Panda Realty Ltd. v. MNR, 86 DTC 1266, [1986] 1 CTC 2417 (TCC)

Kempo, T.C.J.

Part I — Issue

The narrow issue with respect to the 1976, 1977 and 1978 taxation year appeals is whether the appellant (hereinafter called “Realty”) in computing its income for the 1974 taxation year was entitled to deduct as an expense an amount of $182,584 which it paid to the Royal Bank of Canada pursuant to a guarantee it made in favour of its tenant, Panda of Canada Limited (hereinafter called “Canada”) which went bankrupt.

In reporting that a non-capital loss had been occasioned in 1974 by this expenditure, and there being insufficient income in 1974 and in 1975, Realty carried forward $72,210 in 1976, $108,066 in 1977 and $2,308 in 1978 as a non-capital loss.

The Minister disallowed the deductions and acted on the assumption that the loss sustained by Realty was an outlay or loss on account of capital.

Part II — Decision

The appeals are allowed, with costs, and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant incurred a non-capital loss of $182,584 in 1974 and that in computing its taxable income for each of its 1976, 1977 and 1978 taxation years, the amounts of $72,210, $108,066 and $2,308 are to be allowed, respectively, as a deduction in accordance with the provisions of subsection 9(2) and paragraph 111(1)(a) of the Income Tax Act (the “Act’’).

Part III — Reasons for Decision

Facts

A lengthy agreed statement of facts was filed at the outset of the proceedings, together with a folio of documents referred to in the agreed facts encompassing exhibits No. 1 to 28, inclusive. This document is attached as Appendix A and forms part of these reasons; the exhibits that are referenced therein are not reproduced because no interpretative issues arise therefrom.

The substantial agreement on the facts resulted in only one witness, Mr. Murray Nadler, being called for Realty; no one was called for the Minister. An overall summary of the salient facts is as follows.

Canada carried on the business of a clothing manufacturer. In early 1965 it entered into a basic buying and merchandising agreement with Simpsons- Sears (“Sears”) under which it agreed to manufacture children’s dresses for Sears for a five-year term ending December 31, 1969, and from year to year thereafter terminable on six months' notice. Contemporaneously, Mr. Nadler, who at that time was Canada’s sole shareholder, sold 20 per cent of his common shares to Sears. They entered into a shareholders’ agreement respecting their rights and obligations as shareholders and further matters with respect to Canada’s operations. Canada was expressly precluded from incurring any long-term borrowings or indebtedness (other than operating and factory borrowings) without the express consent of Sears. Sears did not want to absorb any long-term debt as part of their production costs, nor did they want to be involved in real estate.

In March of 1965, and for the purposes of building a factory thereon, Canada had acquired a 2.128-acre parcel of land municipally known as 890 Rangeview Road, Mississauga, Ontario. The appellant, Realty, was incorporated for the purpose of acquiring these lands from Canada and erecting a factory thereon for lease to Canada. Mr. Nadler's wife, Mrs. Eleanor Nadler, was its sole shareholder, officer and president from inception to 1978. The factory was completed in or about July of 1965. All of the financing to purchase the land and to build the factory had been acquired from third parties.

Realty entered into a verbal month-to-month tenancy with Canada on a triple-net basis, that is, Canada absorbed all expenses connected with the maintenance of the factory, including taxes, in its capacity as sole tenant and paid Realty a monthly amount. At all times this amount exceeded the principal and interest payments required to be made by Realty in connection with the financing of the factory. The amount paid for the 1966 to 1973 years, inclusive, was $25,000 per year.

For the years 1965 to 1970, inclusive, both Sears and Realty had been guarantors of working capital loans made by the Royal Bank to Canada. In March of 1971, Realty guaranteed increased working capital loans by the Royal Bank to Canada, limited to $425,000. The stated reason for Realty giving this guarantee was to ensure an ongoing source of rental income to it. This reason has been acknowledged as being factually true by viva voce testimony of Mr. Nadler, by paragraph 17 of the agreed statement of facts (Appendix A) and by paragraph (c) of clause 5 of the Minister's reply to notice of appeal; the latter being one of the stated assumptions of fact underlying the assessing position on these appeals.

The 1971 operating loan was also guaranted by the shareholders of Canada, namely Sears to the extent of $200,000 and Mr. Nadler to $425,000. Mrs. Nadler did not enter into any guarantees on her personal account. Neither Mrs. Nadler nor Realty held a shareholder's interest in Canada.

