section of the agreement headed “Duration and Expiration of the Agreement” which provides for the term thereof and the method of termination. While there is no specific provision for it, the distributor was expected to have its own retail outlet and the respondent did in fact do so.

In the fall of 1959 the respondent, upon the urging of Volkswagen, commenced construction of a new showroom, office facilities, service garage and warehouse for both the distributorship and dealership and that building was completed in May of 1960.

In April 1963 an additional building was constructed closely adjacent to the main structure the main purpose of which was the sale and display of used cars. Mr Tucker testified that while Volkswagen did not require this structure to be erected, no objection was taken to it. The cost to the respondent was approximately $180,000 and was financed primarily by increasing the existing mortgage on the premises erected in 1960 by a further sum of $100,000. The second structure became known as Avenue Auto Mart.

Mr Tucker testified that, while he knew of the right of Volkswagen to terminate the distributor agreement in accordance with the terms thereof, he had always felt that such early termination was unlikely in view of the substantial sums which the respondent had invested in fixed assets either at the urging of Volkswagen or, as in the case of the Auto Mart, with their concurrence. In addition, all discussions with the first managing director of Volkswagen indicated that the relationship was to be a long-term one. However, in November of 1963, at the annual meeting of all distributors of Volkswagen products from across Canada in Toronto, the then managing director, Mr Karl Barths, informed the distributors at the opening of the meeting that their respective distributor agreements were to be terminated as at December 31, 1963 and that thereafter all distributor functions would be performed by Volkswagen itself. This oral information was subsequently confirmed by letter which also invited the respondent to continue as a direct dealer in St John’s and was accompanied by a Volkswagen dealer agreement dated January 1, 1964 for the respondent’s signature. The letter also advised Mr Tucker that in order to assist the respondent during the transition period from distributorship to dealership, Volkswagen would, on a voluntary basis, continue the existing distributor’s discounts on all shipments of 1964 model vehicles and for parts shipments made prior to June 30, 1964.

Representations were made to Volkswagen by an informal distributors’ association apparently as a result of which, on November 26, 1963, Volkswagen sent to Mr Tucker and the other dealers an offer to extend the distributor agreement to April 30, 1964. Subsequently, by letter dated December 11, 1963, Mr Barths offered the respondent a renewal of its distributorship as of January, 1964 with only minor changes in the existing agreement. Needless to say, Mr Tucker accepted the offer immediately upon receipt thereof.

A memorandum by Mr Barths dated May 11, 1964, filed as Exhibit 31, referred to a conversation he had had with Mr Tucker on that day in which he had indicated that the Volkswagen distributor system would be reorganized by the end of 1965. Confirmation of this reorganization came by letter dated October 1, 1964 when Mr Barths informed Mr Tucker that the respondent would be retained as distributor only until the end of 1965 under the existing distributor agreement. In his letter Mr Barths expressed the hope that the respondent would continue as a Volkswagen retailer thereafter. After giving the matter considerable thought Mr Tucker wrote to Mr Barths on December 8, 1964 outlining suggestions for settlement of the unstabilized situation existing between the parties to the distributor agreement.

In view of its importance I set out hereunder the text of Mr Tucker’s letter in full:

December 8, 1964

Mr K L Barths,

Managing Director,

Volkswagen Canada, Ltd

Golden Mile,

Toronto, 16, Ont	Without Prejudice
Dear Mr Barths,

After a year of uncertainty regarding our mutual business relationship, we feel that the time has come for us to spell out our position.

In September, 1963 we completed a large additional building on the strength of the distributorship as we then saw it and in the belief that there would be no change in the foreseeable future.

In addition to the equity funds which went into this building we increased our mortgage obligations by $100,000.00 repayable over a period of ten years. This mortgage represents a heavy burden but relief from it would enable us to operate comfortably and profitably as a dealer. We therefore have the following suggestions to make:—

1. That Volkswagen Canada, Ltd pay to us $100,000.00 to be applied in payment of this mortgage.

2. That we immediately revert to the status of dealer but that our existing discounts be left in effect for the calendar year 1965.

