The Queen v. Canadian General Electric Co. Ltd., 87 DTC 5070, [1987] 1 CTC 180 (FCA)

MacGuigan, J. (Pratte, J. concurring):—The issue raised by this case and by case A-689-82 may be expressed in the oft-cited question of Bankes, L.J. in British Dyestuffs Corporation (Blackley) Ltd. v. The Commissioners of Inland Revenue, 12 T.C. 586 at 596:

[l]s the transaction in substance a parting by the Company with part of its property for a purchase price, or is it a method of trading by which it acquires this particular sum of money as part of the profits and gains of that trade?

In these two cases the amounts in question were received by the respondent in the 1968 (A-688-82) and 1971 (A-689-82) taxation years in consideration of agreeing to provide Atomic Energy of Canada Limited ("A.E.C.L.") with knowhow and a non-exclusive licence under patents and patent applications relative to the design, construction and operation of a heavy water plant and the processes involved in producing heavy water.

The two appeals raise identical issues and were heard on common evidence, decided together by the trial judge, and argued together before us

— or more accurately only the 1968 receipt of $750,000 was argued, with the parties agreeing that the 1971 receipt of $250,000 should be treated in the same way.

The respondent was induced by A.E.C.L. in 1966 to build a heavy water plant at Port Hawkesbury, N.S. by a long-term firm-price contract to sell the 400-ton-a-year production to A.E.C.L., along with a right of first refusal on A.E.C.L.’s future needs of heavy water. The respondent accordingly contracted with the Lummus Company and its Canadian subsidiary (collectively "Lummus”), which had built and was operating a heavy water plant of smaller capacity for the U.S. Atomic Energy Commission, to participate in the design, engineering and construction of its plant. The agreement with Lummus also contemplated the possibility of non-exclusive licences with third parties, either with both or only one of the two parties. In fact, the only agreement the respondent ever made for the licensing of its knowhow was its subsequent agreement with A.E.C.L., under which all of the payments were made to the respondent and no part of the payment was shared by it with Lummus.

The agreement of December 18, 1968, with A.E.C.L. came about in this fashion. By the summer of 1968 A.E.C.L. became convinced that the commercial future of its Candu program depended on a substantial expansion of heavy water production. A.E.C.L. offered the respondent the opportunity to build and own new heavy water facilities, but from a business point of view the respondent felt unable to make such an additional commitment at that time. Its investment in the plant at Port Hawkesbury, which was completed only in 1970, represented some 52 per cent of its investment in fixed assets and an amount equal to about a quarter of its equity. In the words of the respondent's memorandum of fact and law:

41. In the early fall of 1968, AECL indicated to CGE that it wanted CGE to double the capacity of the Port Hawkesbury plant. CGE was not prepared to do so for economic reasons. The original estimated cost of the plant was about $65,000,000, the plant was behind schedule and it was clear then that the actual costs would exceed the estimate.

A.E.C.L. therefore decided to build a plant itself with an annual capacity of 420 tons. The evidence shows that, although A.E.C.L. could have pro- ceeded without the help of the respondent, it would save time (two years) and expense through access to the respondent’s newly acquired knowhow. The agreement of December 1968 provided that, for a total consideration of $1.5 million,* [1] the respondent was to provide A.E.C.L. with drawings and specifications relating to the design of the Port Hawkesbury plant. The agreement also included two first-refusal clauses for the respondent: the first, in the event that A.E.C.L. decided to dispose of its plant to any party other than the Hydro Electric Power Commission of Ontario; the second, in the event that additional production of heavy water was required, in which case the respondent was to have a reasonable opportunity either to add to the production capabilities of its Port Hawkesbury plant or to construct additional plants.

Within seven weeks of this agreement A.E.C.L. announced its intention to double the capacity of its 420-ton plant unless the respondent exercised its option to build increased capacity. Again in the words of the respondent’s memorandum of fact and law,

50. For CGE there was no way at that time that it could build the additional capacity. All of the economic factors constraining it in December, 1968 were still in effect in early February, 1969. By surrendering the technology in 1968, it had given up its position as the sole supplier of heavy water in Canada. . . .

51. Although CGE continued to produce heavy water at its plant pursuant to its supply contract after the sale of the plant technology and the decision of the AECL to undertake production of heavy water for its own account marked the end of the business opportunity to build, own and operate additional heavy water plants in Canada.. ..

52. The sale of the Port Hawkesbury plant to AECL in 1975 was seen as the inevitable result of the decision to sell the technology in 1968. . . .

Four House of Lords’ decisions are directly in point. In Evans Medical Supplies, Ltd. v. Moriarty (H.M. Inspector of Taxes), 37 T.C. 540 and Wolf Electric Tools Ltd. v. Wilson (H.M. Inspector of Taxes), 45 T.C. 326; [1969] 2 All E.R. 727 lump sum payments were held to be capital. In Jeffrey (H.M. Inspector of Taxes) v. Rolls-Royce-Ltd., 40 T.C. 443 and Musker (H.M. Inspector of Taxes) v. English Electric Co., Ltd., 41 T.C. 556 lump sum payments were held to be income.

The leading authority for this Court must, however, be the Court’s unanimous decision in Canadian Industries Limited v. The Queen, [1980] 2 F.C. 463; [1980] C.T.C. 222. There, Canadian Industries Limited (“C.I.L.”) had received $378,000 from the government of the United States under a contract licensing that government to use C.LL.’s data, inventions and knowhow for the manufacture of T.N.T. according to a new process. After analyzing the English authorities Le Dain, J. said for the Court at 484-87 (C.T.C. 235-37):

What emerges from this analysis is that it is not sufficient that there be the stipulation of a lump sum payment unrelated to the extent of the anticipated use of the patent in order for such payment to be capital in nature; the licence for which it is consideration must amount to a disposition or sale of part of the patent rights. This concept of a disposition of or parting with a capital asset is central to the test formulated by Bankes L.J. in British Dyestuffs, which has been cited with approval in several of the cases. . . .

It is my opinion, therefore, based on this line of authority, that the fact the lump sum payment in the present case was given for a licence to use patents as well as for “know-how” does not add any significant force to the appellant’s contention that the sum must be considered to be capital. While the United States patents are clearly capital assets the licence, which is non-exclusive, for a limited purpose (to the United States Government for military or non-commercial purposes) and for a limited term, cannot be considered, on the analysis to be found in the cases, to be a parting with or disposition of the patent rights. The right stipulated in the Licence Agreement to sell any plant built under the licence and to disseminate the design and process data furnished under the Services Agreement would not appear to have any bearing on the nature of the licence to use the United States patents. Moreover, I would observe that these patent rights are in any event not, strictly speaking, the property of the appellant. CIL was given the right to grant licences under them by those who control the patents in accordance with the understanding in paragraph 4(c) of the CIL-Chematur agreement that CIL would negotiate the licence agreements for continuous process plants on the North American continent. What had been granted to CIL by that agreement was a non-exclusive licence under any Canadian patents. The record shows that Chematur owned or controlled the rights under the four United States patents referred to in Article 1, paragraph (b) of the Licence Agreement.

