Fernand Pellerin and Atelier d'Usinage Marmen Inc. v. Minister of National Revenue, [1991] 1 CTC 2011, 91 DTC 107

Tremblay, T.C.l.:—These appeals were heard on common evidence on March 28 and 31,1989 in the city of Québec, Québec.

1. Matter in Dispute

The point is to find out whether the appellant Atelier d'Usinage Marmen Inc. (hereinafter referred to as Marmen Inc.) is justified in considering as the purchase price the sum of $155,000 for a machine known as a vertical lathe, but technically called a Bertram vertical boring mill, when calculating its income for tax year 1984.

According to the appellants, the fair market value of this vertical lathe was then $155,000 even though the selling company, Allis-Chalmers Canada Inc. sold it for only $10,900 to appellant Fernand Pellerin, one of the major shareholders and the director of Marmen Inc. Mr. Pellerin sold it to Marmen Inc. for $155,000.

The respondent insisted that the lathe was only worth $16,447.02 and that the appellant never used it anyway. Furthermore, when appellant Mr. Pellerin filed his 1984 income tax return, he declared a capital gain of $100,000 on the sale of the lathe because he gave a total cost of $55,000. The respondent insisted that the cost was only $16,447.02 and thatthe $138,552.65 differential must be considered as a benefit received from the company under the terms of section 15 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). If not, it is a company income of $138,552.65.

2. Burden of Proof

2.01 The burden of proof lies with the appellants, who must show that the respondent's assessments are unjustified. This burden of proof is based on several court decisions, including a judgment by the Supreme Court of Canada handed down in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.

2.02 In the same judgment, the Court ruled that the facts presumed by the respondent to support the assessments or the new assessments are also presumed correct until proved otherwise. In this case, the facts presumed by the respondent are described in paragraphs (a) to (r) of subsection 6 of the answer to the respondent's notice of call. This subsection reads as follows. At the start of the legal action, following the reading of each subclause, the appellants’ attorney agreed with, denied or ignored the subclause as indicated below:

6. In reassessing the appellant's 1984 tax year, the Minister of National Revenue based his action, inter alia, on the following:

(a) the firm Atelier d'Usinage Marmen Inc. was duly incorporated on March 8, 1975 and its specialty is the tooling of metal products; (agreed)

(b) the fiscal year of Atelier d'Usinage Marmen Inc. ends on November 30 of each year; (agreed)

(c) during the year 1984, the only common shareholder of Atelier d'Usinage Marmen Inc. was Gestion Marmen Inc. (the common shares of the latter company being held by Mr. Fernand Pellerin's spouse and children), while in 1984 Fernand Pellerin held the preferred shares of both Atelier d’Usinage Marmen Inc. and Gestion Marmen Inc.; (agreed)

(d) during the years 1981 to 1984, the advances granted Fernand Pellerin by Atelier d'Usinage Marmen Inc. amounted to $127 ,020 as of November 29, 1984; (agreed)

(e) Fernand Pellerin was therefore liable to have to repay Atelier d'Usinage Marmen Inc. the sum of $127,020.00 or to be taxed in accordance with the amount of his advances under the terms of subsection 15(2) of the Income Tax Act; (agreed)

(f) during the same year 1984, the bankers of Atelier d’Usinage Marmen Inc. appointed a management consultancy firm which recommended a cash injection of $100,000.00; (agreed in part)

(g) On November 30, 1984, Fernand Pellerin purchased in his own name a piece of machinery through a telephone order.* That was a 25 foot Bertram vertical boring mill sold by Allis-Chalmers for the sum of $10,900.00;

(h) To carry out this transaction, Fernand Pellerin borrowed the sum of $20,000.00; (agreed)

(i) The transaction between Fernand Pellerin and Allis-Chalmers was carried out at arm's length and it is unthinkable that the Allis-Chalmers salesman, who knows this type of machinery very well could have sold it for $10,000.00 if it was really worth $155,000.00, as Fernand Pellerin claims; (denied)

