McKeown,
J.:—
The
issue
is
whether
the
plaintiff
is
entitled
to
deduct
an
inventory
allowance
in
the
amount
of
$652,754
in
1977
giving
rise
to
a
noncapital
loss
which
it
sought
to
carry
back
to
its
1976
taxation
year.
The
matter
comes
before
me
as
an
appeal
by
way
of
a
statement
of
claim
from
the
decision
of
the
Associate
Chief
Justice
of
the
Tax
Court
of
Canada
who
concluded
that
the
taxpayer
was
not
entitled
to
the
deduction.
The
plaintiff
conceded
that
it
was
not
entitled
to
a
deduction
with
respect
to
the
inventory
allowance
on
the
non-finished
goods
(i.e.,
the
work
in
process
and
raw
materials)
portion
of
the
inventory.
The
plaintiff
seeks
to
have
the
matter
referred
back
to
the
Minister
of
National
Revenue
for
reconsideration
and
reassessment
on
the
basis
of
granting
an
inventory
allowance
in
respect
of
the
finished
goods
inventory.
Facts
There
was
no
material
disagreement
on
the
facts
except
with
respect
to
the
relevance
of
certain
admissions
which
I
will
deal
with
later.
The
plaintiff
"was
incorporated
under
the
laws
of
Canada.
The
appellant's
fiscal
period
ended
on
December
31
and
consequently
its
taxation
year
is
a
calendar
year”.
The
1977
calendar
year
of
the
plaintiff
comprised
365
days.
On
September
27,
1976,
GSW
entered
into
a
"foundation
agreement”
with
Canadian
General
Electric
Co.
("CGE").
The
first
recital
thereof
stated
their
“wish
to
integrate
their
respective
major
appliance
businesses
into
a
new
Canadian
major
appliance
company".
For
this
purpose
GSW
and
CGE
agreed
to
cause
a
company
to
be
incorporated
under
the
Canada
Business
Corpora-
tions
Act,
S.C.
1974-75,
c.
33,
and
Canadian
Appliance
Manufacturing
Company
Ltd.-Limitée
("Cameo")
was
subsequently
incorporated
on
December
6,
1976.
By
paragraph
4
of
the
Foundation
Agreement,
GSW
covenanted
to“
enter
into
an
asset
transfer
agreement”
with
Cameo
substantially
in
the
form
of
Exhibit
C
attached
thereto
“whereby,
among
other
things,
GSW
will
agree
to
convey
and
transfer
and
cause
its
subsidiaries
to
convey
and
transfer
to
the
company
[Cameo]
to
the
extent
provided
for
in
such
agreement
the
assets
and
properties
used
by
it
and
by
its
subsidiaries
in
carrying
on
the
business
of
manufacture,
sale
and
servicing
of
major
appliances.”
Under
paragraph
5
CGE
also
undertook
to
enter
into
a
similar
agreement
with
Cameo.
Paragraph
6
provided
in
part:
The
completion
of
the
conveyance
and
transfer
of
such
properties
and
assets
from
each
of
GSW
and
CGE
to
the
company
[Cameo]
will
take
place
on
January
4,
1977
or
on
such
other
date
as
may
be
agreed
to
in
writing
by
GSW
and
CGE
(the
“closing
date")
but
effective
as
of
the
commencement
of
January
1,
1977,
both
such
dates
being
subject
to
change
as
provided
in
Exhibits“
C"
and
D"
attached
hereto
(such
Exhibits
being
the
respective
asset
transfer
agreement
for
each
of
GSW
and
CGE).
Paragraph
10(3)
stated
that
the
plaintiff
was
one
of
three
named
subsidiaries
of
GSW
through
whom
the
major
appliance
business
of
GSW
was
primarily
owned
and
carried
on.
GSW
agreed
to
cause
each
such
subsidiary
to
take
all
action
required
to
implement
the
terms
of
the
foundation
agreement
and
the
Exhibits
thereto.
On
December
3,
1976,
in
accordance
with
the
provisions
of
section
247
of
the
Business
Corporations
Act,
R.S.C.
1970,
c.
53,
of
the
Province
of
Ontario
(which
section
related
to
voluntary
dissolutions),
the
shareholders
of
the
plaintiff
adopted
a
resolution
that
the
plaintiff
be
dissolved
pursuant
to
the
said
section
247.