Mr. Nadler acknowledged that for the nine years that the relationship lasted (i.e., 1965 to 1974), Canada had consistently been “under the gun" to provide competitive pricing to Sears for the manufactured product. Of Canada’s total sales per year, 70 per cent had been made to Sears. The significance of this is that, by the terms of the said merchandising agreement, the manufacturing cost of the product included, inter alia, the appropriate proportion of Canada’s rent as was applicable to such product. Simply put, Sears’ purchases covered 70 per cent of the rent that Canada had paid to Realty. Therefore Canada’s dependency on Sears was twofold; one was that their business carried 70 per cent of the rental and the other was the tenuousness of Sears' business as ongoing because of Canada's requirement to provide competitive pricing.

Mr. Nadler acknowledged that it was his recollection and belief that Realty's guarantee in 1971 was vital and necessary to Canada’s ongoing operations and that at that time Canada's relationship with Sears had been expected to continue indefinitely. He said that Sears was of the opinion that if they were to have given a guarantee so should Realty and Mr. Nadler in his personal capacity.

Three years later, that is in early 1974, Canada suffered serious financial difficulties. In the meantime Realty, in February of 1974, had established a line of credit with the Guaranty Trust Company in the amount of $500,000 and drew down about $200,000 thereof, depositing same into its own bank account with the Royal Bank. By letter of March 13, 1974 the Royal Bank demanded payment of the full amount of its loans and overdraft from Canada as borrower, and from Realty under its guarantee. At the time of this demand $182,584 was in Realty's Royal Bank account which they seized pursuant to the guarantee. A Receiving Order in Bankruptcy was made against Canada in October of 1974.

Paragraphs 4, 5, 6 and 7 of the Minister’s reply to notice of appeal set out the assessing position and are as follows:

4. In reassessing tax for the 1976 and 1977 taxation years, the respondent disallowed the deductions by the Appellant of the said amounts.

5. In reassessing the Appellant as aforesaid, the Respondent assumed the following findings or assumptions of fact:

(a) The facts admitted or alleged above;

(b) in its 1974 taxation year, the Appellant owned ari industrial property at 890 Rangeview Road, Mississauga, Ontario;

(c) in its 1974 taxation year, the Appellant paid to the Royal Bank of Canada the amount of $182,584 pursuant to a guarantee of the indebtedness of Panda of Canada Limited to the Royal Bank of Canada;

(d) in the 1974 taxation year and at all material times, the Appellant was beneficially owned by Eleanor Nadler;

(e) in the 1974 taxation year Panda of Canada Limited was 80%, beneficially owned by Murray Nadler, husband of Eleanor Nadler, and 20% beneficially owned by Simpsons-Sears Limited;

(f) the Appellant rented 890 Rangeview Road to Panda of Canada Limited for $25,000 per year in 1974;

(g) the Appellant guaranteed the indebtedness of Panda of Canada Limited to ensure an ongoing source of rental income;

(h) the loss sustained by the Appellant was an outlay or loss on account of Capital.

6. The Respondent relies, inter alia, upon subsections 18(1)(a), 18(1)(b), 40(2)(g)(ii), 50(1), 111(1)(b) and 111(8)(a) of the Income Tax Act, R.S.C. 1952, Chapter 148 as amended.

7. The Respondent submits that the outlay of $182,584 was not incurred by the Appellant for the purpose of gaining or producing income from its business or property, but was a payment on account of capital pursuant to its guarantee of the indebtedness of Panda of Canada Limited which was made to ensure an ongoing source of rental income.

The Minister's Submissions

The Minister’s counsel stated he would be confining his arguments to paragraph 18(1)(b) of the Act and contended that the common sense and commercial realities of the facts in this case are indicative of an expenditure of a capital nature as having been made in 1974. The 1971 guarantee had been given by Realty in respect of the preservation of an asset or an advantage for the enduring benefit of trade, that is, to ensure Canada’s existence and thereby to ensure the source of its own rental income through the continuation of a long-term relationship. And, when viewed contextually, the 1971 guarantee was a continuum of the 1965 guarantee such that a longterm advantage, or source of rental income, did indeed ensue. Accordingly, the expenditure made pursuant to the 1971 guarantee is to be characterized as a Capital outlay in that it had been clearly made to obtain an advantage of an enduring nature.

The Appellant's Submissions

As to the requirements of paragraph 18(1 )(a) of the Act, they have been satisfied for two essential reasons. First, because the provisions of subparagraph 40(2)(g)(ii) of the Act were not applied to deny the loss, the Minister must be taken to have viewed the 1971 guarantee as having been given for the purpose of gaining or producing income from property. Secondly, and parenthetically, because the Minister has conceded that the guarantee was given to ensure an ongoing source of rental income (which fact the appellant does not dispute), it follows that it had been given for the purpose of gaining or producing income from property. And indeed, rental income had in fact been received.