(j) an Allis-Chalmers Canada Inc. in-house management document dated December 4, 1984 entitled ” Capital Asset Change and Status Notice” indicates that the original cost of the machinery was $396,599.72 and that the accumulated depreciation was $390.563.97; (ignored)

(k) on the same day, i.e., November 30, 1984, Fernand Pellerin sold the piece of machinery that he had purchased for $10,900.00 to Atelier d'Usinage Marmen Inc. for $155,000.00; (denied)

(I) on the same day, i.e., November 30, 1984, this transaction between Fernand Pellerin and Atelier d'Usinage Marmen Inc., which was not at arm’s length, was entered in the books of Marmen as a year end adjusting entry, so that Mr. Pellerin was able to cancel his $127,020.00 debt to the company and even record a loan of $27,979.69 to the latter; (agreed in part, except for the date)

(m) on December 3, 1984, Fernand Pellerin sent Allis-Chalmers Canada Inc. a cheque for $10,900.00 to pay for the piece of machinery; (denied)

(n) in addition to the $10,900.00 payment to Allis-Chalmers Inc., Mr. Fernand Pellerin assumed the following expenses:

Cheque dated June 18, 1985 to Transport Hamel: $4,342.52; (agreed)

Cheque dated March 31, 1985 by Atelier d'Usinage Marmen Inc. to Québec Grue Limitée, included in the loan to Mr. Fernand Pellerin: $1,204.50; (agreed)

Total of expenses assumed by Mr. Fernand Pellerin to purchase the piece of machinery: $16,447.02; (denied)

(o) the cost of acquiring the piece of machinery by Fernand Pellerin therefore amounts to $16,447.02. Since he received a sum of $155,000.00 from Atelier d'Usinage Marmen Inc., he therefore received a benefit of $138,552.00 as a shareholder; (denied)

(p) with regard to Atelier d'Usinage Marmen Inc., its acquisition cost is supposed to be a sum equal to the fair market value of the piece of machinery, which in the case at hand is $16,447.02, not the sum paid to Mr. Fernand Pellerin, i.e., $155,000.00 that Atelier d'Usinage Marmen Inc., used to compute the capital cost allowance; (denied)

(q) Atelier d'Usinage Marmen Inc. never used the piece of machinery which it acquired from Mr. Fernand Pellerin; (agreed)

(r) during tax year 1984, Atelier d'Usinage Marmen Inc. therefore deducted an

excess amount of $21,546 as an allowance for capital costs; (denied)

2 .03 The facts presumed by the respondent concerning the appellant, Mr. Pellerin, are mutatis mutandis similar to those given above.

3 . Facts

3.01 All the facts in evidence relate to the one hand to the assessment of the vertical lathe transferred to the appellant by the appellant, and on the other

*This was confirmed the same day by Order 4269 on which the name of Atelier d'Usinage Marmen Inc. had been erased; (agreed)

hand to the intentions of the appellant when purchasing the said lathe and reselling it to the appellant.

3.02 Mr. Fernand Pellerin, born in December 1930, graduated from the Department of Commerce in 1952. After working for 20 years as an auditor, financial analyst, etc., for several companies, among others Beaudet Express, CIL, and Pat McNally Ltd., he set up his own company in Trois-Rivières in 1972 under the name General Machine Shop Enr. In 1975, this company became Atelier d'Usinage Marmen Inc. In 1983 or 1984, he created Compagnie Gestion Mar- men inc.

3.03 On March 5, 1984, following some financial difficulties at the end of 1983 and beginning of 1984, the appellants’ financial institution, the Royal Bank of Canada (hereinafter referred to as "the Bank") sent the appellant and his spouse Pâquerette Marmen Pellerin a warning and restriction letter concerning excessive expenses and dividends (Exhibit A-1). On September 7 of the same year, the Bank asked Le Groupe Ger-Inter Inc. (hereinafter referred to as "Ger- Inter”) to prepare a brief review of Atelier d'Usinage Marmen Inc. In its report (Exhibit A-2) dated September 25, 1984, Ger-Inter wrote a short history of the appellant company which summarized fairly well Mr. Pellerin's testimony on this subject:

History

Atelier d'Usinage Marmen Inc. (previously General Machine Shop) was incorporated on May 8, 1975 under Part I of the Québec Companies Act.

