Evans
J.:
A.
Introduction
Ticketnet
Corporation
claimed
an
investment
tax
credit
for
expenses
of
$2,000,000.00
incurred
in
the
years
1985
and
1986
for
research
and
development
undertaken
to
produce
software
for
automated
ticketing.
Revenue
Canada
disallowed
the
claim,
and
Ticketnet
has
appealed
against
this
assessment.
The
expense
on
which
Ticketnet
relies
for
its
investment
tax
credit
is
a
contractual
obligation
to
pay
$2,000,000.00
to
Air
Canada,
with
which
it
had
worked
to
develop
the
software.
The
resolution
of
the
legal
issue
at
stake
turns
on
the
interpretation
of
that
contract.
Ticketnet
alleges
that
on
June
30,
1986,
the
relevant
date
for
present
purposes,
it
was
unconditionally
indebted
to
Air
Canada
for
$2,000,000.00,
even
though
payment
was
not
yet
due.
Revenue
Canada,
on
the
other
hand,
interprets
the
contract
as
imposing
on
Ticketnet
only
a
conditional
liability
to
pay,
which
would
become
unconditional
on
the
happening
of
a
future
event
that
might
not
occur,
and
in
fact
did
not.
It
is
agreed
that,
if
Revenue
Canada
is
correct
to
interpret
the
contract
as
imposing
only
a
contingent
liability,
paragraph
18(1)(e)
of
the
Income
Tax
Act
precludes
Ticketnet’s
claim
to
a
scientific
research
and
development
tax
credit
under
subsection
37(1)
of
the
Act.
Conversely,
if
Ticketnet’s
interpretation
prevails,
then
it
is
entitled
to
the
tax
credit.
Furthermore,
since
Ticketnet
was
an
“accrual
basis”
taxpayer,
the
tax
credit
would
be
payable
in
respect
of
the
tax
year
when
its
liability
to
pay
arose,
and
not
when
payment
was
actually
made.
B.
Factual
Background
David
Clark
and
Gilles
Lamarre
met
in
Ottawa
in
the
mid
1970s.
Mr.
Clark
has
a
background
in
electronics
and
computer
systems,
and
Mr.
Lamarre
was
the
box
office
manager
at
the
National
Arts
Centre.
In
the
late
1970s
Mr.
Clark’s
consulting
firm
was
assisting
the
NAC
to
automate
its
ticket
sales.
Mr.
Clark
and
Mr.
Lamarre
had
a
very
good
idea.
They
thought
that
it
should
be
possible
to
develop
software
that
would
enable
a
person
anywhere
in
Canada,
who
had
access
to
a
computer,
to
book
a
ticket
for
an
entertainment
event
anywhere
else
in
the
country.
The
program
would
display
the
seat
plan
of
the
auditorium
or
arena,
and
indicate
the
seats
still
available.
After
the
customer
had
purchased
the
ticket
the
seat
selected
by
the
customer
would
show
as
sold
when
the
next
user
accessed
the
program
to
see
what
seats
were
available
for
that
particular
event.
In
1984
Messrs.
Clark
and
Lamarre
incorporated
Ticketnet
as
the
corporate
vehicle
for
this
project,
on
which
they
both
started
working
full
time.
But
they
needed
capital
to
finance
it.
In
the
spring
of
1984
they
managed
to
interest
Air
Canada
officials
in
the
project
which,
of
course,
also
had
an
obvious
application
for
transportation
ticket
sales.
The
essential
element
of
the
commercial
relationship
contemplated
between
Air
Canada
and
Ticketnet
for
the
development
of
the
software
was
set
out
in
correspondence
in
December
1984
between
Mr.
Clark
and
Mr.
Ingham,
Air
Canada’s
General
Manager,
Computers/Communications,
Marketing
and
Sales.
Air
Canada
was
to
bear
most
of
the
cost
of
developing
the
software
by
using
its
own
staff
and
other
resources,
and
by
hiring
staff
for
the
project.
At
this
stage,
Air
Canada’s
costs
were
estimated
at
$1.4
million,
a
figure
that
was
later
increased
to
$2
million
so
as
to
include
$0.6
million
as
profit.
Ticketnet
would
be
responsible
for
the
costs
that
it
incurred
in
the
course
of
working
with
Air
Canada
on
the
project.
It
was
always
understood
that
Ticketnet
would
be
the
owner
of
the
final
product.
Air
Canada
was
to
recover
its
development
costs
from
the
sale
of
tickets
through
the
use
of
the
software:
five
cents
per
ticket
was
to
be
paid
by
Ticketnet
to
Air
Canada
for
this
purpose.
At
this
stage
there
were
still
important
details
to
be
worked
out,
such
as
the
number
of
years’
sales
for
which
payments
would
be
made:
Mr.
Clark
proposed
the
first
five
years.
The
possibility
of
granting
a
stock
option
in
Ticketnet
to
Air
Canada
was
also
contemplated.
Marketing
arrangements
were
also
to
be
agreed
upon.
These
and
other
matters
were
resolved
over
the
next
6
months
prior
to
the
signing
of
the
contract,
the
software
development
agreement,
on
July
23,
1985.
The
tax
aspect
of
the
arrangements
was
also
in
Mr.
Clark’s
mind
from
the
beginning.
In
a
letter
to
Mr.
Ingham,
dated
December
12,
1984,
he
wrote:
The
overall
project
should
be
structured
so
that
your
development
resources
are
perceived
as
being
under
contract
to
Ticketnet.