The
resolution
further
provided
that
as
incidental
thereto,
the
property
of
the
plaintiff
be
distributed
rateably
among
its
shareholders.
GSW
entered
into
an
asset
transfer
agreement
with
Cameo,
made
as
of
December
28,
1976.
Section
12.1
of
the
agreement
provided
for
the
closing
of
the
transactions
contemplated
by
the
agreement,
stating:
The
Closing.
Subsection
to
section
12.2,
the
closing
(the"closing")
of
the
transactions
contemplated
hereby
shall
take
place
at
the
offices
of
.
.
.
at
2:00
p.m.
on
the
4th
day
of
January,
1977
or
at
such
other
place
and
time
as
shall
be
fixed
by
agreement
of
the
parties
(the"closing
date”)
but
with
effect
as
of
the
commencement
of
January
1,
1977
(the
effective
date")
The
asset
transfer
agreement
defined
the
expression
“GSWS”
as
meaning
GSW
and
its
three
wholly
owned
subsidiaries
through
which
it
was
engaged
in
its
appliance
operations,
identifying
the
plaintiff
as
one
of
the
three
subsidiaries.
Section
2.1
reads
as
follows:
2.1
Purchase
and
Sale
of
the
Acquired
assets
Upon
and
subject
to
the
terms
and
conditions
hereof,
GSWS
shall
sell,
transfer,
assign
and
deliver
to
the
company,
and
the
company
shall
purchase
and
acquire,
at
the
closing
(but
with
effect
as
of
the
effective
date),
all
of
the
property
and
assets
(other
than
excluded
assets)
of
GSWS's
major
appliance
operations
(hereafter
collectively
called
the
“
cquired
assets").
Provisions
in
the
asset
transfer
agreement
relevant
to
this
appeal
include
section
6.2
which
provided
that
GSWS
shall
during
the
period
from
December
28,
1976
to
the
closing
date
(the
date
on
which
the
closing
shall
occur
pursuant
to
section
12.1)
conduct
its
major
appliance
operations
only
in
the
ordinary
and
usual
course
thereof.
Section
6.3
stated
that
subject
to
closing,
GSWS
shall
from
and
after
the
effective
date
and
until
the
time
of
closing,
carry
on
the
major
appliance
operations
as
agent
for
and
on
behalf
of
Cameo.
Section
12.1
provided
that
upon
payment
by
Cameo
of
the
consideration
payable
at
closing
and
the
delivery
by
GSWS
of
the
deeds,
the
agreement
was
to
operate
as
and
from
the
effective
date,
as
a
transfer
of
the
acquired
assets
by
GSWS
to
the
company
[Cameo]"
but
that
GSWS
and
Cameo
shall
nevertheless
from
time
to
time
on
and
after
the
closing
date
execute
further
documents
in
order
to
effectuate
the
sale
and
transfer.
The
aforesaid
provisions
are
set
forth
on
Schedule
“A”
annexed
hereto.
An
indenture
made
as
of
January
1,
1977,
between
the
plaintiff
and
GSW,
contained
recitals
to
the
effect
that
the
plaintiff
had
authorized
the
distribution
of
all
of
its
assets
rateably
to
its
shareholders
and
the
filing
of
articles
of
dissolution
under
the
Business
Corporations
Act
and
that
GSW
was
the
beneficial
owner
of
all
the
issued
and
outstanding
shares
of
the
plaintiff.
The
indenture
provided
that
the
plaintiff
“doth
hereby
grant,
bargain,
assign,
transfer,
convey
and
set
over
unto”
GSW
the
property
of
the
plaintiff.
The
indenture
also
contained
the
following
provision:
This
agreement
is
made
by
the
[plaintiff]
and
received
by
[GSW]
subject
to
all
of
the
liabilities
of
the
[plaintiff]
which,
by
the
acceptance
hereof,
[GSW]
hereby
expressly
assumes
and
undertakes
to
pay
and
discharge
and
to
indemnify
and
save
harmless
the
[plaintiff]
in
respect
thereof.
By
virtue
of
such
indenture,
all
of
the
assets,
property
and
business
of
the
plaintiff,
including
its
inventories
were
transferred
to
GSW.
The
closing
of
the
transactions
contemplated
in
the
asset
transfer
agreement
took
place
on
January
4,
1977.