3. That existing dealers be immediately handled direct by Volkswagen Canada, Ltd with Import Motors, Ltd carrying out for an interim period any distributor functions required by Volkswagen Canada, Ltd on a fee basis. We believe that this arrangement would promptly end our state of uncertainty and enable us to give full attention to the implementing of our new role.

Yours very truly,

Douglas D Tucker Import Motors Ltd

The mortgage to which Mr Tucker referred in paragraph numbered 1 in the letter is the mortgage which was obtained at the time of the erection of Avenue Auto Mart. On December 16, 1964 the assistant to the managing director of Volkswagen, Mr Bernard Hoffmann, and the regional manager for the Maritime Provinces, Mr lan Smith, met with Mr Tucker in St John’s for the purpose of discussing Mr Tucker’s letter. All three witnesses agreed that at the meeting the question of payment referred to in paragraph numbered 1 in Mr Tucker’s letter was disposed of fairly quickly but that no mention was made by anyone of the mortgage. The sum eventually agreed to be paid was $100,800 in twelve equal monthly instalments of $8,400 each, commencing on January 31, 1965. There was marked disagreement between Mr Tucker and Mr Hoffmann as to how the figure of $100,800 was arrived at.

Mr Barths, whose testimony was confirmed by that of Mr Hoffmann, stated that the amount of $100,800 was calculated by multiplying $92 by the number of new Volkswagen vehicles sold by Import Motors Limited during the year 1964 at both wholesale and retail level. The $92 was the average distributor’s discount on vehicles and spare parts throughout Canada in 1964. Of this sum $56 related to the vehicle discount and the balance thereof in the sum of $36 related to the average discount on parts to distributors during the same period. Mr Barths testified that these discounts were given because Volkswagen knew that the distributors would have a difficult time for a period following termination of their distributorships and Volkswagen wished to lessen the impact of the dislocation to ensure that the reduced profits likely to be derived as dealers were bolstered in the initia! year at least so that the former distributors would remain part of the Volkswagen organization. Mr Barths further testified that it was contrary to Volkswagen policy to make any payment for the surrender or purchase of a distributor’s franchise and pointed out that the distributor agreement prohibited its assignment and provided, as above stated, that no payment would be made on termination thereof.

Mr Hoffmann testified that he had discussed the proposed additional discounts to be given to distributors who accepted early termination of their distributor agreements and the formula by which the additional discount was arrived at. He stated that it was agreed that the number of cars that had been sold by the respondent to that date in 1964, plus the number of cars that would be sold by it prior to the end of the year, would amount to 1120 and that for easy calculation of the gross amount payable he had used the figure of $90 rather than the authorized figure of $92 as the total additional discount per vehicle in arriving at the total amount to be paid to the respondent during 1965.

Mr Tucker, on the other hand, testified that there had been no discussion of any kind in relation to additional discounts or the method of calculation thereof until after the meeting when Mr Hoffmann presented to Mr Tucker a letter dated December 16, 1964 (Exhibit 19) and the contents of which are set out hereunder in full:

December 16, 1964 K1B/EV

Import Motors Limited,

81 Elizabeth Ave,

ST JOHN’S, Nfld

Dear Sirs,

Under an agreement dated December 16, 1964, we have accepted your resignation as a Volkswagen Distributor.

In recognition of your services as a Volkswagen Distributor, we hereby grant to you, Import Motors, the following additional distributor discount on your past purchases of vehicles and spare parts.

The difference between distributor and direct dealer prices on all vehicles sold by VW to Import Motors during the period from January 1,1964 to December 31, 1964:

ie VW will pay Import Motors

$45.00 on every Model 111

$51.00 on every Model 113

$75.00 on every Model 311 M3

and so on according to the models, based on VW’s vehicle price list dated October 1, 1964.

