Interprovincial Co-operative Ltd. v. The Queen, 87 DTC 5115, [1987] 1 CTC 222 (FCTD)

Martin, J.:—The plaintiff, Interprovincial Co-Operative Limited, appeals from reassessments by the defendant, the Minister of National Revenue, deleting from the total value of goods dealt in by the plaintiff the value of goods which were shipped by suppliers directly to customers of the plaintiff and for which payment was made by those customers directly to the suppliers. The effect of the reassessments is to reduce the amount of the plaintiffs deduction in respect of allocations in proportion to patronage under section 135 of the Income Tax Act.

The plaintiff also appeals from reassessments by the defendant disallowing the plaintiff’s claim for capital cost allowance on real property, an organic manufacturing plant, purchased by the plaintiff in 1973.

The appeal relating to the patronage allocations arises out of what both counsel describe as the direct billing procedure, a term used to distinguish it from what they describe as the rebilling procedure. Both terms are descriptive of the methods or procedures whereby the plaintiff conducts its wholesale trading business with its customers, a group of regional wholesale co-operatives across Canada.

The defendant claims that the value of the merchandise which is routed to the regionals by means of the plaintiff's direct billing procedure does not come within the meaning of the term

. . . the value of goods or products acquired, marketed, handled, dealt in or sold . ..

by the plaintiff in paragraph 135(4)(d) of the Act.

On the other hand, merchandise which finds its way to the regionals by means of the plaintiffs rebilling procedure is treated by the defendant as if it does come within the meaning of the above-noted term contained in paragraph 135(4)(d). Because of the different treatment accorded by the defendant to the two merchandising procedures employed by the plaintiff, I will describe them in some detail.

In each procedure there are three parties: the plaintiff, which its counsel describes as a super wholesaler, the regionals, which are the plaintiffs customers and wholesalers themselves, and various suppliers or manufacturers of the merchandise which is the subject of the trading among the three parties.

Under each procedure the plaintiff negotiates a price for the goods with the supplier and informs the regional of the price which it has negotiated by means of advice sheets which it amends as the prices are renegotiated. From these advice sheets the regionals select the goods which they require and order directly from the suppliers which in turn ship the goods directly to the regional or to a location directed by the regional.

Again, in each procedure, the plaintiff informs the suppliers of the names of its customers and authorizes the supplier to ship the goods on the order of its named customer. In neither case does the plaintiff, except in rare instances, warehouse the goods or physically handle them in any way. The goods are, as already indicated, shipped directly from the supplier on the instructions and to the location directed by the regional.

In the rebilling procedure the invoice for the goods so ordered by a regional is sent direct to the plaintiff which, in turn, rebills the regional. The plaintiff pays the supplier directly and, when invoicing the regional, charges the same price as it is billed adding, however, any shipping charges which it may have paid. The plaintiff, in this procedure, must pay the supplier directly whether or not the regional pays the plaintiff.

The plaintiff’s profit, and benefit to the regional, under this procedure arise out of the rebate. On a monthly basis the supplier calculates a volume rebate, according to the terms of the originally negotiated price, and remits it directly to the plaintiff. The plaintiff pays a portion of this rebate to the regional on an annual basis and keeps the balance itself. The defendant treats goods falling under this procedure as being goods which are acquired, marketed, handled, dealt in or sold by the plaintiff.

The difference between the rebilling procedure and the direct billing procedure is minimal. Instead of sending the invoice for the goods delivered to the regional directly to the plaintiff, the supplier bills the plaintiff in care of the regional and sends the invoice directly to the regional. Instead of the plaintiff paying the invoice directly and rebilling the regional, the regional pays the invoice directly together with any shipping charges which may have been incurred. The plaintiff, in this procedure, must pay the supplier if the regional does not pay.

