Tremblay,
T.C.C.J.:—The
point
at
issue
for
determination
is
whether
the
appellant,
which
operates
various
types
of
businesses,
was
justified
in
considering
amounts
received
by
[sic]
Geneseo
of
Canada
Co.
Ltd.
(herein
after
called
"Geneseo")
as
capital
gains
in
calculating
its
income
for
the
fiscal
years
ended
February
12
and
July
30,
1983.
The
said
amounts
were
paid
in
consideration
of
the
exclusive
right
granted
to
Genesco
to
operate
the
footwear
departments
of
all
existing
Miracle
Marts
and
all
Miracle
Marts
that
would
open
their
doors
in
future.
The
various
terms
and
conditions
of
application
of
this
transaction
are
found
in
a
contract
entitled,
“licence
agreement".
The
appellant
also
signed
a
rental
agreement
with
Geneseo
enabling
it
to
exercise
the
exclusive
right
granted
to
it
under
the
"licence
agreement".
That
contract
was
entitled
“rental
agreement”.
The
respondent
argues,
for
his
part,
that
the
income
derived
from
the
“licence
agreement"
constitutes
a
component
of
the
income
of
Steinberg
Inc.
Counsel
for
the
Department
of
National
Revenue
claims
that
the
"licence
agreement"
and
the
“rental
agreement"
in
fact
constitute
one
and
the
same
rental
agreement.
2.
Burden
of
proof
2.01
The
burden
is
on
the
appellant
to
show
that
the
respondent's
assessments
are
incorrect.
This
burden
arises
from
a
number
of
judicial
decisions
including
the
Supreme
Court
of
Canada
judgment
in
Johnston
v.
M.N.R.,
(1948)
S.C.R.
486,
[1948]
C.T.C.
195,
3
D.T.C.
1182.
2.02
In
that
judgment,
the
Court
ruled
that
the
facts
assumed
by
the
respondent
in
support
of
his
assessments
or
reassessments
shall
also
be
presumed
to
be
true
until
proven
otherwise.
In
the
instant
case,
the
facts
on
which
the
respondent
relied
in
assessing
the
appellant
are
described
in
subparagraphs
(a)
to
(g)
of
paragraph
7
of
the
declaration
[sic].
That
paragraph
reads
as
follows:
In
assessing
the
appellant
for
its
fiscal
periods
ending
on
February
12th,
1983
and
July
30th,
1983,
the
respondent
relied,
inter
alia,
on
the
following
assumptions
of
fact:
a)
On
May
28th,
1982,
the
appellant
and
Geneseo
entered
into
an
agreement
whereby
Genesco
was
given
the
right
to
sell
most
of
its
footwear
products
in
space
rented
in
the
appellant's
Miracle
Mart
store;
[agreed]
b)
Although
two
documents
were
signed
by
the
appellant
and
Geneseo
on
May
28th,
1982,
when
the
two
documents
are
considered
together
they
provide
for
the
use
of
space
by
Genesco
to
operate
its
footwear
retail
business
in
the
Miracle
Mart
stores
for
a
rent
of
$25.50
per
square
foot;
[denied]
c)
The
rent
of
$25.50
per
square
foot
can
be
compared
with
the
rent
of
$26.76
per
square
foot
paid
to
the
appellant
by
Astral
Bellevue
Pathe
Inc.
("Astral")
under
a
contract
signed
on
June
1st,
1981;
[denied]
d)
Under
that
contract,
Astral
rented
space
from
the
appellant
to
operate
its
photographic
equipment
and
supplies
business
and
the
appellant
treated
all
the
income
derived
from
that
contract
as
business
income;
[agreed]
e)
The
appellant
similarly
rents
space
to
other
firms
including
Pik
Nik;
[disagreed]
f)
The
agreement
with
Geneseo
lasted
for
one
year;
[agreed]
g)
The
amounts
derived
from
the
agreement
with
Geneseo
was
[sic]
part
and
parcel
of
the
appellant's
business
income
or,
to
use
the
words
of
Lord
Elgin
in
the
case
of
Rolls-Royce
Ltd.
v.
Jeffrey,
(1962),
1
All
E.R.
801,
p.
804,
it
was
"merely
another
method
of
deriving
profit"
from
its
business.
[disagreed]
3.
Facts
The
facts
raised
in
this
appeal
were
not
disputed:
3.01
The
appellant
is
a
corporation
which,
through
its
many
commercial
divisions,
operates
supermarkets,
restaurants
and
related
businesses.
3.02
During
its
1982
fiscal
year,
the
appellant
also
put
32
stores
into
operation
in
Quebec
and
Ontario
under
the
firm
name
"Miracle
Mart".
3
03
Miracle
Marts
are
large
department
stores
which
generally
carry
on
their
activities
in
large
shopping
centres.
The
Miracle
Marts
constitute
only
one
commercial
division
of
the
appellant.
3.04
The
various
Miracle
Marts
generally
offer
some
60,000
square
feet
of
retail
space
where
a
broad
variety
of
goods
are
sold
to
the
public.
3.05
The
Miracle
Mart
stores
sold,
inter
alia,
footwear
for
men
and
women.
3.06
The
footwear
departments
in
the
Miracle
Mart
stores
generally
did
not
break
even.
The
appellant
therefore
decided
to
"franchise"
the
operations
of
the
said
footwear
departments.
3.07
After
considering
the
various
offers
made
to
it,
the
appellant
transferred
to
Geneseo
the
operations
of
the
footwear
departments
of
the
32
Miracle
Mart
stores
in
operation
at
the
time.
3.08
On
May
28,
1982,
the
appellant
and
Geneseo
signed
an
agreement
entitled
licence
agreement",
whereby
Geneseo
obtained
the
exclusive
right
to
operate
the
footwear
departments
of
all
the
existing
Miracle
Marts
and
of
all
Miracle
Marts
that
would
subsequently
open
their
doors
(Exhibit
A-l).
The
amount
to
be
paid
in
consideration
of
this
right
was
$6,000,000
payable
in
monthly
instalments
of
$100,000
over
the
term
of
the
contract.
The
clauses
particularly
relevant
to
the
settlement
of
the
present
dispute
were
drawn
from
the
preamble
to
the
said
contract
and
from
paragraphs
2.01,
2.03,
3.01
and
3.02.
They
read
as
follows:
Preamble
WHEREAS
the
company
through
its
division,
Miracle
Mart,
operates
retail
stores
under
an
established
concept
with
a
known
custom;
AND
WHEREAS
Geneseo
is
in
the
business,
inter
alia,
of
manufacturing
and
selling
footwear
and
operating
shoe
stores
and
shoe
departments;
AND
WHEREAS
Geneseo
is
desirous
to
be
granted
by
the
Company
and
the
Company
is
prepared
to
grant
same,
the
exclusive
right
and
license
to
operate
shoe
departments
in
the
Stores
and
conduct
its
business
therein
to
appear
as
though
it
is
operating
under
the
name
Miracle
Mart,
the
whole
to
the
extent
of
and
subject
to
the
terms
and
conditions
hereof;
NOW
THEREFORE,
IN
CONSIDERATION
OF
THE
FOREGOING
AND
THE
COVENANTS
HEREIN
CONTAINED,
THE
PARTIES
HERETO
AGREE
AS
FOLLOWS:
2.01
The
Company
does
hereby
grant
to
Genesco,
the
latter
present
and
accepting,
for
and
during
the
Term,
an
exclusive
license
to
operate
a
full
line
family
shoe
department
for
the
sale
of
Footwear
in
each
of
the
Existing
Stores
and
in
each
of
the
Future
Stores,
the
whole
subject
to
the
terms
and
conditions
of
this
Agreement.
2.03
In
consideration
of
the
Company
granting
Geneseo
the
aforementioned
exclusive
license,
Geneseo
agrees
to
pay
to
the
Company
as
a
Capital
license
Payment
the
following
amounts
in
the
following
manner:
a)
a
Capital
License
Payment
for
the
Existing
Stores
in
the
aggregate
amount
of
Six
Million
Dollars
($6,000,000)
payable
in
equal
monthly
instalments
of
One
Hundred
Thousand
Dollars
($100,000)
each
during
the
Term
of
the
Agreement,
the
1st
payment
to
become
due
and
exigible
on
the
2nd
day
of
August,
1982
and
to
continue
on
the
1st
day
of
each
subsequent
month
during
the
Term
of
the
Agreement,
until
fully
paid,
unless
the
Term
of
the
Agreement
is
earlier
terminated
in
accordance
with
the
provisions
of
this
Agreement.
b)
A
Capital
License
Payment
for
Future
Stores
in
the
amount
of
Thirty-
Seven
Thousand
Five
Hundred
Dollars
($37,500)
per
annum
for
each
of
the
Future
Stores,
payable
at
the
rate
of
Three
Thousand
One
Hundred
Twenty-
Five
Dollars
($3,125)
per
month
during
the
remainder
of
the
Term
of
the
Agreement,
the
first
instalment
being
due
and
payable
on
each
Opening
Date
and,
where
necessary,
pro-rated
on
a"
per
diem"
basis.
3.01
This
Agreement
shall
be
for
a
Term
of
five
(5)
years
less
one
(1)
day,
commencing
on
the
2nd
day
August,
1982
(the
Effective
Date")
and
terminating
on
the
31st
day
of
July,
1987.
3.02
Either
the
Company
or
Genesco,
at
their
sole
discretion,
with
or
without
cause,
shall
have
the
right
to
terminate
and
cancel
completely
this
Agreement,
any
time
prior
to
the
expiration
of
the
Term
of
the
Agreement,
provided
that
in
cases
the
Party
so
seeking
such
termination
and
cancellation
must
give
the
other
Party
a
six
(6)
months
prior
written
notice
to
that
effect
and
provided
further
that
such
cancellation
or
termination
can
only
take
effect
on
the
1st
of
June
or
the
1st
of
December
during
the
Term
of
the
Agreement,
the
whole
subject
to
all
other
terms
and
conditions
herein
governing
cancellation
and
termination.
3.09
Paragraph
14.06
of
the"
licence
agreement”
stated
that
the
payments
in
respect
of
this
contract
would
be
adjusted
if
the
contract
were
terminated
prematurely,
that
is
before
July
31,
1987.
This
clause
reads
as
follows:
14.06
The
Parties
furthermore
agree
and
acknowledge
that
this
agreement
will
be
complementary
with
and
read
together
with
a
Memorandum
of
Agreement
of
even
date,
in
which
the
Parties
may
enter
in
relation
with
the
leasing
of
any
and
all
of
the
Geneseo
Premises,
and
that,
without
limitations
to
the
foregoing,
in
any
event
of
termination
or
cancellation
in
whole
or
in
part
for
any
reason
whatsoever
of
this
Agreement,
then
this
agreement
and
the
Memorandum
of
Agreement
and
any
and
all
of
Geneseo's
rights
in
and
to
any
of
the
Geneseo
premises
shall
cease
and
terminate
as
of
the
appropriate
effective
date
of
such
termination
or
cancellation,
as
the
case
may
be,
and
all
payments
hereunder
shall
be
adjusted,
subject
to
any
provision
to
the
contrary,
to
such
appropriate
effective
date
of
termination
or
cancellation.
3.10
The
appellant
also
signed
a
rental
agreement
with
Geneseo
to
enable
the
latter
effectively
to
exercise
the
right
granted
to
it
under
the
“licence
agreement".
Under
this
agreement,
Geneseo
received
rental
space
in
the
existing
Miracle
Mart
stores
and
in
the
future
Miracle
Mart
stores
(Exhibit
A-2)
The
clauses
of
this
agreement
that
drew
this
Court's
attention
were
taken
from
the
preamble
and
paragraphs
2.01,
3.01,
3.02,
4.01
and
21.05.
Preamble
WHEREAS
the
Parties
hereto
have
entered
into
a
License
Agreement
(The
"License
Agreement”),
bearing
the
same
date
as
the
present
Agreement
whereby
the
Company
has
granted
to
Geneseo
an
exclusive
license
to
operate
the
shoe
department
in
each
of
its
retail
stores,
the
whole
subject
to
and
as
detailed
in
said
License
Agreement;
AND
WHEREAS
the
Parties
hereto
agree
that,
in
order
to
give
effect
to
the
License
Agreement,
the
Company
shall
sub-lease
from
the
Company
spaces
(herein
after
called
the
"Geneseo
Premises")
included
within
the
Stores,
and
that
Geneseo
shall
operate
in
each
case
a
department,
the
sole
line
of
business
of
which
shall
be
the
sale
thereat
at
retail
of
Footwear;
NOW
THEREFORE,
IN
CONSIDERATION
OF
THE
FOREGOING
AND
THE
COVENANTS
HEREIN
CONTAINED,
THE
PARTIES
HERETO
AGREE
AS
FOLLOWS:
2.01
In
consideration
of
the
grant
by
the
Company
to
Geneseo
of
the
exclusive
license
to
operate
within
its
Stores
and
in
further
consideration
of
the
rents,
covenants
and
agreements
hereinafter
reserved
and
contained
on
the
part
of
Geneseo
to
be
paid,
observed
and
performed,
the
Company
doth
hereby
demise
and
sub-lease
unto
Genesco
hereby
accepting
the
same,
the
Geneseo
Premises.
3.01
This
Agreement
shall
be
for
a
Term
of
five
(5)
years
less
one
(1)
day,
commencing
on
the
2nd
day
of
August,
1982
(the
“Effective
Date")
and
terminating
on
the
31st
day
of
July,
1987.
