Doyle v. MNR, 70 DTC 6251, [1970] CTC 365 (Ex.Ct.), briefly aff'd 78 DTC 6027, [1978] CTC 530, 1 S.C.R. 547

GIBSON, J.:—The issue in this appeal is whether or not the receipt by the appellant in 1950 of 490 shares of Boon Strachan Coal Company Limited, which the parties agree had a value of $200,000, was income from a business within the meaning of Sections 3, 4 and 127(1) (e) of The 1948 Income Tax Act.

The background giving rise to this issue may be put as follows :

For some years prior to 1946, the appellant was employed by Southern Coal Company, a corporation organized under f‘ the laws of the United States of America and carrying on business therein as a producer and vendor of coal. In 1946 the appellant came to Montreal, Canada, to become the general manager of Boon Strachan Coal Company Limited, a corporation organized under the laws of Canada and carrying on a business of coal dealer and agent for the sale of coal. Boon Strachan Coal Company at that time, in part, was owned by Southern Coal Company. (Later the latter acquired, through a subsidiary, total ownership of it.) Boon Strachan Coal Company Limited had agencies at various places in the United States and Eastern Canada for the sale of coal produced by mines in the United States and in Western Canada. In 1949, the appellant received information to the the effect that Solar Mining Company, a corporation organized under the laws of the United States, and carrying on business therein, had strip mining equipment which, in the opinion of the appellant, could be used successfully in Canada for strip mining operations resulting in a substantial reduction in the cost of mining coal in Western Canada. The appellant ascertained that Solar Mining Company was prepared to sell such equipment for $180,000 U.S. dollars. The appellant was then of the opinion specifically that in mining properties in the Town of Forestburg in Alberta, Canada, there could be used the said strip mining equipment. In consequence, in and about the month of August or September 1949 the appellant approached the registered owners of certain of the properties in or about the Forestburg area and discussed the matter of forming a syndicate (1) with certain persons named Mitchell who were the officers and controlling shareholders of Luscar Collieries and Mountain Park Collieries in Alberta, Canada, two coal mining producing companies for whom Boon Strachan Coal Company Limited acted as sales agents, and (2) with one Borger and one Chipman, the latter two being representatives of certain individuals, called the Bishes and the Osmacks, who in turn owned coal mining leases and rights in and about the area of Forestburg, Alberta, Canada. At that time a company by the name of Forestburg Collieries Limited had been incorporated for the purpose. of acquiring certain coal mining rights owned by the said Bishes, but that Company was only in its organizational stage and it had not acquired any properties at the time. In fulfillment ‘of the purpose of the appellant’s approaches to these and other various persons a number of things happened. An agreement was entered into in September 1949 by which the appellant was appointed the general manager of Forestburg Collieries Limited. After that, Forestburg Collieries Limited acquired various coal mining leases, licences and properties. At the same time, the appellant arranged with Solar Mining Company to purchase the said equipment at a purchase price of $180,000 U.S. dollars of which $50,000 was to be paid immediately on account, the equipment to be dismantled and shipped to the Forestburg area. The said mining equipment was purchased by the parties of the syndicate in and to the coal mining operations of Forestburg Collieries Limited and resold by them for $1,445,000 to Forestburg Collieries Limited. Evidencing these two transactions, the so-called Solar Agreement dated October 1949 was executed by the parties purchasing the said equipment from Solar Mining Company, and the so-called Forestburg Agreement bearing date October 15, 1949 was executed, whereby the said parties re-sold the said equipment to Forestburg Collieries Limited. The said interested parties in the Forestburg Collieries Limited also executed a so-called Syndicate Agreement among themselves bearing date October 19, 1949, which Syndicate Agreement they also refer to as the Battle River Syndicate. After that, the equipment purchased from Solar Mining Company was in due course dismantled and shipped in or about the month of January or February 1950 to Forestburg Collieries Limited. The said equipment was, however, never during the time which the appellant was interested in the operations of Forestburg Collieries Limited, put into use, nor did Forestburg pay any part of the purchase price. The down payment of $50,000 was provided by the Mitchells either directly or indirectly by the intervention of Luscar Collieries. During the said time in 1950 when the appellant was interested in the Company, the situation was that Forestburg Collieries Limited did not have and could not obtain adequate financing to carry on mining operations using this equipment and the members of the said Battle River Syndicate had no monies to do such financing.

In November 1950 the appellant sold to a Canadian company by the name of Portal Coals Limited all his right, title and interest in the mining machinery and equipment acquired through the Battle River Syndicate and he received from Portal Coals Limited all the issued shares, namely 490 shares, of Boon Strachan Coal Company Limited. The appellant thereupon became the sole owner of the shares in Boon Strachan Coal Company Limited. At the same time, Sinclair Coal Company, which prior thereto, had owned Boon Strachan Coal Company Limited caused Boon Strachan Coal Company Limited to sell the Western Division of Boon Strachan Coal Company Limited so that what the appellant got when he acquired all the shares in Boon Strachan Coal Company Limited was not all the assets which Boon Strachan Coal Company Limited previously had, but instead only the assets representing the Eastern Division of its business. The Eastern Division of the business of Boon Strachan Coal Company Limited, at the time of the appellant’s acquisition, consisted of contracts with the two Canadian Railways, the C.N.R. and the C.P.R., to supply coal and also coal supplying contracts with certain paper mills and also a small household stove business. The parties agree that the value of the Boon Strachan Coal Company Limited 490 issued shares which the appellant received pursuant to the said agreement dated November 14, 1950 between the appellant and Portal Coals Limited then had a value of $200,000.