The plaintiff’s profit and the regional’s benefit under this method, arise, as in the rebilling procedure, out of the rebates. The suppliers keep and send monthly, to the plaintiff, detailed accounts of the goods, the prices for which have been negotiated by the plaintiff and which have been delivered by the supplier to the regionals. These accounts are kept for each regional authorized by the plaintiff to order goods on the credit of the plaintiff. With each monthly statement the supplier remits directly to the plaintiff the appropriate rebate which is apportioned between the plaintiff and the regionals in precisely the same way as the rebate in the rebilling procedure. The defendant submits that the goods coming within this procedure are not goods which are acquired, marketed, handled, dealt in or sold by the plaintiff.

The defendant says that in the direct billing procedure there is no contract of sale except between the regional and the supplier, that the price negotiated does not result in a contract of sale but only in an invitation to treat, that the regionals are not true agents of the plaintiff because they receive no instructions on quantities which they should buy, do not report their purchases to their “principal”, and are not reimbursed by their “principal” for the purchases which they make, and make all their decisions with respect to the purchases independently of their “principal”. The direct billing method, the defendant submits, is nothing more than the supply of services by the plaintiff to the regionals in the arrangement of terms pursuant to which future contracts for the purchase and sale of merchandise may or may not be made by the regionals directly with the suppliers.

The true characterization of the direct billing procedure, counsel for the defendant submits, is described by one of the plaintiff’s senior personnel in his written report of July 31, 1983, in which he noted:

Since IPCO is a “buying club” and operates as an agent for its members, suppliers immediately turned to IPCO for payment of their account.

Counsel for the defendant admits that there is no substantial difference between the two procedures. He agrees with the plaintiffs submission that apart from eliminating some paper work by the direct billing approach, the methods are identical. In this respect he simply submits that the goods routed through the rebilling procedure should not be accorded the treatment which they are by the defendant and, in respect to the value of those goods, he would like to send the matter back to the defendant for reconsideration and reassessment to raise the plaintiff’s taxes even further.

Unfortunately, that observation does not assist me. While the fact that the defendant sees fit to allow the plaintiff a favourable tax treatment for one method, and disallows the same treatment for another, is not conclusive, where the methods of marketing are identical, that both should be accorded the same favourable treatment, it does provide me with a strong incentive to do so. When the defendant concluded that the goods traded under the direct billing procedure were not acquired, marketed, handled, dealt in or sold by the plaintiff, he had to have had before him the manner in which the same goods were traded under the rebilling procedure, and it must have been the difference between the two procedures which caused him to determine that one was acceptable for the purposes of patronage allocation and the other was not.

The absence of any explanation with respect to this different treatment of the two identical methods of merchandising leaves me with a strong inclination to find that both should receive the same favourable treatment.

Fortunately, however, I am not left only with my inclination or disposition. There is sufficient evidence for me to conclude that the regionals acted as agents of the plaintiff in the acquisition of the goods traded under the direct billing procedure and thus that the plaintiff acquired, marketed or dealt in the goods.

In this respect the defendant's argument was directed to the submission that there was no contract of sale or sale between the suppliers and the plaintiff, that the sale which did occur was a sale of the goods between the supplier and the regional, and that there was no evidence of the sale between the plaintiff and the regional. The words used in paragraph 135(4)(d), however, are much broader than the restrictive meaning assigned to them by the defendant. The words used contemplate something other than and less than the mere passage of ownership from a seller to a buyer. If it was intended that only the value of goods sold should be the test there would have been no necessity to include in section 135 the more general descriptive terms of "acquired, marketed, handled" or "dealt in".

While the evidence is not clear just precisely when or by what means the title to the goods passes from the supplier to the plaintiff and from the plaintiff to the regional, I am satisfied that the goods were acquired by the regionals as agents of the plaintiff.

