Strayer,
].:
—
Introduction
This
is
an
appeal
from
a
reassessment
of
the
Minister
of
National
Revenue
of
the
plaintiff's
income
with
respect
to
its
Canam
Oil
Services
division
for
the
1983
taxation
year.
The
amount
in
question
is
$1,370,000
which
the
Minister
reassessed
as
income.
The
plaintiff
asserts
that
this
amount
was
a
tax-free
capital
receipt
paid
to
it
by
Imperial
Oil
Limited
with
respect
to
the
termination
of
a
contract
for
the
supply
of
waste
oil
by
Canam
to
Imperial
Oil.
The
defendant
contends
that
this
was
an
income
receipt
or,
in
the
alternative,
if
it
was
a
capital
receipt
it
was
a
capital
gain
representing
the
disposition
of
property
for
which
the
adjusted
cost
is
zero,
the
result
being
that
one-half
of
this
amount
is
taxable.
Background
Facts
Mr.
Lonsdale
Schofield,
President
and
majority
shareholder
of
the
plaintiff
company,
has
been
in
the
waste
oil
business
in
one
form
or
another
since
the
19505.
The
plaintiff
company
was
incorporated
in
1971
and
was
involved
in
the
collection
of
waste
oil
from
service
stations
and
some
industrial
users
of
oil
until
its
waste
oil
division,
known
as
Canam
Oil
Services,
was
merged
with
Breslube
Enterprises
in
1983.
It
also
operated
another
division,
Canam
Solvent
Services,
which
is
not
involved
in
this
appeal.
Mr.
Schofield
and
his
family
are
obviously
very
astute
business
people
and
Canam
Oil
Services
soon
became
the
dominant
waste
oil
collector
in
Ontario
and,
later,
in
parts
of
Quebec.
To
dispose
of
some
of
the
used
oil
Canam
also
became
involved
in
using
it
to
oil
roads
with
the
result
that
during
the
1970s
it
became
the
largest
road
oiler
in
North
America.
It
also
sold
substantial
amounts
to
industry
for
bunker
fuel
for
heating,
and
to
rerefiners
who
would
process
the
oil
and
resell
it
as
motor
oil.
In
the
late
1970s,
Canam
was
looking
for
new
markets
as
growing
concerns
were
being
expressed
about
the
environmental
effects
of
road
oiling.
About
the
same
time
the
international
price
of
crude
oil
had
risen
extremely
with
the
result
that
major
oil
companies
had
become
interested
in
recycling
used
lubricating
oils.
Canam
became
involved
in
negotiations
with
Shell
Oil
(hereafter
"Shell")
and
with
Imperial
Oil
Limited
(hereafter
"Imperial")
both
of
which
companies
were
planning
to
build
a
rerefining
plant
in
Canada.
Eventually
Canam
signed
a
contract
with
Imperial
on
November
1,
1979.
Under
this
contract
Canam
agreed
to
deliver
quantities
of
waste
oil
as
set
out
in
the
contract
(varying
from
2,000,000
gallons
in
1981
to
8,000,000
gallons
in
1983
and
for
each
year
thereafter).
The
contract
included
a
mechanism
for
fixing
the
price.
Imperial
was
to
pay
an
additional
allowance
for
freight
for
oil
purchased
in
distant
parts,
was
to
provide
free
storage
for
at
least
one
million
gallons
of
waste
oil
for
a
certain
period
of
time,
and
was
to
assist
Canam
in
obtaining
the
cooperation
of
Imperial
service
station
operators
in
supplying
waste
oil
to
Canam.
For
its
part,
Canam
was
to
expand
its
business
to
enable
it
to
supply
these
volumes
of
oil.
Further
to
assure
itself
of
a
supply
from
this
source,
Imperial
was
given
the
first
right
of
refusal
to
purchase,
should
Canam
wish
to
sell
its
assets.
By
another
agreement
Imperial
also
obtained
the
right
of
first
refusal
to
purchase
all
of
the
shares
owned
in
the
plaintiff
company
by
Lonsdale
Schofield
on
the
terms
of
any
arm's
length
offer
made
to
him
for
those
shares.
The
oil
supply
agreement
was
without
a
specific
term
but
was
(except
for
a
special
right
of
termination
given
to
Imperial
and
usable
during
the
early
part
of
the
contract,
which
is
not
relevant
here)
subject
to
termination
by
either
party
on
giving
24
months'
notice.