A
general
conveyance
instrument
was
executed
by
GSW
and
Cameo,
and
delivered
on
January
4,1977.
The
document
was
entitled
“This
indenture
made
as
of
the
first
day
of
January,
1977".
The
first
recital
thereto
referred
to
the
GSW
asset
transfer
agreement
providing
for
the
sale
of
the
major
appliance
operations
of
GSW
and
its
subsidiaries
"as,
at
and
from
the
date
hereof
and
all
the
interests
of
the
subsidiaries
of
GSW
in
the
assets
hereby
conveyed
having
been
conveyed
to
GSW”.
The
granting
clause
of
the
indenture
provided
in
part
as
follows:
GSW
doth
hereby
grant,
bargain,
sell,
assign,
transfer,
convey
and
set
over
unto
the
company
[Cameo]
its
successors
and
assigns,
as
at
the
date
hereof.
.
.all
of
the
property
and
assets
of
GSWS's
major
appliance
operations.
.
.owned
and
used
by
GSWS
or
held
by
them
for
use
in
or
in
respect
of
such
major
appliance
operations,
including
without
limitation;
(iii)
All
inventories
of
major
appliances
(being
the
appliances
listed
in
Schedule
"D"
hereto)
in
a
finished
state,
all
replacement,
service
and
component
parts
(including
for
this
purpose
wringer
washing
machine
parts)
and
all
raw
materials
and
work
in
process
inventories,
which
said
inventories,
parts
and
materials
are
generally
described
by
category
and
location
in
Schedule“
E”;
Included
in
the
inventories
so
described
in
item
(iii),
were
the
inventories
of
the
plaintiff
conveyed
to
GSW
comprising
those
in
a
finished
state
and
those
comprising
parts
and
raw
materials
and
work
in
process.
A
bill
of
sale
of
the
described
and
enumerated
personal
property
of
GSW,
including
its
inventories
of
major
appliances
in
a
finished
state,
and
all
parts
and
all
raw
materials
and
work
in
process
inventories,
was
made,
executed
and
delivered
January
4,1977
by
GSW
in
favour
of
Cameo.
The
recital
stated
that
GSW
had
agreed
with
Cameo
by
agreement
dated
as
of
December
28,
1976
for
the
sale
of
such
personal
property.
The
granting
clause
provided
that
GSW
"does
bargain,
sell,
assign,
transfer
and
set
over
unto
[Cameo]
as
of
the
1st
day
of
January,
1977”
the
enumerated
property.
In
its
income
tax
return
for
its
1977
taxation
year,
the
plaintiff
claimed
an
allowance
pursuant
to
paragraph
20(1)(gg)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act")
in
the
amount
of
$652,754
and
claimed
a
non-capital
loss
in
that
taxation
year
in
the
amount
of
$652,754.
The
amount
claimed
by
the
plaintiff
pursuant
to
paragraph
20(1)(gg)
of
the
Act,
was
three
per
cent
of
the
cost
amount
(as
defined
in
subsection
248(1)
of
the
Act)
to
the
plaintiff,
at
the
commencement
of
the
1977
taxation
year
of
the
plaintiff,
of
the
tangible
property
(other
than
real
property
or
an
interest
therein)
that
was
described
in
the
plaintiff's
inventory
in
respect
of
the
business
at
the
commencement
of
1977.
Pursuant
to
subsection
152(6)
of
the
Act,
the
plaintiff
filed
an
amended
income
tax
return
for
its
1976
taxation
year
claiming
in
the
computation
of
its
taxable
income
a
deduction
from
income
in
the
amount
of
$652,754
under
section
HI
of
the
Act,
in
respect
of
the
non-capital
loss
claimed
in
its
1977
taxation
year.
There
was
an
admission
of
fact
made
by
the
defendant
but
the
evidence
was
objected
to
on
the
grounds
of
relevancy.
The
admission
reads
as
follows:
Neither
GSW
Ltd.-GSW
Limitée,
the
parent
corporation
of
plaintiff,
Cameo
Inc.
obtained
the
benefit
of
the
inventory
allowance
in
respect
of
the
inventory
of
the
plaintiff
for
which
the
plaintiff
claimed
and
was
denied
the
inventory
allowance.