The plaintiff negotiated with the suppliers and concluded agreements with respect to the price at which the goods would be sold. It notified each supplier in writing that the named regionals would be purchasing the goods, which were the subject of the agreements, as its agents and that, although the regionals would pay the suppliers directly, they would be pledging the plaintiff’s credit. The rebates to which the purchasers of the goods were entitled, by agreement between the supplier and the plaintiff, were sent to the plaintiff and not to the regionals. The amount of the rebate, which depended largely on the volume of the goods purchased by any given purchaser, was calculated on the basis that the plaintiff was the purchaser and not the individual regionals which, individually and cumulatively, would have been entitled to a lesser rebate. The regionals and suppliers were informed of the arrangements, acquiesced in them, and acted upon them.

It is true that the plaintiff was not aware at any given time of the precise value of goods which had been purchased by the regionals as its agent. It is also true that the plaintiff had set no restrictions on the value or quantities which the regionals were authorized to order in its name. One would ordinarily expect such matters to be governed by an agency agreement. The fact that they were not does not give rise to the conclusion that there was no agency. Even though a prospective principal would be expected to protect himself from the possibility of abuse by his agents there is no obligation to do so and the agency, if established, is no less an agency relationship because of the principal’s omission in this respect.

In my view, the strongest evidence of the agency relationship occurred when one of the regionals went into receivership leaving suppliers' accounts unpaid. The plaintiff originally attempted to limit its liability, or even deny it, but eventually had to settle the suppliers’ claims. That it may have paid less than the full amount of the claims is a matter of bargaining between debtor and creditor for, on the documentation already referred to, there is no doubt that the plaintiff was liable for the full amount.

Having concluded that the documentation establishes an agency relationship between the plaintiff and the regionals, I have also concluded that the goods traded under the direct billing procedure were acquired by the regionals as agents for the plaintiff and were thus acquired by the plaintiff within the meaning of paragraph 135(4)(d).

I am not concerned that one of the senior officers of the plaintiff described the arrangement as a buying club or something less or other than an agency relationship. That may have been his view, but in my opinion, the determination of whether an agency relationship exists on a given set of facts, is a question of law. In this matter the evidence has led me to the conclusion that there was an agency relationship established between the plaintiff and the regionals.

The second portion of the plaintiff's appeal is with respect to its claim for capital cost allowance on an organic manufacturing plant which it purchased in 1973. The plaintiff's claim for capital cost allowance on the property was disallowed by the defendant pursuant to paragraph 1102(1)(c) of the Regulations to the Income Tax Act on the basis that the property was not acquired by the plaintiff for the purpose of gaining or producing income.

In this respect counsel for the plaintiff argues in the alternative. He submits that on the pleadings the plaintiff has disproved the allegations of fact or assumptions, if they can be characterized as such, which the defendant has set out as the basis for disallowing the plaintiff's claim for capital cost allowance and is not obliged to go further and prove that the property was acquired for the purpose of gaining or producing income. Alternatively, counsel for the plaintiff submits, if there is a positive onus on the plaintiff to prove that the property was acquired for the purpose of gaining or producing income, the plaintiff has discharged that burden.

If I accept counsel’s rather technical argument with respect to the onus of proof I would have to find that the burden is on the defendant to set out in its pleadings the purpose or reason for which the plaintiff acquired the property in question and thereby demonstrate that the property was not acquired for the purpose of gaining or producing income. In other words the plaintiff seeks to place the burden of proving this negative proposition, the support for which must lie in the minds of the person or persons who direct the corporate affairs of the plaintiff, on the defendant. I hasten to add that the position just stated is my interpretation of counsel’s argument and not his exposition of it.

With that starting point counsel for the plaintiff has cited a number of cases (Pillsbury Holdings Limited v. M.N.R., [1965] 1 Ex. C.R. 676; [1964] C.T.C. 294; Tobias v. The Queen, [1978] C.T.C. 113; 78 D.T.C. 6028, and Kit-Win Holdings (1973) Limited v. R., [1981] C.T.C. 43; 81 D.T.C. 5030) to the effect that where the Crown’s pleadings do not contain specific allegations setting forth the essential assumptions that the Minister has relied upon in his reassessment the onus of proof in a tax case shifts to the Crown. Furthermore if the Crown’s pleadings do set out the specific assumptions which form the basis of the reassessment the taxpayer can still succeed if he can either show that one or more of the assumptions are wrong or that, even if the assumptions are correct, they do not of themselves support the reassessment.