In so far as the licence to use the “background data” or “know-how” is concerned, it is quite clear on the authority of the Rolls-Royce and English Electric cases that the fact a lump sum payment for such “know-how” is unrelated to the extent of use is not sufficient by itself to make it a capital receipt. The appellant’s case then comes down in the final analysis to the contention that it reflects the essential distinguishing features of Evans Medical Supplies — namely, that the “know-how” was of a secret or confidential character, that the agreement under which it was imparted was a single or isolated transaction, and that the imparting of it resulted in a loss to the appellant of a substantial part of its business. I am prepared to regard the appellant’s “know-how” as the equivalent, for purposes of analysis, of the “secret processes” in Evans Medical Supplies and Wolf Electric, but that does no more than give it the character of a capital asset analogous to patent rights. As to the evidence that the Licence Agreement was the only one of its kind that CIL had entered into, I think there is this important distinction: while it may have been obliged to enter into this agreement by the position of the United States Government, agreements of this kind were contemplated by the Cil-Chematur agreement as a form of business to be shared in by the parties. They were contemplated as a deliberate policy, to use the distinction that was emphasized in Rolls Royce and English Electric. It comes down then in my opinion to the essential question: does the evidence show that CIL lost its business for military TNT with the United States Government as a direct and necessary result of entering into the Licence Agreement? In my opinion it does not. The evidence shows that the United States Government eventually ceased to purchase TNT from CIL, although precisely when that occurred is not clear. What it does not show is that the loss of this business was inherent in the licensing arrangements that were made. These arrangements did not, as in the case of Evans Medical Supplies and Wolf Electric, permit someone who had not been manufacturing at all to engage in manufacturing.

The United States Government had been purchasing TNT from CIL when the Government had its own “batch process” plants. There is nothing to suggest that at some point it might not have increased its own production and ceased to purchase from CIL. Conversely, there is nothing in the evidence to suggest that it might not have continued to purchase from CIL after the licensing arrangements permitting it to build continuous process plants. Nowhere in the evidence is it indicated that it was part of the understanding which led to the licensing arrangements and the lump sum payment stipulated that the United States Government would cease to purchase from CIL. For these reasons, I do not think the case can be brought within Evans Medical Supplies, assuming that that case may still have some application to a lump sum payment for “know-how”, despite the extent to which its significance has been narrowed by subsequent judicial commentary. In effect, I can see no reason in the circumstances of the present case not to apply the principles affirmed in the Rolls-Royce and English Electric cases with respect to the nature of a disclosure of “know-how” and to hold that the sum received was an income rather than a capital receipt. Accordingly, I would dismiss the appeal with costs. [Emphasis added.]

It seems clear to me that Le Dain, J. regarded the essential question for decision as whether the taxpayer lost its business with the U.S. government as a direct and necessary result of entering into the Licence Agreement. However, the learned trial judge in the instant case, although recognizing the essential question in the C./.L. case, felt that it could not be applied to the facts here:

It is entirely appropriate to characterize the know-how in issue here as “a capital asset analogous to patent rights”.* In that circumstance, it is of no import that the licensing agreement did not allocate the consideration as between know-how and licenses under the patents and that there is no evidence upon which such an allocation could be made.

CIL analysed exhaustively the British judgments on this issue. . .. The analysis confirms the fundamental validity of the principle enunciated by Lord Pearce in BP Australia Ltd. v. Commissioner of Taxation; [1966] A.C. 224 at 264 ff:

The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer. Although the categories of capital and income expenditure are distinct and easily ascertainable in obvious cases that lie far from the boundary, the line of distinction is often hard to draw in border line cases; and conflicting consideration may produce a situation where the answer turns on questions of emphasis and degree. . . . As each new case comes to be argued felicitous phrases from earlier judgments are used in argument by one side and the other. But those phrases are not the deciding factor, nor are they of unlimited application. They merely crystallise particular factors which may incline the scale in a particular case after a balance of all the considerations has been taken.

That principle was cited with approval in M.N.R. v. Algoma Central Railway, [1968] S.C.R. 447; [1968] C.T.C. 161; 68 D.T.C. 5096.

The essential question in C/L was identified, at page 486, as being:

does the evidence show that CIL lost its business for military TNT with the United States Government as a direct and necessary result of entering, into the License Agreement?

The essential question here cannot be so stated because, in this case, the effect of the decisions by AECL and Ontario Hydro to demand, when they did, additional heavy water production was to eliminate, de facto, the Plaintiff’s opportunity to make further use, in Canada, of the inventions and know-how generated in the design, construction and commissioning of the Port Hawkesbury plant. Those decisions antedated the offer to buy the know-how and licenses. The Plaintiff had not undertaken the Port Hawkesbury plant with a view to building and operating only it. It had seen a golden opportunity to build and operate other plants if it built the first one and it saw that opportunity disappear with the Ontario Hydro and AECL decisions. The essential question here is not whether the Plaintiff lost a particular business as a result of entering into the licensing agreement; it lost none of the business attaching directly to the Port Hawkesbury plant and it had already lost the opportunity to engage in that business elsewhere in Canada.

The facts peculiar to this case distinguish it from CIL and from the other authorities considered in CIL. While the Plaintiff does grant licenses of its patents in the ordinary course of its business and does, on occasion, sell its know-how, this transaction was not in the ordinary course of its business. Neither was it an adven ture in the nature of trade. It was not undertaken with a view to realizing a profit. Rather it was essentially a salvage operation, a realization of a capital asset which, in the circumstances, was of considerable immediate value to AECL and of no apparent future value to the Plaintiff in the Canadian market.

*CIL, p. 486.

With respect, I fail to understand why the essential question in the C./.L. case is not equally appropriate here. What seems evident to me is that the question can not only be posed but that it leads to a conclusion unfavourable to the respondent.

The respondent itself admits that in the fall of 1968 it was not prepared to double the capacity of its Port Hawkesbury plant "for economic reasons”, and that “all of the economic factors constraining it in December 1968, were still in effect in early February 1969”. The decision of A.E.C.L. to undertake production of heavy water on its own, if necessary, may have been among the economic factors constraining the respondent, but it is clear from the evidence that both the uncertainty of success and the cost factors surrounding its own Port Hawkesbury plant were the principal constraints. In these circumstances, it would be an improper inference to find that the respondent lost its business as a direct and necessary result of entering into the agreement with A.E.C.L. If it had had the financial resources in 1968-69, it could have continued to build and operate other heavy water plants.