The Minister’s assumptions in making the re- assessment for income tax for 1950 were as follows:

a) That the Appellant, acting as prime mover, together with other persons, formed by a written agreement. dated October 19, 1949, a syndicate called the Battle River Syndicate, the sole purpose of which was the acquisition and resale of certain mining machinery and equipment.

b) That the Appellant was appointed manager of the Battle River Syndicate and that he was given the entire control of the affairs of the Syndicate with power to sell the mining machinery and equipment to a company called Forestburg Collieries Limited for a price of $1,445,000.00.

c) That after payment of all debts and liabilities of the Syndicate and after all the members of the Syndicate had been re-imbursed for monies advanced the consideration for the sale of the mining machinery and equipment was to be divided in the following manner:

The said Doyle 400,000.00:1,245,000.00 The said Mitchells 333,333.33:1,245,000.00

The said Borger 255,833.33:1,245,000.00 The said Chipman 255,833.34:1,245,000.00

d) That even prior to the signing of the agreement referred to in paragraph 5(a) of the Reply to the Notice of Appeal, the Appellant had already arranged for the acquisition from Solar Mining Inc. of the mining machinery and equipment for the price of $180,000 (U.S. Funds) and for its disposition to Forestburg Collieries Limited for a price of $1,445,000.

e) That on November 1, 1949, the Battle River Syndicate acquired from Solar Mining Co. the mining machinery and equipment referred to in paragraph 5(a) of the Reply to the Notice of Appeal for a price of $180,000 (U.S. Funds).

f) That on November 14, 1950, the Appellant sold to a company named Portal Coals Limited all his rights, title and interests in the mining machinery and equipment acquired through the Battle River Syndicate in consideration of Portal. Coals Limited, acquiring and delivering to the Appellant 490 shares of Boon Strachan Coal Co. Ltd.

g) That on the 14th of November 1950, Portal Coals Limited acquired from Nashville Southern Company, 490 shares of Boon Strachan Coal Company Ltd. for the price of $200,000.

h) That on the 15th of November, the Appellant received from Portal Coals Limited 490 shares of Boon Strachan Coal Company Ltd. representing all of the issued and outstanding shares of the capital stock of that company.

i) That the Appellant in selling all his rights, title and interests in the mining machinery and equipment acquired through the Battle River Syndicate realized a profit of at least $290,000.

j) That the Appellant acquired together with other persons the mining machinery and equipment with a view to trading, dealing or otherwise turning it to account.

k) That the profit of $200,000 realized by the Appellant upon the sale of its rights, title and interests in the mining machinery and equipment was income from a business within the meaning of sections 3, 4 and 127 (1) (e) of The 1948 Income Tax Act.

The relevant excerpts from the Agreement dated October 19, 1949 are as follows:

THIS AGREEMENT MADE this 19th day of October, A.D. 1949. BETWEEN:

JOHN C. DOYLE, of Montreal, in the Province of Quebec, (hereinafter called “the said Doyle”)

OF THE FIRST PART,

— and —

SIR HAROLD P. MITCHELL and ALEC M. MITCHELL, both of Hamilton, Bermuda, (hereinafter called “the said Mitchells”)

OF THE SECOND PART,

— and —

J. HENRY BORGER (hereinafter called “the said Borger”)

OF THE THIRD PART,

— and —

ARTHUR U. CHIPMAN (hereinafter called “the said Chipman’’)

OF THE FOURTH PART.

WHEREAS it has been agreed that a syndicate shall be formed for the purpose of the acquisition and sale of the equipment hereinafter described.

WITNESSETH AND IT IS AGREED by and between the parties hereto as follows:

1. A syndicate to be known as the Battle River Syndicate and hereinafter referred to as the “syndicate” is hereby formed for the purpose of acquiring the following equipment:

(a) Tipple and inventory relating thereto presently located on the mine property of Solar Mining Co., near Rushville, Illinois, including in such inventory the rails and switches, which are installed on such property; and

(b) 621-S Page Dragline and inventory relating thereto presently located on the said property,

Such capital as is required (in the sum of approximately Fifty Thousand and 00/100. ($50,000.00) Dollars) shall be contributed by the Mitchells. The members of the syndicate shall be the signatories to this agreement, and shall be entitled to share in the profits in the proportions hereinafter set out. The interest of the syndicate holder shall not be transferable or assignable without the consent of all members of the syndicate. Any agreement, made between the said Doyle and Solar Mining Co., shall be deemed to have been made on behalf of the syndicate.

2. The said Doyle shall until otherwise determined by the members of the syndicate at a meeting of the syndicate by the manager of the same.

5. The manager shall have the entire control of the affairs of the syndicate and may conduct them in such manner as he thinks fit, subject to the provisions of paragraphs six and seven.

6. It is expressly declared that the manager may, if he thinks fit:

(a) sell the said property to Forestburg Collieries Limited at a price or sum of One Million, Four Hundred and Forty- five Thousand and 00/100 ($1,445,000.00) Dollars, or such amount as may be agreed upon by the manager and the said Forestburg Collieries Limited

(b) enter into on behalf of the syndicate such agreement as may be necessary for the acquisition of the said property from Solar Mining Co. and execute all such securities and other documents as may be necessary to secure delivery and possession of the said property.

7. The manager may convene meetings of the syndicate and shall at any time upon receipt of telegraphic or written instructions from any member of the syndicate convene a meeting of the syndicate to deliberate and decide on any of the affairs of the syndicate; every member shall have one vote (provided that each of the said Mitchells shall have a vote) ; the majority of votes to decide; three days’ notice of all meetings shall be given.