Counsel that directed my attention to paragraphs 4(o) and 4(p) of the defence which contain the following allegations:

(o) the said Organic Plant was not intended to be purchased by the Plaintiff for reactivation or use, as:

(i) it was incapable of efficient utilization in view of the removal by DOW in 1969 of a substantial portion of its manufacturing equipment,

(ii) the reactivation of the Organic Plant required the expenditure of large sums to defray start-up costs which the Plaintiff was neither willing nor financially able to expend,

(iii) the international demand for organic herbicide continued in its depressed state in 1973 and remained so at all material times thereafter, which circumstance did not make the reactivation of the Organic Plant a proposition which was economically more viable than the one which had led the Plaintiff to abandon the use of that plant in 1969 and into the said comanufacturing agreement or arrangement with DOW,

(iv) the Plaintiff never did reactivate or use the Organic Plant following its said purchase from SEDCO, and

(v) the Plaintiff has at all material times continued to procure all of its raw materials requirements for the manufacture of organic herbicides at its Manitoba plant from DOW on the said comanufacturing price basis agreed to with that company in 1969, and

(p) the real or main reason for the Plaintiff’s purchase of the Organic Plant from SEDCO was a direction to do so by FCL, the Plaintiff’s sole beneficial owner at the time, in order to prevent FCL’s having to make good on its unconditional guarantee of NICL’s loan from SEDCO when NICL defaulted on that loan.

Counsel then submitted that because the defendant could not prove the allegations contained in paragraphs 4(o)(i), (ii) and 4(p), and in fact the plaintiff had disproved them, the onus of proving that the property had not been purchased for the purpose of gaining or producing income had shifted to the defendant, an onus which he submitted had not been discharged, and accordingly he claims that the reassessment should be vacated.

Even if I accepted the basis of counsel's argument in this matter, which I do not, I would not accept his conclusions. I agree with him that the evidence does not support the allegations contained in paragraphs 4(o)(i) and 4(o)(ii) of the defence. I also agree with him that the evidence tends not to support the allegation that the plant was purchased to prevent Federated having to make good on its unconditional guarantee of its subsidiaries’ loans as contained in paragraph 4(p) of the statement of claim.

However the other allegations remain undisturbed. The allegations that the plant was never used following its purchase contained in paragraph 4(o)(iv) of the defence, the allegation that the main reason the plant was purchased by the plaintiff was because it was directed to do so by Federated as contained in paragraph 4(p), and of crucial importance, the allegation contained in paragraph 5 of the defence that the plant was not purchased for the purpose of gaining or producing income have not been proven wrong.

In my view these remaining allegations were sufficient to put the plaintiff on notice of the case it had to meet and the burden throughout was on the plaintiff to prove that the property was acquired for the purpose of gaining or producing income.

I am further of the view that the question of the onus of proof, as argued by counsel for the plaintiff, does not arise in this case at all. Counsel's argument is applicable where there exists some doubt or uncertainty of the basis upon which the taxpayer is sought to be taxed or, in this case, upon which a claimed deduction is disallowed by way of reassessment.

Here there never was any doubt of the basis on which the capital cost allowance was disallowed. The explanations attached to the notices of reassessment for the plaintiff's 1975 and 1976 taxation years each contained a revised schedule of capital cost and each noted that the capital cost allowance claimed on the property in question had been disallowed because the property in respect of which the allowance was claimed had not been acquired for the purpose of gaining or producing income.