As to paragraph 18(1)(b) of the Act, the 1974 outlay by Realty is not one of capital within the meaning of that provision for the following reasons.

1. The loss in question arose in connection with the earning of income from property; it was not a loss from business. Because the appellant was earning income from property, the source of the rental income was not Canada’s tenancy nor the 1971 guarantee. The source was the land and building itself which was the capital asset that yielded the income. The 1971 guarantee had not been given to preserve or ensure that source. From a landlord’s perspective, the letting is merely a compendium of obligations; the letting is not the capital asset per se but is simply the method of turning the land and building to account. And in any event the preservation of a right to receive rental income does not transform that right to one of capital; the right remains one of income. Realty’s right to earn income from its property was not being impugned by anyone.

2. The 1971 guarantee was given in the course of Realty's revenueearning activities and was on the operational side of an established commercial relationship with Canada. The practical and commercial purpose of the guarantee was with a view to revenue receipts solely in the form of rental income from property.

3. Only the 1971 guarantee is of direct relevance because it was given in connection with a then ongoing business relationship; it had nothing to do with the one given in 1965. That there is alleged to be a continuum is too broad a generalization. The issue in these appeals is with respect to only the 1971 guarantee.

4. Alternatively, the giving of the 1971 guarantee with the view to ensuring Realty's established method of turning the property to account does not amount to the preservation of a capital asset or advantage in a capital aspect. No enduring features were attached to the stream of rental payments because it was merely a month-to-month tenancy and the continuation of the rental stream was ensured only by the continuation of the Sears merchandising agreement which not only had a pricing competition clause but was, after 1969, terminable on six months' notice.

Statutory Provisions and Authorities

Subsection 18(1)(a) and subparagraph 40(2)(g)(ii) provide:

18(1) In computing the income of a taxpayer from . . . property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the . . . property.

40(2) Notwithstanding subsection (1),

(g) a taxpayer’s loss, if any, from the disposition of a property, to the extent that it is

(ii) a loss from the disposition of a debt or other right to receive an amount, unless the debt or right, as the case may be, was acquired by the taxpayer for the purpose of gaining or producing income from . . . property

is nil.

[Emphasis is mine.]

Paragraph 18(1)(b) provides:

18(1) In computing the income of a taxpayer from . . . property no deduction shall be made in respect of

(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part.

Many authorities were referenced by counsel for each party in respect of the various tests that have thus far been developed by the courts, on the particular facts before them, in distinguishing outlays that are on capital account from those on income account. Many of these same authorities have very recently been considered and applied in Johns-Manville Canada Inc. v. The Queen, [1985] 2 C.T.C. 111; 85 D.T.C. 5373 (S.C.C.) and Angostura International Limited v. The Queen, [1985] 2 C.T.C. 170; 85 D.T.C. 5384 (F.C.T.D.).

As to the matter at hand, and speaking generally, the jurisprudence has drawn a distinction between an outlay made to protect the very existence of a going concern either as a whole or within a particular area of exploitation, viz., M.N.R. v. Dominion Natural Gas Co. Ltd., [1940-41] C.T.C. 155; 1 D.T.C. 499 (S.C.C.); B.P. Oil Limited v. The Queen, [1980] C.T.C. 408; 80 D.T.C. 6331 (F.C.A.) to one that impacts on day-to-day operations viz., M.N.R. v. Goldsmith Bros. Smelting and Refining Co. Limited, [1954] C.T.C. 28; 54 D.T.C. 1011 (S.C.C.); Canada Starch Company Limited v. M.N.R., [1968] C.T.C. 466; 68 D.T.C. 5320 (Ex. Ct.); The Queen v. Romeo Lavigueur, [1973] C.T.C. 773; 73 D.T.C. 5538 (F.C.T.D.); Oxford Shopping Centres Ltd. v. The Queen, [1980] C.T.C. 7; 79 D.T.C. 5458 (F.C.T.D.) affirmed [1981] C.T.C. 128; 81 D.T.C. 5065 (F.C.A.).