The distinguished trial judge evidently placed great emphasis on the de facto consequence of A.E.C.L.’s decision to go it alone, if necessary. If the question were entirely open on the authorities, such a de facto approach might perhaps be the most fruitful pathway for the law. But it seems to me that the C./.L. case stands for the proposition that the sale of knowhow will not normally be regarded as the sale of a capital asset, particularly when the sale is by a non-exclusive licence, and that any exception to this rule must be strictly established as a total loss of knowhow which is a direct and necessary result of the licence agreement. There is no more reason to make allowance in this case for de facto factors than there was in the C./.L. case. If the C.I.L. test is strictly applied, as I believe it must be, the respondent cannot succeed.

The respondent also argued that the appellant’s pleadings do not put in question whether the $750,000 that became receivable during 1968 was receivable as income from a business carried on by the respondent. But paragraph 5 of the respondent's own statement of claim, following on the ministerial assessment, clearly indicates the respondent's understanding that the amount was business income received in 1968.

The respondent further argued that, if only some part of the $750,000 that became receivable in 1968 is on income account, but not all of it, the respondent is nevertheless entitled to succeed on this appeal in the absence of any evidence with respect to an allocation between the income portion and the capital portion. However, I do not come to the conclusion that any portion of the amount received in 1968 is on capital account.

I would therefore allow the appeal, set aside the decision of the trial judge and restore the reassessment of the Minister, with costs to the appellant here and below.

Urie, J. (dissenting):—This is an appeal from a judgment of the trial division in which the respondent's appeal from an income tax reassessment made by the Minister of National Revenue in respect of the respondent's 1968 taxation year, was allowed. The issue in the trial division was the same as that in this Court and was defined by the learned trial judge, Mahoney, J., in the following way:

The sole issue remaining, after settlement and abandonment of other matters, is whether an amount received by the Plaintiff in consideration of agreeing to provide Atomic Energy of Canada Limited, hereafter “A.E.C.L.”, with “know-how” and a non-exclusive licence under patents and patent applications relative to the design, construction and operation of a heavy water plant and the processes involved in producing heavy water was a capital or income receipt. . . .

He found that the payment in issue was received by the respondent on account of capital and that, therefore, the reassessment should be set aside since it had been based on the payment in issue being a receipt in the hands of the respondent on account of income. The appellant appeals this finding.

The resolution of the appeal depends, to a large extent, on a determination of whether or not the trial judge made a proper assessment of the facts and thus necessitates a rather extensive review of the evidence to effect such a determination. It will then become necessary to decide whether or not on that proper appreciation of the facts, the judgment of this Court in Canadian Industries Limited v. The Queen, [1980] 2 F.C. 463; [1980] C.T.C. 222 is determinative of the issue, as counsel for the appellant contended.

The appropriate framework within which the determination must take place as to whether an amount received by a taxpayer is on his capital account or on his income account, was enunciated in the oft-quoted excerpt from the judgment of the Privy Council in B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia, [1966] A.C. 224; [1965] 3 All E.R. 209 wherein Lord Pearce, speaking on behalf of the Court, said at pages 264-65 (All E.R. 218):

The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer. Although the categories of capital and income expenditure are distinct and easily ascertainable in obvious cases that lie far from the boundary, the line of distinction is often hard to draw in border line cases; and conflicting considerations may produce a situation where the answer turns on questions of emphasis and degree. That answer:

“depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process”:

per Dixon J. in Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation. As each new case comes to be argued felicitous phrases from earlier judgments are used in argument by one side and the other. But those phrases are not the deciding factor, nor are they of unlimited application. They merely crystallise particular factors which may incline the scale in a particular case after a balance of all the considerations has been taken. [Emphasis added. ]

This statement of principle received the approval of the Supreme Court of Canada in M.N.R. v. Algoma Central Railway, [1968] S.C.R. 447 at 449; [1968] C.T.C. 161 at 162. To evaluate the . . many aspects of the whole set of circumstances . . .” I will first deal with the evidence which can be taken to have established undisputed facts.

I

The Facts Established by the Evidence

The respondent is one of the largest and most diversified manufacturers in Canada. It is engaged in the design, manufacture and sale of its very broad product line to the electrical, utility, industrial, commercial and consumer goods markets. In or about 1952 it commenced its involvement in the engineering and manufacturing of components for the Candu nuclear reactor, Canada’s entry in the utilization of nuclear energy for civilian, as opposed to military, purposes. It initially participated in the design and construction of a prototype nuclear generating plant at Rolphton, Ontario, utilizing the Candu concept of natural uranium and heavy water. The Candu process is a method of producing steam to drive a turbine generator which produces electricity. In that process, natural uranium is employed in the reactor in conjunction with a heavy water moderator. In other systems enriched uranium is used in conjunction with ordinary water. Heavy water is chemically known as deuterium oxide (D,O), and is found in ordinary water (H,O) in proportion of about one part in 7000. To obtain it, it must be separated from ordinary water. A heavy water plant performs that function. For a viable Candu reactor heavy water must be available in substantial quantities.

The Atomic Energy Control Board (“the Board”) was created pursuant to the Atomic Energy Control Act* [1] and its regulations, to regulate the nuclear industry in Canada. Atomic Energy of Canada Limited (“A.E.C.L.”) is a Crown corporation formed in 1952 under subsection 10(2) of the Act to solely coordinate, direct, promote and control the nuclear industry in Canada. Heavy water is a prescribed substance under the Act and, thus, its production and sale is regulated and controlled by the Board. By virtue of that control, A.E.C.L. is the only customer for heavy water in Canada.

The respondent’s (herein sometimes referred to as “C.G.E.’’) original involvement in the nuclear industry in Canada was in the design and construction of the Rolphton prototype. It had originally thought that it had had an understanding with A.E.C.L. that it would be given the opportunity to build future nuclear plants. For a variety of reasons, only peripherally relevant here, that opportunity was denied to it. All subsequent nuclear reactors were built either by A.E.C.L. or provincial utilities, principally Ontario Hydro Electric Power Commission (“O.H.E.P.C.”).

In the early 1960s, A.E.C.L. awarded a contract for the construction of a 200 ton heavy water plant at Glace Bay, Nova Scotia, to Deuterium of Canada (“Deuterium”). The plant was built but, in the event, never produced a pound of heavy water. Because this eventual result appeared a likelihood and because of the urgent need for heavy water in the production of electricity from the quickly expanding nuclear power facilities, C.G.E., notwithstanding its earlier rebuff in the construction of nuclear reactors, in 1966 agreed to construct a 400-ton capacity heavy water plant at Port Hawkes- bury, Nova Scotia, and to supply A.E.C.L. with the heavy water there produced. There can be no doubt from the evidence that in deciding to participate in this undertaking, C.G.E. evaluated not only the economics of this 400-ton capacity plant but also anticipated growth in the demand for heavy water which would require the provision of additional plants. It thought that A.E.C.L. had, by giving it a right of first refusal to construct more plants, given it the opportunity to meet all future needs of A.E.C.L. for heavy water. It therefore entered into a supply contract under which A.E.C.L. agreed to buy all of the production of the Port Hawkesbury plant for a period of 121/ years at stipulated prices.