The
taxation
year
of
each
of
GSW
Ltd.-GSW
Limitée
and
Cameo
Inc.
was
the
calendar
year.
I
agree
with
the
Minister’s
objection
that
each
taxpayer's
affairs
are
dealt
with
individually
and
it
would
be
impossible
to
determine
the
effect
of
the
failure
of
GSW
Ltd.-GSW
Limitée
or
Cameo
Inc.
to
take
advantage
of
the
inventory
allowance
without
looking
into
their
returns
in
detail.
Accordingly,
this
evidence
will
not
be
considered
by
me.
By
notice
of
reassessment
no.
623042,
dated
May
10,
1982,
in
respect
of
the
plaintiffs
1976
taxation
year,
the
said
deduction
from
income
in
the
amount
of
$652,754
claimed
by
the
plaintiff
under
section
111
of
the
Act
in
its
amended
income
tax
return
for
its
1976
taxation
year
in
respect
of
the
non-capital
loss
claimed
by
the
plaintiff
in
its
1977
taxation
year,
was
not
applied
by
the
Minister
of
National
Revenue
in
the
computation
of
the
taxable
income
of
the
plaintiff.
An
appeal
by
the
plaintiff
was
heard
by
the
Tax
Court
of
Canada
and
by
decision
dated
May
9,
1985,
the
appeal
was
dismissed.
The
plaintiff
then
brought
this
appeal
by
way
of
a
statement
of
claim.
On
the
basis
of
the
December
31,
1976
balance
sheet
included
in
the
financial
statements
filed
with
its
1976
tax
return,
the
aggregate
liabilities
of
the
plaintiff
at
December
31,
1976
totalled
$28,371,022
($25,920,043
current
liabilities
plus
$2,333,801
provision
for
warranties
plus
$117,178
note
payable
to
parent
company).
The
total
assets
reflected
on
such
balance
sheet
were
$39,577,232
of
which
inventories
were
recorded
at
$21,603,830.
Under
the
indenture
between
the
plaintiff
and
GSW
made
as
of
the
1st
day
of
January,
1977,
the
assumption
by
GSW
of
all
of
the
liabilities
of
the
plaintiff
resulted
in
a
portion
of
such
liabilities
assumed
being
allocable
to
the
inventories
of
the
plaintiff.
The
inventories
of
the
plaintiff
at
December
31,
1976
and
hence
at
the
commencement
of
its
1977
taxation
year,
comprised
finished
goods
inventory
and
raw
material
and
work
in
process
inventory.
Although
an
allocation
as
between
such
two
classes
of
inventory
was
not
disclosed
on
the
December
31,
1976
balance
sheet
of
the
plaintiff,
or
in
the
notes
thereto,
such
allocation
does
exist
in
the
working
papers
of
the
plaintiff.
During
its
1977
taxation
year,
the
plaintiff
prepared
its
financial
statements
for
its
1976
fiscal
period
dated
September
28,
1977,
and
the
income
tax
return
for
its
1976
taxation
year
was
dated
October
3,
1977.
Law
and
disposition
It
is
important
to
set
out
paragraph
20(1)(gg)
of
the
Income
Tax
Act
as
it
read
at
the
relevant
time:
20.(1)
Notwithstanding
paragraphs
18(1)
(a),
(b)
and
(h),
in
computing
a
taxpayer's
income
for
a
taxation
year
from
a
business
or
property,
there
may
be
deducted
such
of
the
following
amounts
as
are
wholly
applicable
to
that
source
or
such
part
of
the
following
amounts
as
may
reasonably
be
regarded
as
applicable
thereto:
(gg)
an
amount
in
respect
of
any
business
carried
on
by
the
taxpayer
in
the
year,
equal
to
that
portion
of
3%
of
the
cost
amount
to
the
taxpayer,
at
the
commencement
of
the
year,
of
the
tangible
property
(other
than
real
property
or
an
interest
therein)
that
was
(i)
described
in
the
taxpayer's
inventory
in
respect
of
the
business,
and
(ii)
held
by
him
for
sale
or
for
the
purposes
of
being
processed,
fabricated,
manufactured,
incorporated
into,
attached
to,
or
otherwise
converted
into
or
used
in
the
packaging
of,
property
for
sale
in
the
ordinary
course
of
the
business
that
the
number
of
days
in
the
year
is
of
365.