3.02
Either
the
Company
or
Genesco,
at
their
sole
discretion
with
or
without
cause,
shall
have
the
right
to
terminate
and
cancel
completely
this
Agreement,
at
any
time
prior
to
the
expiration
of
the
Term
of
the
Agreement,
provided
that
in
cases
the
Party
so
seeking
such
termination
and
cancellation
must
give
the
other
Party
a
six
(6)
months
prior
written
notice
to
that
effect
and
provided
further
that
such
cancellation
or
termination
can
only
take
effect
on
the
1st
of
June
or
the
1st
of
December
during
the
Term
of
the
Agreement,
the
whole
subject
to
all
other
terms
and
conditions
herein
governing
cancellation
and
termination.
4.01
Geneseo
covenants
and
agrees
to
pay
to
the
Company
as
Annual
Minimum
Rental
and
as
additional
Rental:
(a)
an
annual
minimum
rental
for
the
aggregate
of
all
Geneseo
Premises
within
the
Existing
Stores
of
One
Million
Dollars
($1,000,000)
during
each
Agreement
Year,
payable
in
and
by
equal
consecutive
monthly
instalments
of
Eighty-Three
Thousand
Three
Hundred
Thirty-Three
Dollars
and
Thirty-
Three
Cents
($83,333.33)
in
advance,
on
the
1st
day
of
each
month
during
each
Agreement
Year,
the
first
whereof
to
become
due
and
payable
on
the
2nd
day
of
August,
1982,
and
an
annual
minimum
rental
for
the
aggregate
of
all
Geneseo
Premises
within
the
Future
Stores
of
an
amount
equal
to
Eleven
Dollars
and
Fifty
Cents
($11.50)
per
square
foot
per
annum
of
the
Area
of
the
Geneseo
Premises
in
such
Future
Stores,
payable
in
and
by
equal
consecutive
monthly
instalments
on
the
1st
day
of
each
month
during
each
Agreement
Year,
the
first
whereof
to
become
due
and
payable
in
each
upon
the
Opening
Date
of
each
Future
Store
and
provided
that
if
some
Geneseo
Premises
are
not
occupied
for
a
full
Agreement
Year,
or
Geneseo
takes
occupancy
of
Geneseo
Premises
on
any
day
other
than
the
1st
day
of
the
month,
the
appropriate
adjustment
in
the
annual
minimum
rental
applicable
to
such
Future
Stores
shall
be
made;
and
(b)
i)
As
long
as
there
are
only
Existing
Stores,
an
amount
equal
to
nineteen
percent
(19%)
of
the
amount
(if
any)
by
which
the
Gross
Retail
Sales
for
each
Agreement
Year
exceeds
the
aggregate
of
Eleven
Million
Five
Hundred
and
Eighty
Thousand
($11,580,00)
plus
Geneseo's
Proportionate
Share
of
increase
in
Operating
Costs
and
Geneseo's
Pro-
rata
Share
of
the
increase
in
costs
of
Central
Cashiers
for
that
Agreement
Year;
or
ii)
Commencing
the
first
day
of
the
month
next
following
either
the
Opening
Date
of
each
Future
Store
or
each
date
a
Store
(whether
an
Existing
Store
or
a
Future
Store)
is
closed,
an
amount
equal
to
nineteen
percent
(19%)
of
the
amount
(if
any)
by
which
the
Gross
Retail
Sales
for
each
Agreement
Year
exceeds
the
aggregate
of:
a)
$11,580,000;
b)
plus
$360,000
in
the
event
of
the
opening
of
each
Future
Store
or
less
$360,000
in
the
event
of
each
closing
of
a
Store
(whether
an
Existing
Store
or
a
Future
Store);
c)
plus
Geneseo's
Proportionate
Share
of
increase
in
Operating
Costs
for
such
Agreement
Year;
d)
plus
Geneseo's
Pro-rata
Share
of
the
increases
in
costs
of
Central
Cashiers
for
such
Agreement
Year.
iii)
The
consideration
hereinabove
described
in
this
sub-paragraph
(b)
i)
and
(b)
ii)
shall
for
the
purposes
of
this
Agreement
be
called
Percentage
Rental
and
shall
be
payable
in
the
manner
provided
hereinafter
in
Section
4.02
(a)
(c)
Geneseo's
Proportionate
Share
of
increases
in
Operating
Costs
in
the
following
manner:
i)
With
respect
to
the
Existing
Stores
and
commencing
with
the
Agreement
Year
beginning
August
1st,
1983
and
during
each
subsequent
Agreement
Year
or
part
thereof
that
an
Existing
Store
is
in
operation
during
the
Agreement
Term,
and
until
paragraph
(c)
ii)
of
this
Section
4.01
becomes
operative,
Geneseo's
Proportionate
Share
of
all
increases
in
Operating
Costs
over
Base
Operating
Costs
for
Existing
Stores
for
each
Agreement
Year.
ii)
Upon
the
Opening
Date
of
each
Future
Store
or
each
closing
date
of
a
Store
(whether
an
Existing
Store
or
a
Future
Store)
and
commencing
with
the
expiration
of
the
first
full
Agreement
Year
following
the
opening
of
each
Future
Store
or
the
closing
of
each
Store
(whether
an
Existing
Store
or
a
Future
Store),
as
the
case
may
be,
and
continuing
thereafter,
for
each
Agreement
Year
or
portion
thereof
Geneseo's
Proportionate
Share
of
all
increase
in
Operating
Costs
for
each
subsequent
Agreement
Year
in
excess
of
the
Base
Operating
Costs
for
all
stores.
21.05
The
Parties
furthermore
agree
and
acknowledge
that
this
Agreement
will
be
complementary
with
and
read
together
with
a
License
Agreement
of
even
date,
in
which
the
Parties
have
entered
in
relation
with
the
licensing
of
any
and
all
of
the
Geneseo
Premises,
and
that,
without
limitations
to
the
foregoing,
in
any
event
of
termination
or
cancellation
in
whole
or
in
part
for
any
reason
whatsoever
of
this
Agreement,
then
this
Agreement
and
the
License
Agreement
and
any
and
all
of
Geneseo's
rights
in
and
to
any
of
the
Geneseo
premises
shall
cease
and
terminate
as
of
the
appropriate
effective
date
of
such
termination
or
cancellation,
as
the
case
may
be,
and
all
payments
hereunder
shall
be
adjusted,
subject
to
any
provision
to
the
contrary,
to
such
appropriate
effective
date
of
termination
or
cancellation.
This
Agreement
and
the
License
Agreement
may
not
be
modified
or
amended
except
by
instrument
in
writing
signed
by
the
Parties
herein
or
by
their
successors
and
assigns.
3.11
The
appellant
had
never
transferred
to
anyone
the
right
to
operate
any
part
of
all
the
Miracle
Mart
stores
before
signing
the
"license
agreement"
with
Geneseo.
3.12
Counsel
for
the
appellant
also
filed
as
Exhibit
A-3
the
sub-leasing
contract
between
the
Astral
Bellevue
Pathe
company
and
Steinberg
Inc.
That
contract
was
virtually
identical
to
the
"rental
agreement"
signed
by
the
appellant
and
Geneseo.
It
appears,
however,
from
the
testimony
of
Robert
Gertler
that
this
agreement
was
ultimately
only
the
extension
of
the
lease
that
bound
Astral
Bellevue
Pathe
Inc.
and
Steinberg
Inc.
at
the
very
start
of
the
Miracle
Mart's
operations.
Excerpts
from
pages
27
and
28
of
the
stenographic
notes
clearly
present
this
state
of
affairs:
Q.
Now,
what
was
the
nature
of
the
lease
of
the
space
to
Astral
Bellevue;
what
kind
of
space
did
they
rent
or
what
were
they
permitted
to
do
in
heir
[sic]
space?
A.
Well,
the
Astral
lease
was
in
fact
not
a
new
lease
.
.
.
Q.
You
mean
exhibit
A-3
is
not
a
new
lease?
A.
No,
it
was
not
a
new
lease;
it
was
in
fact
an
extension
of
an
existing
lease
that
we
were
working
with,
with
that
camera
shop,
or
Astral
Bellevue.
Q.
You
say
that
this
was
an
extension
of
an
existing
lease;
did
Miracle
Mart
have
a
relationship
with
Astral
Bellevue
going
back
for
many
many
many
years?
A.
Yes,
I
believe
that
the
relationship
extended
to
the
very
beginning
of
Miracle
Mart's
opening.
Q.
When
would
that
have
been?
A.
It
would
have
been
in
the
early
sixties
(60's).
Q.
In
other
words,
from
the
beginning
of,
the
start
of
the
business
of
Miracle
Mart,
it
leased
space
to
Astral
Bellevue
to
operate
the
photo
shop
in
the
Miracle
Mart
stores,
is
that
correct?
A.
Absolutely.
3.13
A
letter
dated
June
29,
1983
was
also
sent
by
Genesco
to
Miracle
Mart
officials
(Exhibit
A-4)
The
purpose
of
this
letter
was
to
state
that
Geneseo
intended
to
withdraw
from
the
contract
binding
it
to
Steinberg
Inc.
before
the
date
initially
set,
July
31,
1987.
In
addition,
the
conditions
that
would
bind
the
parties
between
then
and
the
term
of
the
contract
between
Genesco
and
Steinberg
Inc.
were
established.
The
relevant
excerpts
of
the
said
letter
are
as
follows:
Please
be
advised
that
we
do
hereby
invoke
Sections
[sic]
3.02
of
the
License
Agreement
and
the
Memorandum
of
Agreement
as
modified
by
our
letter
of
May
26,
1983
duly
accepted
by
you
and
we
accordingly
elect
to
terminate
and
cancel
both
the
License
Agreement
and
the
Memorandum
of
Agreement
which
cancellation
and
termination
shall
take
effect
on
December
31,
1983.
Notwithstanding
the
foregoing,
as
we
have
mentioned
to
you,
we
are
prepared
to
extend
the
cancellation
and
termination
date
to
June
2,
1984
(at
which
time
both
Agreements
shall
terminate)
subject
to
the
following
changes
to
the
License
Agreement
and
Memorandum
of
Agreement
form
[sic]
August
1,
1983
to
June
2,
1984
inclusive,
namely:
A.
The
cash
registers
owned
by
us
as
referred
to
in
Section
5.02
of
the
License
Agreement
shall
be
removed
by
us
prior
to
termination
in
order
to
give
effect
to
central
cashiering
as
hereinafter
provided.
B.
The
annual
minimum
rental
provide
[sic]
in
Section
4.01
(A)
of
the
Memorandum
of
Agreement
shall
be
reduced
to
$400,000
payable
in
equal
consecutive
monthly
instalments
of
$33,333.33.
C.
The
percentage
rental
of
19%
referred
to
in
Section
4.01
(B)
of
the
Memorandum
of
Agreement
shall
be
reduced
to
15%
and
the
gross
base
retail
sales
referred
to
in
the
same
Section
shall
be
reduced
from
$11,580,000
to
$10,700,000
with
appropriate
changes
elsewhere
in
the
said
Agreement.
D.
All
references
to
the
payment
of
Geneseo's
proportionate
share
of
increase
in
operating
costs
in
the
Memorandum
of
Agreement
in
general
and
in
Sections
4.01
(B),
4.01
(C),
and
4.03
shall
be
deleted.
E.
All
cashiering
services
as
referred
to
in
Article
V
of
the
Memorandum
of
Agreement
shall
be
through
central
cashiers
owned
and
operated
by
you.
F.
We
shall
not
be
obliged
to
take
any
future
stores
during
the
period
in
question.
3.14
In
preparing
its
tax
return
for
the
1983
fiscal
year,
the
appellant
considered
the
amounts
received
under
the“
"license
agreement"
as
the
realization
of
a
capital
gain.
3.15
On
April
11,
1986,
the
Minister
of
National
Revenue
reassessed
the
appellant
for
its
fiscal
year
ended
July
30,
1983.
In
doing
so,
he
included
the
sum
of
$553,844
in
the
latter’s
income,
thus
reducing
the
total
loss
realized
during
that
fiscal
year
by
the
same
amount.
The
words,
[Translation]
"additional
income.
Genesco
Contract",
explained
the
said
increase
in
income
in
the
notice
of
reassessment.
3.16
In
response
to
an
application
filed
on
or
around
November
25,
1986
for
redetermination
of
the
loss
suffered
by
the
appellant,
the
Minister
confirmed
that
Steinberg
Inc.'s
total
losses
for
the
fiscal
year
ended
July
30,
1983
amounted
to
$24,282,929.
3.17
The
appellant
duly
completed
a
notice
of
objection
to
the
Minister's
redetermination
of
the
total
losses
amounting
to
$24,282,929
for
the
said
fiscal
year.
3.18
On
February
16,
1986,
the
Minister
of
National
Revenue
sent
a
notice
of
confirmation
of
the
total
losses
concerned
by
a
notice
of
objection
previously
filed
by
the
appellant.
3.19
On
May
27,
1986,
the
Minister
of
National
Revenue
reassessed
the
appellant
for
its
fiscal
year
ended
February
12,
1983,
including
the
amount
of
$646,156
in
its
income,
thus
reducing
the
total
loss
realized
by
Steinberg
Inc.
for
that
fiscal
year
by
the
same
amount.
The
words,
[Translation]
"additional
income.
Geneseo
Contract",
explained
the
said
increase
in
income
in
that
notice
of
reassessment.
3.20
In
response
to
an
application,
filed
on
or
around
November
25,
1986,
for
redetermination
of
the
loss
suffered
by
the
appellant,
the
Minister
of
National
Revenue
confirmed
that
the
total
losses
of
Steinberg
Inc.
for
the
fiscal
year
ended
February
12,
1983
amounted
to
$9,334,134.
3.21
The
appellant
duly
completed
a
notice
of
objection
to
the
Minister's
redetermination
of
its
total
losses
for
the
fiscal
year
ended
February
12,
1983.
3.22
On
February
16,
1988,
the
Minister
of
National
Revenue
issued
a
notice
of
confirmation
of
the
total
losses
as
established
in
the
notice
of
reassessment
of
May
27,
1986.