Before
and
during
the
term
of
its
contract
with
Imperial
Canam
expanded
its
collection
system
in
a
variety
of
ways
to
be
able
to
deliver
the
amounts
under
the
contract,
taking
over
some
small
collectors,
adding
staff
which
grew
from
22
to
38,
acquiring
additional
facilities
and
equipment,
tripling
the
number
of
collection
contracts
it
had
with
service
stations
in
order
to
ensure
it
access
to
waste
oil
(albeit
that
it
had
collected
from
many
of
these
stations
before
but
without
a
contract)
and
expanding
its
collection
territory
particularly
in
the
province
of
Quebec.
Imperial,
however,
after
much
futile
effort,
never
built
a
rerefining
plant.
During
the
term
of
the
contract
it
did
buy
some
oil
from
Canam
but
never
in
the
quantities
called
for
by
the
original
contract.
At
the
same
time
Canam
was
selling
the
majority
of
its
oil
elsewhere.
For
example
in
the
plaintiff's
taxation
year
1980
(for
the
year
ending
on
March
31,
1980)
Imperial
bought
no
waste
oil
from
Canam,
in
1981
it
bought
870,000
gallons,
and
in
1982
it
bought
1,761,000
gallons.
It
bought
no
oil
thereafter,
except
nominally
as
a
subsidy
arrangement.
During
these
same
years
some
of
Canam's
other
sales
included:
road
oil,
4,169,000
gallons
in
1980,
3,505,000
gallons
in
1981,
and
2,517,000
in
1982;
and
to
Breslube,
a
rerefiner,
it
supplied
679,000
gallons
in
1980,
1,420,000
gallons
in
1981,
and
1,208,000
gallons
in
1982.
During
the
same
period
Canam
was
experiencing
very
difficult
price
competition
in
collecting
oil
because
Shell,
which
had
in
the
meantime
opened
a
rerefining
plant,
was
competing
for
waste
oil
by
offering
high
prices.
In
order
to
assist
Canam
to
maintain
its
collection
system
Imperial
voluntarily
paid
subsidies
to
Canam
to
enable
it
to
meet
the
price
competition.
This
involved
an
additional
gratuitous
amount
paid
by
Imperial
for
every
gallon
Imperial
purchased,
calculated
by
reference
to
Canam's
total
oil
purchases
so
that,
in
effect,
it
was
assisted
in
the
purchase
of
all
its
waste
oil.
Imperial
also
split
the
cost
of
the
"interceptor
program"
which
was
a
"loss
leader"
offered
to
service
station
operators
involving
the
cleaning
of
the
sumps
in
their
car
bays
as
a
bonus
for
supplying
waste
oil
to
Canam.
The
plaintiff
admits
that
the
subsidy
and
interceptor
payments
by
Imperial
were
purely
voluntary
and
not
required
by
the
contract.
It
appears
that
Imperial
was
losing
money
under
the
contract
and
as
a
result
of
these
voluntary
payments.
Further
it
had
no
use
for
the
oil
which
was
being
supplied
by
Canam
and
it
was
obliged
to
dispose
of
the
oil
in
the
United
States
at
a
loss.
As
a
result
Imperial
by
letter
of
June
22,
1982
gave
notice
of
termination
of
the
agreement,
the
effective
date
of
the
notice
to
be
July
1,
1982.
In
accordance
with
its
terms,
the
contract
would
thus
come
to
an
end
on
June
30,
1984.
Further,
on
July
15,
1982
Imperial
notified
the
plaintiff
by
letter
that
it
was
terminating
the
voluntary
subsidies
and
interceptor
program.
Beyond
this
Imperial
opened
negotiations
with
the
plaintiff
to
terminate
its
obligations
under
the
contract
prior
to
the
time
the
contract
would
have
ended
pursuant
to
the
two-year
notice.
On
October
25,
1982
the
parties
signed
an
agreement
relieving
Imperial
of
such
obligations.
Under
this
agreement
Imperial
was
to
pay
the
plaintiff
$1,300,000
and,
at
the
election
of
the
plaintiff,
either
provide
free
storage
of
certain
quantities
of
waste
oil
for
up
to
two
years
or
else
pay
the
plaintiff
an
additional
$70,000
in
lieu
of
that
benefit.
Imperial
was
also
to
use
its
best
efforts
until
June
30,
1984
to
assist
the
plaintiff
in
getting
access
to
waste
oil
from
Imperial's
stations.