The firm specializes in tooling work and its major customers are Sidbec-Normines Inc. and Sidbec-Dosco. It had some successful years with a net income of $161,771 in 1980 and $200,159 in 1981 for sales of $1,377,870 and $1,567,124 respectively, showing accumulated earnings of $376,666 as of November 30, 1981.

In 1982, due to increased demand and their desire to increase their share of the market, the directors built a second plant at a cost of $720,000, on rue Berlinguet. It was financed as follows:

RoyNat Ltd.	$500,000
MBBR subsidy	133,000
Balance in line of credit	87 ,000
	$720,000

At the same time, there was a recession and reduced sales, as well as a substantial increase in operating costs, now that the company had two plants instead of one. Yet, during the years 1981, 82 and 83, the directors withdrew some $300,000 in cash from the company and this had a considerable impact on its financial situation.

The following tables shows the variations in thousands of dollars during the last five years.

	1979	1980	1981	1982	1983
Sales	$1,151 $1,377 $1,567 $1,379 $1,205
Net profit (loss)	137.0	161.8	200.5	(41.4)	(5.5)
Cash outflow	57.3		100.5	75.0	121.7
		60.0
Line of credit	145.0	100.0	215.0	300.0	375.0

Conscious of the difficult financial situation of the firm, the directors recently made the decision to centralize all their activities in the Berlinguet Street plant. This should be completed by the end of September 1984. This relocation could not take place before June 1984 due to the requirements of the MBBR concerning its $133.000 [sic] grant.

Also since Mr. Pellerin was facing serious tax problems, including the possibility that the Minister of Revenue might institute legal proceedings against him and his company, during the current year, he transferred all his shares to his spouse by creating a new company under the name of Gestion Marmen Inc.

This way, the firm has very little room to manoeuvre with its liquid assets and cannot afford any mistakes until the day when it recovers its former vitality.

3.04 Ger-Inter's summary also clearly summarized Mr. Pellerin's testimony under the title “Administration.”

Administration

The administration of the firm is in the hands of Messrs. Fernand Pellerin and Yves Bourque, respectively president and production manager.

Mr. Fernand Pellerin, who is 54, handles the general administration of the company, develops the market and works in close co-operation with the production manager. Before the creation of his firm, Mr. Pellerin worked for many years in the gas pipeline sector and occasionally continues to sell his services to gas pipeline producers.

He is also a member of Corporation professionnelle des comptables en administration industrielle and used to be a member of the Canadian Institute of Chartered Accountants.

Mr. Bourque, Mr. Pellerin's son-in-law, is a mechanical engineer and has been working for the company for three years. For a while now, he has been developing certain contacts with such customers as Sidbec-Dosco and Sidbec-Normines.

The secretarial and bookkeeping work are handled by Ms. Gisèle Duguay and Ms. Linda Bourque, respectively sister and daughter of Mr. Fernand Pellerin. They share the workweek between themselves.

Apart from the administrative staff, there are twelve production employees. This personnel represents an annual payroll of $400,000. No part of the company is unionized. It must be stressed that the company has a good accident record and has obtained merit points during the last few years.

3.05 Following its study of the financial situation of the appellant and market conditions, Ger-Inter drew its conclusions and made the following recommendations, among others, to the Bank.