3.23
The
appellant
accordingly
filed
an
appeal
from
the
Minister's
decision
to
confirm
the
validity
of
the
notices
of
reassessment
issued
respectively
on
April
11
and
May
27,
1986
in
respect
of
the
fiscal
years
ended
February
12
and
July
30,
1983.
4.
Cases
at
law
(1)
Lasalle
Factories
Ltd.
v.
M.N.R.,
[1979]
C.T.C.
2098,
79
D.T.C.
91;
(2)
British
Salmson
Aero
Engines
Ltd.
v.
Commissioners
of
Inland
Revenue
(1937),
22
T.C.
29,
[1938]
3
K.B.
285;
(3)
Withers
(Inspector
of
Taxes)
v.
Nethersole
28
T.C.
501;
(4)
Margerison
v.
Tyresoles
Ltd.
25
T.C.
59;
(5)
Berthe
F.
Bernard
v.
M.N.R.,
3
Tax
A.B.C.
15,
50
D.T.C.
428;
(6)
Murray
(Inspector
of
Taxes)
v.
Imperial
Chemical
Industries
Ltd.
44
T.C.
175;
(7)
British
Dyestuffs
Corporation
Ltd.
v.
Commissioners
of
Inland
Revenue
(1924),
12
T.C.
586;
(8)
Rolls
Royce
Ltd.
v.
Jeffrey,
40
T.C.
443,
1962
1
All
E.R.
801;
(9)
Atlantic
Sugar
Refineries
Ltd.
v.
M.N.R.,
[1949]
S.C.R.
706,
[1948]
C.T.C.
326,
44
D.T.C.
507;
(10)
Californian
Copper
Syndicate
v.
Harris
(1904),
5
T.C.
159;
(11)
B.P.
Australia
Ltd.
v.
Commissioner
of
Taxation
of
the
Commonwealth
of
Australia
(1966),
A.C.
224;
(12)
Canadian
Industries
Ltd.
v.
M.N.R.,
[1980]
C.T.C.
222,
80
D.T.C.
6163;
(13)
Canadian
General
Electric
Ltd.
v.
M.N.R.,
[1987]
1
C.T.C.
180,
87
D.T.C.
5070;
(14)
Evans
Medical
Supplies
v.
Moriatry
(1957),
37
T.C.
540,
3
All
E.R.
718;
(15)
Wolf
Electric
Tools
Ltd.
v.
Wilson,
45
T.C.
326;
(16)
Musker
v.
English
Electric
Co.
Ltd.,
41
T.C.
556.
5.
Analysis
This
appeal
raised
once
again
the
delicate
problem
of
the
qualification
of
sums
arising
from
a
transaction
conducted
by
a
business.
The
issue
for
determination
in
the
instant
case
is
whether
the
sum
received
by
Miracle
Mart
under
the“
licence
agreement”
constitutes
a
capital
gain
or
a
component
of
its
income.
Counsel
for
both
parties
supported
their
respective
claims
with
abundant
case
law,
which
this
Court
must
study
carefully
to
determine
the
true
scope
of
the
many
decisions
cited
above.
A
summary
presentation
of
the
main
arguments
by
counsel
for
the
parties
is
nevertheless
called
for
before
this
Court
presents
the
approach
it
intends
to
favour
in
settling
the
present
dispute.
5.01
Appellant's
Argument
5.01.1
Counsel
for
the
appellant
first
presented
arguments
which,
in
his
view,
made
it
possible
to
overturn
the
elements
on
which
the
Minister
of
National
Revenue
relied
in
assessing
the
appellant,
He
claimed
that
the
evidence
clearly
showed
that
two
entirely
different
items
of
property
were
in
issue
in
the
negotiations
between
the
appellant
and
Geneseo.
These
were
the
right
to
be
able
to
put
the
footwear
department
into
operation
in
the
Miracle
Mart
stores
and
the
right
to
use
rented
space
in
order
to
operate
the
said
footwear
business.
The
transactions
in
respect
of
these
two
items
of
property
forming
the
subject
of
two
separate
agreements
and
being
governed
by
different
terms
of
payment
should
therefore
receive
different
tax
treatment.
The
comments
by
counsel
for
the
appellant
at
pages
65
and
66
of
the
stenographic
notes
of
the
oral
argument
present
this
aspect
of
his
argument:
Once
that
fact
is
accepted,
or
if
that
fact
is
accepted,
that
there
were
two
(2)
separate
agreements,
with
two
(2)
separate
pricing
mechanism
[sic],
if
I
could
put
it
that
way,
and
two
(2)
separate
items
of
property
being
dealt
with,
and
this
is
the
essential
point,
there
are
two
(2)
separate
items
of
property
being
dealt
with,
then
I
think
all
of
my
learned
friend’s
assumptions
have
been
overturned.
5.01.2
The
appellant
also
contends
that
the
right
to
enjoy
a
goodwill
constitutes
an
asset
that
can
be
disposed
of.
That
asset,
being
of
a
capital
nature,
could
therefore
only
engender
a
capital
transaction
to
the
extent
that
Miracle
Mart
was
not
involved
in
the
commerce
of
such
rights.
The
evidence
in
this
regard
shows
that
Miracle
Mart
had
never
conducted
such
transactions
before
signing
the
“
licence
agreement"
with
Geneseo.
In
the
conclusion
to
the
first
part
of
his
argument,
counsel
for
the
appellant
expressed
himself
as
follows
at
page
68
of
the
stenographic
notes
of
the
oral
argument:
The
basic
principle
we're
invoking
in
this
pace
[sic]
is
that
Steinberg
had
property
which
it
could
dispose
of,
being
the
right
to
operate
the
business
of
selling
footwear
in
its
stores,
in
its
Miracle
Mart
stores,
it
disposed
of
that
right.
The
second
principle
we
invoke
is
this
was
a
transaction
outside
its
ordinary
course
of
business.
Mr.
Gertler
testified
that
in
the
Miracle
Mart
division,
a
two
hundred
and
thirty-five
million
dollar
($235,000,000)
division,
as
long
as
he's
been
there,
twenty-two
(22)
years,
whatever
it
is,
they
had
never
granted
an
exclusive
licence
to
any
other
party
to
operate
a
department.
5.01.3
Second,
the
appellant
bases
his
argument
on
a
series
of
decisions
which,
in
its
view,
show
that
it
is
possible
to
divide
a
transaction
into
various
items
of
property
in
order
to
give
them
separate
treatment.
All
these
decisions
entail
the
granting
of
an
exclusive
licence
for
terms
ranging
from
five
to
ten
years
in
consideration
for
the
payment
of
a
lump
sum.
The
approach
taken
in
these
decisions
consisted
in
an
analysis
of
the
circumstances
of
the
transaction
in
issue.
Particular
attention
was
also
given
to
analyzing
the
extent
of
the
powers
granted
the
beneficiary
under
the
contract
binding
the
latter
to
the
provider
of
such
rights.
Having
taken
all
these
items
into
consideration,
the
courts
were
led
to
rule
that
the
lump
sums
received
in
these
decisions
were
in
the
nature
of
capital.
The
appellant
therefore
argues
subsidiarily
that
a
treatment
similar
to
that
found
in
the
above-mentioned
case
law
should
apply
to
the
present
case.
5.02
Respondent's
Argument
5.02.1
The
argument
of
counsel
for
the
Department
of
National
Revenue
may
be
presented
in
three
parts.
First,
as
expressed
in
subparagraph
7(b)
of
the
respondent's
reply
to
the
appellant's
declaration
(2.
02),
the
respondent
argues
that
the
two
agreements
signed
by
Miracle
Mart
and
Genesco,
that
is
the
"rental
agreement"
and
the
"licence
agreement",
constitute
in
fact
a
single
contract.
Given
that
the
right
to
enjoy
the
goodwill
of
Miracle
Mart
in
operating
the
footwear
department
can
be
concretely
realized
only
through
the
renting
of
retail
space,
the
two
agreements
must
be
considered
solely
as
one
and
the
same
agreement,
that
is
a
commercial
space
rental
agreement.
These
excerpts
from
page
101
of
the
stenographic
notes
of
the
oral
argument
and
subparagraph
7(b)
of
the
respondent's
reply
to
the
appellant's
declaration
summarize
this
part
of
the
respondent's
argument
very
well:
There's
no—the
two
(2)
agreements,
titled
the
license
and
rental
agreement,
have
to
work
together;
one
cannot
survive
the
other.
.
.
I.
when
the
two
documents
are
considered
together
they
provide
for
the
use
of
space
by
Geneseo
to
operate.
5.02.2
Second,
the
respondent
claimed
that
the
application
of
the
test
stated
by
Judge
Bankes
in
British
Dyestuffs
Corporation
Ltd,
v.
The
Commissioners
of
Inland
Revenue,
(supra,
4(7))
clearly
reveals
the
nature
of
the
sums
received
by
Miracle
Mart
in
exchange
for
the
right
granted
to
Genesco
to
operate
the
"footwear
department".
This
test
was
also
applied
in
two
recent
decisions
which
the
respondent
cited
in
his
oral
argument.
They
are
Canadian
Industries
Ltd.
v.
M.N.R.,
(supra,
4(12))
and
Canadian
General
Electric
v.
M.N.R.,
(supra
(4
(13)),
decisions
recently
rendered
by
the
Federal
Court
of
Canada.
The
following
excerpt
from
the
British
Dyestuffs
decision,
(supra)
at
page
596
of
Judge
Bankes's
comments,
presents
very
well
the
tenor
of
this
test:
The
question
is
whether
a
sum
of
£250,000
which
was
made
payable
by
10
yearly
instalments
is
a
capital
sum
representing
the
purchase
price
of
part
of
the
property
'Lasalle
Factories
Ltd.
v.
M.N.R.,
(supra,
4.(1));
British
Salmson
Aero
Engines
Ltd.
v.
Commissioners
of
Inland
Revenue,
(supra,
4.(2));
Withers
v.
Nethersole,
(supra,
4.(3));
Margerison
v.
Tyresoles
Ltd.,
(supra,
4.(4));
Berthe
F.
Bénard
v.
M.N.R.,
(supra,
4.(5));
Murray
v.
Imperial
Chemical
Industries
Ltd.,
(supra,
4.(6)).
of
this
company,
or
whether
it
is
profits
and
gains
acquired
in
the
course
of
the
carrying
on
of
the
particular
business
of
this
company.
I
do
not
myself
think
that
the
method
of
payment
adopted
in
carrying
through
a
transaction
between
a
company
and
a
licensee
is
very
much
guide
to
the
true
nature
of
the
transaction.
The
real
question
is,
is
the
transaction
in
substance
a
parting
by
the
company
with
part
of
its
property
for
a
purchase
price,
or
is
it
a
method
of
trading
by
which
it
acquires
this
particular
sum
of
money
as
part
of
the
profits
and
gains
of
that
trade.
For
that
purpose,
one
has
to
look
at
the
nature
and
substance
of
the
transaction
and
the
agreement
as
a
whole.
[Emphasis
added.]
Counsel
for
the
respondent
therefore
contends
that
the
application
of
the
two
constituent
parts
of
this
test
favours
the
position
of
the
Department
of
National
Revenue.
First,
the
transaction
in
issue
does
not
constitute
a
parting
by
the
corporation
of
part
of
its
property.
Second,
counsel
for
the
respondent
contends
that
the
circumstances
at
the
origin
of
the
transfer
to
Geneseo
of
the
right
to
operate
the
footwear
department
in
the
appellant's
stores
were
entirely
similar
to
those
that
prevailed
in
Rolls
Royce
Ltd.
v.
Jeffrey,
(supra,
4(8)).
This
transaction
was
therefore
merely
another
method
for
Miracle
Mart
of
deriving
income
from
its
business.
The
comments
taken
from
pages
93,
104,105
and
106
of
the
stenographic
notes
of
the
oral
arguments
clearly
show
the
importance
which
the
application
of
the
test
drawn
from
British
Dyestuffs,
(supra,
4(7))
holds
for
the
respondent's
oral
argument:
We
submit
that
this
is
the
question
that
you
must
answer
this
morning.
Is
the
transaction,
that
is
entering
into
the
licence
agreement,
in
substance,
parting
by
Steinberg
of
part
of
its
property
for
a
purchase
price
or
is
it
just
a
method
of
trading
by
which
it
acquires
this
particular
sum
of
money.
The
Minister's
position
was
and
still
is
as
it
had
been
in
the
Lasalle
case
cited
by
my
learned
friend,
substantively,
that
the
decision
in
Rolls-Royce
Ltd.
v.
Inland
Revenue
Commissioners
still
applies,
in
that
the
amounts
received
by
Steinberg
under
the
license
agreement,
exhibit
A-l
was
merely
another
method
of
deriving
profit
from
its
business.
So,
from
loosing
[sic]
money,
Steinberg
put
itself
in
the
position
of
making
money
all
we
have
is
a
new
way
of
making
viable
a
portion
of
their
division.
5.02.3
Lastly,
the
respondent
tries
to
cite
the
application
of
Atlantic
Sugar
Refineries
Ltd.
v.
M.N.R.,
(supra,
4(9))
to
show
that
a
transaction
that
lies
outside
the
normal
activities
of
a
business
can
nevertheless
generate
business
income.
5.03
Decision
5.03.1
The
question
is
therefore
how
to
qualify
the
sums
received
by
Miracle
Mart
during
the
fiscal
years
ended
respectively
February
12
and
July
30,
1983.
These
amounts
were
paid
by
Geneseo
in
consideration
for
the
right
to
operate
the
footwear
departments
in
all
Miracle
Mart
stores.
5.03.2
The
qualification
of
the
income
called
forth
abundant
case
law
in
which
the
courts,
in
order
to
resolve
the
disputes
put
before
them,
had
developed
numerous
tests
and
standards
requiring
a
certain
care
in
their
application.