This
arrangement
will
permit
R&D
[research
and
development]
tax
credits
to
be
issued
by
Ticketnet
(on
the
basis
of
equity
issue)
to
enhance
the
probability
of
success
of
Ticketnet
without
any
detriment
to
Air
Canada.
Air
Canada
will
therefore
invoice
Ticketnet
for
expenditures
incurred.
In
his
reply
of
December
17,
1984
Mr.
Ingham
confirmed
Air
Canada’s
official
approval
of
the
project:
As
we
agreed,
Air
Canada
will
provide
research
and
development
services
to
Ticketnet
to
develop
these
new
software
products.
It
is
expected
that
our
total
expenditures
in
this
regard,
measured
at
our
cost
rate
for
salaries
and
applicable
overheads,
would
amount
to
$1.4
million.
Repayment
of
this
amount
without
interest
by
Ticketnet
will
be
made
on
the
basis
of
five
cents
per
ticket
sold
using
the
resulting
software
product.
In
other
words,
the
parties
intended
that
through
the
tax
credit,
which
eventually
rose
to
100
percent
of
allowable
expenses,
taxpayers
would
reimburse
Ticketnet
for
the
$2,000,000.00
that
Ticketnet
had
agreed
to
pay
to
Air
Canada
from
the
ticket
sales.
However,
it
is
not
sufficient
for
Ticketnet
simply
to
establish
that
the
parties
always
intended
to
structure
their
arrangements
so
as
to
enable
Ticketnet
to
claim
the
benefit
of
the
tax
credit.
Rather,
the
question
is
whether
the
terms
of
the
contract
ultimately
agreed
between
the
parties
succeeded
in
implementing
that
intention
by
imposing
a
liability
on
Ticketnet
that,
properly
interpreted,
can
be
characterized
as
an
unconditional
obligation,
and
thus
as
an
expense
incurred
on
research
and
development,
so
as
to
qualify
for
the
investment
tax
credit.
Before
turning
to
the
relevant
provisions
in
the
software
development
agreement
between
the
parties
I
should
sketch
in
more
of
the
factual
background
to
this
litigation.
The
Ticketnet
project
appears
to
have
been
controversial
within
Air
Canada,
and
it
did
not
proceed
smoothly.
For
example,
perhaps
because
costs
outstripped
the
original
estimates
at
a
time
of
financial
constraint
for
the
corporation,
Air
Canada
came
close
to
cancelling
the
project,
but
instead
pressed
for
a
larger
stake
in
the
profits
that
it
was
anticipated
would
be
generated
by
the
software.
Air
Canada
seems
also
to
have
been
con-
cerned
about
the
possible
sale
of
the
software
by
Ticketnet
to
another
airline.
Accordingly,
it
took
longer
than
Ticketnet
had
expected
for
the
parties
to
sign
the
contract,
and
the
target
date
for
the
completion
of
the
software
was
pushed
back
from
some
time
in
1985
to
the
spring
of
1986.
There
were
also
technical
difficulties
with
aspects
of
the
software
that
proved
difficult
to
overcome,
in
particular
the
display
at
a
distance
of
the
auditorium
seating
plan.
For
reasons
that
are
not
material
to
this
litigation
the
relationship
between
Ticketnet
and
Air
Canada
broke
down
before
the
development
of
the
software
was
complete.
By
the
spring
of
1986
most
of
the
work
had
been
done,
although
some
of
the
modules
continued
to
be
plagued
with
“bugs”,
and
the
modules
had
not
yet
been
tested
as
a
system
to
ensure
that
the
software
functioned
satisfactorily.
Ticketnet
had
approved
the
components
of
the
software
as
they
were
developed,
but
the
final
product
was
not
delivered
or
accepted
by
Ticketnet.
Air
Canada
continued
to
work
on
the
project
until
the
end
of
June
1986,
by
which
time
the
software
development
was
complete,
although
a
few
wrinkles
needed
to
be
ironed
out
of
some
modules,
and
the
system
still
had
to
be
tested.
In
August
of
that
year
it
locked
Ticketnet
out
of
the
project
site.
This
was
effectively
the
end
of
the
project.
Meanwhile,
early
in
1986
American
Airlines
had
expressed
great
interest
in
the
software,
and
provided
operating
funds
for
Ticketnet
in
the
first
part
of
that
year.
Ticketnet
was
ultimately
purchased
in
November
1986
by
American
Airlines
through
its
holding
company,
which
stands
to
benefit
if
Ticketnet
is
found
entitled
to
an
investment
tax
credit
for
the
years
1985
and
1986
in
respect
of
the
$2,000,000.00
liability
to
Air
Canada.
The
contractual
dispute
between
Air
Canada
and
Ticketnet
resulted
in
a
trial
of
four
months’
duration
in
the
Ontario
Court
(General
Division)
before
Farley
J.,
who
determined
that
the
contract
between
Air
Canada
and
Ticketnet
was
valid
and
binding,
and
that
Air
Canada
had
committed
a
repudiatory
breach
of
the
software
development
agreement:
Ticketnet
Corp.
v.
Air
Canada
(February
10,
1993),
Doc.
16125/86
(Ont.
Gen.
Div.).
Farley
J.
calculated
Ticketnet’s
gross
loss
at
approximately
$13.5
million,
but
in
awarding
damages
against
Air
Canada,
he
deducted
$2
million
in
respect
of
Ticketnet’s
contractual
liability
to
pay
Air
Canada,
although
the
payment
“had
not
yet
become
due”:
op.
cit.,
paragraph
111.
Farley
J.
based
his
award
on
the
familiar
principle
that
damages
for
breach
of
contract
are
intended
to
put
the
parties
in
the
position
that
they
would
have
been
if
the
contract
had
been
performed:
op.
cit.,
paragraph
126.