The difference between distributor price and the direct dealer price on all new VW spare parts sold by VW to Import Motors during the 1964 calendar year, excluding heaters. This amounts to $100,800. (One hundred thousand and eight hundred dollars) and payable to Import Motors in twelve equal instalments of $8,400. (Eight thousand and four hundred dollars) each, commencing on January 31, 1965 and continuing month by month until December 31, 1965, however, that such instalment payments shall cease (and VW will not be liable to make any further instalment payments) at the end of any month of 1965 that Import Motors ceases to be a VW dealer in good standing.

Yours very truly,

VOLKSWAGEN CANADA, LTD

(sgd) BERNARD A HOFFMANN Assistant to the

Managing Director.

This was handed to Mr Tucker after having been prepared in his office under the direction of Mr Hoffmann and Mr Tucker stated that he accepted it without comment although he did not agree with the letter in respect to any additional distributor discount because he knew that he had already been offered and had accepted the sum of $100,800 for the relinquishment of his distributor agreement. It will be noted that the letter makes no reference to discounts of $90 or $92. Neither Mr Tucker nor Mr Hoffmann apparently commented on this omission although Mr Tucker testified that Mr Hoffmann had said something to the effect that “this is the way we want to show it”.

Mr Hoffmann also presented to Mr Tucker for his signature an agreement (Exhibit 18) between Volkswagen and the respondent wherein, in the recitals, it is stated that the parties had agreed that the distributor agreement would be terminated as of December 31, 1964 instead of December 31, 1965 and in the operative part of which that the respondent would continue its association with Volkswagen as a direct dealer under a new dealer agreement. No mention is made in the agreement of any consideration for the termination of the distributor agreement but it does contain a provision whereby the respondent acknowledges that it has no claim of any kind against Volkswagen in respect of the termination of the Volkswagen distributor agreement dated February 22, 1957. Mr Tucker signed the agreement upon its presentation by Mr Hoffmann and Mr Hoffmann signed on behalf of Volkswagen at the same time. Subsequently it was signed by Mr Barths in Toronto and a copy returned to Mr Tucker.

The whole issue in this case arises ouf of the character of the payment of $100,800 made by Volkswagen to Import Motors Limited over the calendar year 1965. Was the payment in consideration of the surrender or sale of the distributor franchise, was it a gratuitous payment for past services or, alternatively, was it a payment in lieu of anticipated profits? Having ascertained this, was the receipt of the payment income within the meaning of sections 3 and 4 of the Income Tax Act as it then read or was it a capital receipt and thus not taxable in the hands of the recipient? As has been said in a number of cases, the question is largely one of degree and depends on the facts of the particular case and the inferences to be drawn therefrom.

In this connection it must be borne. in mind that in his testimony Mr Barths admitted that after Volkswagen’s board of directors had authorized the extension of the distributor agreement to December 31, 1965 and the payment of additional dealer discounts in the event that any of the dealers wished to terminate their distributorship earlier than the stated termination date, certain of its officers on his direction consulted the company’s solicitors and accountants to determine the best method of accomplishing the desired result with the least tax consequences to Volkswagen, since tax implications on the payments were present in his mind when the documents were drawn. Moreover, counsel and the accountants approved the agreement dated December 16, 1964 and the letter to Import Motors Limited of the same date. Volkswagen, therefore, apparently treated the payment as a business expense.

lt should also be borne in mind that Mr Hoffmann in his testimony stated that one of the items which he discussed with Mr Tucker and with other distributors was the tax consequence of the receipt of the discounts in the respondent’s hands because he wanted to make sure that Mr Tucker knew that it was taxable income. He pointed out that if Import Motors Limited had stayed on as a distributor to the end of 1965 the discounts which it would have received during that year pursuant to its distributor agreement would have been taxable income in its hands and he had the responsibility to ensure that there was no discrimination between those distributors who agreed to early termination and those who did not but remained as distributors to the end of the term.