This
Court
is
of
the
view
that
these
statements
of
principle
merely
shed
a
light
that
permits
a
better
appreciation
of
the
facts
in
each
case.
5.03.3
The
necessary
warning
regarding
the
qualification
of
income
was
also
clearly
expressed
in
B.P.
Australia
Ltd.
v.
Commissioner
of
Taxation
of
the
Commonwealth
of
Australia,
(supra,
4(11)).
Lord
Pearce
wrote
as
follows
at
page
264
of
his
decision:
The
solution
to
the
problem
is
not
to
be
found
by
any
rigid
test
or
description.
It
has
to
be
derived
from
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
borderline
cases.
5.03.4
Despite
the
abundance
of
tests
which
the
courts
have
stated
concerning
qualification,
the
following
excerpt
from
page
165
of
Californian
Copper
Syndicate
v.
Harris
(1904),
5
T.C.
159,
is
frequently
used
as
a
basis
for
analysis
of
this
matter.
It
is
quite
a
well
settled
principle
in
dealing
with
questions
of
assessment
of
income
tax,
that
where
the
owner
of
an
ordinary
investment
chooses
to
realize
it,
and
obtains
a
greater
price
for
it
than
he
originally
acquired
it
at,
the
enhanced
price
is
not
profit
in
the
sense
of
Schedule
D
of
the
Income
Tax
Act
of
1842
assessable
to
income
tax.
But
it
is
equally
well
established
that
enhanced
values
obtained
from
realization
or
conversion
of
securities
may
be
so
assessable,
where
what
is
done
is
not
merely
a
realization
or
change
of
investment,
but
an
act
done
in
what
is
truly
the
carrying
on,
or
carrying
out,
of
a
business
.
.
.
.
What
is
the
line
which
separates
the
two
classes
of
cases
may
be
difficult
to
define,
and
each
case
must
be
considered
according
to
its
facts;
the
question
to
be
determined
being—Is
the
sum
of
gain
that
has
been
made
a
mere
enhancement
of
value
by
realizing
a
security,
or
is
it
a
gain
made
in
an
operation
of—
business
in
carrying
out
a
scheme
for
profit
making?
5.03.5
Despite
the
general
nature
of
this
statement,
the
situations
giving
rise
to
the
disposition
of
intangible
property
inherent
in
certain
businesses
could
hardly
be
covered
by
the
test
of
Judge
MacDonald
cited
above
(5.03.3).
The
development
of
know-how
or
the
constitution
of
goodwill
by
a
business
could
hardly
be
considered
as
investments
that
could
be
realized.
5.03.6
This
Court
is
of
the
view
that
Judge
Bankes's
test,
stated
in
British
Dyestuffs,
(supra,
4(7)),
is
a
case
involving
the
disclosure
of
know-how
in
consideration
for
a
lump
sum,
and
precisely
resolved
these
difficulties
of
application.
The
rewording
of
Judge
Bankes'
statement
which
appears
on
page
596
of
his
decision
is
certainly
not
superfluous:
Is
the
transaction
in
substance
a
parting
by
the
company
with
part
of
its
property
for
a
purchase
price,
or
is
it
a
method
of
trading
by
which
it
acquires
this
particular
sum
of
money
as
part
of
the
profits
and
gains
of
that
trade.
5.03.7
The
relevance
of
the
test
stated
in
British
Dyestuffs,
(supra,
4(7))
to
the
qualification
of
the
sums
received
by
Miracle
Mart
under
the
"licence
agreement"
cannot
be
put
into
doubt.
However,
this
Court,
drawing
on
the
above
excerpt
from
B.P.
Australia
Ltd.,
(supra,
4(11)),
does
not
intend
to
limit
itself
to
a
strict
application
of
Judge
Bankes'
remarks.
The
Court
is
of
the
view
that
there
exist
very
interesting
similarities
between
this
case
and
Lasalle
Factories,
(supra,
4(1)),
British
Salmson
Aero
Engines,
(supra,
4(2)),
Imperial
Chemicals
Industries,
(supra,
4(6))
and
Tyresoles
Ltd.,
(supra,
4(4)).
In
all
these
decisions,
an
exclusive
right
was
granted
to
use
intangible
property
in
a
given
territory.
Furthermore,
all
these
decisions
concern
the
presence
of
a
contract
giving
rise
to
a
separate
treatment
of
rights
conferred
under
an
"exclusive
licence”
and
rights
strictly
tied
to
the
use
of
the
said
intangible
property.
Lastly,
in
all
these
cases,
a
lump
sum
payment
was
made
in
consideration
for
the
granting
of
an
"exclusive
licence”
which,
in
all
of
these
decisions,
enabled
the
beneficiary
exclusively
to
enjoy
the
right
to
use
a
goodwill,
a
patent
or
know-how.
5.03.8
The
approach
used
in
all
these
decisions
particularly
drew
the
Court's
attention.
The
analytical
framework
which
this
Court
intends
to
apply
to
the
facts
in
this
case
will
be
firmly
based
on
the
principles
that
arise
from
the
British
and
Canadian
decisions
cited
above.
5.03.9
In
this
respect,
British
Salmson
Aero
Engines,
(supra,
4(2))
appears,
however,
to
have
served
as
a
basis
for
the
Tyresoles
Ltd.,
(supra,
4(4))
and
Imperial
Chemical
Industries,
(supra,
4(6))
decisions.
Given
the
importance
of
this
decision,
it
seems
appropriate
to
this
Court
to
present
the
determining
facts
and
the
analytical
approach
used.
Judge
Greene
writes
as
follows
at
pages
37
and
38
of
his
decision:
The
agreement,
which
was
in
the
French
language,
provided
that
its
object
was
to
grant
to
the
licensees—that
is,
the
English
Company—the
exclusive
right
for
the
period
of
ten
years
from
the
25th
October,
1929,
until
the
24th
October,
1939,
to
construct,
use
and
sell
in
the
territory
which
I
have
mentioned
certain
Salmson
aero
engines.
Then
there
were
certain
other
provisions
of
the
agreement
to
which
I
must
just
refer.
Clause
4
provides
for
the
free
use
of
certain
patents
in
use
in
the
types
of
engines
described,
and
Article
II
provides:
"As
consideration
for
"the
Licence
thus
granted
to
them
the
Licensees
shall
pay
to
"The
Constructors"—that
is,
the
French
company—"the
sum
of
£25,000
.
.
.
payable
as
follows:
£15,000
on
the
signing
of
this
agreement,
£5,000
six
months
after
the
signing
of
this
agreement.
£5,000
twelve
months
after
the
signing
of
this
agreement.
There
shall
be
paid
in
addition
to
the
foregoing
payments
and
as
royalty
£2,500
twelve
months
after
the
signing
of
this
agreement,
and
a
like
sum
each
twelve
months
during
the
following
nine
years."
After
presenting
the
essential
clauses
of
the
contract
binding
on
the
British
Salmson
Aero
Engines
company,
the
Court
presents
the
principles
that
will
guide
its
analysis
at
pages
40,
46
and
48
of
its
decision:
What
has
to
be
ascertained
in
these
cases
is
the
true
nature
of
a
payment,
that
is
to
say,
the
true
nature
from
an
accountancy
point
of
view;
and
that
is
a
question
of
fact.
It
is
a
question
which
has
been
investigated
very
carefully
in
a
number
of
different
connections,
and
different
matters
of
fact
have
been
regarded
in
different
cases
as
of
importance
and
of
weight
The
language
used
must
be
construed
in
reference
to
the
particular
facts
of
that
case
and
the
particular
arguments
which
were
being
there
put
forward.
The
application
of
these
major
principles
gave
rise
to
certain
comments
which
would
prove
determinant
in
its
decision.
The
following
excerpts
are
taken
from
pages
38,
39,
40
and
48
of
Judge
Greene's
decision:
On
the
face
of
the
agreement,
the
payments
to
be
made
under
it
in
terms
fall
under
two
heads:
one
is
what
is
expressed
to
be
consideration
for
the
licence
granted,
a
lump
sum
of
£25,000
payable
in
specified
instalments;
the
other
is
what
is
described
as
an
additional
payment
as
royalty
of
£2,500
a
year.
Now
before
I
come
to
examine
the
argument
a
little
more
closely,
and
the
authorities
upon
which
reliance
is
placed,
there
are
one
or
two
matters
with
regard
to
the
agreement
itself
which
must
be
borne
in
mind.
The
first
thing
to
notice
about
it
is
that
it
is
not
merely
an
agreement
under
which
the
English
Company
receives
the
right
to
use
a-patent:
under
this
agreement
the
English
Company
is
entitled
to
restrain
the
patentees
themselves
from
exercising
the
patent
in
the
territory,
and
it
is
entitled
to
call
upon
the
patentees
to
take
steps
to
prevent
others
exercising
the
invention
within
the
territory.
Now
those
rights
are,
to
my
mind,
in
essence
different
from
the
mere
right
of
user.
A
licensee
under
a
patent
is
a
person
who
is
put
into
such
a
position
that
the
patentee
disentitles
himself
to
complain
of
what
would
otherwise
have
been
an
infringement.
That
is
all
a
patent
licence
is.
On
the
other
hand,
where
the
patentee
himself
undertakes
not
to
exercise
the
invention,
that
is
something
quite
different:
he
is
restraining
himself
by
a
covenant
or
contract
from
exercising
his
monopoly
rights,
and,
further,
if
he
undertakes
to
prevent
others
from
infringing
his
monopoly
rights,
he
is
giving
an
undertaking
which
also
in
its
nature
is
quite
different
from
what
is
given
by
a
patent
licence,
which,
in
effect,
is
an
undertaking
not
to
complain
of
what
would
otherwise
have
been
an
infringement.
I
merely
mention
that
fact
as
one
of
the
circumstances
in
this
case
to
which
it
is
necessary
to
have
regard.
The
other
circumstance
to
which
I.
wish
to
call
attention
is
this.
There
is
in
the
Article
relating
to
payment
a
fundamental
difference
in
the
nature
of
the
two
classes
of
sums,
in
this
sense,
that
the
former
class
starts
off
by
being
a
lump
sum
payment,
definite
and
fixed,
which
is
then
to
be
payable
by
instalments.
The
other
class
is
not
of
that
description;
no
lump
sum
payment
is
referred
to;
it
is,
on
the
face
of
it,
nothing
but
an
undertaking
to
pay
yearly
sums
as
royalty.
It
seems
to
me,
on
all
the
facts
of
this
case,
including
the
terms
of
the
contract
itself,
which
is
the
important
and,
indeed,
the
essential
fact
in
the
case,
that
the
Commissioners
were
perfectly
entitled
to
come
to
the
conclusion
to
which
they
did
come,
that
this
class
of
payment
was
not
of
an
income
nature,
but
of
a
capital
nature.
[Emphasis
added.]
5.03.10
Margerison
v.
Tyresoles,
(supra,
4(4))
develops
in
a
manner
entirely
similar
to
British
Salmson
Aero
Engines
Ltd.,
(supra,
4(2)).
The
following
excerpt,
from
pages
67
and
68
of
that
decision,
contains
once
again
the
basis
of
the
decision.
We
have
in
this
case
an
agreement
made
in
the
ordinary
course
of
trade.
This
is
common
ground
and
forms
a
principal
ground
of
the
case
for
the
Crown.
It
is
not
one
of
those
agreements
which
sometimes
come
under
review
in
this
Court,
consisting
of
a
facade,
or
entered
into
in
order
to
afford
a
shield
of
defence
against
the
tax-gatherer.
It
was
intended
to
regulate
and
does
regulate
the
commercial
relations
between
the
parties,
and
deals
expressly
with
these
payments.
They
were
in
return
for
the
rights
conferred
by
clause
2,
conferred
that
is
to
say,
on
the
garage
owner,
the
other
party.
He,
it
must
be
remembered,
was
going
to
provide
and
maintain
a
building
in
which
the
respondents
could
erect
their
plant;
and
he
was
to
provide
lighting
and
power
to
operate
this
plant.
It
is
not
surprising,
therefore,
to
find
him
willing
to
pay
for
some
safeguard
against
competition.
That
safeguard
takes
this
form.
The
Company
enter
[sic]
into
covenants
limiting
and
restricting
their
activities.
They
give
up
their
power
to
exploit
their
own
patents,
not
altogether
it
is
true,
but
to
the
extent
to
which
it
might
compete
with
and
so
damage
the
garage
owners.
And
for
this
they
are
paid
these
sums.
For
other
services,
other
contributions
by
the
Company
to
the
common
trade
to
be
carried
on
by
their
united
efforts,
other
payments
and
of
a
different
kind
ard
arranged.
The
price
of
the
finished
product
is
divided
between
them
in
proportions
set
out
in
the
agreement.
Such
being
the
transaction
it
must
be
admitted
that
the
Company
has
parted-
with
its
freedom
of
action,
its
rights
arising
under
its
ownership
of
the
patented
process,
for
a
certain
limited
period,
for
a
certain
limited
area,
and
for
a
certain
limited
type
of
customer.
And
the
price
for
this
is
the
sums
agreed,
and
under
debate.
How
then
about
the
authorities?
Commissioners
of
Inland
Revenue
v.
British
Salmson
Aero
Engines
Ltd.,
(1937),
2
T.C.
29;
[1938]
3
K.B.
285
is
a
case
which
repays
study
on
the
part
of
anyone
who
has
to
decide
as
I
have
whether
payments
in
respect
of
a
patent
are
in
the
nature
of
payments
for
the
use
of
a
patent,
and
so
income
and
assessable
as
such,
or
on
the
other
hand
are
capital
payments
and
so
not
assessable.
In
that
case,
the
Master
of
the
Rolls
considered
these
two
classes
of
payments
made
by
the
English
company
to
the
French
company,
in
the
light
of
the
House
of
Lords
decision
in
Constantinesco
v.