8. The consideration for the sale or disposition of the property shall be applied first in payment of all debts and liabilities of the syndicate, and secondly, in the return and refund of such moneys as shall have been advanced by the members of the syndicate, or any of them, and any remaining balance shall be divided among the members of the syndicate in the following proportions:

The said Doyle 400,000.00:1,245,000.00

The said Mitchells 333,333.33:1,245,000.00

The said Borger 255,833.33:1,245,000.00

The said Chipman 255,833.34:1,245,000.00

PROVIDED, and IT IS EXPRESSLY AGREED that no division shall be made until such time as all capital advanced by the Mitchells shall have been paid, all moneys due to Solar Mining Co., whether by the syndicate of Forestburg Collieries Limited, arising out of the sale of the property hereinbefore referred to has been paid, and all borrowings of the syndicate, or by Forestburg Collieries Limited, from the Canadian Bank of Commerce, or any other bank or banks, arising out of the purchase or sale of the said property shall have been paid.

The Promissory Note and certain extracts from the chattel mortgage implementing the Agreement dated October 19, 1949 are as follows :

Edmonton, Alberta, November 1, 1949

FOR VALUE RECEIVED, we jointly and severally promise to pay to the order of Solar Mining Co., at its office 307 North Michigan Avenue, Chicago, Illinois, U.S.A. the sum of One Hundred and thirty-five dollars ($135,000.00), together with interest at the rate of six (6%) percent per annum after maturity until paid, in such coin or currency of the United States of America as at the time of payment shall be legal tender for private and public debts, in the following manner:

(a) The sum of One Thousand dollars ($1,000.00) on the 15th day of each of the months of January, 1950 to May 1950 both inclusive.

(b) The sum of Five Thousand dollars ($5,000.00) on the 15th day of October, 1950.

(c) The sum of Ten Thousand dollars ($10,000) on the 15th day of November, 1950.

(d) The sum of Fifteen thousand dollars ($15,000.00) on the 15th days of each of the months of December, 1950 to April 1951, both inclusive.

(e) The sum of Forty thousand dollars ($40,000.00) on the 15th day of May, 1951.

Upon default in payment of any instalment upon the due date hereof, all remaining instalments shall forthwith become due and payable without notice.

(Sgd) John C. Doyle

(Sgd) Arthur U. Chipman (Sgd) J. Henry Borger.

CONDITIONAL SALE CONTRACT

THIS AGREEMENT made in triplicate, the 1st day of November, 1949.

BETWEEN:

SOLAR MINING CO., a body corporate with office at the City of Chicago, in the State of Illinois, one of the United States of America (hereinafter called the “Vendor”)

—of the first part

— and —

JOHN C. DOYLE, of Montreal in the Province of Quebec, Manager, SIR HAROLD P. MITCHELL and ALEC M. MITCHELL, of Bermuda, Proprietors, J. HENRY BORGER, of Winnipeg in the Province of Manitoba, Manager and ARTHUR U. CHIPMAN of Winnipeg in the Province of Manitoba, Manager, (hereinafter called the “Purchasers”)

— of the second part The Vendor sells and Purchasers purchase, subject to the terms and conditions hereinafter set forth, the following property, namely :—

(a) One Tipple and inventory relating thereto, which inventory is marked as Schedule “A” to this agreement, presently located on the property of Solar Mining Co. at or near Rushville, in the State of Illinois, one of the United States of America, including in such inventory, without in any way restricting the generality of the foregoing, the rails and switches which are installed on such property,

and

(b) One 621-S Page Dragline, together with the inventory relating thereto, which inventory is marked schedule “B” to this agreement, also presently located on the aforementioned property

(which foregoing items are hereinafter collectively called the “equipment”), at an aggregate purchase price of One Hundred and Eighty Thousand Dollars ($180,000.00) payable at the office of the said Vendor 307 North Michigan Avenue, Chicago, 1, Illinois, U.S.A. . . .

The said proposed sale and purchase shall be upon the following terms and conditions:—

1. The title and ownership in and to the equipment shall remain in the Vendor at the risk of the purchasers until the entire purchase price, interest, and all costs are fully paid in cash, including the payment of any note, renewal note or extension given, or any judgment secured.

18. The purchasers further agree that they w ill not assign their rights under this contract or dispose of the equipment without the Vendor’s prior written approval, provided that the purchasers may sell the said equipment to Forrestburg Collieries Limited, a provincial corporation organized under the laws of the Province of Alberta, Dominion of Canada upon delivery to the Vendor of security satisfactory to the Vendor.

The appellant received the 490 shares of Boon Strachan Coal Company Limited under the Agreement between himself and Portal Coals Limited dated November 14, 1950. Some relevant excerpts from this Agreement are:

MEMORANDUM OF AGREEMENT DATED the 14 day of November, 1950.

BY AND BETWEEN:

JOHN C. DOYLE of the City of Westmount in the Province of Quebec (hereinafter referred to as “Doyle”)

OF THE FIRST PART: AND:

PORTAL COALS LIMITED, a body politic and corporate having its head office and principal place of business in the Town of Estevan in the Province of Saskatchewan, herein acting and represented by L. Russell Kelce its President and Roy O. Park its Secretary duly authorized hereto (hereinafter referred to as “Portal”)

OF THE SECOND PART.

FOR AND IN CONSIDERATION OF THE MUTUAL COVENANTS AND AGREEMENTS HEREINAFTER SET FORTH, THE PARTIES HERETO AGREE AS FOLLOWS:

1. Doyle hereby sells, assigns, transfers, delivers and sets over unto Portal all his right, title and interest in and to the following equipment:—

(a) Tipple and inventory relating thereto presently located on the mine property of Solar Mining Co., near Rushville, Illinois, including in such inventory the rails and switches, which are installed on such property; and

(b) 621-S Page Dragline and inventory relating thereto presently located on the said property

acquired jointly by Doyle, Sir Harold P. Mitchell and Alec M. Mitchell, both of Hamilton, Bermuda, and others, together with all his right or claim to any of the proceeds from the said sale thereof but, without being limited by the foregoing, all sums due or to become due to Doyle from Forestburg Collieries Limited, and all claims of Doyle of every nature and kind, past or present, fixed or contingent, matured or otherwise against Forestburg Collieries Limited.