C.G.E. employed the Lummus Company as its general contractor for the plant. That company was chosen because of the experience it had derived from refitting and maintaining a heavy water plant at Savannah River, Georgia. There were a number of differences in the two plants, the most significant of which was that the Port Hawkesbury facility was about seven times larger than the Savannah River one. The configuration of the exchange towers was also substantially different, inter alia. The construction contract, dated May 22, 1968, with Lummus provided for the entry into an agreement for the licensing of others to use the '"know-how" and technical information developed in the design, construction and operation . . ."" of the Port Hawkesbury plant.t [2] An agreement dated July 23, 1970 amplified that understanding. There was testimony on the record which disclosed that the principal reasons for entering the licensing arrangement were to prevent Lummus from disclosing the technology without the consent of C.G.E. and to prevent disputes in the future as to the ownership of the "know-how"" acquired during the construction of the plant. In the event, no licensing was ever granted by C.G.E. unless the sale which is the subject matter of this litigation falls within that description.

In the summer of 1968 O.H.E.P.C. had become very concerned about the possibility of the heavy water so vital in the operation of its expanding nuclear power stations becoming in short supply because of the failure of Deuterium to produce and the delays in the completion of the Port Hawkesbury plant. As a result, discussions took place between the respondent and O.H.E.P.C. during that summer and fall about O.H.E.P.C. building its own facility for heavy water production. In early fall of that year, A.E.C.L. asked C.G.E. to double the capacity of the Port Hawkesbury plant. C.G.E. declined to do so for economic reasons and because of the uncertainties arising from the non-completion of the plant then under construction. A.E.C.L. then asked the respondent to sell the plant design, specifications and start-up experience to it for the benefit of O.H.E.P.C. and itself. This sale would enable A.E.C.L. to build its own plant in a shorter time, more economically and without possible legal impediments. At the same time it would assure O.H.E.P.C. of a continued supply of heavy water.

An agreement dated as of December 18, 1968 was entered into between the respondent and A.E.C.L. For a consideration of $1.5 million C.G.E. was to provide A.E.C.L. with certain drawings and specifications, comprising the "knowhow"" from a plant construction and process point of view, to facilitate the design and construction of the Port Hawkesbury plant. The agreement further provided, inter alia:

(1) a first refusal clause for the benefit of the Respondent in the event that A.E.C.L. wished to dispose of its new plant to a party other than O.H.E.P.C. ;

(2) an undertaking from A.E.C.L. to offer to C.G.E. a reasonable opportunity to either add to the production capabilities of the C.G.E. plant or to construct additional plants before making a decision to increase the production capabilities of the A.E.C.L. plant beyond the 420 ton initial capacity.

At the same time, the respondent authorized Lummus to disclose to A.E.C.L. copies of all technical data necessary for Lummus to carry out the engineering, procurement and construction services for a heavy water production plant to be built at Douglas Point, Ontario. It was clearly understood that in doing so, C.G.E. was not relinquishing any ownership rights in these technical data.

By February 1969, A.E.C.L. announced its intention to double the capacity of its new plant. Once again it offered to C.G.E. the opportunity to build this enlarged plant but, again, C.G.E. declined for the same reasons which earlier prevailed. However, after Port Hawkesbury came into production it continued to produce heavy water pursuant to its supply contract until the plant was sold to A.E.C.L. pursuant to an agreement dated May 13, 1975 entered into after many months of negotiations. The amount of $1.5 million paid for the “knowhow” was taken into account in fixing the purchase price of the plant.

By notices of reassessment dated November 26, 1973 and May 31, 1974, the Minister of National Revenue included in the respondent's income for its 1968 taxation year the amount of $750,000 on the assumption that the amount had then become receivable under the December 18, 1968 agreement. The respondent's appeal from those reassessments was allowed by the Trial Division. It is from that judgment that this appeal has been brought.

II

1. The Points in Issue

The appellant takes the position that the trial judge erred in failing to find that the sum in issue was received by the respondent in the course of its profit making process and was, as a result, to be taken into account in computing the respondent's profit for its 1968 taxation year and more particularly in failing to hold that the transaction at issue was simply a method of trading and did not result in a parting of the respondent's assets.

The respondent takes three alternative positions. First, it says, that the determination of whether a receipt is for income or capital account, Is a legal conclusion dependent on the findings of fact made by the trial judge which, if supportable on the evidence, ought not to be interfered with by this Court. In the respondent's view, the agreement of December 18, 1968 effectively took the respondent out of the heavy water production business which, up until that time, it had been assured would be its alone, to the exclusion of others. Alternatively, if because of its retention of the Port Hawkesbury plant until 1975 and its continued production and supply of heavy water until that time, it was not wholly out of the business, it gave up the part of its business which had given it a great advantage and such a divestment was Capital in nature.

Second, the statement of defence of the appellant did not put into issue the question of whether the amount of $750,000 was in the nature of income from a business, with the result that the appellant could not succeed in its contentions.

Third, if this Court should find that only a portion of the amount in issue was received on account of capital, then, in the absence of evidence as to the proper allocation of the amount between income and capital, the respondent is entitled to succeed fully on the appeal.

III

The Jurisprudence

As the learned trial judge pointed out at trial and as affirmed by counsel for the appellant at the commencement of the argument in this Court, the appellant's case is based entirely on the judgment of this Court in Canadian Industries Limited v. The Queen, supra, hereafter referred to as C.I.L. Mr. Justice Le Dain in a thorough analysis of many relevant authorities from the United Kingdom concluded that, on the facts of that case, the payment in issue for the sale of “knowhow” was income in nature. Mr. Justice Mahoney in this case found that “the facts peculiar to this case distinguish it from C.I.L. and from the other authorities considered in C.I.L.”

Very briefly, the relevant facts in the C./.L. case are these. The appellant had received $378,000 from the government of the United States of America under an agreement whereby it had licensed that government to use the appellant's data, inventions and knowhow for the manufacture by way of a new process of the explosive, T.N.T. The issue was whether the $378,000 receipt was on account of capital or for the appellant's income account. Prior to the agreement, the U.S. government had purchased a substantial part of C.I.L.'s production although that government had also been in the business of manufacturing T.N.T. for its own account by using a different process. While it continued making purchases for a period of time thereafter, eventually it ceased to purchase T.N.T. from C.I.L. That company, the appellant therein, contended that as a direct result of entering into the license agreement and the performance of its obligations thereunder, it lost its entire market for the sale of T.N.T. to the United States government. Both the Tax Review Board and the Trial Division held that the receipt of $378,000 was income and those decisions were upheld in this Court.