Rex,
11
T.C.
780,
and
the
case
of
Mills
v.
Jones,
14
T.C.
769.
He
fastened
upon
two
elements
which
distinguish
the
Salmson
case
from
those
in
which
no
more
was
granted
than
the
mere
right
to
use
a
patent.
The
first
was
that
by
the
agreement
the
French
company,
the
patentees,
undertook
not
to
exercise
its
patent
rights
in
the
British
Empire.
This
was
as
the
Master
of
the
Rolls
pointed
out
something
quite
different
from
a
mere
right
of
user.
It
entitled
the
English
company
to
restrain
the
French
company
from
exercising
its
rights
in
that
territory.
Pausing
there,
I
find
something
of
the
same
kind
in
the
case
under
debate.
The
Company
could
be
restrained
by
the
garage
owner
from
exercising
in
the
area
specified
in
the
agreement
its
undoubted
patent
rights
to
the
extent
set
out
in
the
agreement.
The
Company
parted
with
this
amount
of
its
corpus.
The
second
element
to
which
the
Master
of
the
Rolls
drew
attention
was
the
fundamental
difference
between
the
two
payments
recommended
by
the
agreement.
One
was
a
lump
sum,
the
other
was
a
payment
of
yearly
sums
as
royalty.
This
by
itself
created
a
great
difficulty
in
the
way
of
that
Court
finding
that
the
lump
sum
was
nevertheless
income.
Something
of
the
same
kind
I
have
found
it
necessary
to
say
with
respect
to
the
agreement
in
this
case.
In
the
result
I
think
the
underlying
reason
for
the
decision
of
the
Court
of
Appeal
was
that
the
company
in
that
case
bought
a
part
of
the
French
company's
patent
rights,
namely,
the
exclusive
right
to
exploit
them
in
the
British
Empire
for
ten
years,
and
paid
a
lump
sum
price
for
it.
The
Court,
after
establishing
the
case
law
basis
enabling
it
to
rule
on
the
case
before
it,
ultimately
affirmed
the
capital
nature
of
the
payments
received
by
Tyresoles
at
page
70
of
the
above-cited
decision.
In
the
case
before
me
there
is
no
question
of
the
garage
owner
paying
these
sums
for
the
right
to
use
or
vend
the
patents;
that
is
elsewhere
in
the
agreement.
These
payments
are
in
order
to
deprive
the
company
of
their
rights
to
the
extent
stated.
5.03.11
The
Imperial
Chemical
Industries,
(supra,
4(6))
decision
concerns
an
order
of
facts
virtually
identical
to
that
found
in
British
Salmson
Aero
Engines
Ltd.,
(supra)
(4(2)).
The
approach
that
led
the
Court
to
the
operative
part
of
its
-judgment
was
consequently
similar
to
that
in
this
last
decision.
The
short
passages
drawn
from
pages
210,
211
and
212
of
Lord
Dunning's
[sic]
decision
very
clearly
show
the
similarity
of
the
principles
therein
applied:
In
the
1950's
Imperial
Chemical
Industries
Ltd.
were
exploiting
a
new
fibrous
material
which
they
called
"Terylene".
They
manufactured
it
on
a
large
scale
at
Wilton,
but
they
could
not
make
enough
to
meet
the
world
demand.
So
they
granted
exclusive
licences
to
foreign
companies
in
various
countries.
In
each
licence
they
covenanted
that
they
would
not
themselves
enter
the
market
for
that
country.
They
covenanted
to"
keep
out”
of
that
country.
In
return
for
these"
keep-
out"
covenants,
they
received
considerable
sums
of
money
from
the
overseas
company.
The
question
is
whether
these
sums
are
part
of
the
profits
of
I.C.I.
which
should
be
brought
into
charge
to
tax.
The
amount
of
tax
involved
is
over
L1
million.
The
essence
of
the
transaction
in
each
case
is
that
I.C.I.
granted
to
the
foreign
company
an
exclusive
licence
to
use
the
patents
in
the
country
concerned
for
the
term
of
the
patent,
and
in
return
received
remuneration
in
the
shape
of:
(1)
a
royalty
payable
on
the
net
invoice
value
of
products
sold
or
utilised
(this
was
for
use
of
the
master
patents
of
C.P.A.);
(2)
a
royalty
of
a
fixed
sum
payable
each
year
(this
was
for
use
of
the
ancillary
patents
of
I.C.I.);
(3)
a
lump
sum
payable
by
instalments
over
six
years
(this
was
said
to
be
for
the"
keep-out"
covenant).
So
far
as
the
lump
sun
is
concerned,
I
regard
it
as
a
capital
receipt,
even
though
it
is
payable
by
instalments,
I
am
influenced
by
the
facts:
(1)
that
it
is
part
payment
for
an
exclusive
licence,
which
is
a
capital
asset;
(2)
that
it
is
payable
in
any
event
irrespective
of
whether
there
is
any
user
under
the
licence—even
if
the
licensees
were
not
to
use
the
patents
at
all,
this
sum
would
still
be
payable;
(3)
that
it
is
agreed
to
be
a
capital
sum
payable
by
instalments,
and
not
as
an
annuity
or
a
series
of
annual
payments.
5.03.12
Lastly,
the
Lasalle
Factories,
(supra,
4(1))
decision,
on
which
a
large
part
of
the
appellant's
argument
relied,
contains
an
order
of
facts
entirely
similar
to
that
found
in
the
dispute
that
concerns
us.
The
Lasalle
store,
which
operated
a
business
identical
to
that
of
Miracle
Mart,
granted
Associated
Footwear
Ltd.
the
right
to
operate
the
footwear
department
in
all
its
branches
in
Quebec
and
Ontario.
Just
as
in
the
instant
case,
this
right
was
granted
through
two
separate
contracts,
a'"Capital
License
Agreement"
and
a
"Rental
Agreement".
The
excerpts
from
pages
2101
to
2107
(D.T.C.
95,
97,
98
and
99
of
this
Court's
judgment
set
out
the
essential
elements
of
this
decision:
In
the
Board's
opinion,
what
is
called
in
the
present
case
"Capital
License"
(in
other
words,
franchise,
concession)
is
itself
a
capital
asset.
The
legislator
provides
for
patents,
franchises
and
concessions
licenses,
a
special
class
of
depreciable
property
in
Class
14
of
Schedule
B
of
the
Income
Tax
Regulations,
not
including
however,
among
other
things,
a
leasehold
interest.
Referring
to
the
definition
of
property,
no
doubt
a
franchise
is
included
in
the
words:
.
.
.
property
of
any
kind
whatever
whether
real
or
personal
or
corporeal
or
incorporeal
and,
without
restricting
the
generality
of
the
foregoing,
includes
(a)
a
right
of
any
kind
whatever.
.
.
."
Concerning
the
main
argument
of
the
respondent
explained
in
paragraph
4.3.4,
the
Board
should
consider
the
following:
a)
The
deed
(exhibit
A-l)
itself
makes
a
clear
distinction
between
franchise
and
rent.
The
deed
is
passed
between
parties
which
are
at
arm's
length;
(.
.
.)
d)
The
evidence
is
to
the
effect
that
the
franchise
conceded
to
Associated
Footwear
Ltd.
is
the
only
one
conceded
during
the
life
of
Lasalle
Factories
Ltd.
on
its
premises.
Prima
facie,
there
is
doubt
that
the
franchise
is
part
of
the
business.
It
is
obvious
that
such
property
(franchise)
can
be
used
only
on
premises-
(which
are
also
included
in
the
word
"property").
Both,
however,
are
two
different
properties,
two
different
things
even
if
the
franchise
cannot
be
used
without
premises.
The
sale
of
such
a
right
is,
generally
speaking,
a
capital
gain
for
the
vendor
and
a
capital
expenditure
for
the
purchaser.
It
is
only
under
exceptional
circumstances
that
it
must
be
considered
income,
especially
after
the
above
considerations.
Do
these
special
circumstances
exist?
In
the
present
case,
the
franchise
is
not
"merely
another
method
of
deriving
profit
from
the
case
of
their
technical
knowledge,
experience
and
ability”
as
it
was
stated
by
Lord
Elgin
in
the
Rolls-Royce
Ltd.
case
quoted
above
in
paragraph
4.3.4
B).
5.03.13
For
its
part,
Withers
v.
Nethersole,
(supra,
4(3)),
although
slightly
different
from
the
decisions
in
Lasalle
Factories,
(supra,
4(1)),
British
Salmson
Aero
Engines
Ltd.,
(supra,
4(2)),
Imperial
Chemicals,
(supra,
4(6))
and
Tyresoles,
(supra,
4(4)),
is
also
relevant
to
the
analysis
of
the
present
case.
In
that
case,
the
holder
of
the
copyright
on
a
theatre
play
transferred
the
copyright
she
held
on
her
work
to
Paramount
Pictures
Inc.
Paramount
Pictures
paid
Nethersole
the
lump
sum
of
£2,666
in
consideration
for
the
assignment
of
her
rights
to
any
cinematographic
adaptation
project
involving
her
play.
The
problem
raised
in
that
case
consisted
in
qualifying
the
sum
received
from
the
transaction
in
issue.
The
following
excerpt,
from
pages
516
to
520
of
the
House
of
Lords
judgment
in
that
case,
enables
one
to
realize
the
specific
nature
of
this
decision
as
well
as
the
approach
which
appears
to
have
been
favoured
by
the
highest
jurisdiction
in
Great
Britain.
In
dealing
with
this
matter,
it
has
to
be
remembered
that
copyright
occupies
a
position
and
character
of
its
own,
and
the
effect
of
any
dealing
with
it
must
be
judged,
not
merely
on
principles
which
may
be
applicable
in
other
cases,
but
in
the
light
of
the
terms
of
the
Copyright
Act
of
1971.
In
this
case
we
are
not
concerned
not
[sic]
with
patents,
but
with
copyright.
Copyright
is
a
species
of
incorporeal
property.
The
Copyright
Act,
1911,
which
is
a
consolidating
Act
repealing
earlier
Acts,
makes
it
perfectly
clear
that
the
ownership
of
copyright
can
be
transferred
by
assignment
either
wholly
or
partially
and
"either
for
the
whole
term
of
the
copyright
or
for
any
part
thereof"
(subsection
5(2)).
So
far
as
the
property
is
assigned,
the
assignee
becomes
the
owner
instead
of
the
assignor.
If
I
am
right
in
the
construction
of
the
agreement
the
fate
of
this
appeal
as
regards
the
sum
paid
under
the
agreement
is,
to
my
mind,
obvious.
The
taxpayer
has
been
found
to
be
a
person
not
engaged
in
any
trade
or
business.
The
Assessment
is
made
under
Case
VI
of
sched.
D
on
the
footing
that
the
consideration
falls
within
the
category
"annual
profits
and
gains".
The
relevant
fact
is
that
an
owner
of
an
asset,
entitled
by
law
to
divide
it
into
two
distinct
assets,
has
done
so
by
selling
one
of
those
assets
for
an
agreed
consideration
payable
in
a
lump
sum.
The
consideration
was
paid,
not
in
respect
of
the
temporary
use
of
another's
property,
but
for
the
purchase
of
property
with
a
limited
life.
The
taxpayer
may
have
exploited
her
property,
but
she
did
so
only
by
dividing
it
and
selling
part
of
it.
This
amounts
to
a
sale
of
property
by
a
person
who
is
not
engaged
in
the
trade
or
profession
of
dealing
in
such
property,
and
the
proceeds
of
such
sale
are
of
a
capital
nature.
It
appears
clear
that
the
House
of
Lords
mainly
concentrated
on
analyzing
all
the
circumstances
of
the
transaction
in
issue
in
order
to
determine
its
true
nature.
The
absence
of
any
form
of
business
in
any
similar
area
by
Nethersole
as
well
as
the
scope
of
the
powers
conferred
on
Paramount
Pictures
were
particularly
determinant.
The
following
passages,
from
the
decision
by
the
Court
of
Appeal
in
that
case,
can
only
enhance
this
Court's
understanding
of
the
Withers
v.
Nethersole
decision.
Judge
Greene
wrote
as
follows
at
pages
714
and
715
[sic]
of
his
decision:
The
only
guidance
to
be
obtained
for
the
purpose
of
answering
the
question
before
us
appears
to
us
to
be
afforded
by
the
language
of
the
agreement
itself,
and
in
particular
the
nature
of
the
rights
which,
on
the
appellant's
behalf,
was
[sic]
conferred
by
it
upon
the
company.
[Emphasis
added.]
We
find
it
difficult
to
extract
any
clear
principle
from
the
decided
cases,
except
that
all
relevant
circumstances
must
be
considered,
which
is
not
particularly
helpful.
One
might
perhaps
have
expected
that
where
a
piece
of
property,
be
it
copyright
or
anything
else,
is
turned
to
account
in
a
way
which
leaves
in
the
owner
what
we
may
call
the
reversion
in
the
property
so
that
upon
the
expiration
of
the
rights
conferred,
whether
they
are
to
endure
for
a
short
or
a
long
period,
the
property
comes
back
to
the
owner
intact,
the
sum
paid
as
consideration
for
the
grant
of
the
rights,
whether
consisting
of
a
lump
sum
or
of
periodical
or
royalty
payments,
should
be
regarded
as
of
a
revenue
nature.
We
emphasise
the
word
"intact"
since,
if
the
property
is
permanently
diminished
or
injuriously
affected,
it
means
that
the
owner
has
to
that
extent
realised
part
of
the
capital
of
his
property
as
distinct
from
merely
exploiting
its
income-producing
character.
She
confers
rights
upon
the
company
which,
as
we
have
pointed
out,
cannot,
if
exercised,
fail
to
affect
injuriously
the
value
of
her
copyright.