However,
he
also
recognized
(at
paragraph
125)
that
calculating
loss
of
future
profits
was
always
a
difficult
task
and
requires
giving
a
degree
of
certainty
to
that
which
has
not
yet
happened
(and
may
in
fact
never
have
happened
even
if
the
defendant
had
not
breached
the
contract).
Air
Canada
was
also
ordered
to
return
the
software
to
Ticketnet,
and
a
counterclaim
by
Air
Canada
was
dismissed.
On
November
17,
1997
the
Ontario
Court
of
Appeal
allowed
an
appeal
by
Air
Canada,
but
only
to
the
extent
of
reducing
the
damages
payable
by
approximately
$1.3
million:
Ticketnet
Corp.
v.
Air
Canada
(1997),
154
D.L.R.
(4th)
271
(Ont.
C.A.).
C.
The
Contract
For
the
purpose
of
this
litigation
it
is
only
necessary
to
focus
on
a
few
of
the
provisions
of
the
software
development
agreement
between
Air
Canada
and
Ticketnet.
One
of
the
key
clauses
is
1.2,
which
states:
AC
agrees
to
develop
the
Entertainment
Software
in
accordance
with
a
design
statement
and
functional
specifications
for
a
fixed
price
of
$2
million....
AC
shall
invoice
TN
on
a
regular
basis
with
final
invoicing
to
the
$2
million
level
to
occur
on
April
30,
1986
[the
target
date
for
completion
of
the
software].
AC
agrees
to
advance
credit
to
TN
for
the
$2
million
fee
invoiced,
to
be
repaid
in
accordance
with
clause
3
below.
Clause
3
is
headed
‘Payment’
3.1
For
the
first
five
year
period
after
the
Entertainment
Software
acceptance,
as
defined
in
the
functional
specifications,
AC
will
receive
an
amount
of
$0.05
per
ticket
sold
by
TN
or
by
others
under
licence
to
TN,
as
repayment
of
the
amount
advanced
pursuant
to
section
1.2
above.
Should
this
advance
be
repaid
before
the
five
year
period
is
completed,
AC
will
continue
to
receive
this
$0.05
per
ticket
sold
as
an
investment
bonus....
Fifth
year
revenue
obtained
by
AC
according
to
the
formula
above
will
not
exceed
$1,000,000.00.
3.2
As
additional
compensation
TN
will
also
pay
to
AC
a
royalty
of
$0.05
per
ticket
sold
using
the
Entertainment
Software
during
the
first
five
years
after
the
Entertainment
Software
is
accepted.
3.3
The
following
terms
and
conditions
shall
apply
to
repayment
pursuant
to
section
3.1
At
the
rate
of
$0.05
per
ticket
sold,
the
following
minimum
payment
schedule
is
agreed:
|
Elapsed
Months
|
Period
Payment
Due
|
Cumulative
Payment
Due
|
|
After
Acceptance
|
|
|
36
|
$300,000.00
|
$300,000.00
|
|
48
|
$700,000.00
|
$1,000,000.00
|
|
60
|
$1,000,000.00
|
$2,000,000.00
|
(b)
At
the
end
of
each
of
the
above
intervals,
if
the
minimum
cumulative
payment
due
has
not
been
received
by
AC,
then
AC
may
acquire
title
to
the
Entertainment
Software
from
TN
for
a
consideration
of
$2
million
provided
that
TN
must
repay
the
balance
owing
on
the
amount
advanced
to
TN
by
AC
pursuant
to
section
1.2
simultaneously
with
the
payment.
Acceptance
of
the
software
by
Ticketnet
also
has
a
contractual
significance
under
clause
2.2.,
which
is
headed
‘Responsibilities’.
Paragraph
2.2(d)
provides
as
follows:
Following
acceptance
of
the
Entertainment
Software
by
TN
as
described
in
the
functional
specifications,
it
is
agreed
that
all
subsequent
maintenance,
upgrade
and
revisions
to
the
Entertainment
Software
are
at
the
cost
and
sole
responsibility
of
TN.
Furthermore,
TN
cannot
use
the
Entertainment
Software
prior
to
final
acceptance
for
revenue
generation
purposes
except
as
mutually
agreed
by
AC
for
market
development,
testing
or
progressive,
phased
implementation.
D.
Analysis
Counsel
for
Ticketnet
advanced
alternative
interpretations
of
the
contract,
either
of
which,
she
submitted,
leads
to
the
conclusion
that
on
June
30,
1986
Ticketnet
owed
$2
million
to
Air
Canada,
and
that
while
the
payment
was
not
due
at
that
time
it
was
not
contingent
upon
the
happening
of
an
uncertain
event.
(i)
the
dual
contract
theory:
services
and
loan
The
first
and
principal
basis
on
which
counsel
put
her
case
was
that
the
software
development
agreement
had
two
distinct
and
independent
parts.
The
first
part
was
a
contract
for
the
supply
of
services
by
Air
Canada
in
connection
with
the
development
of
software
for
Ticketnet
for
a
fee
of
$2
million.
The
second
part
was
an
interest-free
loan
of
$2
million
by
Air
Canada
to
Ticketnet
to
enable
it
to
pay
Air
Canada’s
fee
for
the
software
service.
The
loan
was
to
be
repaid
through
a
royalty
on
the
ticket
sales,
and
in
the
event
that
the
royalties
exceeded
$2
million
the
excess
represented
an
investment
bonus.