2. Portal hereby undertakes to acquire title to four hundred and ninety (490) shares of Boon-Strachan Coal Co. Limited, . . .

RECEIPT

Received from PORTAL COALS LIMITED, in accordance with the certain Memorandum of Agreement dated November 14, 1950, the following certificates representing all of the issued and outstanding shares of capital stock of Boon-Strachan Coal Company, Limited, all said certificates being duly endorsed in blank for transfer to the undersigned John C. Doyle or his nominees :—

Cert. No.	Date	No. of Sh.	Issued in Name of
29	April 10, 1946	483	Nashville-Southern Co.
28	April 10, 1946	1	R. R. Boon
26	April 10, 1946	1	John C. Doyle
23	April 10, 1946	1	R. J. Billings
31	Dec. 15, 1949	1	L. Russell Kelce
34	Nov. 3, 1950	1	M. F. Devonport
35	Nov. 8, 1950	1	Fred Hobson
36	Nov, 3, 1950	i :v: 1	F. C. Britt

Executed this 15th 1 day of November, 1950.

Witness:

(sgd) M. F. Devonport (sgd) John C. Doyle

In making the Agreement, Exhibit A, page 1, dated October 19, 1949, it was intended that the machinery and equipment be purchased and sold and to accomplish this and make it possible, absolute control of Forestburg Collieries Limited was put in the appellant Doyle by Agreement between himself and Forestburg Collieries Limited dated September 1949 and the Management Agreement dated October 15, 1949 between Forestburg Collieries Limited and the members of the Battle River Syndicate.

The appellant pursuant to the Agreement dated October 19, 1949 at page 4 thereof, was to have received his profit in the manner indicated there. In re-examination Doyle said that this was not quite true because the cost of the equipment was taken off the top before these proportions were arrived at. In other words, the denominator of the fraction therein set out, if the $200,000 the cost of the equipment, had not been taken off, would have been $1,445,000.

The appellant however, as noted, did not carry out his original intention. Instead his evidence was that Sinclair Coal Company became interested in the Forestburg Collieries Limited venture. In consequence whereof, the appellant said that the Sinclair Coal Company in 1950, bought out and became owners of all the shares of Boon Strachan Coal Company Limited purchasing the shares owned by Nashville-Southern Company another coal company, and putting title of these shares into a Canadian company owned and controlled by it, by the name of Portal Coals Limited. It then caused Portal Coals Limited to sell all these 490 shares in Boon Strachan Coal Company Limited to the appellant for the consideration above referred to. Prior to the sale of the shares to the appellant as hereinafter stated, Boon Strachan Coal Company Limited sold the Western Division of its business to another Canadian company owned by Sinclair Coal Company called Sinclair Mines (Canada) Limited.

Some relevant excerpts from the Agreement dated November 14, 1950 between Portal Coals Limited and Nashville-Southern Company and the Agreement also dated November 14, 1950 between Boon Strachan Coal Company Limited and Sinclair Mines (Canada) Limited are herein set out:

MEMORANDUM OF AGREEMENT entered into this 14th day of November, 1950,

BY AND BETWEEN:

PORTAL COALS LIMITED, a body politic and corporate having its head office and principal place of business in the Town of Estevan in the Province of Saskatchewan, Canada, herein acting and represented by L. Russell Kelce its President and Roy O. Park its Secretary duly authorized hereto (hereinafter referred to as “Portal”),

OF THE FIRST PART:

AND:

NASHVILLE-SOUTHERN COMPANY, a Corporation duly organized and existing under the laws of the State of Tennessee, one of the United States of America, herein acting and represented by L. Russell Kelce its President and Roy O. Park its Secretary duly authorized hereto (hereinafter re. ferred to as “Nashville-Southern”),

OF THE SECOND PART.

FOR AND IN CONSIDERATION. OF THE MUTUAL COVENANTS AND AGREEMENTS HEREINAFTER SET FORTH, THE PARTIES HERETO AGREE AS FOLLOWS:

1. Nashville-Southern hereby sells and assigns to Portal, and Portal hereby purchases from Nashville-Southern, all four hundred and ninety (490) shares (being all of the issued and outstanding shares) of Boon-Strachan Coal Co. Limited, a corporation organized under the laws of the Province of Quebec, represented by certificates as follows:

2. Portal covenants and agrees with Nashville-Southern to pay to Nashville-Southern the sum of Two Hundred Thousand Dollars ($200,000.00) in lawful money of Canada within five

(5) years from the date hereof.

MEMORANDUM OF AGREEMENT ENTERED INTO THIS 14th day of November, 1950,

BY AND BETWEEN:

BOON-STRACHAN COAL CO. LIMITED, a body politic and corporate having its head office and principal place of business in the City of Montreal in the Province of Quebec herein acting and represented by John C. Doyle its President and M. F. Davenport its Secretary duly authorized hereto (hereinafter referred to as “the Vendor”) ;

OF THE FIRST PART: AND:

SINCLAIR MINES (CANADA) LIMITED, a body politic and corporate having its head office and principal place of business in the Town of Estevan in the Province of Saskatchewan, herein acting and represented by L. Russell Kelce its President and Roy O. Park its Secretary duly authorized hereto (hereinafter referred to as “the Purchaser”) ;

OF THE SECOND PART.