This
paragraph
first
appeared
in
the
Income
Tax
Act
when
it
was
introduced
in
the
March
31,
1977
budget
by
the
Minister
of
Finance.
The
paragraph
was
made
applicable
to
fiscal
periods
of
businesses
commencing
after
1976
and
to
fiscal
periods
ending
after
March
31,1977
except
that
in
its
application
to
fiscal
periods
that
end
after
March
31,
1977
and
commenced
before
1977
there
were
certain
rules
which
are
not
relevant
here.
I
must
also
review
the
elements
required
to
qualify
for
the
deduction.
In
Mattabi
Mines
Ltd.
v.
M.N.R.,
[1989]
2
C.T.C.
94,89
D.T.C.
5357
(F.C.T.D.);
rev'g
[1987]
1
C.T.C.
2412,
87
D.T.C.
314
(T.C.C.);
aff'd
[1992]
1
C.T.C.
8,
92
D.T.C.
6252
(F.C.A.)
Teitelbaum,
J.
stated
at
pages
107-08
(D.T.C.
5367-68):
To
qualify
for
the
deduction,
the
inventory
on
hand
at
the
start
of
the
fiscal
period
must
be
tangible
property
(other
than
real
estate
or
an
interest
therein)
and
must
meet
two
basic
requirements:
(1)
it
(the
tangible
property)
must
be
described
in
the
taxpayer's
inventory
in
respect
of
the
business;
and
(2)
it
must
be
property
held
for
sale
or
for
the
purpose
of
being
processed,
fabricated,
manufactured,
incorporated
into,
attached
to
or
otherwise
converted
into
or
used
in
the
packaging
of
property
for
sale
in
the
ordinary
course
of
business.
A
failure
to
establish
all
the
elements
of
paragraph
20(1)(gg)
of
the
ITA
results
in
a
disentitlement
to
the
deduction.
Canada
v.
Dresden
Farm
Equipment
Ltd.,
[1989]
1
C.T.C.
99,
89
D.T.C.
5019
(F.C.A.)
at
page
106
(D.T.C
5023).
In
light
of
the
wording
in
paragraph
20(1)(gg)
the
plaintiff
conceded
that
work
in
progress
and
raw
materials
could
not
be
part
of
the
inventory
since
the
taxpayer
did
not
make
the
sale
in
the
ordinary
course
of
business.
The
real
issue
in
this
case
comes
down
to
whether
the
taxpayer
held
the
inventory
for
sale
in
1977.
I
agree
with
the
plaintiff
that
the
finished
inventory
does
not
have
to
be
held
“in
the
ordinary
course
of
business”.
The
pertinent
question
is
whether
the
finished
inventory
was
held
for
sale
by
the
plaintiff.
Inventory
must
be
dealt
with
in
the
trading
context.
This
is
illustrated
by
the
case
of
Canada
v.
Dresden
Farm
Equipment
Ltd.,
[1989]
1
C.T.C.
99,
89
D.T.C.
5019
(F.C.A.).
The
issue
in
that
case
was
whether
the
taxpayer
had
any
right
to
the
inventory
allowance
where
it
dealt
in
consigned
goods.
Urie,
J.
at
pages
104-05
(D.T.C.
5022-23)
stated:
Paragraph
20(1)(gg)
must,
of
course,
be
read
in
the
context
of
the
Act
as
a
whole.
The
principal
sections
relevant
in
its
interpretation
for
purposes
of
this
appeal
include
the
definitions
of
“inventory”
and
"cost
amount”
set
out
in
subsection
248(1),
subsection
9(1),
and
subsection
10(1)
and
(2).
Those
sections
read
as
follows:
248(1)
In
this
Act,
“Inventory”
means
a
description
of
property,
the
cost
or
value
of
which
is
relevant
in
computing
a
taxpayer's
income
from
a
business
for
a
taxation
year.
“cost
amount”
to
a
taxpayer
of
any
property
at
any
time
means,
except
as
expressly
otherwise
provided
in
this
Act,
(c)
where
the
property
was
property
described
in
an
inventory
of
the
taxpayer,
its
value
at
that
time
as
determined
for
the
purpose
of
computing
his
income,
9.
Income
from
business
or
property.
(1)
Subject
to
this
Part,
a
taxpayer’s
income
for
a
taxation
year
from
a
business
or
property
is
his
profit
therefrom
for
the
year.
