Fraser Valley Milk Producers' Assoc. v. Minister of National Revenue, [1929] SCR 435

Supreme Court of Canada

Fraser Valley Milk Producers' Assoc. v. Minister of National Revenue, [1929] S.C.R. 435

Date: 1929-04-30

In the Matter of the Income War Tax Act

and

In the Matter of the Appeal of the Eraser Valley Milk Producers' Association

The Fraser Valley Milk Producers' Association (Plaintiff) Appellant;

and

The Minister of National Revenue (Defendant) Respondent.

1929: March 8, 11; 1929: April 30.

Present: Duff, Newcombe, Rinfret, Lamont and Smith JJ.

ON APPEAL FROM THE EXCHEQUER COURT OF CANADA

Income tax—Income War Tax Act, 1917, c. 28 (Dom.)—Liability for income tax by company incorporated under Agricultural Associations Act, R.S.B.C. 1911, c. 6—Purpose and operations of company—Manner and basis of distribution of moneys to shareholders—Cooperative Associations Act, B.C., 1920, c. 19.

It was held, affirming judgment of Audette J., [1928] Ex. C.R. 215, that the appelant, incorporated under the Agricultural Associations Act, R.S.B.C. 1911, c. 6, and through which was marketed the milk and

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cream produced by its shareholders, was liable to pay income tax under the Dominion Income War Tax Act, 1917, upon the balance (less certain allowances) shown by its financial! report for the year 1923 in respect of that year's operations and distributed among its shareholders as dividends or interest on paid-up capital.

APPEAL from the judgment of the Exchequer Court of Canada, (Audette J.)[1] holding that the appellant, The Fraser Valley Milk Producers' Association, is liable, under the Income War Tax Act, 1917, to pay income tax, and dismissing its appeal from the decision of the Minister of National Revenue affirming an assessment of the appellant in respect of alleged income of the appellant for the year 1923.

The appellant was incorporated on June 18, 1913, under the Agricultural Associations Act, R.S.B.C. 1911, c. 6, its purpose being to sell through the Association the milk and cream produced by its shareholders. The contract between each producer and the Association, which is set out in full, and the other material facts, and the grounds taken by the appellant against the assessment, sufficiently appear in the judgment now reported. The appeal was dismissed with costs.

Lewis Duncan for the appellant.

C. Fraser Elliott K.C. and W. S. Fisher for the respondent.

The judgment of the court was delivered by

Duff J.—The appellant company is incorporated under the Agricultural Associations Act of the Province of British Columbia. The Association has share capital. Persons may be admitted to membership, who are resident of the Fraser Valley, west of Yale, producers of milk and subscribers for at least ten shares, and who execute the Association's agreement respecting the sale of milk and cream through the Association. No shareholder may hold less than ten or more than three hundred shares. A shareholder may withdraw from the Association, with the consent of the directors, if he ceases to produce in the territory, and, on the surrender of his certificate, is entitled to a refund of the amount paid up on his shares.

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Shares are to be paid for in cash, and the directors are entitled to make calls in respect of unpaid balances on shares. The dividends received by shareholders are proportioned to the amounts paid on their shares.

The contract executed by producers is in the following words:—

Whereas the Producer has requested the Association to accept for distribution and sale on his behalf, all the milk and/or cream produced by the Producer during the life of this agreement, which the Association has agreed to do.

Now therefore this Agreement witnesseth: That in consideration of the outlays and expenses incurred and to be incurred by the Association in providing means for handling, manufacturing and marketing the milk and dairy products of the Producer as mentioned herein, the said parties have agreed to, and do hereby agree as follows:—

1. The Producer agrees to forward to the Association, or as it may direct, all milk and/or cream produced by the Producer other than that retained by him for his own personal or family use, for a continuous period from the date hereof until he shall retire absolutely from the dairy business, in the lower mainland of British Columbia, subject to cancellation by a twelve months' notice which may be given by either party to the other to terminate this agreement while the Producer is still carrying on dairying in the aforementioned district, the contract to terminate at the expiration of said notice: Provided always that the Producer will endeavour to follow the instructions of the Association as to the proportionate quantities of milk to be produced during the several months of the year, in order that the natural surplus in the spring may be reduced as much as possible.

2. The Producer agrees to deliver the said milk and/or cream to such plant or other place as the Association may from time to time require and that he will be responsible for the condition of the said milk and/or cream until the same is accepted at such plant or other place by the Association, or by such person or persons as may be appointed by the Association in that behalf.