. . . «we recommend the following to the Bank:

1. Demand a cash injection in the order of $100,000 on the part of the directors. Should they refuse, gradually reduce your bank loans to an acceptable risk level;

2. Demand a trust indenture covering the assets of the company;

3. Follow closely developments at the level of the proceedings started by the ministère du Revenu du Québec against Mr. Fernand Pellerin;

4. Limit Mr. and Mrs. Fernand Pellerin’s cash outflows to $40,000 per year.

3.06 The recommendations to the company were, among others:

— Obtain from Sidbec-Normines Inc. a written agreement that they will pay for the stock they have had on consignment for over a year;

— Diversify its customer base in order to minimize the vulnerability caused by its economic dependency on Sidbec-Dosco and Sidbec-Normines Inc.;

— Approach the long-term creditors to obtain a moratorium of a few months for capital payments in order to ease the cash flow during the transition period when moving to the Berlinguet plant.

3.07 As emphasized in the report, as well as by Mr. Pellerin, the Canadian and world business cycle also explains to a certain degree why it was a difficult period for the company.

3.08 In his testimony, Mr. Pellerin admitted that studying this report made him realize that he had no idea how much money the company had loaned him. He also admitted that he was operating 95 per cent by instinct. He had never prepared any budget. He did not look at the weekly report on gross income input. He always thought that his money was well spent. His children were in qniversity and it was important to him that he should help them in every way, even as far as buying a car.

3.0 9 On November 29, 1984, during the transition period following the report (Exhibit A-2), when the assets in both plants were being installed on Berlinguet Street, Mr. Pellerin received a call from an Allis-Chalmers representative in Montréal who asked him to tender for the tooling of certain pieces of machinery.

Tooling mechanical parts was the basis of the appellant's firm, which makes such major parts as a 25,000-30,000 lb. steel winder, etc.

Allis-Chalmers, which has 1,000 employees, had decided during 1984 to close its manufacturing operations and the tooling of parts and have them made by such subcontractors as the appellant.

3.10 On November 29, 1984, during a visit to Allis-Chalmers in Montréal, Mr. Pellerin met Messrs. Martin Fradette and Raymond Blair and discussed the parts to be tooled. Tenders for the tooling of four pieces were addressed on December 3, 1984 for a total of $14,850 (Exhibit A-3).

3.11 During the same meeting, he heard about the auction which had taken place on November 20 previous to get rid of the machinery no longer needed by Allis-Chalmers because of the decision to close the tooling of parts. He was informed that some of that equipment remained, but that an answer had to be given the next day, November 30, at the latest because the building had to be sold. There remained, among other equipment, a Bertram vertical boring mill, which was the technical term used for a vertical lathe with the following general specifications: a table 20 feet in diameter, with a capacity of 25 feet in diameter, in working condition. It had been purchased new between 1950 and 1960.

3.12 Mr. Pellerin returned to Trois-Rivières thinking that he was going to make a ridiculous offer. When he arrived home, he mentioned it to his son-in-law, Mr. Bourque, production manager, who did not want to have anything to do with it. Mr. Pellerin decided to buy it personally. The following day, November 30, without saying anything to anybody, he went to the Continental Bank and borrowed $20,000. He had a $10,900 certified cheque made to the order of Allis-Chalmers and went to Montréal to meet Messrs. Fradette and Blair. He did not believe that his offer could be accepted. But it was accepted and Allis- Chalmers issued a receipt reading, among other things: "November 30, 1984— Sold to Fernand Pellerin . . . Asset No. 2029—25' Boring Mill. . . $10,900 Paid in full . . .".

Under cross-examination, Mr. Pellerin insisted that by selling him the boring mill for $10,000, Allis-Chalmers made $50,000. According to him, it would have cost Allis-Chalmers $40,000 to take it apart.

3.13 According to Mr. Pellerin, he spent two months removing the boring mill from its foundation, taking it apart and carrying it to Berlinguet Street, in Cap- de-la-Madeleine. It was a difficult job because of the temperature, weather conditions, etc. According to him, the total cost, including the purchase price, was $55,000, as shown in paragraph 2 of the response to notice of appeal:

3.14 According to Mr. Pellerin, he did not know what he was going to do with the boring mill. It was of no use to himself or even to the appellant, at least for the time being. Moreover, before it could be used, a building 100 feet long, 45 feet highand 60 feet wide had to be built (cost: $400,00) and a traveling crane had to be installed (cost new: $250,000.) Mr. Pellerin, who trusts his intuition as a businessman, claimed that he bought it because it was a good buy. He still did not know what to do with it, but he did not want to sell it back. During the cross-examination, he admitted that he did not even "consider leasing it.”