The notices of objection subsequently filed by the plaintiff to the notices of reassessment establish beyond doubt that the plaintiff fully appreciated the basis on which the claimed deduction was disallowed. Subsequent correspondence between the parties on the subject of the disallowed capital cost allowance and the acquisition by the plaintiff of the plant in respect of which it was claimed further confirm that the plaintiff was aware of the basis on which it was reassessed.

The vital assumption of fact made by the defendant was that the property in respect of which the plaintiff claimed capital cost allowance had not been acquired for the purpose of gaining or producing income. In my view once that assumption was made known to the plaintiff, which it was both in the prepleading period and in the defendant's pleadings, the burden was on the plaintiff to disapprove it. That is to say in this case there is a positive onus on the plaintiff to show that the organic plant had been acquired for the purpose of gaining or producing income.

The organic plant in respect of which the capital cost allowance is claimed by the plaintiff is one of two manufacturing facilities contained in a single chemical manufacturing plant which was built in Saskatchewan by the plaintiff in 1962. The other facility is a chlor-alkali plant.

The chlor-alkali plant produced feed stock for the organic plant which in turn produced feed stock for a formulating plant owned by the plaintiff in Manitoba. In 1968 the chlor-alkali plant was expanded, largely on the basis that it would supply the requirements of a pulp company. This proposed use for the plant's output did not materialize and, when combined with other reductions in the demand for the plant’s product, the whole facility became a financial failure by 1970.

At that time, the Saskatchewan Economic Development Corporation (SEDCO), which held a mortgage on the plant, foreclosed. SEDCO, the plaintiff and Federated Co-operatives Limited (Federated), which was at that time one of a number of shareholders of the plaintiff, reached an agreement for the reorganization of the plaintiff's operations and the disposition of the plant.

The agreement, the purpose of which was to remove from the plaintiff the unprofitable plant and allow it to pursue its otherwise profitable wholesale business, required the following matters to be implemented.

(a) The plaintiff was to become a wholly owned subsidiary of Federated.

(b) Federated was to incorporate a new wholly owned subsidiary, a sister company to the plaintiff, to be named Northern Industrial Chemicals Limited (NICL).

(c) The chemical manufacturing plant, including both the organic and the chlor-alkali plant, was to be sold to NICL.

The terms of the agreement were implemented in 1970. Notwithstanding the reorganization and a renewed effort to revitalize the operation of the chemical plant it continued to lose money in the hands of NICL until 1973 when, once again, SEDCO foreclosed. After some unsuccessful negotiations with another prospective purchaser SEDCO sold the chlor-alkali facility to the pulp company, which had been the intended purchaser of its 1968 expanded production, and the organic facility to the plaintiff.

In order to appreciate the reasons for which the plaintiff claims it purchased the organic plant in 1973, it is necessary to go back to 1969. It was then that the plaintiff owned the organic plant and shut it down. It has never been operated since that time either by the plaintiff or by NICL which it owned from 1970 until 1973.

Prior to 1969 the plaintiff had not only supplied its Manitoba formulating plant with base products from its organic plant, but from 1966 to 1968 it sold about one third of its output to Dow Chemical Company (Dow). Dow was a manufacturer of the same base product which it purchased from the plaintiff's organic plant and the supplier of other base products to the plaintiff's formulating plant in Manitoba.

1969 saw a significant reduction in the demand for the product of the organic plant. This excess of supply led the plaintiff and Dow to enter an agreement whereby Dow agreed to supply the requirements of the plaintiff's Manitoba formulating plant with the base product which, until then, had been produced at the plaintiff’s organic plant, provided that the plaintiff would agree to cease operating the organic plant. An essential part of the agreement was the price of the base product which was lower than the price at which Dow sold it to other wholesalers. Because of legislative restrictions on pricing, the preferred price to the plaintiff, which was called a co-manufacturer's price, could only be maintained so long as the plaintiff was a co-manufacturer of the same product or at least a potential comanufacturer.