And turning particularly to the guarantee cases, it is notable that it has been the practical and commercial aspects of the situation which carried considerable weight in the final outcome of The Queen v. F.H. Jones Tobacco Sales Co. Ltd., [1973] C.T.C. 784; 73 D.T.C. 5577 (F.C.T.D.) and D.J. MacDonald Sales Limited v. M.N.R., 16 Tax A.B.C. 49; 56 D.T.C. 481 (T.A.B.) in that the principal object and purpose of the guarantor was seen to have been directed to the maintenance of their way of obtaining supplies or the selling of their products. Neither case involved considerations relative to the financing of a subsidiary’s working capital as was noted to have been the situation in Canada Safeway Limited v. M.N.R., [1957] C.T.C. 335; 57 D.T.C. 1239 (S.C.C.); Stewart & Morrison Limited v. M.N.R., [1972] C.T.C. 73; 72 D.T.C. 6049 (S.C.C.), and The Queen v. H. Griffiths Company Limited, [1975] C.T.C. 2120; 76 D.T.C. 6261 (F.C.T.D.). In Griffiths, the advantage that was sought to be gained was the securing and control of a permanent supply of sheet metal at a relatively low price through a subsidiary corporation. In Stewart & Morrison, supra, the taxpayer was found on the facts to have simply loaned money for working capital to its subsidiary and to have lost its money. In both of these cases the outlays were held to have been on Capital account.

Also analogous in principle to the situation at hand are the cases of M.N.R. v. Steer, [1966] C.T.C. 731; 66 D.T.C. 5481 (S.C.C.) and McLaws v. M.N.R., [1972] C.T.C. 165; 72 D.T.C. 6149 (S.C.C.) where the shareholdertaxpayer had guaranteed loans to protect and preserve the continuing operations and business of their corporations. In Steer the guaranteed loan was held to have amounted to a deferred loan to his company and in McLaws the taxpayer attempted to shore up his company which was at the verge of bankruptcy. There was no intertwining of business operations between Steer or McLaws and their respective corporations. Those guarantees were similarly held to have been on capital account.

The case of The Queen v. Romeo Lavigueur, supra, involved a landlord who lent considerable sums of money (and also had guaranteed some bank loans) to one of its corporate tenants to keep it solvent so it could pay rent. The Court noted that the landlord had probably exercised bad business judgment in allowing the total loans to exceed the rental income that might have been received, but that this did not affect the purpose in making the loans. The loan was held to be deductible. Walsh, J. stated at 782 (D.T.C. 5545):

In the present case . . . the loans did not result in the acquisition of any asset or advantage of an enduring nature nor create a trading structure of a permanent character .. . . The loans were apparently an integral part of the profit-making activities of the business, since from time to time, although not carrying on a money lending business as such, Messrs. Lavigueur and Bolduc did lend money to lessees to retain them as such with a view to keeping the premises rented and collecting as much rent from same as possible. The fact that in the present case this attempt had disastrous consequences does not affect the intention at the time the loans were made, nor does the fact that the eventual loss exceeded the total amount of rent which could have been collected affect the situation, since it is an expense not chargeable against the particular revenue collectable from this tenant but against Lavigueur and Bolduc's total rental income from all their properties.

As to whether an income stream may be characterized as a capital asset, the case of Gladys Evans v. M.N.R., [1960] C.T.C. 69; 60 D.T.C. 1047 (S.C.C.) is relevant. This was not a guarantee case but rather was in respect of the deductibility of legal fees expended by the taxpayer in successfully litigating an entitlement to a life-time annual income from an estate. The court found that the stream of income payments was of an income nature and that it consisted only of income notwithstanding that it could be sold or valued on an actuarial basis or by lump-sum. It was held that the taxpayer had incurred legal expenses "to prevent the right to receive that income being destroyed; the right in question remains throughout a right to income;” per Cartwright, J. at 76 (D.T.C. 1050).

Analysis

Realty’s outlay in 1974 was made in respect of the 1971 guarantee which had been given for bona fide purposes and was for the purpose of gaining or producing income from property. This is supported not only by the testimony of Mr. Nadler but it is also an uncontroverted fact tantamount to an admission in paragraph 5(g) of the Minister's reply to notice of appeal which is repeated for convenience:

5. In reassessing the Appellant as aforesaid, the Respondent assumed the following findings or assumptions of fact:

(g) the Appellant guaranteed the indebtedness of Panda of Canada Limited to ensure an ongoing source of rental income.

There is ample evidence to support this admission; and indeed rental income was received.

Additionally, but without deciding the point, there is merit in the appellant's observation that since subparagraph 40(2)(g)(ii) of the Act, supra, had not been applied the Minister should be taken as having assumed that its exclusion was applicable, and that the guarantee had been given for the purpose of gaining or producing income from property. No counterargument was advanced by the Minister with respect thereto, nor with respect to the non-applicability of subsection 18(1)(a) of the Act, but rather was confined to the statutory prohibition found in subsection 18(1)(b) of the Act relating to an outlay of capital.