3.15 In December 1984 or in January 1985, when the accountant Francois Matteau met him while preparing the appellant's financial statements for the year ending November 30, 1984, it was decided that the boring mill would be sold to the appellant. Mr. Matteau had warned him that he owed a lot to the appellant because of all the loans, i.e., an amount of $127,000. He had not realized until then that he owed money to the appellant. "Why not sell it?” he was asked. But sell it for how much? What was the real value of this machine?

3.16 Mr. Benoit Boulanger, who received a technical studies diploma (mechanical fitting) from the Laval Technological Institute in Montréal in 1963, has a lot of experience with machine tools (CV-Exhibit A-13).

(1) Foreman in the tooling department of Forano-Plessisville, 1963-1966;

(2) Boring—Horizontal Style (Floor Type) operator for Joy-Galt, Ontario, 09/1966 to 09/1967;

(3) CNC Machine operator (mechanical command) for Canadair, in St. Laurent (Montréal), 09/1967 to 09/1968;

(4) Maintenance and Tooling Department manager (see Purchase of New Equipment) for Forano-Plessisville, 09/1968 to 02/1974;

(5) Finally, since February 1974, associated with Machinerie B.V. Ltd., in Plessisville, a firm specialized in purchasing and selling new and second hand machine tools in Canada (mainly in Québec) and in the United States.

In his testimony, Mr. Boulanger stated that four days after purchasing the boring mill, Mr. Pellerin had called him to find out its market value. That took him ten minutes, and he told him $155,000. He purchases secondhand equipment, reconditions it and resells it. Mr. Boulanger claimed that he knows the boring mill purchased by Mr. Pellerin because he had been attending the Allis- Chalmers public auction on November 20, 1984. He filed as Exhibit A-14 a photocopy of the advertising sheet (eight pages with photographs) announcing the said auction and describing the various machine tools. This document described the boring mill as follows:

1 — Bertram 25’ Vertical Boring Mill, Serial Number 13652, maximum table load

140 tons, table diameter 20’, slide run 8’, maximum clearance under tail 1501/4", minimum 253/4", maximum distance between slide centers 300", minimum 4", head swivel 30 degrees in both directions, infinite variable pin speed up to 11 tpm, 8 advances from .019 to .770 IPR, chuck jaws, 75HP motor, console and push-button overhead commands.

Mr. Boulanger claimed to have examined the boring mill and to have found it in excellent condition, which means that it had always been well maintained. Considering its excellent condition, the 25’ diameter of the table and the 1952 manufacturing year (the last two digits of the serial number 13652 give the manufacturing year), in his opinion the boring mill is worth $155,000 plus transportation and installation. His evaluation was filed under Exhibit A-15. It lists the main data, as above, and concludes with a total of $155,000. With proper maintenance, such a boring mill can last 75 years. In Mr. Boulanger's opinion, a new boring mill of this kind would cost $1,700,000 according to the information provided by the Toshiba representative. However, Mr. Boulanger did say that he would not have bought it for $10,900. He had no prospective buyer and had no room to store such a machine tool. It must be noted that Mr. Boulanger's business mainly involves being an intermediary between the buyer and the seller. He himself buys when he already has a buyer.