Any
consideration
referable
to
this
could
not,
we
think
in
any
view
be
anything
but
capital.
5.03.14
This
detailed
analysis
of
the
case
law
applicable
to
the
instant
case
may
appear
long
and
tedious.
This
Court
is
nevertheless
convinced
of
the
necessity
of
a
thorough
study
of
the
cases
at
law
that
will
make
it
possible
to
derive
an
analytical
approach
that
can
take
into
consideration
the
principal
signs
of
a
capital
transaction.
5.03.15
Thus,
the
preceding
development
enables
us
to
state
that
the
courts
have
generally
refused
to
apply
any
form
of
jurisprudential
test
or
standard
in
a
strict
manner.
The
approach
to
qualification
that
has
been
favoured
consists
in
seeking
the
true
nature
of
payments
made
in
the
context
of
the
transaction
in
issue
from
an
analysis
of
all
the
facts
and
circumstances
of
each
case.
The
answer
to
this
question
may
be
derived
from
an
analysis
of
the
contract
at
the
origin
of
the
transaction
(5.03.16.1).
The
type
of
property
subject
to
the
transaction
has
generally
been
relevant
in
the
context
of
the
analysis
conducted
by
the
courts.
The
degree
of
connectedness
between
the
transaction
under
study
and
the
businesses'
ordinary
activities
has
also
been
taken
into
consideration
(5.03.16.2).
Lastly,
the
scope
of
the
powers
conferred
through
the
transaction
as
well
as
the
terms
of
payment
in
respect
of
the
exclusive
right
granted
have
also
made
it
possible
to
discover
the
true
substance
of
the
operation
in
issue
(5.03.16.3).
5.03.16
Thus
the
application
of
the
many
parts
of
this
approach
will
enable
this
Court
to
reach
a
solution
that
will
take
into
account
the
particular
nature
of
this
case.
Application
of
the
analytical
approach
to
the
facts
of
the
instant
case
5.03.16.1
Analysis
of
Contract
First,
the
presence
of
two
contracts,
the
“rental
agreement"
and
the
"licence
agreement",
the
two
addressing
two
different
orders
of
concerns,
suggests
the
existence
of
two
totally
distinct
items
of
property.
The
payments
associated
with
the
"rental
agreement”
should
consequently
be
of
an
entirely
different
nature
than
those
paid
pursuant
to
the
“licence
agreement".
It
also
appears
to
follow
from
the
testimony
of
Robert
Gertler
that
the
parties
to
the
negotiations
leading
to
the
signing
of
the
"licence
agreement"
and
the
"rental
agreement"
voluntarily
wished
to
distinguish
between
the
items
of
property
forming
the
subject
of
the
two
contracts.
The
passages
at
pages
24,25
and
36
of
the
stenographic
notes
clearly
illustrate
the
desired
distinction
between
the
payments
derived
from
the
“rental
agreement"
and
from
the
"licence
agreement":
Q.
Now,
how
did
you
arrive
at
the
rental
figure
for
the
lease
of
these
premises,
Mr.
Gertler,
how
was
that
arrived
at?
A.
Well,
we
looked
at
our
own
rental
costs,
we
considered
all
the
operating
expenses
that
we
were
talking
about
earlier
and
we
included
a
profit
factor
and
that's
how
we
arrived
at
the
amount.
Q.
Could
I
just
clarify
it,
when
you
say
you
looked
at
your
own
rental
costs,
was
Miracle
Mart
leasing
these
premises
from
other
landlords
as
well?
A.
Yes,
we
were.
Q.
So
in
essence,
you
sub-leased
these
premises
to
Genesco?
A.
It
was
in
fact
a
sub-lease,
yes,
that
is
correct.
Q.
And
you
made
a
profit
on
the
sub-lease
over
and
above
your
own
rental
costs?
A.
Yes,
we
did.
Q.
Now,
in
computing
the
income
of
the
company,
I
presume
that
you
included
all
those
rental
payments
as
ordinary
income,
am
I
correct?
A.
Yes,
we
did.
Q.
Now,
how
is
the
licence
fee
established;
how
did
you
come
to
establish
a
licence
fee
of
six
million
dollars
(6
000
000
$)
for
the
sale
of
the
business?
A.
Well,
the
licence
fee
was
established
through
negotiations
on
the
one
hand
and
looking
at
the
type
of
business
that
we
were
doing
on
the
other.
So,
it
really
was
a
value
that
related
to
the
type
of
sales
that
we
were
doing
before
we
sold
the
business
to
Geneseo.
Q.
So,
it
is
basically
valuing
the
business
as
an
ongoing
business
and
selling
it
for
a
price,
is
that
correct?
A.
Absolutely.
Q.
Now,
Mr.
Gertler,
in
determining
the
licence
fee
that
was
payable
under
the
licence
agreement
and
the
rent
that
was
payable
under
the
rental
agreement,
were
you
in
any
way
attempting
to
match
the
rental
payments
made
by
other
subtenants
of
Miracle
Mart
in
the
premises?
A.
Not
at
all.
Q.
In
other
words,
the
sale
of
the,
of
the
.
.
.
A.
The
sale
of
the
business
had
nothing
to
do
with
the
basic
rental
agreement
that
we
had
entered
to
in
August
of
eighty-one
('81).
Counsel
for
the
respondent
strongly
contested
the
reality
of
the
existence
of
two
items
of
property
forming
the
subject
of
the
transaction
in
issue.
Counsel
for
the
Minister
of
National
Revenue,
as
stated
above
(5.02.1),
argues
that
the
inevitable
connectedness
that
binds
the
"rental
agreement"
and
the
"licence
agreement"
requires
these
two
contracts
to
be
considered
as
a
whole,
as
a
single
rental
agreement.
This
position,
according
to
counsel
for
the
respondent,
was
confirmed
by
the
fact
that
the
rights
conferred
on
Geneseo
under
the
two
contracts
were
practically
identical
to
those
of
Astral
Bellevue
Pathe
Inc.
However,
this
latter
company
was
bound
to
the
appellant
only
by
virtue
of
a
rental
agreement.
This
Court,
however,
is
of
the
view
that
an
essential
element
makes
it
possible
to
dismiss
these
claims.
It
appears
entirely
plausible
to
consider
that
Miracle
Mart
had
built
up
an
imposing
amount
of
goodwill
over
the
years.
The
physical
location
of
its
stores,
a
sales
formula
based
on
the
diversity
of
the
products
offered,
as
well
as
a
low
price
policy
are
unquestionably
elements
likely
to
interest
a
large
portion
of
the
population.
Any
merchant
merging
his
operations
with
a
similar
business
will
thus
benefit
from
an
established
clientèle.
The
excerpts
from
the
testimony
of
Robert
Gertler
from
pages
23,
24,
59
and
60
of
the
stenographic
notes
appear
to
express
the
same
point
of
view:
Q.
Now,
when
you
say
the
licence
agreement
was
the
sale
of
the
ongoing
business;
what
was
comprises
[sic]
within
that
ongoing
business
in
your
mind
that
Miracle
Mart
would
sell?
A.
Well,
we
had
certainly
built
up
a
fair
amount
of
goodwill
in
the
business
as
a
whole,
especially
as
it
was
supported
by
the
fact
that
our
traffic
count
was
thought
to
be
higher
than
that
of
our
competition.
Q.
What
do
you
mean
by
“
traffic
count"?
A.
That
is
the
number
of
people
walking
through
the
store
and
making
purchases.
Q.
So,
you
felt
that
the
footwear
or
shoe
department
was
a
viable
business
that
could
be
sold
to
a
third
party
[sic],
is
that
correct?
A.
Absolutely.
We"ve
had
significant
sales
and
that
was
part
of
it.
Q.
Okay
.
.
.
Mr.
Gertler,
even
though
a
business
is
loosing
[sic]
money,
I
presume
it
could
have
goodwill
for
a
person
who
could
make
money
in
that
business?
Am
I
correct?
A.
That's
correct.
Q.
Is
that
the
basis
upon
which
you
negotiated
the
capital
licence
agreement
with
Geneseo
that
they
would
acquire
the
goodwill
built
up
and
would
be
able
to
make
profits
based
on
the
existing
goodwill,
is
that
correct?
A.
Evidently,
yes.
The
first
paragraph
of
the
preamble
to
the
“licence
agreement"
(3.08)
confirms
beyond
a
doubt
the
existence
of
this
goodwill.
That
paragraph
reads
as
follows:
Whereas
the
company
through
its
division,
Miracle
Mart,
operate
[sic]
retail
stores
under
an
established
concept
with
a
known
custom
[Emphasis
added.]
Furthermore,
it
was
admitted
in
the
examination
of
Robert
Gertler
that
the
leasing
contract
that
bound
the
appellant
and
Astral
Bellevue
was
in
reality
only
the
extension
of
the
lease
that
had
been
signed
at
the
start
of
Miracle
Mart's
operations.
Astral
Bellevue
thus
participated,
through
its
specialized
photography
store,
in
building
up
Miracle
Mart's
goodwill.
Astral
Bellevue's
active
role
in
creating
the
goodwill
explains
beyond
any
doubt
the
fact
that
the
latter
company
was
governed
only
by
a
leasing
contract.
The
following
excerpt
from
pages
29
and
30
of
the
stenographic
notes
clearly
illustrates
the
reasons
for
the
absence
of
a
"licence
agreement"
governing
the
activities
of
Astral
Bellevue,
which,
during
the
1983
fiscal
year,
enjoyed
the
same
rights
and
obligations
as
Geneseo:
Q.
Why
is
there
only
a
lease
with
Astral
and
no
licence
agreement?
What's
the
difference
between
Astral
and
Geneseo?
A.
Well,
I
was
referring
previously
to
a
goodwill
that
we
were
building
up
in
the
Miracle
Mart
department
stores.
As
far
as
Astral
was
concerned,
they
in
fact
participated
in
that
building
up
of
that
goodwill.
So
there
was
no
additional
goodwill
that
we
were
able
to
charge
to
them.
Q.
If
I
would
just
re-emphasize
.
.
.
ls
because
you
had
no
goodwill
to
sell
to
Astral
in
that
department,
is
that
correct?
A.
That
is
correct.
Concerning
the
respondent's
argument
based
on
the
connectedness
of
the
contracts
signed
between
the
appellant
and
Geneseo,
this
Court
is
of
the
view
that
interpreting
the
“licence
agreement"
and
the
“rental
agreement"
as
a
single
rental
agreement
would
constitute
gross
interference
by
the
Court
with
respect
to
the
intention
that
appears
to
have
actuated
relations
between
the
parties
when
the
said
contracts
were
signed.
This
Court
does
not
have
the
powers
to
rewrite
the
contracts
signed
between
the
appellant
and
Geneseo.
The
following
excerpt
from
page
68
of
Margerison
v.
Tyresoles,
(supra,
4(4))
illustrates
very
well
the
position
the
Court
intends
to
adopt:
But
it
is
suggested
on
behalf
of
the
Crown
that
I
am
not
bound
by
the
language
of
the
agreement.
The
agreement
must
be
looked
at
as
a
whole,
and
so
regarded
it
will
reveal,
between
the
lines,
something
very
different
from
what
it
bears
on
its
face;
and
by
this
is
meant,
of
course,
that
the
payments
made
under
clause
3
are
not
for
the
consideration
appearing
in
the
agreement,
but
for
other
considerations
which
show
these
payments
to
be
in
the
nature
of
income.
No
Court
of
Law
will
deny
the
propriety
of
the
suggestion
that
this
agreement
should
be
looked
at
as
a
whole.
But
that
does
not
mean
that
just
because
this
is
a
tax
case,
the
Court
can
rewrite
the
agreement
and
substitute
for
the
terms
upon
which
the
parties
agreed,
other
terms
as
to
which
they
have
not
even
been
consulted.
[Emphasis
added.]
In
ruling
in
this
manner,
this
Court
in
no
way
calls
into
question
the
connectedness
that
binds
the
“licence
agreement"
and
the
"rental
agreement".
The
complementary
nature
of
the
two
agreements
is
also
clear
from
paragraph
14.06
of
the
“licence
agreement"
(3.09)
and
paragraph
21.05
of
the
“rental
agreement"
(3.10).
However,
the
reality
of
a
certain
form
of
transfer
of
goodwill
to
Geneseo
for
the
term
of
the
said
agreements
can
hardly
be
denied.
The
particular
nature
of
this
transfer
resides
in
the
fact
that
it
can
be
likened
more
to
a
sharing
of
Miracle
Mart's
goodwill
than
to
an
assignment
pure
and
simple
thereof.
Must
the
commercial
benefit
which
Geneseo
enjoys
by
having
direct
access
to
the
goodwill
which
Miracle
Mart
has
built
up
over
the
years
be
neglected
for
this
simple
reason?
The
following
passage
from
page
2107
(D.T.C.
99)
[sic]
of
this
Court's
decision
in
Lasalle
Factories
can
only
convince
this
Court
that
this
question
must
be
answered
in
the
negative:
It
is
obvious
that
such
property
(franchise)
can
be
used
only
on
premises
(which
are
also
included
in
the
word
"property").
Both,
however,
are
two
different
properties,
two
different
things
even
if
the
franchise
cannot
be
used
without
premises.
Lastly,
counsel
for
the
respondent
pointed
out
to
the
Court
that
no
mention
was
made
in
the
"licence
agreement"
that
a
certain
form
of
goodwill
was
transferred
to
Geneseo.
This
Court
is
of
the
view,
however,
that
the
granting
of
an
exclusive
right
enabling
Geneseo
to
put
into
operation
the
footwear
departments
in
all
present
and
future
Miracle
Mart
stores
implicitly
assigns
the
goodwill
attaching
thereto
to
the
said
company.
The
following
passage
from
page
18
(D.T.C.