In this case, Realty’s perspective was that of preserving an uninterrupted stream of rental income and not the preservation of its profit-making structure on the occasion of the loss of Canada as a tenant. The profit-yielding subject was clearly that of the underlying real estate. In my view, the appellant was correct in its position that this was the capital asset or source which produced the rental income, in a capital aspect, viz., Goldsmith, supra, as per Kerr, J. (sic) at 31 (D.T.C. 1013).

The evidence also clearly establishes that the 1971 guarantee had been given by Realty to preserve an ongoing source of rental payments which would have consisted entirely of income. I accept the appellant’s proposition that this income stream was not capital per se, nor was it of a capital nature viz., Evans, supra.

The commercial and business environment under which the 1971 guarantee was given was fourfold. It was required to satisfy ordinary commercial practices of the bank; the requirements and business practice of Sears; to ensure the maintenance of the required working capital of Canada; and, consequentially, the continuing rental income to Realty. The bank wanted the guarantee, and so did Sears if they were to have given their own and, presumably, to have continued the merchandising relationship which in turn produced the economic activity out of which 70 per cent of the rent was paid.

It was stated in Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation, (1946) 72 C.L.R. 634, that the solution “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.”

And while the Minister’s counsel may be correct in his submission that the giving of the 1971 guarantee should be viewed in context with that given by Realty in 1965, it is of no real assistance because of different circumstances extant at the earlier time plus the fact that the real issue in this appeal is not on the 1965 guarantee but on the one given in 1971, viz., Mclaws, supra, at 169 (D.T.C. 6152).

Additionally, any substantive form of permanancy or endurance of the advantage or benefit to be obtained by Realty could be described as no more than minimal because it hinged on too many factors beyond its control. It was recently said that “endurance” does not mean permanent nor perpetual, viz., Johns-Manville, supra, at 119 (D.T.C. 5378). The taxpayer in F.H. Jones Tobacco Sales, supra, at 2436 (D.T.C. 5583) was similarly subjected to a competitive pricing clause in its exclusive-sales agreement which was viewed as rendering it at the mercy of its competitors and thus of only relative permanency. In Griffiths, supra, the taxpayer was in a position to secure and control its needed supplies at a low price via its own subsidiary. Realty had no such assurances with, ownership in or control over Canada. While this aspect would not be determinative of the matter, it is one factor to be taken into account.

In my opinion the situation here incorporates many similarities to the cases of Evans or Romeo Lavigueur, supra, in that each dealt with matters and issues involving a stream of income to be maintained and preserved, and that of D. J. MacDonald Sales, and Jones Tobacco Sales, supra, in that guarantees had been given to secure a source of supply of goods which in turn yielded income to the taxpayer. And I find that the giving of the guarantee in the case at bar is not analogous or tantamount to a physical addition to a shopping centre which principle the Minister's counsel sought to extrapolate from the case of Oxford Shopping Centres Ltd., supra.

When all of the facts are viewed collectively and objectively, there is considerable doubt as to whether Realty's guarantee had created a trading structure of a permanent nature, or, if it had, that it was of an enduring nature. Like Jones Tobacco Sales, supra, any assurance of an income stream would have been ""relative" since it would have been enjoyed only in the circumstances already mentioned. With respect to its endurance, while it was expected to be ongoing if all went well, it nonetheless was month-to- month in nature. And while it was ongoing, it did produce an income to Realty that exceeded attributable expenses.

In B.P. Australia Ltd. v. Commissioner of Taxation [1966] A.C. 224, Lord Pearce stated, at 264-65:

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.

For all of the above reasons I find that the 1971 guarantee was given, and the amount paid pursuant thereto in 1974, should be treated as a revenue item rather than as a capital item. Accordingly the assessments against which these appeals were taken are referred back to the Minister for reassessment in accordance with the decision given in Part II of these reasons for judgment.

Appeal allowed.

APPENDIX A

AGREED STATEMENT OF FACTS

1. Panda Realty Limited (“Realty”) is a company incorporated under the laws of the Province of Ontario on the 11th day of May, 1965.

2. Panda of Canada Limited (“Canada”) was a corporation incorporated under the laws of the Province of Ontario on the 6th day of May, 1959. From the time of its incorporation Canada engaged in the business of manufacturing clothing. In 1965, Murray Nadler (“Hadler”) owned 3,600 6%, non-voting, redeemable preferred shares having a par value of $10 each and 301 no par value common shares, having an aggregate paid-up capital of $301, representing all of the issued and outstanding common and preference shares of Canada.