3.17 In February 1986, the appellant sent several vendors of machine tools a request to tender on "one used (1950-1960) 25 foot vertical boring mill.” Sixteen tenders were received (Exhibit A-7). Since all of these are vertical boring mills, I will only give the year of manufacturing, diameter of the table and price:

Best Machinery Inc., Rockville Center, NY, sent five tenders:

(1)	1940	40' table	$425 ,000
(2) 1940 19' table			365,000
(3) 1940 20’ table			225,000
(4) 1927 33'6" table			350,000
(5) 1957 23'4" table			675,000
Wessel Machinery Co. Ltd., Edmonton, Alberta:
(6)	1963	twin column boring mill, 13’ table	245,000
Machinerie Lupien Inc., not far from Drummond, PQ:
(7) 1954 12' table			85,000
(8) 1950 14' table			97,000
(9)	1954	11 ‘53/4" table	193,000
Cowan Machinery Ass. Inc., Guelph, Ontario:
(10) 1910 15’ table			222,750
S&S Machinery Co., Brooklyn, NY:
(11)	1910	15’ table	222,750
Westway Machinery Ltd., Mississauga, Ontario:
(12) 1950 15’ table			440,440
Charleston Annex Corporation:
(13) 1952 20' table			350,000
Hildebrand Machinery Co. Inc., York, PA:
(14) 1973 16'5" table			600,000
Machinery System International Ltd., Illinois:
(15) 1954 16’ table			125,000
Morey Machinery Inc., Middletown, NY:
(16)	12’ table and 18’ auxiliary table		205,000
Eastern:
(17)	20' table		145,000

3.18 In his testimony, Mr. François Matteau, chartered accountant since 1969, stated that he had met Mr. Pellerin in January 1985. Following discussions with the latter, he prepared a three-column condensed balance sheet (Exhibit A-11) to show the effects of the sale of the boring mill: the first column shows the final condensed balance sheet, the second column the sale of the equipment to the appellant company; and the third column the condensed balance sheet figures before the transaction without taking into consideration the effect of the transaction on depreciation and on the income tax of the appellant company.

Condensed Balance Sheet as of November 30, 1984

		(1)	(2)	(3)
Assets
Cash	$	8,917	$	8,917
Accounts receivable		166,628		166,628
Inventory and consignment		468 ,302		468,302
Fixed assets—fully depreciated		619,421	$(155,000)	464,421
Other—at cost		45,316		45,316
	$1,328,584		$1,328,584
Liabilities
Line of credit		$320,000	$ 320,000
Accounts payable		125,770		125,770
Owed to Mr. Fernand Pellerin		27,980	$(155,000)	(127,020)
Other		53,525		53,525
Long-term debt		529,094		529,094
Shareholder's equity (CA+BNR)		272,215		272,215
	$1,326,584		$1,173,584

3.19 Mr. Matteau also produced the financial statements for Marmen Inc. for the fiscal year ended November 30, 1984 (Exhibit A-12). In the assets part of the balance sheet, in Fixed Assets amounting to $619,421, reference is made to Notes 5 and 16. Note 5 mentions the acquisition of machinery for a total of $160,000. Note 16 deals with transactions among family members: "Acquisition of capital assets including the purchase from a director of a piece of equipment for an agreed upon amount of $155,000.”

On the liabilities side of the balance sheet, at the “Owed to Directors” item, reference is made to Note 9, which states that Mr. Fernand Pellerin is owed the sum of $27,980.

3.20 The contract under which Marmen Inc. acquired the Bertram vertical boring mill for the price of $155,000 was filed as Exhibit 1-3. It is dated November 30, 1984.

3.21 Mr. Matteau insisted that Mr. Pellerin had not been aware of the loans to him by Marmen Inc. until the two men met for the preparation of the financial statements. He had been paying more than $100,000 for his children in university. Children were paid salaries, but this had not been accepted by the Revenue Department and had been included in the father's income.

4. Statutes-Precedents-Analysis

4 .01 Statutes

The main provisions of the Income Tax Act involved in this case are sections 3, 9,15 and 39. These will be quoted during the analysis whenever necessary.