In his painstaking review of the jurisprudence Le Dain, J. observed at the outset that the appellant contended that the sum received was of the same character as the lump sum payments that had been held to be capital in Evans Medical Supplies Ltd. v. Moriarty (H.M. Inspector of Taxes), 37 T.C. 540 and in Wolf Electric Tools Ltd. v. Wilson (H.M. Inspector of Taxes), 45 T.C. 326; [1969] 2 All E.R. 727. The respondent, on the other hand, argued that it fell within the principles applied in Jeffrey (H.M. Inspector of Taxes) v. Rolls-Royce, Ltd., 40 T.C. 443 and in Musker (H.M. Inspector of Taxes) v. English Electric Co. Ltd., 41 T.C. 556 where the lump sum payments were held to be income. No useful purpose would be served in reviewing here those cases or the many others analyzed by Mr. Justice Le Dain. Suffice it to say that at pages 486-87 (C.T.C. 237-38) of the report he made the following findings:-

In so far as the licence to use the “background data” or “know-how” is concerned, it is quite clear on the authority of the Rolls-Royce and English Electric cases that the fact a lump sum payment for such “know-how” is unrelated to the extent of use is not sufficient by itself to make it a capital receipt. The appellant’s case then comes down in the final analysis to the contention that it reflects the essential distinguishing features of Evans Medical Supplies — namely, that the “know-how” was of a secret or confidential character, that the agreement under which it was imparted was a single or isolated transaction, and that the imparting of it resulted in a loss to the appellant of a substantial part of its business. I am prepared to regard the appellant’s “know-how” as the equivalent, for purposes of analysis, of the “secret processes” in Evans Medical Supplies and Wolf Electric, but that does no more than give it the character of a capital asset analogous to patent rights. As to the evidence that the Licence Agreement was the only one of its kind that C.I.L. has entered into, I think there is this important distinction: while it may have been obliged to enter into this agreement by the position of the United States Government, agreements of this kind were contemplated by the C.I.L.-Chematur agreement as a form of business to be shared in by the parties. They were contemplated as a deliberate policy, to use the distinction that was emphasized in Rolls-Royce and English Electric. It comes down then in my opinion to the essential question: does the evidence show that C.I.L. lost its business for military T.N.T. with the United States Government as a direct and necessary result of entering into the Licence Agreement? In my opinion it does not. The

evidence shows that the United States Government eventually ceased to purchase T.N.T. from C.I.L., although precisely when that occurred is not clear. What it does not show is that the loss of this business was inherent in the licensing arrangements that were made. These arrangements did not, as in the case of Evans Medical Supplies and Wolf Electric, permit someone who had not been manufacturing at all to engage in manufacturing. The United States Government had been purchasing T.N.T. from C.I.L. when the Government had its own “batch process” plants. There is nothing to suggest that at some point it might not have increased its own production and ceased to purchase from C.I.L. Conversely, there is nothing in the evidence to suggest that it might not have continued to purchase from C.I.L. after the licensing arrangements permitting it to build continuous process plants. Nowhere in the evidence is it indicated that it was part of the understanding which led to the licensing arrangements and the lump sum payment stipulated that the United States Government would cease to purchase from C.I.L. For these reasons, I do not think the case can be brought within Evans Medical Supplies, assuming that that case may still have some application to a lump sum payment for “know-how”, despite the extent to which its significance has been narrowed by subsequent judicial commentary. In effect, I can see no reason in the circumstances of the present case not to apply the principles affirmed in the Rolls-Royce and English Electric cases with respect to the nature of a disclosure of “know-how” and to hold that the sum received was an income rather than a capital receipt. Accordingly, I would dismiss the appeal with costs. [Emphasis added.]

This finding was made by applying the essential principles derived from the many cases dealing with the characterization for tax purposes of lump sum payments made for the acquisition of “knowhow” to the facts found to exist in the C.I.L. case. Do the facts in this case lead to the same result or are the facts sufficiently different, as the trial judge found, to enable the characterization of the sum at issue to be capital in C.G.E.’s hands based on the principles derived from the C.I.L. case and the judgments which provided the foundation therefor? We must, of course, start with the proposition that the answer to the question is essentially factual* [3] and must be arrived at by looking at the nature and substance of the contract as a whole.f [4] All the circumstances surrounding the negotiation of the agreement may be relevant in the determination of the answer to the question. That determination requires consideration of certain additional facts relied on by counsel as supporting their respective arguments.

IV

Other Relevant Facts

For purposes of the arguments advanced by the respective counsel, the starting point is the construction agreement of May 22, 1968 between C.G.E. and Lummus. Article XII(A) thereof provides that:

All technical data, including but not limited thereto, drawings, bills of material, flow diagrams, layout details and specifications, prepared by Agent or Lummus pursuant to this Agreement and submitted to C.G.E., shall thereupon become the property of C.G.E.

Paragraph C is critical in this discussion. The relevant part thereof is as follows:t [5]

(C) C.G.E. and AGENT or Lummus propose to enter into a joint effort to promote the adoption and use by others of heavy water plants utilizing the knowhow and technical information developed in the design, construction and operation of the Plant. C.G.E. and AGENT or Lummus to enter into a licensing agreement which takes into consideration the understandings set forth in the letter agreement dated May 22nd, 1968, and attached hereto as Appendix C.

Reginald D. Richardson, who was at all material times the general manager of C.G.E.’s Chemical and Metallurgical Division and whose responsibilities included C.G.E.’s investment in the heavy water industry, had this to say about the inclusion of this clause of Article XII:-

Q. With respect to that joint effort to promote the adoption and the use of know-how of these heavy water plants, can you tell us, Mr. Richardson, why that clause was included in the agreement?

A. If one were to concede some contribution of Lummus and they argued strenuously for it and I was insisting on owning the overall plant design as they were developing it, and if one were to recognize that Lummus as an architect engineer might easily go out and take much of what they learned from designing our plant and perhaps not very quickly, but over time, in fact use to our competitive disadvantage this information, then we would not have been able to protect as well our leadership position, so we elected to have this arrangement whereby we entered into this type of an arrangement, or we entered into a letter of intent to do so and then subsequently did so.

Our objective was very, very largely the question of protecting our market position, our leadership position.

It is obvious that we don’t want to let our competitors have the advantage of our work, our effort, our risk taking, so it seemed better to get into bed with Lummus on this question than to let them be free and of course we had taken the first step of owning the design in the first place.

Mr. Richardson also testified that no licence agreement was ever entered into pursuant to this process agreement. Nor was the next critical contract, viz., that with A.E.C.L., ever considered by the parties to be the sort of licensing contemplated by Article XII. In fact, no part of the payment of $1.5 million from A.E.C.L., part of which is here in issue, was ever shared with Lummus. No income projections in the record included any sums expected to be earned from licensing.