3. Pursuant to a shareholders agreement dated February 1, 1965 (Exhibit 1) between Nadler and Simpsons-Sears Limited (“Simpsons-Sears”), Nadler sold to Simpsons-Sears sixty (60) common shares of Canada for a purchase price of $900. Immediately after such sale, Nadler owned approximately eighty per cent (80%) of the issued common shares of Canada and Simpsons-Sears owned approximately twenty per cent (20%) of such issued common shares.

4, At no time did Realty own any shares in Canada.

5. The shareholders agreement provides, inter alia, in paragraph 7 thereof that so long as Simpsons-Sears owns at least 60 common shares of Canada no additional common or preferred shares of Canada should be issued and no “funded indebtedness” should be created by Canada without the specific consent in writing of Simpsons-Sears. For the purposes of this covenant, “funded indebtedness” means bonds, or debenture debt of Canada secured by any real property, mortgage, floating charges, or long-term lease backs given by Canada, the principal amount of which is due and payable more than one year after the making or issue thereof, but shall not include normal bank and/or factoring borrowings of Canada.

6. By an agreement dated January 1, 1965 (Exhibit 2) Canada entered into a Basic Buying Merchandising Agreement with Simpsons-Sears for an initial term of five (5) years commencing January 1, 1965 and ending December 31, 1969 and from year to year thereafter until terminated. The agreement provides that it could be terminated by either party after the initial five (5) year period or in any year thereafter by either party on six (6) months notice.

7. Paragraph 15 of the Basic Buying Merchandising Agreement provides, inter alia, that if a receiver has been appointed for either party and such receiver shall not have been dismissed within sixty (60) days from the date of his appointment or if either party shall make an assignment for the benefit of creditors, or if either party shall admit in writing its inability to meet its debts as they mature, or if an involuntary petition of bankruptcy shall be filed against either party which is not dismissed within sixty (60) days from the date of filing thereof, then in any such event the other party to the agreement shall have the right, at its option, to cancel the Basic Buying Merchandising Agreement forthwith upon giving written notice of such cancellation to the first-mentioned party.

8. The Basic Buying Merchandising Agreement further provides, inter alia:

(a) Canada will sell and Simpsons-Sears will purchase in each contract year at least 40% of Simpsons-Sears’ requirements for such contract year of childrens’ dresses (the “product”) with provision for additional purchases of product;

(b) the price for product to be manufactured and sold to Simpsons-Sears is to include the “manufacturing cost” of the product as defined in Schedule “A” to the Agreement;

(c) Schedule “A” to the Agreement defines “manufacturing cost” of product as including, inter alia, the appropriate proportion of Canada’s rent as is applicable to such product;

(d) the price charged to Simpsons-Sears (the “billing price”) for product is to be the “manufacturing cost” of such product plus a profit margin of 6% of all elements of such manufacturing cost other than the “non-profit” items described in Schedule “A” to the Agreement to December 31, 1965. From January 1, 1966 and thereafter the aforesaid profit margin is to be 5%. Provided that, if Canada’s net price to any other customer for the same or similar product is less than the billing price as described above, then Canada’s billing price shall not exceed such net price to such other customer unless Canada’s aggregate cost net price to such other customer unless Canada’s aggregate cost per unit produced and sold to such other customer is less than the “manufacturing cost” per unit of the comparable item of product manufactured for Simpsons- Sears;

(e) Canada’s “delivered price” of product to a Simpsons-Sears catalogue order plant means Canada’s proposed billing price plus the cost of transportation of product from Canada’s plant to such catalogue order plant. The term “competitive delivered price” means the lowest price (except a distress price) quoted to Simpsons-Sears by any other reputable manufacturer for the same or similar product of comparable kind and quality, plus the cost of transporta- tion of said product from the plant of such other manufacturer to such Simpsons-Sears’ catalogue order plant. Canada is required to sell its product manufactured for a Simpsons-Sears catalogue order plant at the "competitive delivered price”, otherwise Simpsons-Sears is permitted to purchase product from such other manufacturer;

(f) the term "non-profit item” is defined in paragraph XII of Schedule "A” to the Agreement as including patent royalties and excise taxes on product, transportation prepaid by Canada pursuant to Simpsons-Sears’ request for delivery of product purchased by Simpsons-Sears, and amortization of the cost of special purpose tools to be reimbursed to Canada by adding such items to the manufacturing cost;

(g) paragraph XIII of Schedule “A”’ specifically excludes in computing "manufacturing cost” interest on indebtedness of Canada having an original maturity of one year or more.