Wayne Thompson, the president and chief executive officer of both the plaintiff and Federated, said the agreement was never reduced to writing but was negotiated on an annual basis between the manager of the plaintiffs Manitoba plant and a Dow representative. He says he left it to the manager of the Manitoba plant to ensure that the annual negotiated price was preferential with the ultimate effect of increasing the plaintiffs profits. Thompson says the main reason the plant was purchased in 1973 by the plaintiff was to enable it to maintain its agreement with Dow. That is to say, that the plaintiff would have the status of a co-manufacturer and this would preserve the basis for the preferential pricing arrangement with Dow. He said if the plaintiff did not have the plant the basis of its annual arrangement with Dow would be in jeopardy.

Thompson says there were other reasons, in addition to the main reason, why the plant was acquired by the plaintiff. He said that the plaintiff had some concern about the security of the supply of base products for its Manitoba plant and that by acquiring the organic plant the plaintiff would be in a position, if necessary, to reactivate and operate it. He also said consideration was given to the use of the plant for the manufacture of paint, for warehousing and as a location to which the plaintiff's Manitoba formulating enterprise might be transferred.

None of these secondary purposes materialized. I am not satisfied that they formed any part of the reason for purchasing the plant at the time of the purchase but rather they represented ideas for the possible use of the property after it had been acquired by the plaintiff, or at least, after the decision had been made to acquire it.

This is borne out in several of the documents written by W.E. Bergen, the then chief executive officer of the plaintiffs parent company, at about the time of the purchase of the plant. The references in his report to FCL, IPCO and PAPCO are, respectively, to federated, the plaintiff and to the Prince Albert Pulp Company Limited, the company which, it was anticipated, would take the increased production of the chlor-alkali plant following its expansion in 1968.

In his May 4, 1973 report to the board of directors he reported on negotiations which were then taking place with respect to the disposition of the plant and gave as the preferred of several solutions to the company's financial problems the following:

We advised the government that we would consider the following solutions in the following order of preference:

(1) Sale of the plant or company to PAPCO or SEDCO for one dollar. This would have resulted in no further cash outlay by FCL but would have resulted in a further write-off of approximately $900,000.

On May 11, 1973, commenting on an agreement which he thought he had with an American firm for the purchase of the shares of NICL he made the following observation with respect to the organic plant

FCL would pay an additional $600,000 into the company. For this it would retain ownership of the organic plant. Although this plant is of no real value to us at present, it could have some potential value and certainly assisted in the total process of write-offs re income tax problems as we could foresee them. Rather than give up $600,000 without any asset, we felt this was a better approach. The appraised value of this plant is approximately $1.5 million.

On May 17, 1973, after Bergen had made the decision that the organic plant would be retained he advanced, for the ratification by the Board of that decision, the following advantage for its acquisition:

We will retain the organic plant which as indicated previously, has an appraised value of $1.5 million, plus value of land. Although we cannot establish the value in regard to our negotiations with Dow re the herbicides ingredients with any degree of accuracy, we do know that a year ago we received a competitive bid which was not based on a co-manufacturer’s licence and that the differential between this bid and the one under which we are operating, is equal to approximately $75,000 per year. Furthermore, we will have the use of the building for other purposes and one of the prime ones we will be considering is formulation. Our present plant in St-Bonifice no longer has sufficient capacity. We are also faced with the problem of finding additional facilities for organic.

Finally, on June 1, 1973, Bergen reported in detail to the former shareholders of the plaintiff on the reason why the plaintiff had acquired the organic plant in the following terms:

The organic plant and the land on which it is situated totalling slightly less than seven acres, along with a quartered section of land on which the salt wells are located, has been sold to Interprovincial Co-operatives for $2,000,000. The sale to IPCO of this plant was made for the following reasons:

(a) If the asset had been sold to FCL, further complications could set in in terms of resolving FCL’s loss re the takeover of IPCO when we reached the day that IPCO ownership will revert to the former shareholders. By having the asset in IPCO the depreciation and interest costs and revenues from the plant will reflect in IPCO’s operations.