The
mechanics
of
the
loan
were
that,
as
Air
Canada
submitted
its
periodic
invoices
for
services
rendered
to
date,
an
equivalent
sum
was
drawn
down
from
the
$2
million
loan
until
April
30,
1986,
when
the
last
invoice
was
rendered
for
the
final
portion
of
the
$2
million.
Air
Canada
could
have
written
a
cheque
to
Ticketnet
for
the
amount
of
each
invoice
that
it
submitted,
and
Ticketnet
could
have
written
a
cheque
to
Air
Canada
for
an
equivalent
amount
to
pay
the
invoice.
But,
counsel
said,
whether
the
parties
crossed
cheques
or
simply
noted
the
debits
and
credits
on
their
books
should
make
no
difference
to
the
substantive
nature
of
the
obligation.
Acceptance
of
the
software
by
Ticketnet
was
regarded
by
the
parties
as
a
formality,
and
simply
served
to
measure
the
time
from
which
the
repayment
of
the
loan
and
the
payment
of
the
additional
compensation
through
the
royalties
would
commence.
Counsel
supported
her
theory
of
the
dual
contracts
by
reference
to
the
language
of
the
agreement,
Ticketnet’s
audited
financial
statements
and
considerations
of
fairness.
(a)
the
contractual
language
Clause
1.2
of
the
agreement
provides
for
development
of
the
software
for
a
fixed
fee
of
$2
million
and
for
regular
invoicing
by
Air
Canada,
the
final
account
to
be
invoiced
by
April
30,
1986.
Air
Canada
also
agreed
under
this
clause
to
“advance
credit”
for
the
$2
million
fee
invoiced,
to
be
repaid
in
accordance
with
clause
3.1.
Counsel
emphasized
the
word
“repay”
as
Clearly
indicating
the
repayment
of
money
lent,
not
the
payment
of
a
fee
for
services
rendered.
The
same
idea,
she
pointed
out,
is
found
in
clause
3.
Thus,
clause
3.1
refers
to
the
$0.05
per
ticket
sold
as
“repayment
of
the
amount
advanced
pursuant
to
section
1.2”(emphasis
added),
and
goes
on
to
provide
that
if
the
“advance
be
repaid”
within
the
five
year
period,
the
$0.05
payable
to
Air
Canada
on
each
ticket
sold
shall
continue
as
“an
investment
bonus”.
Similarly,
clause
3.3
sets
out
the
terms
and
conditions
applicable
to
“repayment
pursuant
to
section
3.1”(emphasis
added).
Furthermore,
clause
3.3(b)
provides
that
if
the
minimum
payments
due
from
the
ticket
sales
are
not
received
by
Air
Canada,
then
it
may
acquire
title
to
the
software
from
Ticketnet
from
$2
million
“provided
that
TN
must
repay
the
balance
owing
on
the
amount
advanced
to
TN
by
AC
...
simultaneously
with
the
payment”
(emphasis
added).
One
problem
with
this
argument
is
that
the
agreement
nowhere
uses
the
terms
“loan”,
or
“amount
lent”
by
Air
Canada
to
Ticketnet.
The
fact
that
the
audited
financial
statements
describe
Ticketnet’s
liability
with
respect
to
the
$2
million
as
a
“non-interest
bearing
Air
Canada
loan”
does
not
take
matters
much
further.
However,
I
am
prepared
to
accept
that
the
references
to
“advance
credit”
and
“amount
advanced”,
coupled
with
the
corresponding
obligation
of
Ticketnet
to
“repay”
this
amount,
are
not
inconsistent
with
an
interpretation
of
the
software
development
agreement
as
including
an
independent
contract
of
loan.
More
serious,
however,
is
the
point
relied
on
by
counsel
for
the
Crown,
who
argued
that
an
essential
feature
of
a
loan
is
a
promise
to
repay
the
amount
lent,
with
or
without
interest,
and
Ticketnet
did
not
make
an
express
or
implied
promise
to
repay,
except
as
provided
by
the
agreement.
This
is
because,
as
of
April
30,
1986,
it
was
not
clear
that
Ticketnet
would
ever
be
required
to
“repay”
$2
million
to
Air
Canada,
since
“repayment”
was
only
to
occur
after
the
acceptance
of
software
by
Ticketnet
and
if
the
ticket
sales
generated
a
minimum
of
$2
million
dollars
at
the
rate
of
$0.05
per
ticket
within
five
years.
As
of
June
30,
1986
the
development
of
the
software
may
well
have
been
almost
complete;
however,
there
were
still
“bugs”
to
be
got
out
of
some
of
the
modules
and
the
system
as
a
whole
had
yet
to
be
tested.
In
fact,
for
other
reasons
Ticketnet
never
did
accept
this
software
within
the
meaning
of
the
contract.
The
contract
is
silent
on
the
duty
to
“repay”
in
such
an
eventuality,
and
given
the
carefully
structured
provisions
for
repayment
from
the
sales
of
tickets,
and
the
option
considered
in
the
next
paragraph,
I
do
not
think
that
an
obligation
to
this
effect
can
be
implied.
The
agreement
expressly
contemplates
the
possibility
that,
after
acceptance
of
the
software,
Ticketnet
might
fail
to
pay
to
Air
Canada
five
cents
for
each
ticket
sold
through
the
software
in
accordance
with
the
schedule.
This
could
be
because
the
software
was
not
a
commercial
success
and
insufficient
tickets
were
sold
to
produce
the
minimum
amounts
at
the
stipulated
intervals.
It
could
also
be
because,
while
the
prescribed
amounts
were
generated
in
the
requisite
periods,
Ticketnet
failed
to
make
the
payments.