9. By an agreement of purchase and sale dated March 11, 1965 (Exhibit 3) Canada agreed to purchase from Waco Construction Ltd. a parcel of land, namely, Lot 1, Block "C”, Part of Lot 9, Concession 3, South of Dundas Street, in the Township of Toronto (consisting of 2.128 acres more or less) municipally known as 890 Rangeview Road, Mississauga. The purchase price of the land was $31,935 payable as to $7,500 on closing and by Waco taking back a vendor’s mortgage of $24,435 bearing interest at 7% per annum (Exhibit 4). The closing of the purchase and sale of said lands occurred on or about April 10, 1965 (Exhibit 5).

10. By a deed dated June 8, 1965 (Exhibit 6) Canada transferred the land purchased from Waco to Realty.

11. Pursuant to an agreement dated April 29, 1965 (Exhibit 7) Realty entered into a contract with Field Construction Limited wherein Field agreed to construct a building on the lands described in paragraph 9 above for a price of $88,605. The building was to be substantially completed by July 23, 1965.

12. By a mortgage dated May 26, 1965 (Exhibit 8) Realty borrowed the sum of $86,000 from Crédit Foncier Franco-Canadien, secured by a first and second mortgage on a portion of the lands and building municipally known as 890 Rangeview road. The Crédit Foncier mortgage bears interest at 7 /2% calculated half-yearly, and the balance of the principal and interest owing on August 1, 1975 became due and payable on that date.

13. By a mortgage dated August 10, 1965 (Exhibit 9), Realty borrowed the sum of $25,000 from Lily Tator of the City of Toronto. The mortgage bore interest at 10% per annum and the balance of the principal and interest unpaid on September 1, 1971 became due and payable on that date.

14. Commencing in 1965, Realty leased the lands and building situate at 890 Rangeview Road, Mississauga to Canada on a month to month basis. There was no written lease respecting the tenancy.

15. The financial statements of Realty for the years 1965 to 1973, inclusive (Exhibit 10) accurately state that rent was received for the year ending December 31, 1965 in the amount of $7,291 and for each of such years thereafter in the aggregate amount of approximately $25,000 per annum.

16. The financial statements of Realty accurately state that for the years 1965 to 1970, inclusive, realty was a guarantor of bank loans to Canada limited to $375,000.

17. By a Guarantee and Postponement of Claim dated March 22, 1971, (Exhibit 11) Realty guaranteed bank loans to Canada by the Royal Bank of Canada limited to $425,000. The Appellant guaranteed the indebtedness of Canada to ensure an ongoing source of rental income.

18. By a Guarantee and Postponement of Claim dated June 26, 1972, (Exhibit 12), Simpsons-Sears guaranteed bank loans to Canada by the Royal Bank of Canada limited to $200,000.

19. By a Guarantee and Postponement of Claim dated March 22, 1971, (Exhibit 13), Nadler guaranteed bank loans to Canada by the Royal Bank of Canada limited to $425,000.

20. By a loan dated January 25, 1974 Realty estabalished a line of credit of $500,000 with Guaranty Trust Company of Canada. Realty drew down $200,000 of this line of credit, which amount was deposited into Realty’s bank account at the Royal Bank.

21. By a letter dated March 11, 1974 (Exhibit 14) C. R. Sharpe, Vice President, Merchandising, of Simpsons-Sears notified Canada that Simpsons-Sears was terminating their Basic Buying Merchandising Agreement effective six months from March 11, 1974 and further advised Canada that the Basic Buying Merchandising Agreement would be terminated forthwith upon Canada being petitioned into bankruptcy or making an assignment for the benefit of its creditors or if it should admit its inability to meet its debts as they mature, all pursuant to clause 15 of the Basic Buying Merchandising Agreement.

22. By a letter dated March 13, 1974 (Exhibit 15) the Royal Bank of Canada demanded from Canada immediate payment of a loan to Canada of $500,000 and $24,434.31 by way of overdraft (Canadian funds) with interest from March 13, 1974 at the rate of 10%% on the first $200,000 and 1034% on the balance and $1,316.62 in U.S. funds by way of overdraft.

23. By a letter dated March 13, 1974 (Exhibit 16) the Royal Bank made demand on Realty for payment, as guarantor, pursuant to its Guarantee and Postponement of Claim dated March 22, 1971 in respect of the loan and overdrafts owing to the Royal Bank of Canada referred to in paragraph 22 above.