(b) Since IPCO formulates the herbicides and the organic plant was constructed to provide some of the raw materials required for formulating, it is logical to retain the ownership of this plant in the same company.

We will be considering various possible uses for the organic plant. We intend to approach other manufacturers to see whether they are interested in using it as an organic plant. Failing this we may convert it to some other purpose. In any event, we hope to derive some revenue from this asset so that we can offset the cost of depreciation, interest, taxes, etc. The Prince Albert Pulp Company was not interested in this asset and it was for this reason that we decided to retain same.

In the strict sense the plaintiff did purchase or acquire the organic plant. Practically speaking, however, and as Bergen put it, because a purchaser could not be found the plant was retained. Having decided to retain the plant it was then a matter of determining to which of the associated companies ownership should be allocated and of considering the various possible uses to which the plant could be put.

The evidence given by the plaintiffs witnesses and the documentary evidence, to which reference has just been made, with respect to the purpose or purposes for which the organic plant was acquired by the plaintiff, is not unlike that described by Thurlow, J., as he then was in M.N.R. v. Gordon, [1966] C.T.C. 722 at 728-729; 66 D.T.C. 5445 at 5450. There the taxpayer had purchased a summer cottage and land with the claimed ultimate intention of building a number of cottages on the land to let to salmon fishermen and a convalescent unit which he intended to construct and operate. The taxpayer admitted that these purposes were long-term projects but said that in the meantime he intended to lease the property. In fact, apart from a period of three and a half months in 1963, when the property had been leased, the only purpose which the cottage served during the approximately five-year period that the taxpayer held it was as a summer cottage for himself. Thurlow, J. rejected the taxpayer’s claim that the property had been acquired for the purpose of gaining or producing income and observed that the expressed purposes were mere ideas that the taxpayer had at the time of the purchase for possible uses of the property.

In my view the alleged secondary purposes for the acquisition of the organic plant i.e. paint manufacturing, warehousing and an alternate site for the formulating plant, fall into the same category as the purposes advanced by the taxpayer in the Gordon case. They represented possibilities for the use of a property, the ownership of which had been assigned to the plaintiff. The purposes claimed did not enter into the reasons or purposes for which the property was acquired. I also note that, as in the Gordon case, the property in this case was never used for any of those expressed purposes for which it was said to have been acquired.

The plaintiff admits that the proposed purposes referred to in the preceding paragraph were secondary or ancillary and asserts that the main or principal purpose for acquiring the plant was in order to maintain its bargaining stance with Dow as a co-manufacturer. The plaintiff’s submission in this respect is not at all convincing.

According to the plaintiffs witnesses the foundation of the agreement with Dow was the plaintiffs ownership of the plant because it raised the possibility of the plaintiff resuming production in competition with Dow and this possibility was essential, under the combines legislation, to the preferential price. However, from 1970 to 1973, while the plaintiff did not own the plant, Dow continued to renew the agreement on an annual basis. Even after the plant was acquired in 1973 Bergen's June 1, 1973 report indicates that the preferred course of action was to approach other manufacturers to see whether they would be interested in using it and failing that, it might be converted to some other purpose. Of the several reasons given by Bergen for the acquisition of the plant in that report the main reason now advanced by the plaintiff was not even mentioned nor does that reason appear in any way to have diminished the expressed and primary wish to dispose of it to another manufacturer.

The organic plant was acquired by the plaintiff because it was directed to do so by its parent company Federated. Federated directed the plaintiff to acquire the plant because it could not find a purchaser for it and because, as between the three associated companies, Federated determined it would be more conveniently held by the plaintiff for the reasons given in Bergen's June 1, 1973 report. It was not acquired for the purpose of gaining or producing income.

The reasons now advanced by the plaintiff as the reasons for the acquisition of the plant were not the basis or purpose for which the plant was acquired. In my view they consist of an explanation or attempted justification for the acquisition and arose only after it had been determined by the plaintiff's parent company that the plant would be retained and the ownership of it would be allocated to the plaintiff.