Counsel for the respondent recognizing that, if the evidence adduced by the appellant was accepted by me, the inferences that I might draw therefrom might well be that the payment of $100,800 was a reimbursement for the loss of distributor discounts which the respondent would have received during the year 1965 had it not agreed to early termination of its distributor agreement and thus taxable income in its hands, invited me to find that it is the real character of the transaction and not the name given to it or the method by which it is carried out which governs its taxability and in order to discover the real purpose of the transaction all of the surrounding circumstances must be examined. In support of this submission he referred to Front & Simcoe Ltd v MNR, [1960] CTC 123; 60 DTC 1081, a judgment of Cameron, J in the Exchequer Court of Canada and in particular to his statement at page 132 [1085] wherein he stated that

The question for determination, therefore, is ‘‘What is the real character of the receipt?” ‘and in answering that question I am entitled to regard the Surrounding circumstances.

It is a principle with which one cannot quarrel. However, the difficulty comes in endeavouring to characterize the payment, taking into account all of the surrounding circumstances.

The relevant considerations in making such a characterization are, it seems to me, concisely stated by Lord Russell in Commissioners of Internal Revenue v Fleming & Co (Machinery) Limited, 33 TC 57, a decision of the Court of Session of Scotland wherein at page 63 he States:

The sum received by a commercial firm as compensation for the loss Sustained by the cancellation of a trading contract or the premature termination of an agency agreement may in the recipient’s hands be regarded either as a capital receipt or as a trading receipt forming part of the trading profit. It may be difficult to formulate a general principle by reference to which in all cases the correct decision will be arrived at since in each case the question comes to be one of circumstance and degree. 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. Illustrations of such cases are to be found in Van den Berghs, Ltd (19 TC 390) [1935] AC 431, and Barr, Crombie & Co, Ltd (26 TC 406) 1945 SC 271. 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. See eg Short Brothers, Ltd, 12 TC 955: Kelsall Parsons & Co (21 TC 608) 1938 SC 238.

(Italics mine.) At page 61 the Lord President (Cooper) used words which are peculiarly applicable in this case:

In this instance the difficulty is created by the fact that “the substance of the transaction” cannot easily be equated with formal deed by which the transaction received effect. Indeed I should almost be prepared to say that if attention is concentrated upon the business substance of this transaction the payment should be treated as a capital payment, whereas if attention is concentrated upon the form the payment should be treated as a revenue payment.

In that case the loss by a selling agency of one agency (out of eight held by them at the time) was held to be one which must be treated as a normal trading risk and the payment in respect thereto was described as a loss of future profits and therefore taxable.

Certainly it can be said that there is evidence not only through the testimony of the appellant’s witnesses but also in the form of documents prepared at the time of termination from which one might conclude that the payment of $100,800 was merely a compensation for the loss of trading profit by the respondent and would, therefore, be taxable in the respondent’s hands. However, there is in my opinion, too, cogent evidence that the “business substance” of the transaction was that the payment was compensation for ‘‘the loss or sterilization of a capital asset” by the early termination of the distributor franchise which Volkswagen had been seeking for over a year.

Whether or not Volkswagen treated the distributor agreement as a capital asset in my view is immaterial. It is the true nature of the loss not the subjective views of the parties as to its nature which is important. The uncontradicted evidence is that on November 15, 1963 Mr Barths, on behalf of Volkswagen, terminated the respondent’s distributor agreement as at December 31, 1963 which date was later extended to April 30, 1964. That notice of termination was later withdrawn, apparently for two reasons,

(a) because the proposal then made to continue distributor discounts for the 1964 model year to the former distributors in their new capacities as direct dealers was found by Volkswagen’s solicitors to be in contravention of the combines legislation; and

(b) because of the representations made by the informal distributors’ committee arising out of such dealer termination due to the substantial investments which all of the distributors had made in the distributor aspect of their businesses.