10.
Valuation
of
inventory
property.
(1)
For
the
purpose
of
computing
income
from
a
business,
the
property
described
in
an
inventory
shall
be
valued
at
its
cost
to
the
taxpayer
or
its
fair
market
value,
whichever
is
lower,
or
in
such
other
manner
as
may
be
permitted
by
regulation.
10.(2)
Notwithstanding
subsection
(1),
for
the
purpose
of
computing
income
for
a
taxation
year
from
a
business,
the
property
described
in
an
inventory
at
the
commencement
of
the
year
shall
be
valued
at
the
same
amount
as
the
amount
at
which
it
was
valued
at
the
end
of
the
immediately
preceding
year
for
the
purpose
of
computing
income
for
that
preceding
year.
Urie,
J.
continues
at
page
105
(D.T.C.
5023):
First
and
foremost,
it
is
clear
from
the
definition
that
for
property
to
be
"inventory"
in
a
taxation
year,
its
cost
or
value
must
be
relevant
in
the
computation
of
income
from
a
business
in
that
year.
By
virtue
of
subsection
9(1)
income
for
a
taxation
year
from
a
business
is
the
profit
therefrom
for
the
year.
The
significance
of
the
inclusion
of
inventory"
in
the
calculation
of
income
from
a
business
in
a
taxation
year
is
well
illustrated
in
the
following
passage
from
the
unanimous
judgment
of
the
Supreme
Court
of
Canada
delivered
by
Martland,
J.
in
M.N.R.
v.
Shofar
Investment
Corp.,
[1979]
1
C.T.C.
433,
79
D.T.C.
5347
at
page
435
(D.T.C.
5349)
citing
with
approval
the
judgment
of
Jackett,
C.J.
in
this
Court:
As
Chief
Justice
Jackett
points
out,
the
practice
hardened
into
a
rule
of
law"
in
the
computation
of
the
profit
of
a
trading
business
is
to
deduct
from
the
aggregate
proceeds
of
all
sales
the
cost
of
sales
computed
by
adding
the
value
placed
on
inventory
at
the
beginning
of
the
year
to
the
cost
of
acquisitions
to
inventory
during
the
year,
less
the
value
of
inventory
at
the
end
of
the
year.
[Emphasis
added.]
In
the
case
before
me
simply
because
the
inventory
was
transferred
to
Cameo
on
January
4
does
not
mean
that
it
was
inventory
held
for
sale.
It
was
not
available
for
sale
on
January
1,
2,
3
and
4.
The
inventory
was
already
committed
to
Cameo.
There
were
certain
conditions
in
the
agreement
which
Cameo
had
to
meet
before
it
was
entitled
to
take
legal
title
to
the
property.
However,
there
were
no
indications
from
Cameo
that
the
agreement
would
not
be
completed
and
the
only
reason
the
deal
was
not
completed
January
4
was
because
the
first
three
days
of
1977
were
not
business
days.
Urie,
J.
went
on
to
say
at
page
106
(D.T.C.
5023-24):
[Quoting
Joyal,
J.
from
Burrard
Yarrows
Corp.
v.
The
Queen,
[1986]
2
C.T.C.
313,
86
D.T.C.
6459
(F.C.A.)
at
page
317
(D.T.C.
6462)]
In
order
for
a
taxpayer
to
meet
the
paragraph
20(1)(gg)
requirement
holding
property
for
sale,
he
must
have
property
in
it
which
he
can
sell.
Here,
as
I
noted
above,
the
property
in
the
ships
was
vested
in
the
purchasers
and
not
in
the
plaintiff
taxpayer.
As
a
result,
the
plaintiff
did
not
have
property
in
the
ships
which
he
could
sell
and,
therefore,
he
could
not
be
said
to
be
holding
them
for
sale
within
the
meaning
of
paragraph
20(1)(gg).
As
a
result,
it
was
not
eligible
to
claim
a
reserve
pursuant
to
that
paragraph.
The
appeal
with
respect
to
this
issue
must
fail.
[Emphasis
added.]
The
facts
in
this
case
are,
of
course,
substantially
different
from
those
in
the
Burrard
Yarrows
case
but
there
can
be
no
doubt,
in
my
view,
that
similarly
for
the
paragraph
to
apply
in
the
factual
situation
in
this
case,
the
taxpayer
must
have
a
property
interest
in
the
inventory
upon
which
he
seeks
the
allowance.