I turn now to the agreement with A.E.C.L. dated as of December 18, 1968. It was entered into subsequent to C.G.E. declining to expand the Port Hawkesbury plant by 400 tons and building a new one for Ontario Hydro at Douglas Point. The recitals to the agreement are instructive when read in conjunction with some of the testimony adduced at trial.* [6]

WHEREAS CGE owns certain drawings and specifications relating to the design and construction of a heavy water plant now being constructed by CGE at Port Hawkesbury, Nova Scotia (hereinafter called “the CGE Plant”);

AND WHEREAS it is presently believed that the demand for heavy water required within the next few years both in Canada and in other countries cannot be met by the CGE Plant or any other existing heavy water plant in Canada;

AND WHEREAS CGE has indicated its intention to continue to expand its production capacity of heavy water but AECL’s need for an immediate expansion of heavy water production capacity is untimely for CGE;

AND WHEREAS AECL has indicated its intention to erect a heavy water plant (hereinafter called "The AECL Plant’’), with an initial capacity of 420 tons of heavy water per year to be located at the Douglas Point generation site operated by the Hydro Electric Power Commission of Ontario, and in order to facilitate the early construction of the AECL Plant, AECL has requested CGE to provide to AECL certain drawings and specifications relating to the design and construction of the CGE Plant, which drawings and specifications are the sole property of CGE;

AND WHEREAS CGE is prepared, in the interests of the Canadian reactor program to provide certain drawings and specifications relating to the design and construction of the CGE Plant, including technical information pertaining to procurement and cost of equipment and material, relative to construction of the CGE Plant, all as provided for hereinafter in Part A of this agreement;

The relevant portions of the agreement for purposes of this appeal are the following: [7] t

PART

1. CGE agrees to provide to AECL two complete sets of the following drawings and specifications relating to the CGE Plant for the use of AECL in constructing the AECL Plant:

(a) Detail drawings of the process flow design

(b) Detail architectural and engineering drawings

(c) All material specifications

(d) Procurement and cost details

(e) e) Results of tests made by or for CGE on foaming characteristics of various foodwaters made for the purpose of providing plant design information.

Where the term “use by AECL” is used in this agreement in relation to information furnished by CGE hereunder such term shall be deemed to include use by AECL's servants, agents, architect-engineers and contractors employed for the purposes of the AECL Plant.

2. CGE agrees to provide to AECL access to a scale mode of the main process equipment and piping layout of the CGE Plant, with permission to duplicate said scale model, for the use by AECL in designing and constructing the AECL Plant.

PART B

1. CGE hereby grants and agrees to grant to AECL for the lives of the patents, a non-exclusive indivisible license to make heavy water in the AECL Plant under the Canadian patents and patent applications of CGE granted, filed or to be filed based on the following docketed inventions, and non-exclusive indivisible license to use and sell heavy water so made in the AECL Pant under the patents and patent applications owned or controlled by CGE based on the aforesaid docketed inventions in all countries of the world:

PART F

1. Because of the possibility that the AECL plant may be acquired by the Hydro Electric Power Commission of Ontario (hereinafter called “Ontario Hydro”) in the future, AECL agrees to enter into an agreement with Ontario Hydro whereby, in the event of such acquisition Ontario Hydro will, vis-a-vis the AECL plant be entitled to all applicable AECL rights and shall be subject to all applicable AECL obligations under this agreement.

2. The rights and licenses herein granted by CGE may not be assigned or transferred otherwise than as provided for in Paragraph 1 of this Part F without the written permission of CGE. However, in the event AECL desires to dispose of the AECL Plant to a party other than ONTARIO HYDRO, CGE shall give such permission provided that:

(1) AECL first offers to CGE the opportunity to acquire said AECL Plant, and

(2) any other party acquiring the AECL Plant accepts in writing the obligations of AECL as contained in this agreement.

3. In recognition of CGE’s heavy investment in the CGE Plant and in order to ensure CGE of every opportunity to increase its capacity to supply the demand for heavy water, AECL agrees to give CGE a reasonable opportunity to either add to the production capabilities of the CGE Plant or to construct additional plants, before itself making a decision to increase the production capabilities of the AECL Plant beyond the 420 ton initial capacity.

Mr. J. Herbert Smith was the chief executive officer of C.G.E. during the period between 1957 and 1972. He testified on all aspects of his involvement in the heavy water project. The following excerpt from his testimony reveals his thinking at and before the execution of the December 18, 1968 agreement.! [8]

Q. Now, let us move on to the germ of this particular dispute with the Minister of National Revenue.

You had signed — you had gone ahead with the Port Hawkesbury plant. It was a building, you had retained The Lummus Company, had the contract signed with AECL Which government entity approached you about purchasing the know-how you had developed in the construction of the plant?

A. I think the first approach was from Harold Smith, the head of the Ontario Hydro, because they were going ahead then with the first nuclear power plant which I referred to earlier at Rolphton.

It was obvious there was going to be trouble at Deuterium Company of Canada, that was a 200 plant increase to 400 tons; ours was 400 so we could see real problems coming up and I think it was Harold Smith of Ontario Hydro.

Q. Let me refresh your memory by turning you to Tab 10 which is a letter from Mr. R.D. Richardson on Canadian General Electric stationery to yourself. Who was Mr. Richardson?

A. Mr. Richardson was the General Manager of the Chemical Metallurgical Department and the Vice President reporting directly to me, responsible for the heavy water plant construction and the sale and business.

Q. Mr. Richardson is writing to you reporting about HEPC — that’s Ontario Hydro, my Lord, HEPC — that’s what HEPC stands for.

HIS LORDSHIP: Hydro Electric Power Commission.

MR. TURNER: HEPC is Ontario Hydro. You will see that Mr. Richardson is telling you about an approach Ontario Hydro has made about producing a facility for their own heavy water.

You will see in the 5th paragraph, Mr. Richardson writes,

I can see no alternative to agreeing to provide our design and full cooperation with respect to know-how and other information, all of which should enable the construction of a low cost plant.

What meaning did you take from that paragraph?

A. The "no alternative”, the same thing applies to me. This is probably the largest single customer of Canadian General Electric. They have very great engineering facilities. In a way it should not have been a surprise that they decided to build nuclear power plants because they built all the great hydraulic plants, and now, when heavy water was going to be such a critical item in the success of the Candu system, they would — it would be normal, I feel, for them to decide to produce their own heavy water.

You cannot deny a customer of that importance, a cooperative approach — I’ll phrase it that way.

Q. What about the heavy water supposedly available from Sidney, Nova Scotia from the Deuterium of Canada plant?

A. At that time it was known they would never produce a pound and never did. The plant was torn down a few years later.

Q. At this time — we are now looking at the date of this letter — which is June 27, 1968. Your plant — of course Hawkesbury was under construction. Was C.G.E. interested at this time in expanding Port Hawkesbury or building a second plant to meet Ontario Hydro’s requirements?