Whatever
the
reason
for
Ticketnet’s
failure
to
make
the
stipulated
payments,
the
agreement
created
an
option
for
Air
Canada
to
purchase
the
software
for
$2
million,
against
which
Ticketnet
was
required
to
set-off
so
much
of
the
$2
million
advanced
by
Air
Canada
that
it
had
not
repaid
from
the
ticket
sales.
The
contract
does
not
provide
that
Air
Canada
could
in
these
circumstances
elect
to
sue
Ticketnet
for
the
amount
of
the
loan
that
it
had
not
“repaid”
instead
of
exercising
the
option
to
purchase.
Counsel
for
the
plaintiff
referred
me
to
Canada
Deposit
Insurance
Corp.
v.
Canadian
Commercial
Bank,
[1992]
3
S.C.R.
558
(S.C.C.)
for
the
proposition
that
a
transaction
does
not
lose
the
character
of
a
loan
because
it
also
includes
provisions
for
the
participation
by
the
party
advancing
the
money
in
the
profits
generated
by
the
recipient.
The
question
in
Canada
Deposit
Insurance
was
whether
such
a
hybrid
agreement
in
substance
constituted
a
loan,
to
which
the
other
features
were
ancillary.
In
concluding
that
the
agreement
was
in
essence
a
loan
lacobucci
J.
(at
599)
noted
in
particular
the
provision
in
the
agreement
by
which
the
recipient
promised
to
indemnify
those
advancing
capital
against
any
loss
that
they
might
sustain
if
the
profits
were
insufficient
to
cover
the
amount
advanced.
In
this
case,
however,
I
have
not
found
that
Ticketnet
unconditionally
promised
to
repay
the
$2
million,
so
that
there
was
no
contract
of
loan.
Counsel
for
the
Crown
relied
on
R.
v.
Alberta
&
Southern
Gas
Co.
(1976),
76
D.T.C.
6362
(Fed.
T.D.),
where
the
Court
rejected
the
argument
that
a
transaction
constituted
a
loan
because
Amoco,
the
alleged
borrower,
did
not
assume
a
personal
liability
to
repay.
Under
the
agreement,
Cat-
tenach
J.
said
(at
6368),
the
plaintiff
for
its
reimbursement
shall
look
exclusively
to
the
petroleum
substances
to
the
extent
of
Amoco’s
share
therein
which
was
assigned
to
the
plaintiff.
The
present
case
may
appear
to
be
distinguishable
from
Alberta
&
Southern
Gas
because
Ticketnet
did
not
assign
to
Air
Canada
the
royalties,
but
assumed
a
personal
liability
to“repay”
the
$2
million
from
them.
However,
according
to
article
3.3(b)
of
the
software
development
agreement
if
Air
Canada
did
not
receive
the
minimum
stipulated
payments
at
the
end
of
any
of
the
prescribed
periods,
it
had
an
option
to
purchase
the
software
from
Ticketnet
for
$2
million,
against
which
Air
Canada
could
set-off
the
unpaid
amount
of
the
“loan”
that
had
not
been
repaid
by
Ticketnet
from
the
proceeds
of
ticket
sales.
Thus,
just
as
the
plaintiff
in
Alberta
&
Southern
Gas
looked
for
repayment
to
the
assigned
petroleum
substances,
so
Air
Canada
could
ultimately
resort
to
its
option
to
purchase
the
software
for
reimbursement
in
the
event
that
it
did
not
receive
the
agreed
payments
from
the
ticket
sales.
Another
difficulty
with
counsel
for
the
plaintiffs
characterization
of
the
agreement
as
a
loan
that
was
independent
of
the
delivery
and
acceptance
of
the
software
is
that
its
sole
commercial
rationale
seems
to
be
the
tax
benefit.
Stripped
of
the
references
to
“repayment”
and
“amount
advanced”
by
Air
Canada,
the
essence
of
the
transaction
is
that
Air
Canada
is
to
bear
a
substantial
part
of
the
cost
of
the
development
of
the
software
for
Ticketnet
and
in
return
to
participate
to
a
defined
extent
in
the
anticipated
profits.
Alternatively,
Air
Canada
could
be
regarded
as
simply
providing
services
on
credit,
services
that
Ticketnet
was
to
pay
for
from
the
profits
arising
from
the
use
of
the
software.
This,
of
course,
does
not
make
the
contract
one
of
loan.
Of
course,
if
on
their
proper
construction
the
terms
of
the
agreement
created
a
relationship
of
lender
and
borrower
between
Air
Canada
and
Tick-
etnet
by
clearly
imposing
on
Ticketnet
either
expressly
or
by
implication
an
obligation
to
repay,
then
that
would
be
conclusive,
and
Ticketnet
would
be
entitled
to
the
tax
credit.
However,
if
the
terms
of
the
contract
are
unclear
in
this
regard,
then,
in
the
absence
of
a
commercial
rationale
other
than
obtaining
a
tax
credit,
the
Court
should
not
in
my
opinion
strive
to
construe
the
contract
in
the
way
that
counsel
for
the
plaintiff
has
urged.
(b)
the
accounting
evidence
In
order
to
plug
any
leaks
that
may
seem
to
be
springing
from
the
terms
of
the
software
development
agreement,
counsel
for
Ticketnet
submitted
that
weight
should
be
attached
to
the
characterization
of
Ticketnet’s
obligation
in
the
financial
statements
prepared
by
its
auditors
in
accordance
with
Canadian
generally
accepted
accounting
principles.