429)
of
Commissioner
Monet's
decision
in
Berthe
F.
Benard
v.
M.N.R.,
Tax
A.B.C.
3
supports
this
Court's
reasoning:
In
the
case
of
Burlow
v.
Turner
,
51
C.S.
52,
the
Court
of
Revision
upheld
the
judgment
of
the
judge
of
the
first
instance
who
said:
[Translation]
Whereas
the
defendant
acquired
the
business
of
the
plaintiff,
whereas
a
business
essentially
comprises
a
clientele
and
goodwill,
whereas
the
plaintiff
also
formally
assigned
the
goodwill
and
clientele
of
his
business,
whereas
the
purchase
included
the
name,
title,
shop
sign
and
all
distinctive
signs
to
make
it
possible
to
keep
the
clientele
by
showing
it
that
the
purchaser
is
continuing
the
business
of
the
assignor
(Ruben
de
Couder,
Fonds
de
commerce,
nos.
3,
12);
For
these
reasons,
the
plaintiff's
case
is
dismissed,
with
costs.
If,
as
stated
by
the
learned
judge
in
the
above
judgment,
the
business
sold
in
this
case
includes
the
clientele
and
goodwill—and
I
share
this
opinion—goodwill
being
only
incidental
to
the
business,
it
was
not
necessary
to
mention
the
goodwill
in
the
clause
quoted
above
for
the
acquirer
to
become
the
absolute
owner
thereof
since
he
became
the
absolute
owner
of
the
business
he
purchased.
Ultimately,
analysis
of
the
two-part
structure
given
in
the
agreement
signed
between
Steinberg
Inc.
and
Geneseo,
consideration
of
the
terms
used
therein
and
the
presence
of
a
goodwill
that
was
implicitly
transferred
through
the
“licence
agreement"
enable
this
Court,
after
considering
the
light
shed
by
Robert
Gertler's
testimony,
to
confirm
the
existence
of
two
entirely
different
contracts,
thus
pointing
to
the
presence
of
two
entirely
separate
items
of
property.
5.03.16.2
Connectedness
of
the
Transaction
in
Issue
to
Miracle
Mart's
Usual
Business
The
development
of
this
part
of
the
Court's
analysis
will
be
brief.
It
was
admitted
that
the
transaction
enabling
Geneseo
to
operate
the
footwear
department
was
an
isolated
transaction
in
the
history
of
the
commercial
division
of
the
appellant
(paragraph
3.11).
5.03.16.3
Terms
of
Payment
in
Respect
of
the
Transfer
by
Steinberg
Inc.
of
the
Right
to
Operate
the
Footwear
Department
for
All
Miracle
Mart
Stores
British
Salmson,
(supra,
4(2)),
Imperial
Chemicals,
(supra,
4(6))
and
Tyresoles
Ltd.,
(supra,
4(4))
have
clearly
established
the
relevance
of
the
presence
of
a
lump
sum
payment
as
an
indicator
for
the
purpose
of
qualifying
the
sums
at
the
root
of
the
dispute.
Payment
for
an
asset
by
means
of
a
lump
sum
creates
a
species
of
presumption
that
there
was
disposition
of
the
said
asset,
not
simply
a
leasing
thereof.
Paragraph
2.03(a)
of
the
“licence
agreement"
clearly
establishes
the
presence
of
a
lump
sum
which
enabled
Geneseo
to
start
up
the
footwear
business
in
all
Miracle
Mart
stores.
5.03.17
The
preceding
development
clearly
demonstrates
the
capital
nature
of
the
amounts
paid
to
Steinberg
Inc.
in
the
context
of
the
transaction
in
issue.
The
analytical
approach
favoured
by
this
Court
has
made
it
possible
to
show
the
presence
of
a
disposition
of
the
appellant's
goodwill
in
consideration
for
a
lump
sum.
Furthermore,
the
unusual
nature
"of
the
transaction,
and
the
nature
of
the
asset
transferred
in
accordance
with
the
text
of
the
“licence
agreement"
can
only
confirm
the
relevance
of
the
claim
by
counsel
for
Steinberg
Inc.
In
order
to
complete
our
analysis,
however,
it
is
necessary
to
comment
on
the
main
elements
on
which
counsel
for
the
respondent
based
his
argument.
5.03.18
Does
the
test
drawn
from
British
Dyestuffs
(4(7))
meet
the
respondent's
claim?
The
test
stated
by
Judge
Bakes,
which
was
also
cited
in
Canadian
Industries
Ltd.,
(supra)
and
Canadian
General
Electric
Ltd.,
(supra),
may
be
restated
as
follows:
Is
the
transaction
in
issue
a
parting
by
the
company
with
a
part
of
its
property,
or
is
it
a
transaction
the
profits
of
which
are
part
of
the
company's
business
strategy?
5.03.18.1
This
Court
is
of
the
view
that
the
preceding
development
clearly
establishes
the
presence
of
the
implicit
disposition
of
a
capital
asset
through
an
"exclusive
licence”
permitting
the
operation
of
all
footwear
departments
in
all
present
and
future
Miracle
Mart
stores.
This
statement
is
beyond
any
doubt
supported
by
the
fact
that
the
entire
organizational
structure
of
the
"footwear
department"
was
abandoned
by
Miracle
Mart
upon
signature
of
the
agreement
with
Genesco.
These
passages
from
pages
34
and
35
of
the
stenographic
notes
express
this
point
of
view
very
well:
Q.
Let
me
understand
this;
when
Miracle
Mart
signed
the
Geneseo
agreements
and
gave
them
the
Licence
to
operate
the
footwear
department,
did
the
whole
shoe
footwear
department
that
Miracle
Mart
had
the
buyers
all
supervise
all
these
people,
these
people
were
released
from
their
function,
is
that
correct?
A.
That
is
correct.
Q.
So
you—Miracle
Mart
gave
up
that
business,
am
I
correct?
A.
Absolutely.
Q.
And
so
when
Geneseo
terminated,
Miracle
had
to
what,
go
out
and
start
up
this
whole
business
all
over?
A.
Yes,
we
had
no
support
staff
whatsoever.
Q.
You
had
no
buyers?
A.
No.
Q.
No
merchandise
managers,
in
that
area,
is
that
correct?
A.
No,
we
did
not.
Q.
So,
you
had
to
restart
the
business,
is
that
correct?
A.
Absolutely.
Furthermore,
the
approach
used
by
Judge
Pennycwick
[sic]
in
Wolf
Electric
Tools,
(supra,
4(15))
is
highly
relevant
to
the
solution
to
the
first
part
of
the
test
drawn
from
the
British
Dyestuffs
decision.
He
writes
as
follows
at
page
340
of
his
decision:
In
a
case
such
as
the
present,
the
effect
of
the
whole
arrangement—and
I
must
look
at
the
whole
arrangement—is
that
the
trader
receives
a
new
capital
asset,
namely,
the
shares
in
the
foreign
company,
in
exchange
for
that
which
he
previously
had,
namely,
his
connection
or
goodwill
in
the
foreign
country.
That
is
a
transaction
of
a
wholly
capital
nature.
It
would
not,
I
think,
be
useful
to
go
further
into
a
comparison
of
the
three
cases.
It
is
sufficient
to
say
that
the
present
case,
it
seems
to
me,
falls
clearly
within
the
first
of
the
two
alternatives
propounded
in
the
British
Dyestuffs
Corporation
case
and
approved
by
Lord
Simonds,
and
that
it
thus
does
not
fall
within
the
second
alternative.
I
would
add
only
this,
that
in
the
[.
.
.]
pre-existing
goodwill
in
the
countries
with
the
governments
of
which
they
made
the
contracts
for
imparting
"know-how".
Here,
the
Company
did
have
this
pre-existing
connection
of
goodwill
in
India,
and
that
circumstance,
it
seems
to
me,
is
the
crucial
factor
which
places
the
present
case
within
the
former
and
not
the
latter
of
the
two
alternatives.
5.03.18.2
Despite
the
fact
that
the
first
part
of
the
British
Dyestuffs
(4(7))
test
clearly
disfavours
the
position
of
counsel
for
the
respondent,
it
is
nevertheless
appropriate
to
examine
whether
Rolls
Royce
v.
Jeffery,
(supra,
4(8))
applies
to
the
instant
case.
Can
it
be
argued
that
the
decision
in
Rolls
Royce
can
be
applied
in
this
case?
This
Court
cannot
support
such
a
claim.
In
that
case,
they
have
particularly
concentrated
on
showing
that
the
circumstances
of
the
transaction
in
issue
could
not
be
compared
to
those
that
prevailed
in
Evans
Medical
Supplies
v.
Moriatry
(4(14)).
This
latter
decision
was
based
on
the
fact
that
the
transmission
of
know-how,
to
the
extent
that
it
constitutes
an
isolated
operation
which
results
in
the
total
loss
of
the
market
in
which
the
company
carried
on
its
business,
must
be
considered
as
the
disposition
of
a
portion
of
its
capital.
The
remarks
of
Lord
Morris
tend
to
show
that
the
situation
of
Rolls
Royce
did
not
meet
this
standard.
On
the
contrary,
Rolls
Royce,
through
a
determined
commercial
policy,
maximized
its
profits
by
transferring
know-how
to
companies
located
in
countries
that
refused
to
allow
them
to
build
plants
to
manufacture
their
products.
The
Court
wrote
as
follows
at
page
809
of
that
decision:
The
remarks
made
in
the
chairman's
report
point
to
the
conclusion
that
it
had
become
a
recognized
part
of
the
company's
trading
activities
as
manufacturers
to
obtain
trading
receipts
be
entering
into
licensing
agreements:
in
that
way
profits
would
be
derived
from
the
use
of
the
manufacturing
knowledge
and
experience
the
appellants
had
acquired
and
which
was
constantly
being
added
to
and
kept
up
to
date
(.
.
.)
the
fact
that
many
successive
licensing
agreements
were
made
suggests
to
my
mind
that
of
set
policy
the
appellants
decided
that
their
methods
of
trading
as
manufacturers
should
include
that
development.
Lord
Radcliffe
expressed
a
similar
view
at
page
807
of
that
decision.
In
my
view
that
expressed
the
reality
of
the
matter
since
[.
.
.]
the
appellants
were
interested
to
promote
the
production
of
their
engines
for
reward
to
themselves,
and
it
was
a
question
of
trading
policy
by
which
method
they
secured
this
result.
To
the
extent
it
is
established
that
the
transaction
in
issue
was
the
first
transaction
of
its
kind
in
the
history
of
Miracle
Mart,
it
is
difficult
to
argue
that
there
existed
a
business
strategy
constituting
another
method
of
deriving
business
income.
It
therefore
appears
clear,
at
this
stage
of
our
analysis,
that
the
second
part
of
the
test
stated
in
British
Dyestuffs,
(supra,
4(7))
is
equally
inapplicable
to
the
transaction
conducted
between
the
appellant
and
Genesco.
5.03.19
The
inapplicability
of
the
British
Dyestuffs
test
should
theoretically
close
the
debate
since,
as
stated
above,
the
analytical
approach
favoured
by
this
Court
clearly
shows
the
capital
nature
of
the
transaction
in
issue.
This
Court
nevertheless
wishes
to
show
the
reasons
why
it
rejects
the
application
of
Canadian
Industries
Ltd.,
(supra,
4(12))
and
Atlantic
Sugar
Refineries,
(supra,
4(9))
on
which
part
of
the
respondent's
argument
was
based.
5.03.20
First,
Canadian
Industries,
(supra,
4(12)),
on
which
Canadian
General
Electric,
(supra,
4(13))
was
based,
raised
the
problem
of
the
qualification
of
sums
received
in
consideration
for
the
disclosure
of
know-how.
That
knowhow
was
mainly
related
to
the
implementation
of
a
patented
process
for
the
manufacture
of
nitroglycerin.
After
conducting
an
exhaustive
analysis
of
the
applicable
case
law
in
the
field,
the
Federal
Court
of
Appeal
stated
that
the
payments
received
would
be
of
a
capital
nature
to
the
extent
that
the
transaction
in
issue
constituted
a
disposition
of
the
know-how
disclosed.
The
operative
part
of
the
judgment
particularly
took
into
account
the
fact
that
the
initial
contract
whereby
Canadian
Industries
Ltd.
came
into
contact
with
the
patented
process
provided
for
the
possibility
of
exporting
that
know-how.
The
following
passage
from
page
236
(D.T.C.
6174)
of
that
decision
contains
the
first
part
of
the
decision
delivered
by
Judge
Le
Dain
in
that
case:
The
appellant's
case
then
comes
down
in
the
final
analysis
to
the
contention
that
it
reflects
the
essential
distinguishing
features
of
Evans
Medical
Supplies—
namely,
that
the
“know-how”
was
of
a
secret
or
confidential
character,
that
the
agreement
under
which
it
was
imparted
was
a
single
or
isolated
transaction,
and
that
the
imparting
of
it
resulted
in
a
loss
to
the
appellant
of
a
substantial
part
of
its
business.
As
to
the
evidence
that
the
Licence
Agreement
was
the
only
one
of
its
kind
that
CIL
had
entered
into,
I
think
there
is
this
important
distinction:
while
it
may
have
been
obliged
to
enter
into
this
agreement
by
the
position
of
the
United
States
Government,
agreements
of
this
kind
were
contemplated
by
the
CIL-Chematur
agreement
as
a
form
of
business
to
be
shared
in
by
the
parties.
They
were
contemplated
as
a
deliberate
policy,
to
use
the
distinction
that
was
emphasized
in
Rolls-Royce
and
English
Electric.
The
Court,
using
the
criterion
that
arose
in
Evans
Medical
Supplies
(4(14),
then
came
to
the
conclusion
that
the
evidence
did
not
show
that
disclosure
of
the
know-how
had
resulted
in
a
total
loss
of
the
market
which
Canadian
Industries
exploited
for
the
manufacture
of
nitroglycerin.