The
agreement
provided
that
the
plaintiff
released
Imperial
from
all
actions
or
claims
under
the
contract
or
with
respect
to
subsidies
or
the
interceptor
program.
The
plaintiff
subsequently
elected
to
take
the
$70,000
instead
of
the
free
storage
with
the
result
that
the
total
payment
to
it
by
Imperial
was
$1,370,000,
the
amount
in
dispute
in
this
appeal.
During
the
12-month
period
following
the
termination
of
this
contract
it
appears
that
Canam
did
seek
and
find
some
new
markets
in
the
United
States
where
it
disposed
of
at
least
1.5
million
gallons.
Also
during
the
taxation
year
in
which
the
contract
was
terminated
road
oil
sales
appear
to
have
increased
by
over
800,000
gallons.
In
January
1983,
some
three
months
after
the
termination
of
the
contract,
Mr.
Schofield
was
approached
by
Breslube
with
an
offer
to
purchase
4,000,000
gallons
of
waste
oil
per
year
for
rerefining.
Mr.
Schofield
rejected
that
offer
but
eventually,
after
considering
other
possibilities,
it
was
agreed
that
Canam
would
be
merged
with
Breslube
to
form
an
integrated
company
involved
in
both
the
collection
and
rerefining
of
oil
with
collection
systems
in
both
Canada
and
the
United
States.
This
merger,
which
involved
the
continuation
of
the
Canam
collection
system
within
Canada,
appears
to
have
been
very
successful.
Conclusions
To
assist
in
the
determination
of
the
nature
of
the
payment
from
Imperial,
counsel
for
both
parties
cited
to
me
the
now
classical
statement
of
Lord
Russell
in
Commissioners
of
Inland
Revenue
v.
Fleming
&
Co.
(Machinery),
Ltd.'
.
.
.
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.
.
.
.
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.
.
.
.
Thus
the
question
is,
was
this
money
paid
to
replace
lost
capital
or
lost
income?
I
have
recently
examined
the
authorities
at
length
in
my
judgment
Canadian
National
Railway
Co.
v.
M.N.R.
and
will
not
repeat
that
exercise.
In
that
case
I
took
the
approach
that
it
was
necessary
to
look
at
both
the
purpose
and
the
effect
of
the
payment,
in
the
process
of
characterizing
it
as
capital
or
income
in
nature.
It
appears
to
me
here
that
the
purpose
actually
being
pursued
by
the
parties
was
to
replace
income.
It
is
clear
from
an
internal
document
of
Imperial
(put
into
evidence
by
the
plaintiff)
that
it
had
made
in
preparation
for
possible
negotiations
to
terminate
the
contract,
that
Imperial's
preoccupation
was
to
avoid,
through
a
settlement,
its
liability
to
buy
from
Canam,
as
required
by
the
contract,
some
15,000,000
additional
gallons
of
waste
oil
prior
to
the
lawful
termination
date
of
the
contract
of
June
30,
1984.
This
was
oil
for
which
it
had
no
use
and
whose
disposition
would
cost
it
further
money.
For
his
part
Mr.
Schofield,
who
acted
on
behalf
of
the
plaintiff
in
this
matter,
frankly
admitted
in
his
evidence
that
when
faced
with
Imperial’s
desire
to
get
out
of
its
further
contract
obligations,
he
focused
on
the
potential
loss
of
the
subsidy
of
over
twenty
cents
per
gallon
that
he
had
been
receiving
from
Imperial
prior
to
its
termination
of
the
subsidy.
Multiplying
that
by
the
14
or
15
million
gallons
which
Imperial
was
obliged
to
buy
before
the
termination
notice
had
run
out,
he
came
up
with
the
rough
figure
of
$3,000,000
which
he
felt
he
should
receive
if
he
were
to
abandon
his
rights
under
the
contract.
The
logic
of
this
position
is
not
entirely
clear,
as
by
this
time
the
subsidies
had
already
been
cancelled
unilaterally
(as
Imperial
was
entitled
to
do)
by
the
letter
of
July
15,
1982.
But
it
is
clear
that
Mr.
Schofield’s
preoccupation
was
with
lost
sales
and
some
suitable
compensation
for
them.
He
testified
that
he
negotiated
the
compensation
in
order
to
"buy
time"
for
Canam
after
the
loss
of
the
payments
from
Imperial,
so
that
he
could
redirect
the
business
into
profitable
markets.