That the desire to change the method of distribution of Volkswagen vehicles and parts was never far from Volkswagen’s corporate mind, because of the obvious financial advantages accruing therefrom, is exemplified by Exhibit 31, Mr Barths memorandum of May 11, 1964, referring to his conversation with Mr Tucker indicating that termination would take place at the end of 1965, and his letter of October 1, 1964, terminating the agreement, notwithstanding the fact. that it had been unconditionally renewed only a little over nine months before. It is important to note that in that notice no mention was made of any termination prior to December 31, 1965 or payment in the event of such premature termination. It was not until Mr Tucker suggested in his letter of December 8, 1964 that a lump sum payment of $100,000 be made to the respondent to compensate it for having incurred mortgage indebtedness of approximately that sum to build Auto Mart, to which building no objection had been taken by Volkswagen, that Mr Barths despatched Messrs Hoffmann and Smith to negotiate a settlement. In his instructions, Mr Barths gave Mr Hoffmann certain guidelines for such settlement. From all of the above, as well as the admissions made by Mr Barths in his testimony, it is abundantly clear that Volkswagen was anxious to end the old method of distribution of its products, not only in Newfoundland but throughout Canada. The respondent was apparently the first distributor to capitulate and Volkswagen, it is clear, was willing to pay for that early termination notwithstanding that both the agreements of February 22, 1957 and the agreement of December 16, 1964 precluded the distributor from any claim for damages or otherwise on the termination of the distributorship.

The payment was, in my opinion, made to compensate the respondent for the loss of a substantial portion of its business, a capital asset which could never be recovered. The fact that there was such a substantial loss is dramatically illustrated by the drop in sales arising out of the loss of distributor rights. Mr Tucker testified that the respondent’s new car sales for the period 1963 through 1966 were as follows:

This opinion is further reinforced when one recalls the closeness of the amount suggested by Mr Tucker to be paid for the surrender of the distributor franchise, namely $100,000, and the amount ultimately paid to it in the sum of $100,800. An analysis of the method of calculation of the latter sum as explained by the appellant’s witnesses raises in my mind some element of doubt on such explanation. it will be noted that nowhere in the letter of December 16, 1964 are either of the figures of $90 or $92 as total dealer discounts per unit mentioned. Neither is the total number of sales made by the respondent to the date of the letter, nor the projections of the sales thereafter to the end of 1964, mentioned. Purchases by the respondent during the period as above stated were 1,099 which, at the $90 figure used by Mr Hoffmann, would mean an aggregate additional discount of $98,910 on purchases. Mr Barths testified that the respondent sold 1,075 new units in 1964, not 1,071 as Mr Tucker testified. Using the discount of $90 which Mr Hoffmann said he used on sales of 1,075 units would result in an aggregate additional discount to which the respondent would be entitled of $96,750, or using the $92 per unit figure authorized by Mr Barths would lead to an aggregate figure of $98,900. Thus, no matter what figures are used the total does not coincide with that which Mr Hoffmann agreed to pay and which Volkswagen in fact did ultimately pay to the respondent.

The respondent in support of its submissions relied mainly on two cases, namely Parsons-Steiner Ltd v MNR, [1962] Ex CR 174; [1962] CTC 231; 62 DTC 1148; and H A Roberts Limited v MNR, [1969] S.C.R. 719; [1969] CTC 369; 69 DTC 5249.