24. By a letter dated March 18, 1974 (Exhibit 17) the Royal Bank notified Realty that it was seizing the sum of $182,584 on deposit in the current account of Realty at the main branch of the Royal Bank and was applying the said amount against the liability of Canada under Realty’s guarantee.

25. On October 3, 1974, Continental Financial Corporation filed a Petition in Bankruptcy against Canada and on the 21st day of October, 1974, a Receiving Order in Bankruptcy was made by the Supreme Court of Ontario against Canada and Mr. Bruce G. Buckley, C.A., of Thorne, Riddell & Company was appointed Trustee of the Estate of Canada.

26. Realty treated the loss of $182,584 incurred by it in respect of the payment made by it to the Royal Bank under its Guarantee and Postponement of Claim dated March 22, 1971, as a non-capital loss incurred by it in 1974 within the meaning of paragraph 111 (8)(b) of the Income Tax Act, Canada (the “‘Act’’), Chapter 63, S.C. 1970-71-72, as amended.

27. In computing its taxable income for its 1976 taxation year, Realty deducted the amount of $72,210 in respect of the loss incurred by it in its 1974 taxation year by virtue of the payment made by it in 1974 pursuant to its aforesaid guarantee to the Royal Bank. (Exhibit 18)

28. In computing its taxable income for its 1977 taxation year, Realty deducted the amount of $108,066 in respect of the loss incurred by it in its 1974 taxation year by virtue of the payment made by it in 1974 pursuant to its aforesaid guarantee to the Royal Bank. (Exhibit 19)

29. By Reassessment, notice of which is dated September 6, 1974 (Exhibit 20) the Minister of National Revenue (the “Minister") reassessed the tax payable by Realty in respect of its 1974 taxation year as nil and, inter alia, reclassified as a capital loss the loss of $182,584 incurred by Realty in 1974 by virtue of the payment made by it in 1974 pursuant to its aforesaid guarantee to the Royal Bank.

30. By Reassessment, notice of which is dated September 6, 1977 (Exhibit 21) the Minister issued a nil assessment to Realty.

31. By Reassessment, notice of which is dated August 19, 1980 (Exhibit 22) the Minister reassessed the taxable income of Realty and, inter alia, disallowed the deduction by Realty of the amount of $72,210 claimed by Realty in computing its taxable income for its 1976 taxation year, as a non-capital loss carried forward from its 1974 taxation year in respect of the payment made by Realty to the Royal Bank pursuant to its guarantee to the bank.

32. By Reassessment, notice of which is dated August 19, 1980 (Exhibit 23) the Minister reassessed the taxable income of Realty and, inter alia, disallowed the deduction by Realty of the amount of $108,066 claimed by Realty in computing its taxable income for its 1977 taxation year, as a non-capital loss carried forward from its 1974 taxation year in respect of the payment made by Realty to the Royal Bank pursuant to its guarantee to the bank.

33. By Reassessment, notice of which is dated August 19, 1980 (Exhibit 24) the Minister reassessed the taxable income of Realty for its 1978 taxation year.

34. By Notices of Objection dated August 27, 1980 (Exhibit 25) Realty, in respect of its 1976, 1977 and 1978 taxation years, objected to the aforesaid Reassessments respecting such years, notices of which are dated August 19, 1980, and in particular, by its Notice of Objection dated August 31, 1980 in respect of its 1978 taxation year, Realty deducted the amount of $2,308 in computing its taxable income for its 1978 year as a non-capital loss carried forward from its 1974 taxation year in respect of the payment made by Realty to the Royal Bank in 1974 pursuant to its guarantee to the bank. Aside from the Notice of Objection, Realty had not claimed the $2,308 in its 1978 income tax return.

35. By Notification of Confirmation by the Minister dated June 3, 1981 (Exhibit 26) the Minister confirmed the Notices of Reassessment dated August 19, 1980 in respect of the taxable incomes of Realty for its 1976, 1977 and 1978 taxation years and disallowed the respective portion claimed by Realty in each of such years as a non-capital loss incurred by it in respect of the payment made by it in 1974 to the Royal Bank pursuant to its guarantee to the bank.

36. By Notice of Appeal dated June 11, 1981 (Exhibit 27), Realty appealed the Reassessments respecting its 1976, 1977 and 1978 taxation years, notices of which were dated August 19, 1980.

37. By Reply dated November 9, 1981 (Exhibit 28), the Minister replied to the Notice of Appeal by Realty dated June 11, 1981.