Nowhere
has
he
suggested
that
he
made
any
calculation
of
losses
of
any
assets
such
as
good
will
or
the
structure
of
his
business
in
order
to
quantify
his
negotiating
demands,
or
that
he
raised
any
such
matters
with
Imperial
in
those
negotiations.
The
resulting
contract,
to
the
extent
that
it
contains
any
indications
as
to
the
intentions
of
the
parties
in
this
respect,
supports
the
view
that
it
simply
provided
to
the
plaintiff
compensation
for
revenues
from
sales
it
would
otherwise
been
entitled
to
make
to
Imperial.
While
I
agree
that
the
measure
employed
for
calculating
compensation
is
not
necessarily
determinative
of
the
nature
of
the
payment
actually
made
it
is
certainly
a
factor
which
can
be
taken
into
account
in
characterizing
that
payment.
I
am
equally
satisfied
that
the
effect
of
this
payment
was
not
to
compensate
the
plaintiff
for
the
destruction
of
"the
whole
structure
of
the
recipient's
profit-making
apparatus
.
.
.”,
as
referred
to
by
Lord
Russell
in
the
passage
quoted
above,
but
was
rather
a
"surrogatum
for
the
future
profits
surrendered
.
.
.”
as
he
said.
The
essence
of
the
plaintiff's
case
appears
to
be
that
from
the
commencement
of
the
Imperial
contract
Canam's
whole
raison
d'être
was
the
performance
of
that
contract,
involving
supplying
such
oil
to
Imperial
as
the
latter
saw
fit
to
take
with
prospects
of
better
days
ahead,
equipping
itself
with
a
reliable
collection
apparatus
sufficient
to
meet
the
contract
gallonnages
prescribed
for
the
future
in
the
contract,
and
receiving
numerous
benefits
from
Imperial
both
contractual
and
gratuitous.
As
has
been
often
said,
these
cases
turn
on
their
respective
facts
and
the
differences
from
one
to
another
are
more
of
degree
rather
than
of
kind.
I
am
satisfied
on
all
the
evidence
that
I
cannot
accept
the
plaintiff's
characterization
of
its
relationship
to
Imperial
as
the
essence
of
its
business
which
was
destroyed
by
the
termination
of
the
contract.
One
thing
which
seems
quite
clear
is
that
the
plaintiff
up
to
the
time
of
its
merger
with
Breslube
in
1983
was
and
always
had
been
in
the
oil
collection
business.
That
business
was
a
successful
one
before,
during
and
after
the
Imperial
contract.
It
enjoyed
substantial
gross
profits
throughout
the
whole
period.
It
also
reported
net
profits
in
the
years
in
question
except
for
1983,
returning
to
a
small
net
profit
in
1984.
During
the
period
of
the
contract
Imperial
was
never
a
major
purchaser
of
its
oil
although
Imperial
gratuitously
subsidized
all
the
plaintiff's
oil
collections
because
of
a
temporary
price-war.
The
plaintiff
has
alleged
in
its
pleadings
that
the
contract
represented
80
per
cent
or
more
"of
the
business"
of
Canam,
but
this
has
not
been
demonstrated.
After
the
contract
was
terminated
the
plaintiff
agrees
that
it
did
not
lay
off
staff
and
it
did
not
dispose
of
any
substantial
part
of
its
assets.
It
appears
to
have
had
a
period
of
some
surplus
of
stock
and
of
a
reduction
of
sales
but
within
a
few
months
it
was
in
a
position
to
turn
down
an
offer
from
Breslube
to
purchase
4,000,000
gallons
per
year.
Instead
the
plaintiff
was
able
to
use
its
ownership
of
the
dominant
oil-collecting
apparatus
in
Central
Canada
to
effect
a
very
profitable
merger
with
a
rerefiner,
Breslube,
which
had
recently
doubled
the
capacity
of
its
plant
and
was
in
need
of
oil.
The
profit-making
apparatus
of
the
plaintiff
was
in
no
way
destroyed:
it
survived
the
termination
of
the
Imperial
contract
and
in
fact
was
liberated
by
that
termination
so
that
it
could
use
its
secured
access
to
a
dominant
share
of
the
waste
oil
supply
in
Central
Canada
to
negotiate
disposal
of
that
oil
on
very
favourable
terms,
namely
by
merging
into
an
integrated
oil
recycling
industry.