In the former, Mr Justice Thurlow dealt with a situation in which the appellant company carried on the business of a manufacturer’s agent and wholesale merchant in china and related wares. From its inception it represented Doulton & Company Limited, manufacturers of chinaware. It was remunerated by commissions on all sales in Canada whether the order was secured by it or placed directly by the customer. The agency agreement provided that it would remain in force for one year and thereafter until terminated by three months’ notice which might be given by either party. In fact the relationship continued from 1933 until December 31, 1955 when it was terminated pursuant to an agreement between the parties rather than pursuant to the notice of the kind mentioned in the agreement. Doulton & Company Limited paid the appellant $100,000 “‘in full settlement of their claim for damages for loss of rights under the agreement”. Thurlow, J found that the payment was a capital receipt in the hands of the appellant and in so finding at page 187 [244, 1154] made the following observations:

On the whole therefore having regard to the importance of the Doulton agency in the appellant’s business, the length of time the relationship had subsisted, the extent to which the appellant’s business was affected by its loss both in decreased sales and by reason of its inability to replace it with anything equivalent, to the fact that two of the appellant’s employees became employees of the Doulton subsidiary on the termination of the relationship and the fact that from that time the appellant was in fact out of that part of its business, both as an agent and as a wholesale dealer and particularly to the nature of the claim asserted in respect of which the payment was made, I am of the opinion that, except in so far as it was a consideration for services rendered to Doulton & Co Limited, in connection with the take-over by its subsidiary which is admitted to be income, and except in so far as it took the place of commissions on sales of goods ordered before, but invoiced after December 31, 1955, the payment in question was not income from the appellant’s business, but was referable to the appellant’s claim for loss of what it and Doulton Co Limited as well considered to be the appellant’s interest in the goodwill and business in Doulton products in Canada. /n my view this was, to use Lord Evershed's expression “a capital asset of an enduring nature". It was one which. the appellant had built up over the years in which it had the Doulton agency and which on the termination of the agency the appellant was obliged to relinquish. The payment received in respect of its loss was accordingly a capital receipt.

(italics mine.)

The Roberts case (supra) was a decision of the Supreme Court of Canada written on behalf of the Court by Mr Justice Spence on appeal from the Exchequer Court of Canada and arose as follows: The appellant had carried on a real estate business and mortgage business for a number of years prior to 1963. Most of the revenue from the mortgage business came from agency contracts obtained from three mortgage lending companies. In 1963 two of the three agency contracts were terminated and the appellant received payment of $83,663.72 as compensation and closed its mortgage department. The Minister assessed the amount of compensation received as income and the Exchequer Court upheld the Minister’s assessment.

Spence, J found for the appellant on two grounds. Firstly, he applied the decision of the Supreme Court of Canada in Frankel Corporation Ltd v MNR, [1959] S.C.R. 713; [1959] CTC 244; 59 DTC 1161, in determining that the payments made were payments of compensation for the termination of a separate business of the appellant. Therefore, following the decisions in Van den Berghs, Ltd v Clark (HM Inspector of Taxes), 19 TC 390; [1935] AC 431, and Barr, Crombie & Co, Ltd v Commissioners of Inland Revenue, 26 TC 406; [1945] SC 271, he held that the compensation received was capital and not assignable to the appellant’s income for the taxation year in which it was received. He found that the separation of the mortgage department from the remainder of the appellant’s business was distinct in the same way that the nonferrous metal division of the appellant in the Frankel case (supra) was distinct from the remainder of its business, notwithstanding the fact that it was under the same corporate structure and operated from the same building. While undoubtedly the business of the respondent in the case at bar was divided into distinct wholesale and retail divisions in some respects and separate accounting records were maintained for each, it is not alone on this ground of the Roberts decision that the respondent emphasizes the support given to its position by such decision.

t is the second or alternative ground that is used by the respondent herein for its principal authority. Spence, J, among other cases, cited the excerpt from the Fleming & Company (Machinery) Limited case which was quoted earlier herein and the Parsons-Steiner case (supra) and pointed out that in the Roberts case, as in the Parsons-Steiner case, the cancellation of the agencies therein made a very distinct impact on the appellant’s business. He pointed out that the two agencies lost were two out of three which made possible the operation of the appellant’s mortgage department. The loss of those agencies made the mortgage department no longer viable with the result that it ceased to exist. At page 730 [379, 5255], Spence, J said:

Realizing therefore that the determination is one of degree, it would seem to me that the cancellation of the two correspondency agency contracts would fall into the line of cases illustrated by the Barr, Crombie case and the Parsons-Steiner case, and it would not be simply an example of the cancellation of one of a number of agencies as in Kelsall Parsons & Co v Inland Revenue, supra.