3. The Association agrees with the Producer to receive from him all the said milk and/or cream produced by him and to sell the same, as may be deemed by the management of the Association to be most advantageous to all members thereof and to pool the proceeds of all sales on behalf of all Producers delivering to the Association and to distribute the same to such Producers on the basis of the butter fat content f.o.b. Vancouver (reducing the price of such butter fat content f.o.b. Vancouver where the amounts paid for delivery have been less than the cost of delivery at Vancouver, by an equitable difference (according to market prices obtained for sour cream, sweet cream, and whole milk Provided always that from and out of the moneys realized from the sale of milk and/or cream during the term of this agreement the Association may deduct and retain from month to month such amounts for the purposes of the Association as its Directors may from time to time decide, which amounts shall not exceed in all 10 per cent, of the amount realized from the sale of the said milk and/or cream, and said amounts so deducted and retained by the Association together with similar amounts deducted and retained by the Association from all other

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Producers delivering to the Association shall be a fund in the hands of the Association to be expended 'as follows:—

(a) To provide for all losses, costs, charges and expenses incurred by the Association in carrying on its business together with a reasonable allowance for depreciation of all plants and equipment.

(b) To establish a reserve fund as may be required by the provisions off the "Co-operative Associations Act" as in force here from time to time.

(c) For the purpose of paying a cash dividend on the paid-up shares in the capital stock of the Association at such rate as may be fixed by the said Association in annual general meeting, such dividend not to exceed eight per centum per annum.

(d) The directors may retain from such fund after the foregoing subsections have been complied with, such amounts as the directors may deem 'advisable for the purpose of purchasing any land, buildings, machinery or equipment, or in making any other investment or investments which they may deem for the benefit of the Association, Provided always that such expenditure in any year shall not exceed 2½ per cent, of the total amount realized from all sales of milk and/or cream during such year; unless the expenditure of a larger amount be authorized by a special general meeting of the Association called for that purpose, in which case the Producer hereby agrees to be bound by the decision of such meeting whether he be present or not. Upon the completion of any such purchase or investment the Association shall issue paid-up shares to the extent of the capital sum expended and shall issue to each Producer and each Producer agrees to accept his proportion of said shares being that proportion which the value of the butter fat calculated f.o.b. Vancouver, shipped by him during such year bears to the total amount expended by the Association under this subsection.

(e) Any balance remaining over, shall be disposed of in such manner as shall be decided by the members of the Association in Annual General Meeting, and the Producer hereby agrees to be bound by the decision of such meeting, whether he be present or not.

4. The tests for butter fat content shall be made by persons holding Government certificates' of qualification and shall be subject to the provisions of the Creameries and Dairies Regulation Act.

5. The Association agrees to make payment semimonthly for all milk and/or cream received, subject to the provisions herein contained, about the middle and end of each and every month during the life of this agreement, or at such periods as may be fixed by the Association in annual general meeting.

6. While doing its best to provide sufficient empty cans to every member for use in shipping milk and/or cream, the Association is not to be held responsible for the failure of any transportation company or milk hauler to leave the requisite number of empty cans for this purpose.

7. The Producer hereby covenants with the Association that should the said Producer fail to carry out the terms of this agreement by making default in the supply or delivery of the milk and/or cream within contracted

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for, he will pay to the Association the sun of twenty cents (20 cents) for each pound of butter fat not delivered by reason of the said milk and/or cream being not delivered, and such amount shall be held to be 'liquidated damages for such non-delivery and not as a penalty.

The financial report of the company, for the year 1923, showed that there was, from the operations of the company for that year, a balance of $39,953.34, which admittedly has been distributed among the shareholders. In respect of the sum of $32,000 odd, which is arrived at by deducting certain allowances from this balance, it has been held by Audette J.[2] that the appellants are assessable to income tax as taxable income received during the year 1923. From this judgment the appellants now appeal.

The judgment of Audette J. is assailed on two grounds: First, that this sum was not received by the appellants in the year 1923; and, secondly, if so received, it is not assessable to income tax.

To deal first with the second of these contentions. Both the statute, under which the appellants are organized, and the appellants^, own rules contemplate the distribution of profits to the shareholders of the Association as such. Section 13 of the Co-operative Associations Act, Chapter 19, B.C. Statutes of 1920, is in these words:—

13. (1) The profits from the business of an association shall be apportioned as follows:—

(a) By setting aside such sum as its rules may provide, not being less than ten per cent, of the net profits, as a reserve fund, until such fund is equal to at least thirty per cent, of the share capital paid up at the date of the apportiontment.

(b) By payment of such dividend as its rules may provide, not exceeding eight per cent per annum, on the share capital paid up at the date of the apportionment.