FOR AND IN CONSIDERATION OF THE MUTUAL COVENANTS AND AGREEMENTS HEREINAFTER SET FORTH, THE PARTIES HERETO AGREE AS FOLLOWS:

I. The Vendor hereby sells, assigns, transfers, delivers and sets over unto the Purchaser all of the following properties, contracts, rights and interests to wit:—

(1) Subject to the Purchaser obtaining the consent of the respective Producers hereinafter referred to, all of the right, title and interest of the Vendor in, to and under:—

(a) The certain Agreement dated February 1st, 1950, by and between Forestburg Collieries Limited, a corporation, as “Producer”, and Boon-Strachan Coal Co. Limited (Vendor herein), as “Sales Agent” and “Agent”, an executed copy of which said Agreement has been delivered to the Purchaser, and said Agreement is hereby incorporated herein by reference with the same force and effect as though fully set forth herein; and

(b) The certain Agreement entitled “Appointment of Sales Agent” made and entered into on September 10th, 1948, by and between Luscar Coals Limited, a Dominion corporation, as “Producer”, and Boon-Strachan Coal Co. Limited (Vendor herein) as “Sales Agent” and “Agent’’, the executed original of which said Agreement has been delivered to the Purchaser, and said Agreement is hereby incorporated herein by reference with the same force and effect as though set out in full herein; and

(c) The certain Agreement entitled “Appointment of Sales Agent” made and entered into on September 10th, 1948, by and between Mountain Park Coals Limited, a Dominion corporation, as “Producer” and Boon-Strachan Coal Co. Limited (Vendor herein), as “Sales Agent” or “Agent”, the executed original of which said Agreement has been delivered to Purchaser and said Agreement is hereby incorporated herein by reference with the same force and effect as though set out in full herein; and

(d) All oral or other agreements between Old Mac Coal Limited, a Dominion corporation, as “Producer” and Vendor herein as “Sales Agent” as to sales rights on coal to be produced by said Old Mac Coal Limited; and any and all other Agreements of every nature and kind in which Vendor herein is made or appointed Sales Agent for coal produced in Western Canada; all coal shipped by the respective Producers up to the close of business on the 31st of October, 1950, shall be for the account of the Vendor who shall be liable for the purchase price thereof and shall be entitled to collect the sale price thereof; . . . (etc.)

(2) All orders and agreements of the Vendor for the sales of coal produced by any and all said Producers above referred to insofar as same pertain to coal which had not been shipped at the close of business on October 31st, 1950, . . . (etc.)

(3) All of the following described coal owned by the Vendor located on Canadian Pacific dock at Fort William, Ontario:— . . . (etc.) ,

(4) All of the automobiles, office furniture, fixtures and supplies as listed and referred to on Schedule B hereto attached, . . .:(etc.)

(5) All of the rights of the Vendor in, the and under that certain Agreement dated by and between the Vendor and J. Walter Thompson Co. Ltd., an executed copy of which has been delivered to the Purchaser, . . . (etc.)

(6) All the goodwill of the Vendor pertaining to its business of selling coal produced in Western Canada (as the term “Western Canada” is hereinafter defined in paragraph V hereof) and sold in Western Canada and/or to railroads in all parts of the Dominion of Canada.

. . . (etc.)

As part of this transaction also, the appellant ceased to have the same quality of position in Boon Strachan Coal Company Limited because Boon Strachan Coal Company Limited had a reduced operation and business.

Counsel for the appellant submitted, among other things (a) that the Minister’s assumptions ignore many basic facts, as for example: (1) the substantial premise under which the appellant and the partners in the Battle River Syndicate in this Alberta project entered into such agreement, namely, long term investment benefits, and (2) that no sale of the appellant’s right and title in the machinery and equipment was made, but instead, there was an extinguishment of his capital interest in a business ; and (b) that the correct view is that: (1) this was not a trading venture; and (2) if the acquisition of this machinery and equipment constituted an adventure in the nature of trade, the disposition did not partake of any of the elements of such, but instead, was the accomplishment of a complicated overall settlement of many interests, all of a capital nature, in the process of which the appellant lost his right to a salary from Boon Strachan Coal Company Limited (as it was before that time constituted, namely as a company having a business across all of Canada), and also lost all his rights to the assets of this Battle River Syndicate.

In the result, counsel for the appellant submitted that what the appellant got from Sinclair Coal Company when he received the 490 shares in the ‘‘shrunken’’ Boon Strachan Coal Company Limited was a substitution of one business interest for another. In other words, Sinclair Coal Company bought out the appellant’s position, which was of a capital nature, and through his old employer, it compensated him for such. position.

Counsel for the respondent submitted, among other things, that the appellant, in doing what he did during this whole period when he entered into all these Agreements, was engaged in an adventure in the nature of trade, and that the profit of $200,000 was income therefrom.

In relation to the submissions of counsel for the appellant, the jurisprudence relating to the categorizing of lump sum payments on the extinguishments of rights must be considered.

In The Gleriboig Union Fireclay Co., Ltd. v. C.I.R. (1922), 12 T.C. 427, a lump sum was paid by a railway company to the apepllants as compensation for the injurious effect of the embargo in excluding the appellants from working part of their leased mineral area and in depriving them of the profits which they might have earned through such working.