Accord*
ingly,
in
my
view,
the
trial
judge
erred
in
holding,
as
he
seems
to
have
done,
that
ownership
or
property
in
the
inventory
in
issue
is
not
required
so
long
as
"it
be
part
of
the
taxpayer's
stock-in-trade”.
His
finding
fails
to
appreciate
the
scheme
of
the
Act
as
it
relates
to
inventories
and
to
the
jurisprudence
relating
thereto.
In
the
case
before
me
the
taxpayer
had
already
committed
the
inventory
to
be
sold
pursuant
to
the
agreements
made
in
1976.
In
fact
these
agreements
were
completed
and
the
inventory
was
sold
as
part
of
the
overall
sale.
The
December
28
and
September
27
agreements
amount
to
equitable
transfers.
The
completion
of
the
transfer
of
inventory
in
1977
does
not
constitute
carrying
on
business.
The
plaintiff
submitted
that
on
the
winding
up
of
a
subsidiary
the
rules
of
paragraph
88(1)(a)
apply
with
respect
to
each
property
of
the
subsidiary
distributed
to
the
parent
for
the
purpose
of
deferring
to
the
parent
any
gain
which
would
otherwise
have
been
made
by
the
subsidiary
under
the
distribution
of
property.
The
plaintiff
further
submitted
that
the
structure
of
these
rules
and
in
particular
the
rule
relating
to
the
distribution
of
eligible
capital
property
(the
goodwill
of
the
business)
from
a
subsidiary
to
its
parent
corporation,
establish
that
where
the
assets
of
the
business
are
distributed,
the
business
of
the
subsidiary
is
carried
on
until
after
the
completion
of
the
distribution,
so
that
the
subsidiary
is
carrying
on
business
at
the
time
of
distribution
of
property.
However,
section
88
has
an
entirely
different
focus.
It
is
dealing
with
the
time
when
a
company
is
going
out
of
business
and
section
20
is
applicable
where
the
company
is
staying
in
business.
Section
88
is
not
intended
to
establish
the
deeming
provision
for
any
other
section
nor
does
it
establish
that
in
any
case
where
there
is
a
sale
from
a
subsidiary
to
its
parent
corporation
and
a
distribution
of
eligible
capital
property
that
for
all
sections
of
the
Act
the
business
of
the
subsidiary
is
carried
on
until
after
completion
of
the
distribution.
Section
88
is
designed
to
prevent
any
tax
consequences
arising
from
the
rollover
in
the
scenario
therein
laid
out.
Furthermore
Income
Tax
Application
Rules,
subsection
21(1)
enacted
in
the
Income
Tax
Application
Rules,
1971
as
Part
III
of
S.C.
1970-71-72
c.
63
does
not
assist
the
plaintiff.
It
sets
out
a
factual
basis
and
says
if
the
taxpayer
has
the
same
facts
the
following
rules
apply.
It
does
not
say
for
all
purposes
the
taxpayer
is
deemed
to
be
carrying
on
business.
The
plaintiff
submitted
that
certain
income
tax
interpretation
bulletins
confirmed
that
there
was
a
sale
under
section
88
and
accordingly
the
deeming
provisions
[were]
applicable.
However,
there
is
nothing
in
any
of
the
bulletins
that
states
in
circumstances
similar
to
the
case
before
me
that
the
taxpayer
is
entitled
to
take
the
inventory
allowance
deduction.
The
income
tax
interpretation
bulletins
are
correct
if
one
is
dealing
with
factual
circumstances
as
contemplated
therein.
Since
the
plaintiff
did
not
hold
tangible
property
(inventory
herein)
for
sale
on
January
1
it
cannot
meet
one
of
the
essential
elements
of
subparagraph
20(1)(gg)(ii)
it
is
therefore
not
entitled
to
the
deduction
with
respect
to
the
inventory
allowance
on
the
finished
goods
portion
of
the
inventory.
I
agree
that
the
plaintiff
was
not
entitled
to
the
deduction
with
respect
to
the
inventory
allowance
on
the
non-finished
goods.
The
plaintiff's
appeal
is
dismissed
with
costs
to
the
defendant.
Appeal
dismissed.
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