4 .02 Precedents

The precedents referred to by the parties to the case are as follows:

1. Conn v. M.N.R., [1986] 2 C.T.C. 2250; 86 D.T.C. 1669 (T.C.C.);

2. Friedberg v. M.N.R., [1989] 1 C.T.C. 274; 89 D.T.C. 5115 (F.C.T.D.);

3. Greater Sarnia Investment Corp. v. M.N.R., [1987] 1 C.T.C. 2158; 87 D.T.C. 110 (T.C.C.);

4. Todd v. M.N.R. (1956), 15 Tax A.B.C. 42; 56 D.T.C. 2089;

5. Cox v. M.N.R., [1972] C.T.C. 2577; 72 D.T.C. 1446 (T.R.B.);

6. Smyth v. M.N.R. (1966), 40 Tax A.B.C. 441; 66 D.T.C. 264;

7. Racine, Demers and Nolin v. M.N.R., [1965] 2 Ex. C.R. 338; [1965] C.T.C. 150; 65 D.T.C. 5098;

8. M.N.R. v. Taylor, [1956-1960] Ex. C.R. 3; [1956] C.T.C. 189; 56 D.T.C. 1125;

9. Honeyman v. M.N.R., [1955] C.T.C. 151; 55 D.T.C. 1094;

10. Buchbach v. M.N.R., [1957] C.T.C. 417; 57 D.T.C. 1263;

11. Knight v. M.N.R. (1960), 24 Tax A.B.C. 120; 60 D.T.C. 235;

12. Rutledge v. M.N.R. (1929), 14 T.C. 490;

13. C.I.R. v. Fraser (1942), 24 T.C. 498.

4.03 Analysis

4.03.1 For appellant Mr. Pellerin, the point is to find out whether the transaction we are dealing with earned him a capital income or a business income.

For appellant Marmen Inc., the point is the fair market value of the boring mill. This is the information it needs to file its capital cost allowance.

4.03.2 Capital Gain or Business Income

4.03.2(1) Did Mr. Pellerin earn a capital gain or a business operation income?

The main criterion to determine whether a capital gain is involved is Mr. Pellerin’s intention at the time of the purchase.

According to Mr. Pellerin himself, he does not seem to have had any special intention. In fact, he did not know what he was going to do with the boring mill. He said he had no intention to sell it and had not considered leasing it. On the other hand, he also said that it was of no use to himself. The cost of more than $500,000 makes us understand this (subsection 3.14).

There are many precedents involving a person (whether individual or corporation) who purchases an asset as an investment but circumstances (illness, financial problems, etc.) become such that later on the only solution is reselling. The Courts have then decided that it was a capital gain.

4.03.2(2) In case at hand, Mr. Pellerin could not obtain any income by using it himself or leasing it. The leaser of such a machine tool, who must invest more than $500,000 (subsection 3.14) to use it, would prefer to buy it, I believe, unless he already owns the building and the travelling crane, and this would no doubt be another reason to purchase it rather than lease it.

Even though Mr. Pellerin stated that at the time of the purchase he did not know what to do with it, in practice he could not have purchased it as an investment, as it is generally understood, either for rental or for his personal use.

There remained only one solution, resell it himself, even though he insists that this was not his intention. By its nature, together with its size and weight, if this item cannot be leased nor used personally, it cannot be kept in a museum. There is only one practical solution: reselling it despite the fact, once again that Mr. Pellerin stated that he did not want to resell it.

If, on the one hand, it can be considered that Mr. Pellerin is not a buyer of machine tools for reselling purposes, that he is not in other words a businessman in this field, it remains however that, in this case, this was a commercial type deal which is included in the definition of the expression "business" in section 248 of the Act:

"business"—" business” includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purpose of paragraph 18(2)(c), section 54.2 and paragraph 110.6(14)(f), an adventure or concern in the nature of trade but does not include an office or employment;

4.03.2(3) The appellant's attorney quoted the well-known statement of Judge Noël in the Racine, Demers and Nolin case, supra, (paragraph 4.02(7)) to the effect that, for a business profit to be considered in a commercial type deal, at the time of purchase there must have been at least the secondary intention of reselling. The attorney insisted that the appellant had no intention at all. This is exactly the point that the Court cannot accept. In practice, there must be some kind of intention. Since at the time of the purchase, Mr. Pellerin could not, as an investment, use it himself or lease it, he could only sell it.