Again at page 731 [379-80, 5255] Mr Justice Spence said:

The learned trial judge distinguished the Parsons-Steiner case from the present one on the grounds that in such case the taxpayer possessed an exclusive agency which was cancelled. In the present case the Crown Life agency was exclusive and I can see no difference in principle between an agency to sell china and one to solicit mortgages and manage them. The learned trial judge also pointed out that in the Parsons-Steiner case the compensation was negotiated while here the exact compensation paid was prescribed for in the agreement. Again, I cannot find such a circumstance decisive. In this case in 1960 the taxpayer realizing that it was building up a capital asset desired to assure that it would endure or that proper compensation would be paid for its loss and negotiated an exact provision for that compensation agreeing to a reduction of its income for the purpose of securing such compensation for loss of the capital asset. The payment of such prefixed compensation is no less a payment for a capital loss than a payment for such loss after negotiation at the time when it occurs. Finally, counsel for the Minister, if we were of the opinion that the Parsons-Steiner case was undistinguishable, invited us to hold it was badly decided and refuse to accept it. I am not willing to do so. With respect, I am of the opinion that Thurlow J in Parsons-Steiner came to the correct conclusion after a careful and accurate analysis of the case law and the principles involved.

I am therefore, of the opinion that the cancellation of these two agency contracts did represent the loss of capital assets of an enduring nature the value of which had been built up over the years and therefore the payments received by this appellant represented capital receipts.

All of the above language, in my opinion, is applicable in this case. The cancellation of the wholesale division of the respondent’s business caused that department simply to cease to exist. It could not be replaced unless the respondent also relinquished its right to be a Volkswagen dealer. As a result thereof not only did the volume of the respondent’s business decline substantially but, in addition, the respondent found itself with an organization which had been set up for an expanding business and which it was necessary to curtail drastically. The business premises from which it operated were said by Mr Tucker to be much too large and expensive for a retail dealership with its smaller volume, margins and profits and, as a result, it was necessary to place the buildings on the market for sale in 1965. Mr Tucker said that the respondent planned to build a new dealership building to better suit the new operation and for that purpose purchased a piece of property in an appropriate location but since it was unable to dispose of its existing property until 1967 it never did build the new structure. By 1967, Mr Tucker testified, many of the company’s former employees had left either voluntarily or, in the case of lower level staff, by layoff since they were no longer required. He further testified that most of those who left voluntarily were employees in a supervisory capacity and they left because they were aware that their future in the organization was curtailed by the obvious necessity for reduction in its size.

In my view the circumstances under which the respondent found itself in this case were very similar to those in which the appellants in the Roberts and Parsons-Steiner cases found themselves. The loss of the distributor franchise seriously crippled the whole of the respondent’s profit-making structure. I am, therefore, of the opinion that notwithstanding that the form of the transaction might lead conceivably to the conclusion that the payment should be treated as revenue, the business substance of the transaction was that the cancellation of the distributor agreement represented the loss of a capital asset of an enduring nature, the value of which had been built up over the years 1954 to 1963 and that the payment received by the respondent represented a capital receipt. The fact that the respondent had agreed in the distributor agreement not to make a claim for damages on termination is, in my opinion, immaterial since, in fact, a claim was made and, as I have found, accepted by Volkswagen irrespective of what view Volkswagen took of its nature. Such too is the case with respect to the acknowledgement of no claim clause in the agreement of December 16, 1964.

The appeal is therefore dismissed with costs and I direct that the assessment for the 1965 taxation year be returned to the Minister of National Revenue for revision in accordance with these reasons.