In categorizing such lump sum payment, Lord Buckmaster at pages 463-64 said :

It therefore only remains to consider whether the sum of £15,316 was properly included as a profit in the Appellants’ balance sheet for the year ending 31st August, 1913. The argument in support of its inclusion can only be well founded if the sum be regarded as profits, or a sum in the nature of profits, earned in the course of their trade or business. I am quite unable to see that the sum represents anything of the kind. It is said, and it is not disputed, that the amount in fact was assessed by considering that the fireclay to which it related could only be worked for some two and a half years before it would be exhausted, and it is consequently urged that the amount therefore represents nothing but the actual profit for two and a half years received in one lump sum. I regard that argument as fallacious. In truth the sum of money is the sum paid to prevent the Fireclay Company obtaining the full benefit of the capital value of that part of the mines which they are prevented from working by the Railway Company. It appears to me to make no difference whether it be regarded as a sale of the asset out and out, or whether it be treated merely as a means of preventing the acquisition of profit that would otherwise be gained. In either case the capital asset of the Company to that extent has been sterilised and destroyed, and it is in respect of that action that the sum of £15,316 was paid. It is unsound to consider the fact that the measure, adopted for the purpose of seeing what the total amount should be, was based on considering what are the profits that would have been earned. That, no doubt, is a perfectly. exact and accurate way of determining the compensation, for it is now well settled that the compensation payable in such circumstances is the full value of the minerals that are to be left unworked, less the cost of working, and that is, of course, the profit that would be obtained were they in fact worked. But there is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the application of that test. I am unable to regard this sum of money as anything but capital money, and I think therefore it was erroneously entered in the balance sheet ending 31st August, 1913, as a profit on the part of the Fireclay Company.

And Lord Wrenbury.at pages 465-66 put the matter in this way :

. as to the £15,316, this was compensation for being precluded from working part of the demised area which otherwise the Appellants might have worked and thereby made profit. Was that compensation profit? The answer may be supplied, I think, by the answer to the following question: Is a sum profit which is paid to an owner of property on the terms that he shall not use his property so as to make a profit? The answer must be in the negative. The whole point is that he is not to make a profit and is paid for abstaining from seeking to make a profit. The matter may be regarded from another point of view: the right to work the area in which the working was to be abandoned was part of the capital asset consisting of the right to work the whole area demised. Had the abandonment extended to the whole area all subsequent profit by working would, of course, have been impossible, but it would be impossible to contend that the compensation would be other than capital. It was the price paid for sterilising the asset from which otherwise profit might have been obtained. What is true of the whole must be equally true of part. Again, a further point of view is this: had the working not been interfered with, the profit by the working would have extended over, say, three years; it would have been an annual sum. The payment may be regarded as a redemption of that annuity. Is the redemption of an annuity itself an annuity? If the currency of the annuity had been, say, ten years, and the beneficiaries were A for three years and B for seven years, could A have claimed all the compensation money on the ground that it was income of the first year? Clearly not.

In C.I.R. v. Newcastle Breweries, Ltd. (1927), 12 T.C. 927, the respondent company which carried on the business of brewers and wine and spirit merchants had a substantial portion of their stock of rum requisitioned by the Admiralty under orders it issued pursuant to certain Defence of the Realm Regulations. In categorizing the receipt of compensation for such requisition, Viscount Dunedin at page 954 points out the difference between a sale of stock in trade and a sale of a capital asset, viz :

. . . I think the taking of the rum had no analogy with the embargo on working the clay fields in the Glenboig case (supra). The payment for the sum was in no sense a return of capital. It was simply a realisation of a portion of the stock-in-trade at rather an earlier stage of the process than was the case with ordinary sales.

In Short Bros, Lid. v. C.I.R. (1927), 12 T.C. 955, the categorizing of the payment to the shipbuilder for the cancellation of a contract to built two ships was the issue. Lord Hanworth, M.R. at pages 972-73 put the matter this way:

. . . No doubt, from the point of view of the taxpayer, it is possible to formulate, as Sir John Simon has done, both an interesting and indeed a plausible argument to show that this sum is not a payment in the ordinary course of business in view of the fact that the number of contracts that would be made by a company like this cannot be so very many, cannot exceed the number of slips which they have unoccupied, and their yard itself must contemplate that not more than a certain limited number of ships of these dimensions can be built. But, applying the ordinary tests of business, it appears to me that this sum must be included in the accounting period. It is not denied that Messrs. Short Brothers, Limited, carry on a business of building ships, and in the course of carrying on their business they must enter into a great number of contracts—contracts, some of which are fulfilled, possibly, some of which are broken, some of which, possibly, are terminated; but in all such matters it is not argued that Messrs. Short Brothers, Limited, have less power than other business firms to determine whether or not they will bring to an end, upon terms which they are disposed to agree, contracts which they have entered into, contracts which, for one reason or another, are to be terminated in the interests of one party or the other to the contracts. Once one sees that a contract may be determined in the course of business, it appears to me that we have the answer to the problem which is put before us. The sum which was paid to Messrs. Short Brothers, Limited, was paid to them for the purpose of the other party to the contract, the Hindustan Steam Shipping Company, terminating their liability in respect of these two ships, and the Appellants were ready to agree and to meet their customer in the way and on the terms finally agreed, namely, the payment of £100,000 to the shipbuilding company. You may, of course, without any great stretch of imagination, say that, if the contracts had been carried out, there would have been a payment, not all of it at the same time; payments were to be made as the ship progressed and neared completion and was. actually completed; and you may argue that in that sense and that from that point of view the sum of £100,000 in November, 1920, was the estimated value which would have been obtained by Messrs. Short if they had continued the contract under which, in the future, they would have reaped a profit, not at once, but postponed over a period, and thus you may say, if you like, that it is a lump sum paid in respect of payments to be made during the course of two or more years. But the Statute imposes this liability upon the profits which are made and which arise from a trade or business. One must look first of all at what is the intrinsic business of the matter. We are not to look at the facts from the point of view of the taxpayer, or to reconstruct the business so as to give an advantage to him so that he should not be liable to the tax. We have to take the substance of the matter from the point of view of the business. Now it seems to me quite an inversion of the facts to say that this sum was not received in the course of carrying on the trade. The company did not enter into any restrictive covenant that they would not use the slips, during the two and a half years, that the vessels number 414 and number 416, if they had been built, would have occupied; not at all. The £100,000 is paid down as a business proposition to Messrs. Short Brothers, Limited, and their business is no longer hampered with the contracts which they had entered into with regard to these two ships. Their business was free to undertake new contracts. Thus there is, in the ordinary course of carrying on their trade, an adjustment made between them and their clients or contractors under which a payment is made to them; they are free from all responsibility in the matter of building ships; they are free to place their yard or their slips under contract to fresh customers. The sum of £100,000 is a sum arrived at, if you will, not without regard to the fact that some of the payments would have been postponed, but it is an immediate pay- ment under which freedom in the course of business is received from the responsibility of carrying out the two contracts. If one looks at the substance of the matter, therefore, from the business point of view, as we are doing, it appears to me that the problem is answered. . . . It seems to be simply the sum paid in order that, as a matter of business, the responsibility and liability under the contract should be terminated and the business should be free to engage in others. Looked at from this point of view it appears clear that the sum received was received in ordinary course of business, and that there was not in fact any burden cast upon the company not to carry on their trade. It was not truly compensation for not carrying on their business: it was a sum paid in ordinary course in order to adjust the relation between the shipyard and their customers.