A. No, we had you see the commitment from — this was going on parallel to the Ontario Hydro discussions with Mr. Richardson, with Mr. Gray approaching me, telling me that in line with the commitment made, when I agreed to undertake the study leading to the heavy water plant, that we would have the right of refusal.

He approached me — well at that time, 1968, we were still a couple of years from completion. We were running into troubles, the usual things when you made a technological breakthrough, the risk was too great, and I was, while it is 14 years ago, my deep involvement was such that I remember my conversation precisely.

I said “you have met your commitment to me, Lome, I appreciate it”, but I don’t need to say we will not take an order for another heavy water plant until this one is running, which then, of course, led to the Ontario Hydro’s move because more heavy water had to be produced.

I have dealt with the licensing aspects at such great length to deal with the appellant’s principal contention which has two aspects, that the inclusion of the licensing provision indicated the income character of the sale thereof to A.E.C.L.

The first aspect relating to the alleged practice of C.G.E. of licensing others for the use of its patents, permits several conclusions to be reached. First, there is no evidence that the licensing of either its patents or knowhow was contemplated for reasons other than for C.G.E.’s proprietary interests therein not as a source of revenue. In fact, the oral evidence is all to the contrary. Secondly, C.G.E. never licensed others in respect of the “knowhow” here in issue. Thirdly, the evidence of licensing of patents as distinguished from “knowhow”, had been of minimal importance in C.G.E.’s business. The learned trial judge found that:

The Plaintiff’s revenues from fees for licensing of patents has over the past ten years run between $500,000 and $800,000 per annum, about .01% of its revenue. About half of that revenue derived from one licence involving a patent for wire wrapping insulation.* [9]

I, therefore, conclude that while the evidence of previous patent licensing may be relevant, its weight is minimal in the determination of the issue in this appeal.

The second aspect of appellant counsel’s argument that the licensing provisions in the two agreements show that the receipt is for income account is more difficult. The argument is raised to deal with the respondent's position that the payment was capital in nature because the entry of O.H.E.P.C. and A.E.C.L. into the heavy water industry effectively spelled the end of C.G.E.’s participation therein so that the payment was received on capital account.

The evidence, totally uncontradicted, discloses that:

1. C.G.E. undertook to build the heavy water plant at Port Hawkesbury because it felt that, unlike the construction of the nuclear reactor at Rolphton, the public sector would be unlikely to enter the market. It felt that it would have such a head start on its competitors that it would have a virtual monopoly on the production of heavy water in Canada.

2. It felt that it had this monopoly not only because it was first in the field but because it had obtained the assurance of Dr. Lome Gray, the Charman of A.E.C.L. that it would have the right of first refusal to undertake any expansion of production either by increasing the capacity of Port Hawkesbury or in constructing new production facilities.

3. Dr. Gray lived up to his undertaking in that he offered C.G.E. the opportunity in the late summer and early fall of 1968 first to double the Capacity at Port Hawkesbury and subsequently to build a new plant at Douglas Point. C.G.E., Mr. Smith said, felt it had to decline each of the expansion opportunities because of the vast expenditures that it had already undertaken in constructing Port Hawkesbury, the delay in the completion thereof and the uncertainty at that time as to its production and financial viability.

4. O.H.E.P.C., concerned with the potential shortage in the supply of heavy water for its nuclear power plants, considered going into heavy water production and C.G.E., concerned with keeping its largest industrial customer happy, decided to cooperate in that endeavour.

5. A.E.C.L., with O.H.E.P.C.’s cooperation, decided to proceed on its own to construct a heavy water production facility and to negotiate the purchase of C.G.E.’s technology and “knowhow” derived from the construction at Port Hawkesbury, as well as to utilize the services of Lummus in the construction.

6. The sale of the technology and "knowhow" to A.E.C.L., meant that the public sector entity, A.E.C.L., which was the regulator of all aspects of the nuclear industry in Canada, was not only entering the production field [but] intended to sell its product to other public sector organizations, principally power utilities like O.H.E.P.C., C.G.E.’s most important customer.

7. The cost of construction of one 400-ton plant at Port Hawkesbury represented 52 per cent of the entire fixed assets of C.G.E. in Canada and approximately 25 per cent of its total equity. Thus, to expand its production facilities would mean undertaking of vast further construction expenses without assurance of its market exclusivity. From a business point of view, such an action would be imprudent particularly since Port Hawkesbury had not yet been completed and there was no assurance that it would operate at all, let alone be profitable;

8. C.G.E.’s construction contractor at Port Hawkesbury, Lummus, had been negotiating with O.H.E.P.C. before A.E.C.L. had, in compliance with Dr. Gray’s commitment, offered the expansion and new construction work to C.G.E. and this fact was known to C.G.E..

9. With the sale of the technology and "knowhow" to A.E.C.L., Mr. J. Herbert Smith, the then chairman and chief executive officer of C.G.E., said that he felt, in his own mind, that C.G.E. could no longer consider itself a player in the heavy water industry having lost that possibility when A.E.C.L. decided to enter the game just as it had lost its place in reactor construction when O.H.E.P.C. and A.E.C.L. moved in after the completion of the pilot plant at Rolphton. At best, if all went well, it could hope to recoup its capital expenditures at Port Hawkesbury by virtue of its 12 / year supply contract.

The foregoing capsulizes the evidence, inter alia, from which Mahoney J. concluded that:

The facts peculiar to this case distinguish it from C.I.L. and from the other authorities considered in C.I.L. While the Plaintiff does grant licenses of its patents in the ordinary course of its business and does, on occasion, sell its know-how, this transaction was not in the ordinary course of its business. Neither was it an adventure in the nature of trade. It was not undertaken with a view to realizing a profit. Rather it was essentially a salvage operation, a realization of a capital asset which, in the circumstances, was of considerable immediate value to A.E.C.L. and of no apparent future value to the Plaintiff in the Canadian market.

The payment in issue was received by the Plaintiff on account of capital. Its action succeeds. It is entitled to costs.

The testimony of all witnesses was uncontradicted since the appellant called no witnesses and, in my opinion, it supported the factual conclusions of the trial judge. There was no material weakening of any of the testimony in chief in cross-examination. No findings of credibility were made, adverse or otherwise. The testimony, the salient points of which I have attempted to highlight, explains the reason for the inclusion of the licensing provisions in the Lummus and A.E.C.L. agreements. Essentially, that reason was to protect C.G.E.’s proprietary interest in its patents, technology and “knowhow”. It was not thought of as a source of income. I share the view expressed in the jurisprudence that there is no material difference between property in a patent and a secret process which term can, as I see it, include the “knowhow” here in issue. The following passage from the judgment of Viscount Simmonds in Evans Medical Supplies, Ltd. v. Moriarty (Inspector of Taxes), supra, at 580 is, as it seems to me, appropriate in this context.