In
the
year
following
that
merger,
the
Canam
apparatus
supplied
an
additional
8
million
gallons
of
waste
oil
to
Breslube,
as
much
as
it
would
have
supplied
to
Imperial
had
the
contract
been
in
force
and
respected
by
Imperial.
In
reaching
this
conclusion
I
have
considered
carefully
the
nature
of
the
Imperial
contract
which
is
said
by
the
plaintiff
to
have
been
at
the
centre
of
its
profit-making
apparatus.
There
is
no
doubt
that
the
contract
caused
the
plaintiff
to
expand
and
stabilize
its
collection
arrangement.
The
contract
was
an
important
means
of
securing
a
future
supply
for
Imperial,
and
a
market
for
the
plaintiff,
of
the
quantities
of
oil
specified
in
the
contract.
The
"first
refusal”
rights
of
Imperial
to
purchase
were
important
elements
in
this
security.
But
the
supply
contract
was
never
of
an
exclusive
nature:
Imperial
could
buy
oil
elsewhere
if
it
took
the
quantities
from
Canam
specified
in
the
contract,
and
Canam
was
always
free
to
sell
elsewhere
any
oil
not
required
by
Imperial.
Further,
it
was
a
contract
that
was
always
terminable
on
two
years
notice,
with
no
obligation
to
pay
any
compensation
either
for
loss
of
revenue
or
loss
of
capital
where
the
contract
was
terminated
with
the
proper
notice.
It
is
hard
to
believe
that
the
plaintiff
ever
made
"the
whole
structure
of
[its]
.
.
.
profit-making
apparatus
.
.
."
dependent
on
such
a
transitory
arrangement.
Nor,
as
the
contract
only
lasted
in
fact
for
three
years,
can
it
be
said
that
this
long-standing
successful
oil-collection
business
had
become
completely
dependent
on
the
Imperial
contract.
Mr.
Schofield
was
obviously
preoccupied
with
the
loss
of
subsidies
from
Imperial
and
based
his
personal
calculations
of
suitable
compensation
on
the
loss
of
those
subsidies.
The
subsidies
were
no
doubt
important
to
the
profitability
of
the
plaintiff
during
the
period
when
they
were
paid
because
the
plaintiff
was
experiencing
very
difficult
price
competition
for
the
first
time
in
its
existence.
But
while
the
existence
of
the
contract
was
a
sine
qua
non
for
the
payment
of
subsidies
on
gallonage
purchased,
the
subsidies
were
not
in
any
way
required
under
the
contract.
In
fact,
the
plaintiff
had
already
lost
those
subsidies
through
a
unilateral
notice
from
Imperial
on
July
15,
1982
well
before
the
termination
agreement
was
negotiated
and
signed
in
October
that
year.
At
that
point
the
contract
at
best
entitled
the
plaintiff
to
supply
Imperial
with
the
prescribed
amounts
of
oil
at
an
unsubsidized
price
of
what
I
understand
was
then
58.9
cents
per
gallon,
not
dissimilar
to
the
prices
received
in
other
sales
in
the
period
following
the
termination.
This
was
the
"business"
as
it
existed
immediately
before
the
signing
of
the
termination
agreement
under
which
the
compensation
in
question
here
was
paid.
Thus
the
termination
of
the
contract
did
not
deny
the
plaintiff
the
subsidies
which
it
considered
essential
to
the
viability
of
its
business.
Those
subsidies
had
already
been
lost
and
the
compensation
of
$1,370,000
paid
pursuant
to
the
termination
agreement
cannot
be
considered
in
any
way
as
a
replacement
for
this
supposed
foundation
of
the
business.
I
note
that
subsidies
are
referred
to
in
the
release
provisions
of
paragraph
5(a)
of
that
agreement
but
I
am
satisfied
that
is
attributable
only
to
an
abundance
of
caution.
Of
course,
even
in
the
unlikely
event
that
the
settlement
payment
could
be
seen
as
replacement
of
subsidies
it
should
be
regarded
as
replacement
of
income
because
the
plaintiff
had
always
treated
the
subsidies
as
income
and
such
voluntary
payments
can
be
properly
so
regarded.
I
therefore
conclude
that
the
payment
of
$1,370,000
from
Imperial
to
the
plaintiff
was
for
the
purpose
of
replacing
lost
income
otherwise
payable
under
the
contract
which
was
being
terminated
and
therefore
the
Minister
properly
reassessed
it
as
income.
The
appeal
is
dismissed
with
costs.
Appeal
dismissed.
Email this Content