Lord Lawrence at page 975 stated the issue in this fashion:

The solution of the first question argued by Sir John Simon seems to me to depend entirely upon whether this sum of £100,000 was an annual receipt or was a capital receipt. It appears to me that, in a business of this kind, where a contract has been entered into in the ordinary course of business, a sum received for the cancellation of that contract is a sum which would go into the ordinary trading receipts of the company for the year in which it was received or in which it became payable, just as, if the company here had paid a sum for the cancellation of an onerous contract, they would have entered into the debits for the year the sum so paid. If that be the true view I think that this sum is one of those sums which would have to be entered as an item of receipt in the receipts of the company for the year. Whether it turned out to be a profit or not, of course, would depend upon other considerations. So much as regards the first question argued.

In Van Den Berghs, Limited v. Clark (Inspector of Taxes), [1935] A.C. 431, the lump sum payment received by the appellants for the termination of marketing agreements of long duration was the subject matter. Lord Macmillan at pages 442-43 states the issue in these terms:

The three agreements which the appellants consented to cancel were not ordinary commercial contracts made in the course of carrying on their trade; they were not contracts for the disposal of their products, or for the engagement of agents or other employees necessary for the conduct of their business; nor were they merely agreements as to how their trading profits when earned should be distributed as between the contracting parties. On the contrary the cancelled agreements related to the whole structure of the appellants’ profit-making apparatus. They regulated the appellants’ activities, defined what they might and what they might not do, and affected the whole conduct of their business. I have difficulty in seeing how money laid out to secure, or money received for the cancellation of, so fundamental an organization of a trader’s activities can be regarded as an income disbursement or an income receipt. Mr. Hills very properly warned your Lordships against being misled as to the legal character of the payment by its magnitude, for magnitude is a relative term and we are dealing with companies which think in millions. But the magnitude of a transaction is not an entirely irrelevant consideration. The legal distinction between a repair and a renewal may be influenced by the expense involved. In the present case, however, it is not the largeness of the sum that is important but the nature of the asset that was surrendered. In my opinion that asset, the congeries of rights which the appellants enjoyed under the agreements and which for a price they surrendered, was a capital asset.

I have not overlooked the criterion afforded by the economists’ differentiation between fixed and circulating capital which Lord Haldane invoked in John Smith & Son v. Moore ((1921) 2 A.C. 13) and on which the Court of Appeal relied in the present case, but I confess that I have not found it very helpful. Circulating capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital is not involved directly in that process, and remains unaffected by it. If this is to be the test, I fail to see how the appellants could be said to have been engaged in turning over the asset which the agreements in question constituted. The agreements formed the fixed framework within which their circulating capital operated; they were not incidental to the working of their profit-making machine but were essential parts of the mechanism itself. They provided the means of making profits, but they themselves did not yield profits. The profits of the appellants arose from manufacturing and dealing in margarine.

In Duff (H.M. Inspector of Taxes) v. Barlow (1941), 23 T.C. 633, and Hose v. Warwick (H.M. Inspector of Taxes) (1946), 27 T.C. 459, the lump sum payments were paid for giving up an office or employment. In the Duff (supra) case, Lawrence, J. at pages 640-41, stated :