Thus,
for
the
year
1985
the
company’s
expenses
were
shown
as
including
an
item,
“subcontract,
$1,192,800.00”this
is
the
amount
for
which
Air
Canada
had
submitted
a
statement
on
January
3,
1986.
This
same
figure
also
appears
as
“Long
Term
Debt”
with
the
following
explanatory
note:
Non-interest
bearing
Air
Canada
loan,
repayable
at
the
rate
of
five
cents
per
ticket
sold
by
the
system,
with
minimum
repayments
to
be
made
after
software
acceptance
as
follows:
15%
after
36
months,
35%
after
48
months
and
50%
after
60
months
Similar
entries
are
found
in
the
auditor’s
financial
statements
of
Ticketnet
for
the
6
months
ending
June
30,
1986.
For
this
period,
however,
the
expenses
attributable
to
the
subcontract
are
$807,200.00,
and
the
long
term
debt
owing
to
Air
Canada
is
shown
as
$2
million,
with
the
same
explanatory
note
as
appeared
in
the
1985
statement.
I
do
not
find
this
evidence
persuasive.
First,
whether
Ticketnet’s
liability
to
Air
Canada
is
properly
characterized
as
arising
from
a
loan
or
from
the
supply
of
services,
or
as
unconditional
or
contingent,
is
a
question
of
law
that
depends
on
the
construction
of
the
contract
between
Air
Canada
and
Ticketnet.
It
is
not
a
matter
of
the
general
principles
of
accounting.
This
is
consistent
with
Canderel
Ltd.
v.
R.,
[1998]
1
S.C.R.
147
(S.C.C.),
where
Iacobucci
J.
stated
(at
166)
that,
while
generally
accepted
accounting
or
business
principles
could
be
of
assistance
in
the
interpretation
of
a
term
in
a
taxing
statute
for
which
Parliament
had
not
provided
a
definition,
...well-accepted
business
principles
are
not
rules
of
law
and
thus
a
given
principle
may
not
be
applicable
to
every
case.
More
importantly,
these
principles
must
necessarily
take
a
subordinate
position
relative
to
the
legal
rules
which
govern
Thus,
whether
Ticketnet’s
liability
was
“contingent”
for
the
purpose
of
paragraph
18(1)(e)
of
the
Income
Tax
Act,
or
the
advance
was
a
loan,
could
not
be
conclusively
determined
by
its
inclusion
in
the
financial
statements
under
the
rubric
of
“long
term
debt”.
Furthermore,
as
Mr.
Machado,
a
Revenue
Canada
tax
audit
manager,
testified,
the
purpose
of
a
financial
statement
is
to
give
investors
a
complete
and
accurate
picture
of
a
company’s
financial
position.
In
this
context,
it
would
be
prudent
to
include
a
debt,
regardless
of
whether
it
was
contingent
or
accrued
but
payable
in
the
future.
For
tax
purposes,
however,
the
distinction
between
contingent
and
unconditional
liability
is
critical:
J.L.
Guay
Ltée
v.
Minister
of
National
Revenue
(1971),
71
D.T.C.
5423
(Fed.
T.D.),
5426-27;
aff’d.
(1975),
6
N.R.
550
(S.C.C.);
Canderel
Ltd.
v.
R.
supra,
at
page
179.
Mr.
Machado
also
raised
a
question
about
the
nature
of
the
documents
provided
to
Ticketnet
by
Air
Canada
recording
the
work
done,
and
attaching
a
dollar
amount
to
it
on
the
basis
of
the
number
of
“person
months”
at
$8,400.00
each
that
had
been
spent
on
the
project.
All
but
one
of
these
documents,
he
pointed
out,
were
described
as
a
“statement”,
and
had
been
signed
by
the
project
leader,
and
not
someone
from
Air
Canada’s
accounts
department.
They
were,
he
suggested,
more
akin
to
informational
progress
reports
than
to
invoices
showing
an
amount
due,
as
Ticketnet
characterized
them.
Moreover,
the
one
unequivocal
“invoice”
included
in
the
documents
for
the
year
1985,
was
for
$2
million,
while
the
statement
submitted
by
Air
Canada
showed
only
$1,192,800.00,
the
amount
that
the
auditors
used
in
the
financial
statement.
I
do
not
attach
much
significance
to
these
irregularities:
the
contract
called
upon
Air
Canada
to
“invoice
TN
on
a
regular
basis”,
and
the
fact
the
Air
Canada
may
have
been
sloppy
about
the
discharge
of
its
obligation
cannot
be
held
against
Ticketnet.
However,
the
apparently
casual
and
inaccurate
way
in
which
some
of
these
statements
and
the
invoice
appear
to
have
been
prepared
may
reflect
the
fact
that,
even
if,
as
Ticketnet
alleges,
these
statements
or
invoices
had
the
effect
of
drawing
down
instalments
of
the
$2
million
loan,
this
was
not
a
matter
of
any
commercial
or
accounting
significance
as
far
as
Air
Canada
was
concerned.
Not
altogether
surprisingly,
there
was
no
evidence
before
me
about
Air
Canada’s
internal
documentation
of
its
making
a
loan
to
Ticketnet.
(c)
fairness
considerations
Counsel
for
Ticketnet
also
maintained
that
considerations
of
fairness
supported
Ticketnet’s
analysis
of
the
agreement.
She
argued
that
there
should
be
no
objection
in
principle
to
the
fact
that
one
party,
Air
Canada,
wore
two
contractual
hats:
one
as
the
provider
of
services,
and
the
other
as
the
lender
of
money
to
pay
for
those
services.