For the decisive fact is not what was the company’s motive in entering into the agreement but what it in fact effected. I cannot, however, suppose that Mr. Fer- gusson, if he spoke of the best available method of developing the company’s business, had in mind any fine distinction between an income or a capital receipt or, indeed, had anything in mind except that, if the government were to become competitors in Burma, the company’s prudent course was to cut its loss as best it could and use the proceeds in the development of its business elsewhere. I should not care to attribute to any man of business the notion that the best way of developing the company’s business in Burma was to take a step which might effectually put an end to it.

Clearly, the respondent did not at the time of its sale of the technology and “knowhow” to A.E.C.L. lose the whole of its heavy water business. It retained the Port Hawkesbury plant which eventually got into production in 1970 and which continued to operate for the benefit of C.G.E. until it was sold to A.E.C.L. in 1975. Mahoney, J. correctly held that “it lost none of the business attaching directly to the Port Hawkesbury plant. . .” but it did lose the opportunity to engage in the production of heavy water elsewhere in Canada as both J.H. Smith and Dr. Lome Gray thought at the time of sale. They were proven right in the passage of time. As a result, C.G.E. lost a substantial part of its potential business.

Le Dain, J. found in the C.I.L. case, at 486 (C.T.C. 236) of the reports, that:

It comes down then in my opinion to the essential question: does the evidence show that C.I.L. lost its business for military TNT with the United States Govern- ment as a direct and necessary result of entering into the Licence Agreement. In my opinion it does not. [Emphasis added.]

Crucially, he also found:

What it [the evidence] does not show is that the loss of this business was inherent in the licensing arrangements that were made.

To distinguish the situation in that case I can do no better than to repeat Mahoney, J.’s response to the Le Dain question:

The essential question in CIL was identified, at page 486, as being:

does the evidence show that CIL lost its business for military TNT with the United States Government as a direct and necessary result of entering into the License Agreement?

The essential question here cannot be so stated because, in this case, the effect of the decisions by A.E.C.L. and Ontario Hydro to demand, when they did, additional heavy water production was to eliminate, de facto, the Plaintiffs opportunity to make further use, in Canada, of the inventions and know-how generated in the design, construction and commissioning of the Port Hawkesbury plant. Those

decisions antedated the offer to buy the know-how and licenses. The Plaintiff had not undertaken the Port Hawkesbury plant with a view to building and operating only it. It had seen a golden opportunity to build and operate other plants if it built the first one and it saw that opportunity disappear with the Ontario Hydro and A.E.C.L. decisions. The essential question here is not whether the Plaintiff lost a particular business as a result of entering into the licensing agreement; it lost none of the business attaching directly to the Port Hawkesbury plant and it had already lost the opportunity to engage in that business elsewhere in Canada. [Emphasis added.]

Conclusion

I share Mahoney, J.’s views that the facts of this case are sufficiently different to distinguish it from C.I.L. I have endeavoured to illustrate from salient parts of the evidence where those differences lie. I am also of the view that the trial judge's principal findings of fact that:* [10]

. . . The Plaintiff felt, and I am entirely satisfied on the evidence, correctly so, that it had no real choice but to sell it. The Plaintiff also felt, and events have proved it correct to date, that the decision of AECL to undertake production of heavy water for its own account marked the end of that business opportunity in Canada, just as the decision of Ontario Hydro to build its own nuclear power plants had marked the end of private sector opportunities in that area. The Plaintiff’s traditional market for equipment remained but its opportunity to build, own and operate additional plants in Canada was foreclosed.

and others in the reasons for judgment find ample support in the evidence. I am unable to find any palpable or overriding error justifying any interference therewith/ [11] Moreover, while the agreements containing the provisions relating to the licensing of the technology and “knowhow” are clear and unambiguous at least in so far as those particular provisions are concerned, one cannot ignore the equally clear and unequivocal evidence of the respondent's witnesses as to the purposes for which they were included therein. In assessing the weight to be given that evidence, as it relates to the documents, it is not without relevance to consider the past, unfortunate experience of C.G.E. in the construction of nuclear reactors and its displacement by A.E.C.L. and O.H.E.P.C. in that field. Its whole philosophy on its entry into the heavy water industry was coloured by that experience. Nor can the immense expenditures that had been required to build the Port Hawkesbury plant, representing over half of C.G.E.’s investment in fixed assets and a quarter of its equity, be lost sight of, as an indication of the sums which would be required if it were to continue to enjoy its lead in the production of heavy water in Canada. Prudent businessmen do not undertake such expenditures in a vacuum. They must weigh the costs as against the long-term benefits to their shareholders and make a calculated decision to embark on a course of action which, overall, is in the company’s best interests. Messrs. Smith and Henderson did so in this case. While the terminology of the agreements might suggest otherwise, for the good and valid reasons they gave in their testimony, they knew when the sale of the technology and “knowhow” was made, they could no longer expect to be involved in the Canadian heavy water industry on more than the 400 ton capacity of the Port Hawkesbury plant. It thus became a “salvage” operation as the trial judge said. I have no difficulty then, in agreeing with him, that the receipt in issue was capital in nature.

Summary

Thus, I return to the point at which I began by quoting from the B.P. Australia case, supra, that:

The solution to the problem . . . is a commonsense appreciation of all the guiding features . . . depends on what the expenditure is calculated to effect from a practical business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. [Emphasis added.]

My commonsense appreciation of all of the guiding features as they relate to the facts of this case, leads me to the view that the trial judge correctly found the receipt in issue to be capital in nature. That characterization of the receipt was reached by an appreciation of all of the circumstances surrounding its acquisition. Two of those circumstances were the existence of the licensing provisions in the Lummus and A.E.C.L. agreements with the respondent. However, their existence does not restrict the inquiry of those facts. Other circumstances had to be weighed. All of the evidence adduced at trial surrounding the sale and receipt was relevant in making the determination. That involved an assessment of the credibility of the witnesses. The reasons for judgment, while they do not make any specific findings thereon, disclose beyond doubt that Mahoney, J. accepted the evidence of the key witnesses. This Court is not in a position to doubt the propriety of that acceptance. That being so, it is clear that the effect of the decision of the respondent not to accede to the demand of A.E.C.L. and O.H.E.P.C. to increase its production of heavy water, effectively obviated the possibility of it using its accumulated technology and “knowhow” in the future in Canada. That result, together with the regulatory position of A.E.C.L. in the heavy water industry into which it was then becoming a producer and, as well, the importance of C.G.E. cooperating in the circumstances, to the best of its ability with its biggest customer, led directly and inevitably to the sale of the technology and “knowhow”. It was, thus, in my view, a Capital receipt from the sale of an asset.

In view of the conclusion to which I have come, it is unnecessary for me to examine the other defences raised by the respondent.

Accordingly, I would dismiss the appeal with costs.

Appeal allowed.