The question seems to me-to be whether the sum was paid as compensation for loss of Mr. Barlow’s office, which, being a source of income, was in my opinion itself a capital asset, or was a lump sum payment as remuneration for future services in that office. If it was the former, it was not assessable; if it was the latter, it was assessable. I was for some time in doubt as to whether the Case Stated dealt sufficiently with the fact whether Mr. Barlow was continuing to manage the Eaglesbush Company, but I have come to the conclusion that the Commissioners were right in their decision and were entitled to assume that whether or not Mr. Barlow was performing any of the services in connection with the Eaglesbush Company which he had performed, he was not under any obligation to do so, and that therefore, in the circumstances of this case, the £4,000 which was paid to him was properly treated as compensation for loss of his office as manager of the Eaglesbush Company, which was a source of income to him and was therefore a capital asset. But Mr. Hills and the Attorney- General, in reply, have contended that there is nothing in the circumstances which I have stated, or in the documents, which in any way indicates that Mr. Barlow was not obliged to continue his service with the Metal Box Company as manager of the Eaglesbush Company, and that therefore the £4,000 ought to have been treated as being a lump sum paid down in respect of services which were to be performed between October, 1937, and December, 1945. In my opinion, that argument is negatived by the terms of the minute of 28th October, 1937, which states: “The Chairman referred to the agreement made with Mr. Barlow and Mr. Rankin in 1935, under which they were responsible for the management of Eaglesbush Tinplate Works”, and were entitled to be paid a certain percentage. The minute continues: “It was now felt that the agreement on these lines was not in the best interests of the Company.” That is a statement, which it is not suggested was colourable or in any way deceptive, that the company had decided that the agreement, not merely the agreement to pay the percentages, but the agreement under which Mr. Barlow was to perform the services of manager of the Eaglesbush Tinplate Works, was not in the interests of the company. In accordance with the minute, the formal agreement of 25th November, 1937, after reciting the material facts, in paragraph 2 expressly determines the agreement—again not the agreement merely to pay Mr. Barlow the percentages, but the agreement under which Mr. Barlow was obliged to perform these duties as manager of the Eaglesbush Company. In my opinion, as that agreement was determined, and as Mr. Barlow received under that agreement the sum of £4,000 for compensation for loss of his right to remuneration, there could rest upon him thereafter no obligation to perform his services in connection with the Eaglesbush Company and such services could not be any part of the consideration for the payment of that sum. That appears to me to be exactly the view which the Commissioners have taken of the circumstances of the agreement in this case.

I am therefore of opinion that this sum of £4,000 is to be regarded as a sum of money which was not provided for and not paid under the contract which Mr. Barlow made with the Metal Box Company at the time of the inception of this new venture with the Eaglesbush Company, and was not paid in consideration for services rendered under that agreement, because that was provided for by the payment of the $500, nor for services to be rendered, but was a payment made as compensation for loss of the source of income which Mr. Barlow was giving up by the agreement of 25th November, 1937.

In the Hose (supra) case Atkinson, J. stated at pages 472 and 473:

To my mind it is perfectly clear that the £30,000 had nothing whatever to do with his remuneration as managing director. That office is not mentioned in paragraph 1. I have pointed out that in paragraphs 6 and 7, when they are dealing with what was to be paid to him as managing director, it is stated in terms, “paid to Mr. Hose as . . . Managing Director”. There are no such words in clause 1. If the agreement should terminate by his death the following week, or if, it should terminate under clause 15 of the agreement, there is no suggestion whatever of any return of the £30,000. When one knows the background, and knows what the giving up of his own position meant, or, as the board put it in their circular, the change by which the company would acquire the business of Mr. Hose, to my mind it is plain that the £380,000 was in no sense a remuneration or reward for the services to be rendered as managing director, but was a sum paid to him for abandoning to the company his personal connection, and securing their hold on it by the covenants in clauses 19 and 20.

It seems to me impossible to say in truth and in fact that it was paid in respect of his services as managing director, in face of the acceptance of the evidence of Mr. Parsons and Mr. Hose as to the mutual understanding that it was paid for his connection, and in face of the circular to the shareholders in which the board described this change as one which was handing over to the company Mr. Hose’s connection. I can see no difficulty in construing the document once one knows what the position was and what his rights under the agreement were, and once one appreciates how his personal connection had been preserved to him by those rights, and how under this agreement that connection (be it remembered valued in fact by two accountants at £30,000) was secured to the company. There is nowhere any suggestion that the payment was to make up his future salary to what it had been before, but there is a finding that it was expected that in the future the position would be still better remunerated.

. . . Mr. Hose lost an office which brought him up to £10,000 a year. He also in fact made over to the company a valuable connection which was a capital asset.

Considering the facts of this case in relation to this jurisprudence, in my view, the appellant did not receive the 490 shares in Boon Strachan Coal Company Limited having a value of $200,000 as compensation for loss of capital assets. Instead, and on the contrary, the whole of the course of conduct of the appellant during all the material times indicates that he was engaged in an adventure in the nature of trade, within the meaning of the case law.

The Battle River Syndicate Agreement dated October 19, 1949 specifically sets out the intention of the parties in its first recital, namely, that among the members of the Syndicate ‘‘it has been agreed that a syndicate shall be formed for the purpose of the acquisition and sale of the equipment hereinafter described’’.

When that Agreement. was entered into, the members of the Syndicate knew that they could buy this equipment and machinery from Solar Mining Company for $180,000 in U.S. dollars and they did so as is evidenced by the Promissory Note and Conditional Sales contract above referred to with that Company (see Exhibit “A” pages 39 and 40). At that time also, the Syndicate knew that they could sell this equipment for $1,145,000 to Forestburg Collieries Limited which the Syndicate owned.

The evidence indicates, however, that the original intention of the appellant as to how he was to obtain his profit from this adventure was not accomplished. Instead, the appellant obtained his profit in another way, but that is of no significance. He caused his then employer Sinclair Coal Company to become interested in this Forestburg project and in the result by way of a number of complicated transactions completed in a relatively short time, the appellant obtained all the shares in Boon Strachan Coal Company Limited, namely, 490 shares, which the parties agree have a value of $200,000, for the consideration above referred to, namely, the transfer of all his interests in the Battle River Syndicate which included his interest in this equipment and machinery.

Loking at these transactions in their entirety, the whole has all the elements of an adventure in the nature of trade as prescribed in the cases (see M.N.R. v. James A. Taylor, [1956- 60] Ex. C.R. 3; [1956] C.T.C. 189.

Contrariwise, such does not have the necessary attributes of a transaction by reason of which it could be characterized as the extinguishment of rights or the exchange of rights of a capital nature.

As a consequence, the profit having the value of $200,000 was income of the appellant in his 1950 taxation year within the meaning of Sections 3, 4 and 127 (1) (e) of The 1948 Income Tax Act.

The appeal is dismissed with costs.