After
all,
she
said,
if
Ticketnet
had
borrowed
the
money
from
a
third
party
to
pay
Air
Canada’s
periodic
statements
of
account
for
services
rendered,
there
would
have
been
no
doubt
about
Ticketnet’s
right
to
an
investment
tax
credit
for
the
expense
thereby
incurred
in
the
form
of
an
obligation
to
repay
a
loan
to
finance
research
and
development.
It
would
be
unfair,
counsel
argued,
to
deny
Ticketnet
the
benefit
of
the
tax
credit
simply
because
Air
Canada
was
providing
both
the
service
and
the
financing
for
the
service.
This
argument
misses
the
point.
The
problem
is
not
that
the
service
provider
and
the
lender
are
one
and
the
same
person,
but
that
the
terms
of
the
contract
do
not
impose
on
Ticketnet
an
unequivocal
obligation
to
repay
money
lent,
one
of
the
defining
legal
characteristics
of
a
loan.
If
Ticketnet
had
found
a
third
party
willing
to
finance
the
development
of
the
software
by
Air
Canada
on
the
same
terms
to
which
Air
Canada
agreed,
then
my
analysis
of
the
transaction
would
have
been
the
same.
(d)
conclusion
For
these
reasons
I
am
not
satisfied
that
the
terms
of
the
contract
created
two
independent
legal
relationships
between
Ticketnet
and
Air
Canada,
those
of
lender
and
borrower,
and
provider
and
recipient
of
services.
Despite
the
elegant
arguments
advanced
on
behalf
of
Ticketnet,
counsel
for
the
Crown
is
correct
to
say
that
the
legal
obligations
assumed
by
Ticketnet
under
the
contract
were
not
those
of
a
borrower,
and
that
the
underlying
commercial
reality,
tax
considerations
aside,
gives
no
substance
to
this
characterization.
Nor
do
I
find
anything
in
the
accounting
evidence
to
dissuade
me
from
the
view
that
I
have
formed
on
the
basis
of
the
contractual
document.
(ii)
the
single
contract
theory
(a)
unconditional
liability
if
i
was
persuaded
by
the
dual
contract
theory,
which
I
am
not,
counsel
submitted
an
alternative
theory
on
which
to
base
Ticketnet’s
claim
for
the
tax
credit.
It
was
that
the
contract
obliged
Ticketnet
to
pay
for
the
services
rendered
by
Air
Canada
that
was
not
conditional
on
Ticketnet’s
acceptance
of
the
software.
The
argument
is
that
the
contract
was
for
the
provision
of
services,
and
not
for
the
delivery
of
a
product.
The
evidence
of
Mr.
Clark
was
that
since
Ticketnet
had
accepted
the
software
in
its
various
stages
of
development
final
acceptance
was
merely
a
formality.
Indeed,
by
June
30,
1986,
he
said,
the
work
had
progressed
to
the
point
that
the
software
was
for
all
intents
and
purposes
complete.
Indeed,
Ticketnet
had
advised
Air
Canada
that
it
was
prepared
to
accept
the
software
as
it
was,
before
the
final
testing
and
“debugging”
had
been
completed.
Counsel
put
her
point
powerfully
when
she
asked
whether
it
could
really
be
the
case
that
Ticketnet
would
be
entitled
to
avoid
liability
to
pay
for
the
work
done
by
Air
Canada
by
arbitrarily
refusing
to
accept
the
software.
Surely
not,
she
said,
seeing
that
Ticketnet
would
thereby
end
up
as
the
owner
of
valuable
software
without
having
had
to
pay
for
the
improvements
made
to
it
by
Air
Canada
at
the
request
of
Ticketnet
and
in
the
expectation
that
they
were
to
be
paid
for.
Furthermore,
she
submitted,
it
would
be
a
mistake
to
think
that
Ticketnet
was
not
entitled
to
a
tax
credit
because
it
had
incurred
no
actual
loss.
On
the
contrary,
in
the
civil
action
between
Air
Canada
and
Ticketnet
Farley
J.
had
reduced
by
$2
million
the
damages
that
he
would
have
otherwise
awarded
to
Ticketnet
as
a
result
of
“netting
out”
the
amount
of
its
contractual
obligation
to
Air
Canada.
In
my
opinion,
the
judgment
in
Ticketnet
Corporation
v.
Air
Canada
is
of
no
assistance
to
the
plaintiff
because,
in
deducting
$2
million
from
the
damages
awarded
to
Ticketnet
by
way
of
“netting-out”
its
loss,
Farley
J.
did
not
decide
that
as
of
June
30,
1986
Ticketnet’s
obligation
to
Air
Canada
was
unconditional.
Rather,
he
based
his
award
of
damages
on
an
estimate
of
the
net
profits
that
Ticketnet
would
have
made
if
the
contract
had
been
performed.
If
the
contract
had
been
performed
and
events
had
turned
out
as
the
parties
anticipated,
Ticketnet’s
profits
would
have
been
reduced
by
the
$2
million
paid
to
Air
Canada
from
the
proceeds
of
the
sales
of
tickets
through
use
of
the
software.
In
other
words,
there
is
nothing
in
the
judgments
of
either
Farley
J.
or
the
Court
of
Appeal
to
contradict
the
Crown’s
submission
in
this
case
that
the
contract
was
for
the
development
and
the
delivery
of
a
product,
namely
software
that
met
the
design
and
functional
specifications
of
Ticketnet.
Moreover,
until
the
finished
product
was
delivered
by
Air
Canada
and
accepted
by
Ticketnet,
Ticketnet’s
liability
to
pay
was
contingent
only:
it
might
never
be
obliged
to
pay
anything.