The respondent's attorney rightly referred to the Taylor case, supra, (paragraph 4.02(8)), in which it is stated that in a commercial type deal, it is often the nature of the item which best determines the nature of the transaction.

A 250-ton boring mill which is not purchases for personal use or for leasing can only be purchased for reselling.

In both British cases, Rutledge, supra, (paragraph 4.02(12)) and Fraser, supra, (paragraph 4.02(13)), such quantities of toilet paper and whisky had been purchased that it was obvious that the taxpayer could not use it all himself. There was only one other alternative, purchasing to resell.

4.03.3 Fair Market Value of the Boring Mill

4.03.3(1) Mr. Pellerin purchased the said vertical boring mill for $10,900. He resold it to Marmen Inc. for $155,000. Considering the fact that Mr. Pellerin is a shareholder of Marmen Inc., the counterpart of the disposal is presumed to be the fair market value under the terms of subsection 69(1) of the Act.

There is a reasonable amount of evidence concerning boring mills. There is not enough concerning a 25 foot table made in 1952. The machines described in subsection 3.17, no. 2 ($365,000), no. 3 ($225,000), no. 4 ($350,000), no. 5 ($675,000) and no. 12 ($125,000) give an average of $348,000.

According to the testimony of Mr. Boulanger, who examined the boring mill in question at the beginning of November 1984, it was in very good condition and could last 75 years. Mr. Boulanger’s competence in the field of machine tools cannot be questioned. There is moreover the tender for a boring mill built in 1910 (therefore 80 years old) with a 15 foot table offered for sale for $222,750 (no. 11 in subsection 3.17.)

4.03.3(2) In my opinion, the $155,000 price seems very reasonable as the fair market value. This was the acquisition price for Marmen Inc. Considering the low selling price of $10,900 charged by Allis-Chalmers Canada Inc., the explanation given by Mr. Pellerin about the $40,000 dismantling cost is reasonable (subsection 3.12 in fine). Moreover, according to the fact presumed by the respondent concerning the answer to the notice of appeal (paragraph 6(f)), Allis-Chalmers Canada Inc. had acquired the boring mill for $3%,599.72 and the accumulated depreciation was $390,563.97.

Therefore, any sale above $6,035.97 ($396,597.72 — $390,563.97) provided a recapture of depreciation whose amount had to be included in the income of Allis-Chalmers Canada Inc. This may also explain why Allis-Chalmers Canada Inc. had no interest in selling it for a high price, but rather for a price sufficiently low to get rid of it.

The fact that the accumulated depreciation almost corresponded to the price paid by Allis-Chalmers Canada Inc. has no significance on the fair market value, since the life of such a machine tool is 75 years so that in 1984, 43 years of useful life remained.

I therefore conclude that the fair market value of the boring mill is $155,000.

4.03.3(3) Appellant's Alleged Cost of $55,000

The detail of this overall $55,000 sun alleged by the appellant is found in subsection 3.13.

It concludes, among other things, the sum of $37,100 as''Other installation costs to be paid." The details of this sum were not given and of course there are no receipts. Are these wages paid by Marmen Inc. to the workers who dismantled the boring mill? Is this the amount considered as a transfer to Mr. Pellerin, since he was the owner of the boring mill? There is no evidence concerning this.

After checking the documents, the respondent computed an amount of $16,447 (see paragraph 6(n) of the reply to the notice of appeal quoted in subsection 2.02).

This fact presumed by the respondent is presumed to be true. Even if it has been denied, it has not been contradicted by preponderant evidence.

Therefore, Mr. Pellerin’s income on the transaction is $138,552. Since we reached the conclusion that this was a commercial type income of $138,552, there is no need to determine whether there is any benefit received under section 15 of the Act.

5, Conclusion

The appeal of appellant Atelier d'Usinage Marmen Inc. is allowed together with expenses and the matter referred back to the respondent for reconsideration and reassessment.

The appeal of appellant Fernand Pellerin is dismissed.

Appeal of Pellerin dismissed.

Appeal of Marmen allowed.