(c) By distributing, in accordance with the rules of the association, among its patrons, whether members or not and whether vendors to or purchasers from the association, the remaining profits, or such portion thereof as the association may provide.

The statute treats the Association as a profit-making concern, and as a profit-making concern it is contemplated by the contract. The contract provides for the deduction for moneys, realized from the sale of milk and cream, and the retention by the Association, from month to month, of such amounts not exceeding ten per cent, of the sums so realized, as the directors may from time to time decide, for the purposes of the Association. These moneys deducted

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and retained 'b

 

y the Association "for the purposes of the Association " are to be expended:—

(1) In providing for all losses, costs, charges and expenses of the business of the Association, including an allowance for depreciation of plant and equipment,

(2) in establishing a reserve fund in compliance with the statute,

(3) in payment of a " cash dividend " to the shareholders of the Association, at such rate as shall be " fixed by the said Association, not exceeding eight per cent, per annum,"

(4) as to any surplus, after providing for these requirements, in paying a sum, not to exceed 2½ per cent. of the total moneys realized, in the purchase of lands, buildings, machinery or equipment, or "in making any other investment," deemed to be "for the benefit of the Association"; and in disposing of any balance of the surplus in such manner as the Association may determine in annual general meeting.

Moneys distributed among the shareholders by way of dividend, pursuant to the terms of this contract, are moneys paid out of profits—profits assessable to income tax. The contention of the appellants, however, is that the scheme as a whole is a co-operative scheme; and that the Association is incorporated for the purpose of providing convenient machinery for putting this scheme into effect. The appellants are, it is said, a mere agency, and, the profits, so called, distributed among the shareholders, constitute, in part, the returns received by the appellants in that character, which, in the form of dividends, or interest on paid-up capital, are handed over to the producers.

It seems impossible to accept this view. It is quite clear that the moneys distributed, as dividends, or among shareholders as interest on paid-up capital, are not divided among the producers, unless by .accident, in the same proportion as the share of moneys realized from sales, which is paid directly to producers from month to month, under the terms of the contract. The share of each producer in the moneys so distributed is determined by the butter fat

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content of his product; while his share of moneys distributed, by way of dividend or interest, is determined by the amount he has paid on his shares. Moreover, while it is intended, no doubt, that the number of shares held shall bear a definite relation to the number of cans of milk supplied by the shareholder to the Association, that relation is not necessarily maintained, as the following evidence shows:—

Q. Supposing we had a shipper who shipped one can of milk but he only held five shares, and we have another who ships one can of milk but he has three hundred shares; you say the money all goes to the shipper and they are synonymous?

A. Yes.

Q. Do they get the same amount of money?

A. No.

Q. Where is the difference?

A. The man with bigger shipments would get more.

Q. The shipments are both the same?

A. The man who has more capital in the company would get more interest.

On the whole it seems impossible to treat the distribution of moneys under clause 3 (c) of the contract as a mere accounting by the appellants, as agents, to their principals. Admittedly, by the contract, the moneys realized from the sale of milk and cream, were to be distributed "about the middle and the end of each month," or at such periods as might be fixed by the Association, subject to the monthly deduction above mentioned, which is not to exceed ten per cent. of the total amount realized from sales. Moneys retained, which remained in the hands of the Association at the end of the year 1923, could only be retained in virtue of the proviso to the third paragraph of the agreement, which authorized the retention of moneys "for the purposes of the Association." The destination of the moneys, so retained, is explicitly fixed by the terms of the agreement itself. Only in payment of a cash dividend is the distribution of any part of such moneys among the shareholders authorized, and this only after the expenses, incurred by the Association "in carrying on its business," have been provided for.

As to the first contention. The terms of the contract seem to conclude the point against the appellants. The appellants' argument is that the balance of $39,000 odd, which was distributed after the annual meeting of February, 1924, consisted of the undistributed proceeds of sales

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in the year 1923. These moneys, as part of such proceeds, could only be retained rightfully under the terms of the proviso, paragraph 3; and, therefore, we are entitled, and indeed bound, to presume that they were, from month to month, deducted and retained by the Association, pursuant to those terms, that is to say, " for the purposes of the Association," and, moreover, that the distribution among the shareholders was made in conformity with the obligations of the appellants under the contract. The proper inference, therefore, is that these moneys were received by the appellants, for their own purposes, in the year 1923.

The appeal is to be dismissed with costs.

Appeal dismissed with costs.

Solicitor for the appellant: Lewis Duncan.

Solicitor for the respondent: C. Fraser Elliott.