It
would
not
necessarily
follow
from
this
view
of
the
contract
that
Ticketnet
could
refuse
without
good
reason
to
accept
the
software.
Ticketnet
would
obviously
be
required
to
decide
in
good
faith
whether
or
not
to
accept
it.
No
court
would
countenance
a
claim
by
Ticketnet
that
it
was
entitled
under
the
contract
to
enrich
itself
at
Air
Canada’s
expense
by
the
simple
expedient
of
refusing
without
good
reason
to
accept
the
software,
thus
avoiding
triggering
the
provisions
in
the
contract
for
the
payment
of
a
share
of
the
proceeds
of
the
ticket
sales.
Suppose,
however,
that
for
reasons
of
its
own
Air
Canada
decided
to
pull
out
of
the
project
before
completing
the
work,
or
that
it
delivered
software
that
did
not
operate
as
a
system
in
accordance
with
the
specifications,
so
that
Ticketnet
was
fully
justified
in
not
accepting
it.
In
these
circumstances
I
do
not
think
that
Air
Canada
would
be
able
to
claim
a
payment
of
$2
million.
This
is
simply
not
what
the
contract
provides:
payments
are
dependent
on
the
commercial
success
of
developing
and
marketing
software
for
a
prescribed
function.
Nor
would
a
quantum
meruit
liability
be
imposed
in
the
face
of
the
clear
contractual
provisions
prescribing
the
manner
in
which
Ticketnet
was
to
pay
for
the
software.
The
fact
that
Ticketnet
would
not
be
liable
to
pay
if
Air
Canada
failed
to
deliver
the
software,
or
the
software
that
it
delivered
was
not
accepted
by
Ticketnet
for
good
reason,
is
sufficient
to
make
the
debt
contingent
as
defined
in
Samuel
F.
Investments
Ltd.
v.
Minister
of
National
Revenue
(1988),
88
D.T.C.
1106
(T.C.C.).
For
these
reasons,
I
am
satisfied
that
on
June
30,
1986
Ticketnet’s
liability
to
pay
$2
million
to
Air
Canada
was
contingent.
Acceptance
was
a
condition
to
the
“vesting”
of
that
liability:
Air
Canada’s
entitlement
to
receive
payment
was
not
simply
a
matter
of
the
passage
of
time.
(b)
condition
subsequent
Counsel’s
last
argument
was
that
even
if
I
found,
as
I
have,
that
Ticketnet’s
acceptance
of
the
software
was
a
condition
that
attached
to
its
liabil-
ity
to
Air
Canada,
the
agreement
should
be
interpreted
as
imposing
a
condition
subsequent,
not
precedent.
On
this
view,
the
liability
of
Ticketnet
was
not
contingent
on
June
30,
1986,
but
at
most
might
be
terminated
on
the
happening
or,
more
accurately,
the
non-happening,
of
an
event,
namely,
Ticketnet’s
good
faith
non-acceptance
of
the
software.
Whether
a
condition
operates
as
a
condition
precedent
or
subsequent
depends
entirely
on
the
construction
of
the
instrument
creating
the
conditional
liability
in
question.
Counsel
did
not
point
me
to
anything
in
the
wording
of
the
software
development
agreement
that
supported
her
interpretation.
Indeed,
it
is
in
my
view
clear
on
the
face
of
the
contract
that
Ticketnet
did
not
assume
an
unconditional
liability
to
pay
until
the
software
was
accepted
and
tickets
sold.
If
the
software
was
accepted,
but
less
than
the
specified
payments
were
made
from
the
ticket
sales,
Ticketnet
would
be
liable,
if
requested,
to
transfer
title
to
the
software
to
Air
Canada
for
a
net
amount
that
depended
on
how
much
of
the
$2
million
had
been
paid
by
Ticketnet
from
the
proceeds
of
the
ticket
sales.
Counsel
relied
on
Canadian
Pacific
Ltd.
v.
Ontario
(Minister
of
Revenae)
(1998),
41
O.R.
(3d)
606
(Ont.
C.A.)
as
an
example
of
a
situation
in
which
it
was
held
that
the
existence
of
a
future
uncertain
event
that
affected
the
taxpayer’s
liability
was
regarded
as
a
condition
subsequent.
However,
in
that
case
the
uncertainty
related
only
to
the
amount
of
the
liability,
and
not
the
liability
itself:
moreover,
any
change
to
the
amount
was
said
by
Borins
J.A.
(at
page
621)
likely
to
be
“relatively
inconsequential”.
The
distinction
between
uncertainty
as
to
liability,
as
opposed
to
quantum,
is
supported
by
J.L.
Guay
Ltée,
supra,
where
the
uncertainty
was
said
(at
5427)
to
render
the
debt
contingent
because
we
are
dealing
with
amounts
withheld
which
are
not
only
uncertain
as
to
quantum
if
partial
damages
result
from
badly
done
work,
but
which
will
no
longer
be
ever
due
or
payable
if
damages
exceed
the
amount
withheld.
The
parties
might,
of
course,
have
agreed
that
Ticketnet
was
liable
to
pay
$2
million
to
Air
Canada
for
services
rendered,
a
liability
that
terminated
on
the
good
faith
non-acceptance
of
the
software.
In
my
view,
however,
this
is
not
what
the
contract
provides.
E.
Conclusion
For
these
reasons
the
plaintiff’s
claim
is
dismissed.
Counsel
may
make
written
submissions
on
costs
within
14
days
from
the
date
of
this
judgment.
Appeal
dismissed.
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