The
following
passage,
at
page
236
(D.T.C.
6174
and
6175)
of
the
decision,
clearly
expressed
the
Court's
position:
It
comes
down
then
in
my
opinion
to
the
essential
question
:
does
the
evidence
show
that
CIL
lost
its
business
for
military
TNT
with
the
United
States
Government
as
a
direct
and
necessary
result
of
entering
into
the
Licence
Agreement?
In
my
opinion
it
does
not.
The
evidence
shows
that
the
United
States
Government
eventually
ceased
to
purchase
TNT
from
CIL,
although
precisely
when
that
occurred
is
not
clear.
What
it
does
not
show
is
that
the
loss
of
this
business
was
inherent
in
the
licensing
arrangements
that
were
made.
These
arrangements
did
not,
as
in
the
case
of
Evans
Medical
Supplies
and
Wolf
Electric,
permit
someone
who
had
not
been
manufacturing
at
all
to
engage
in
manufacturing.
The
United
States
Government
had
been
purchasing
TNT
from
CIL
when
the
Government
had
its
own
"batch
process"
plants.
There
is
nothing
to
suggest
that
at
some
point
it
might
not
have
increased
its
own
production
and
ceased
to
purchase
from
CIL.
Conversely,
there
is
nothing
in
the
evidence
to
suggest
that
it
might
not
have
continued
to
purchase
from
CIL
after
the
licensing
arrangements
permitting
it
to
build
continuous
process
plants.
Nowhere
in
the
evidence
is
it
indicated
that
it
was
part
of
the
understanding
which
led
to
the
licensing
arrangements
and
the
lump
sum
payment
stipulated
that
the
United
States
Government
would
cease
to
purchase
from
CIL.
[Emphasis
added.]
5.03.21
Canadian
General
Electric,
(supra,
4(12))
raises
an
order
of
facts
entirely
similar
to
those
found
in
Canadian
Industries,
(supra,
4(13)).
General
Electric,
which,
inter
alia,
was
involved
in
the
manufacture
of
heavy
water,
had
developed
expertise
and
know-how
when
it
introduced
a
heavy
water
manufacturing
plant.
The
company,
the
sole
supplier
of
heavy
water
to
the
Canadian
government,
nevertheless
had
to
disclose
its
know-how
as
a
result
of
its
financial
inability
to
build
other
plants
to
meet
the
need
caused
by
spectacular
developments
in
the
Canadian
nuclear
program.
The
operative
part
of
the
majority's
judgment
of
the
Federal
Court
of
Appeal
is
expressed
as
follows
at
page
185
(D.T.C.
5074)
of
the
decision:
It
seems
to
me
that
the
CIL
case
stands
for
the
proposition
[sic]
of
know-how
will
not
normally
be
regarded
as
the
sale
of
a
capital
asset,
particularly
when
the
sale
is
by
a
non-exclusive
licence,
and
that
any
exception
to
this
rule
must
be
strictly
established
as
a
total
loss
of
know-how
which
is
a
direct
and
necessary
result
of
the
licence
agreement.
There
is
no
more
reason
to
make
allowance
in
this
case
for
de
facto
factors
than
there
was
in
the
CIL
case.
If
the
CIL
test
is
strictly
applied,
as
I
believe
it
must
be,
the
respondent
cannot
succeed.
5.03.22
The
observations
which
this
Court
wishes
to
make
concerning
these
decisions
are
as
follows:
these
two
decisions
concern
situations
involving
the
imparting
of
know-how
in
consideration
for
a
determined
sum.
The
particular
nature
of
these
problems
of
qualification
constitutes
without
any
doubt
a
first
order
of
difficulties
in
the
application
of
these
decisions
to
the
instant
case.
The
tests
applied
in
order
to
qualify
those
payments
can
hardly
have
the
same
impact
in
a
case
involving
the
transfer
of
part
of
a
business
goodwill.
In
this
respect,
the
standard
developed
in
Evans
Medical
Supplies,
(supra,
4(14))
concerning
the
economic
consequences
suffered
by
the
assignor
of
the
know-how
cannot
provide
a
convincing
analogy
to
the
facts
in
our
case.
The
goodwill
inherent
in
the
commercial
operations
of
Miracle
Mart,
which
formed
the
subject
of
the
transaction
in
issue,
underwent
no
change
as
a
result
of
Geneseo's
operation
of
the
footwear
departments
in
reality,
Miracle
Mart,
far
from
giving
up
its
goodwill,
merely
provided
Geneseo
with
access
to
it
in
return
for
a
monetary
consideration.
Furthermore,
the
evidence
absolutely
does
not
show
that
Miracle
Mart
could,
by
virtue
of—its
constituent
charter
or
some
other
document,
grant
"exclusive
licences"
permitting
beneficiaries
to
take
charge
of
operations
in
certain
sectors
of
its
store.
5.03.23
As
regards
the
Canadian
General
Electric,
(supra,
4(13))
decision,
the
simple
fact
that
this
case
was
appealed
to
the
Supreme
Court
calls
for
a
certain
restraint
on
the
part
of
the
courts
as
to
its
application.
5.03.24
This
Court
wishes
to
mention
that
the
preceding
comments
were
certainly
not
indispensable.
The
application
to
the
facts
of
this
case
of
the
British
Dyestuffs,
(supra,
4(7))
test,
which
is
the
judicial
standard
that
was
applied
in
Canadian
Industries
and
Canadian
General
Electric
in
order
to
qualify
the
payments
received
in
consideration
for
disclosure
of
know-how,
clearly
showed
that
the
payments
received
were
in
the
nature
of
capital.
5.03.25
The
decision
in
Atlantic
Sugar
Refineries
Ltd.,
(supra,
4(9))
raises
an
entirely
different
type
of
judicial
problem.
The
task
in
that
case
was
to
qualify
the
proceeds
of
the
sale
of
unrefined
sugar
in
the
New
York
markets
by
a
company
which
usually
derived
its
profits
from
the
sale
of
refined
sugar
to
the
public.
Judge
Thorson
clearly
established
in
that
decision
that
an
isolated
transaction
outside
the
usual
course
of
its
ordinary
business
could
nevertheless
result
in
business
income.
The
following
excerpts
from
pages
333
to
335
(D.T.C.
511
and
512)
of
the
decision
faithfully
present
the
authorities
on
which
the
Court
relied
in
making
this
statement.
The
appellant
cannot
escape
liability
merely
by
showing
that
its
entry
into
the
raw
sugar
futures
market
was
an
isolated
transaction.
While
it
is
recognized
that
as
a
general
rule
an
isolated
transaction
of
purchase
and
sale
outside
the
course
of
the
taxpayer's
ordinary
business
does
not
constitute
the
carrying
on
of
a
trade
or
business
so
as
to
render
the
profit
therefrom
liable
to
income
tax—Commissioners
of
Inland
Revenue
v.
Livingston
et
al.,
(1926)
11
T.C.
538
at
543,
per
Lord
Sands;
Leeming
v.
Jones,
(1930)
1
K.B.
279,
(1930)
A.C.
415;
it
is
also
established
that
the
fact
that
a
transaction
is
an
isolated
one
does
not
exclude
it
from
the
category
of
trading
or
business
transactions
of
such
a
nature
as
to
attract
income
tax
to
the
profit
therefrom.
Whether
the
gain
or
profit
from
a
particular
transaction
is
an
item
of
taxable
income
cannot,
therefore,
be
determined
solely
by
whether
the
transaction
was
an
isolated
one
or
not.
A
further
test
must
be
applied.
One
such
test
was
laid
down
in
Californian
Copper
Syndicate
v.
Harris
(1904)
5
T.C.
159.
The
test
to
be
applied
was
put
in
a
somewhat
narrower
form
in
7.
Beynon
and
Co.
Ltd.
v.
Ogg
(1918)
7
T.C.
125.
Sankey,
J.
put
the
matter
thus,
at
page
132:
The
only
question
one
has
to
determine
is
which
side
of
the
line
this
transaction
falls
on.
Is
it
in
the
nature
of
capital
profit
on
the
sale
of
an
investment?
Or
is
it
a
profit
made
in
the
operation
of
the
appellant
Company's
business?
A
more
specific
test
was
suggested
in
Commissioners
of
Inland
Revenue
v.
Livingston
(1926)
11
T.C.
538.
At
page
542,
the
Lord
President
(Clyde)
said:
I
think
the
test,
which
must
be
used
to
determine
whether
a
venture
such
as
we
are
now
considering
is,
or
is
not,
“in
the
nature
of
trade”,
is
whether
the
operations
involved
in
it
are
of
the
same
kind,
and
carried
on
in
the
same
way,
as
those
which
are
characteristic
of
ordinary
trading
in
the
line
of
business
in
which
the
venture
was
made.
If
they
are,
I
do
not
see
why
the
venture
should
not
be
regarded
as
“in
the
nature
of
trade",
merely
because
it
was
a
single
venture
which
took
only
three
months
to
complete.
While
it
may
not
be
possible
to
define
the
line
between
the
class
of
cases
of
isolated
transactions
the
profits
from
which
are
not
assessable
to
income
tax
and
that
of
those
from
which
the
profits
are
so
assessable
more
precisely
than
in
the
tests
referred
to,
it
is
clear
that
the
decision
cannot
be
made
apart
from
the
facts.
The
character
or
nature
of
the
transaction
must
be
viewed
in
the
light
of
the
circumstances
under
which
it
was
embarked
upon
and
the
decision
as
to
the
side
of
the
line
on
which
it
falls
made
after
careful
consideration
of
its
surrounding
facts.
After
presenting
the
main
principles
which
should
be
applied,
the
judge
conducted
a
form
of
search
for
the
connectedness
between
the
isolated
transaction
and
the
business's
usual
operations.
In
this
way,
he
tried
to
see
how
the
circumstances
at
the
origin
of
the
transaction
in
issue
could
be
related
to
the
company's
ordinary
activities.
The
following
comments
from
pages
336
and
337
(D.T.C.
512
and
513)
of
the
decision
clearly
show
the
approach
favoured
by
the
Court.
It
is
clear
from
his
evidence
that
the
appellant
entered
into
the
transactions
because
it
had
been
caught
in
an
abnormal
situation
in
its
business
operations
in
its
ordinary
field
and
thought
it
could
offset
the
consequences
thereof,
to
some
extent
at
least,
by
operating
in
a
related
field.
It
was
faced
with
a
prospective
loss
because
of
its
purchases
of
raw
sugar
at
high
prices
and
its
undertaking
to
sell
refined
sugar
without
any
increase
in
price
and
with
the
likelihood
of
sugar
control
and
a
fixed
price.
There
seemed
no
possibility
of
avoiding
such
loss
if
it
confined
its
business
operations
to
their
usual
and
ordinary
course.
This
was
the
abnormal
emergency
situation
in
the
appellant's
business
that
led
Mr.
Seidensticker
to
the
venture
in
the
raw
sugar
futures
market.
With
his
knowledge
of
the
sugar
business
and
sugar
prices
and
the
advice
of
his
friend
in
New
York
he
thought
that
the
prices
of
raw
sugar
were
too
high
and
would
fall.
It
was
only
in
such
a
free
market
as
the
raw
sugar
futures
market
in
New
York
that
he
could
put
his
knowledge
and
judgment
to
profitable
use.
The
venture
into
such
market
was
thus
not
an
isolated
transaction
that
was
unconnected
with
the
appellant's
business.
On
the
contrary
it
was
closely
connected
therewith.
It
was
impossible
to
listen
to
Mr.
Seidensticker
without
being
constantly
reminded
of
this
close
connection.
That
theme
ran
through
the
whole
course
of
his
evidence.
Emergency
situations
in
business
frequently
beget
departures
from
the
usual
and
ordinary
course
without
any
change
in
the
character
of
such
departures
as
business
transactions.
That
is
what
happened
in
the
present
case.
It
was
the
abnormal
situation
in
the
appellant's
business
in
its
ordinary
course
that
took
it
into
the
raw
sugar
futures
market.
It
was
only
because
of
its
prospective
loss
through
its
purchases
of
raw
sugar
at
high
prices
in
the
cash
market
that
it
decided
to
sell
and
subsequently
purchase
raw
sugar
in
the
futures
market.
The
sales
and
purchases
in
the
futures
market
would
not
have
happened
otherwise;
they
were,
in
a
sense,
the
result
of
what
had
happened
in
its
ordinary
course
of
business.
Moreover,
quite
apart
from
their
cause,
they
were
transactions
in
the
same
commodity
as
that
which
it
had
to
purchase
for
its
ordinary
purposes.
In
my
view,
they
were
of
the
same
character
and
nature
as
trading
and
business
operations
as
those
of
its
business
in
its
ordinary
course,
even
although
they
involved
a
departure
from
such
course.
The
appellant
made
such
departure
an
operation
of
its
business.
This
Court
is
of
the
view
that
the
application
of
this
search
for
connectedness
to
the
circumstances
of
the
instant
case
does
not
reveal
the
presence
of
a
concern
in
the
nature
of
trade.
The
evidence
presented
in
no
way
reveals
a
significant
relation
between
the
business
usually
conducted
by
Miracle
Mart
and
the
transaction
whereby
the
right
to
operate
the
footwear
department
for
all
Miracle
Mart
stores
was
transferred
to
Genesco.
What
is
more,
no
evidence
was
submitted
concerning
the
other
criteria
that
would
make
it
possible
to
conclude
there
existed
a
concern
in
the
nature
of
trade.
5.03.26
For
all
of
these
reasons,
this
Court
allows
Steinberg
Inc.'s
appeal
seeking
redetermination
of
its
income
for
the
fiscal
years
ended
February
12
and
July
30,
1983,
with
costs.
Appeal
allowed.
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