Counsel for the plaintiff submitted that the cost of the acquisition of the plant was laid out for the purpose of gaining or producing income for the plaintiff within the meaning of Regulation 1102(1)(c) of the regulations to the act. He cited a number of decisions interpreting the provisions of paragraph 18(1)(a) of the Act, which is similar but not identical to Regulation 1102(1)(c), and argued that the same broad interpretation be given to the regulation.

Specifically, he cited British Columbia Electric Railway Co. Ltd. v. M.N.R., [1958] S.C.R. 133; [1958] C.T.C. 21, The Royal Trust Co. v. M.N.R. (1956-60), Ex. C.R. 70; [1957] C.T.C. 32, E.R. Squibb & Sons Ltd. v. M.N.R., [1973] F.C. 162; [1973] C.T.C. 120, The Queen v. Dorchester Drummond Corporation Ltd., [1979] C.T.C. 219; 79 D.T.C. 5163, and E. Gordon Hudson v. M.N.R. (1958), 19 Tax A.B.C. 95 and submitted that property acquired by a taxpayer need not have been used directly to produce income in order that capital cost allowance be available, rather it is the purpose for which the property was acquired, and not the actual production of income or even the direct use of the property to produce income which is relevant.

In his written submission counsel for the plaintiff concluded:

The test is not whether the chemical complex was in fact used to produce base technical products after 1973. Rather, the issue is whether the plant was acquired as part of the profit-making operations of the Plaintiff. The actual and potential utility of acquiring the plant indicates that this expenditure was made and this property was acquired for the purpose of gaining or producing income from the Plaintiff’s business. The primary, albeit indirect, income-producing purpose related to the continuing supply of base technical products by Dow at a preferential price to the profitable formulating plant in Manitoba. The evidence shows that there was a real and tangible profit motivation in this regard. In addition, there were potential and ancillary profitable uses for the plant which were seriously contemplated and which were also operating motivations for the acquisition of the plant in 1973. The Plaintiff was carrying on a profitable business and acquired the chemical complex in the content of that business and for the purpose of enhancing its profitability.

This argument is largely directed to the question of the deductibility of capital cost allowance in respect of property which does not itself produce income but is nevertheless acquired for the purpose of rendering the taxpayer's business more profitable in a general sense.

Counsel for the Minister, on the other hand, cited Ben’s Limited v. M.N.R., [1955] C.T.C. 249; 55 D.T.C. 1152 and Bolus-Revelas-Bolus Limited v. M.N.R., [1971] C.T.C. 230; 71 D.T.C. 5153 and submits that in order to qualify for capital cost allowance within the meaning of Regulation 1102(1)(c) the property must have been acquired, not only for the purpose of gaining or producing income but for the purpose of gaining or producing income from that property.

It is only necessary to determine which line of authorities applies to a given set of facts if it is first established that the property was acquired for the purpose of gaining or producing income generally. As I have already concluded the organic plant was not acquired for the purpose of gaining or producing income, either generally or from that property specifically, it follows that the plaintiff’s claim has not reached the level where the distinctions raised by the two lines of authorities have to be considered.

Accordingly, for the reasons given, the plaintiff’s appeal from the notices of reassessment is allowed to the extent that the reassessments are referred back to the defendant for reconsideration and reassessment on the basis that the value of goods or products acquired or dealt in on behalf of or for customers or members of the plaintiff includes the value of such goods or products acquired or dealt in under the so-called direct billing procedure. In all other respects, and in particular, with respect to the plaintiff’s claim for capital cost allowance the reassessments are confirmed.

As the plaintiff has succeeded on one part of its claim and failed on the other there will be no order as to costs. Counsel for the plaintiff is asked to submit a draft formal judgment for signature in accordance with the reasons set out herein approved as to form by counsel for the defendant.

Appeal allowed in part.