Guy
Tremblay:—
This
case
was
heard
in
Winnipeg,
Manitoba,
on
February
12,
1981.
1.
The
Point
at
Issue
The
issue
is
whether
the
sum
of
$75,000
received
by
the
appellant
during
the
1975
taxation
year
from
the
Canadian
Industries
Limited
(CIL)
should
be
included
in
the
apellant’s
income.
According
to
the
appellant,
it
should
not
be
included
in
the
income
because
the
said
sum
represents
compensation
to
the
appellant
for
capital
expenditures
made
or
incurred
for
the
completion
of
an
agreement.
The
respondent’s
thesis
is
to
the
effect,
that
the
said
sum
was
received
in
lieu
of
sales
income
because
CIL
was
released
from
its
obligation
to
purchase
the
balance
of
approximately
21,000
tons
of
sulphuric
acid.
Therefore
the
respondent
contends
that
the
sum
must
be
included
in
the
computation
of
the
appellant’s
income.
2.
The
Burden
of
Proof
2.01
The
burden
is
on
the
appellant
to
show
that
the
respondent’s
assessment
is
incorrect.
This
burden
of
proof
results
particularity
from
several
judicial
decisions,
including
the
judgment
delivered
by
the
Supreme
Court
of
Canada
in
Johnston
v
MNR,
[1948]
CTC
195,
3
DTC
1182.
2.02
In
the
same
judgment,
the
Court
decided
that
the
assumed
facts
on
which
the
respondent
based
the
assessment
or
reassessment
are
also
deemed
to
be
correct.
In
the
present
case,
the
assumed
facts
are
described
fin
the
reply
to
notice
of
appeal,
paragraph
4,
subparagraphs
(a)
to
(g):
(a)
that
prior
to
entering
the
agreement
of
June
3,
1974
and
after
its
termination,
and
in
the
ordinary
course
of
its
business,
the
Appellant
was
and
continued
to
be
in
the
business
of
selling
sulphuric
acid
and
crude
sulphur;
(b)
that
the
agreement
required
C.I.L.
to
purchase
a
minimum
of
50,000
tons
of
Sulphuric
acid,
and
further
purchases
above
this
amount
were
at
C.I.L.’s
option;
(c)
that
after
it
had
purchased
29,469
tons
of
sulphuric
acid
from
the
Appellant,
C.I.L.
sought
to
terminate
the
agreement;
(d)
that
by
a
letter
dated
December
11,
1975
and
signed
by
both
parties,
C.I.L.
was
released
from
its
obligation
to
purchase
the
balance
of
20,531
tons
of
sulphuric
acid
in
consideration
of
payment
by
C.I.L.
to
the
Appellant
of
$75,000;
(e)
that
the
amount
of
$75,000
was
paid
to
the
Appellant
in
lieu
of
sales
income
that
would
otherwise
have
been
earned
by
the
Appellant
in
the
ordinary
course
if
the
agreement
had
not
been
terminated;
(f)
that
the
loss
of
the
sale
of
the
remaining
20,531
tons
of
sulphuric
acid
did
not
destroy
or
materially
cripple
the
whole
structure
of
the
Appellant’s
business
and
no
part
of
the
$75,000
was
received
by
the
Appellant
as
compensation
for
the
destruction
or
crippling
of
the
whole
structure
of
its
business;
and
(g)
that
the
said
sum
of
$75,000
received
in
the
course
of
the
Appellant’s
business
is
therefore
income
from
a
business
or
source
and
is
to
be
included
in
computing
the
Appellant’s
income
for
the
1975
taxation
year
pursuant
to
sections
3
and
4
of
the
Income
Tax
Act.
The
Facts
3.01
The
appellant,
who
lives
in
Winnipeg,
Manitoba,
carries
on
a
business,
which
consists
in
part
of
the
manufacturing
and
distribution
of
sulphuric
acid.
Following
an
amalgamation
in
January
1981,
the
name
of
the
company
became
Border
Chemical
Company
Ltd.
3.02
The
only
witness
of
the
appellant
was
Mr
Tom
Smerchanski,
general
manager;
he
has
been
with
this
company
since
its
inception
in
1958.
Fifty
per
cent
of
the
business
of
the
company
consists
of
the
production
and
selling
of
sulphuric
acid
and
aluminum
sulphate,
whereas
the
other
50%
is
the
production
of
fertilizers.
There
are
about
50
workers
in
the
plant
(SN
10).
3.03
The
appellant
sells
sulphuric
acid
products
within
a
500
Mile
radius
of
Winnipeg
(Thompson,
Manitoba;
Thunder
Bay,
Ontario;
Minneapolis,
USA;
Grand
Forks,
USA,
etc).
The
two
other
producers
of
sulphuric
acid
in
Canada
are
Inland
Chemical
in
Edmonton,
Alberta,
and
Canadian
Industries
Limited
(CIL)
in
Sudbury,
Ontario
(SN
11
and
12).
3.04
The
appellant
has
the
capacity
of
producing
up
to
500
tons
a
day
of
Sulphuric
acid
(SN
14).
The
pulp
and
paper
companies
which
are
the
appellant’s
customers
need
between
35
to
40
tons
per
day.
3.05
The
sulphuric
acid
is
sold
in
liquid
form.
90%
of
the
product
is
moved
by
trucks
(40
pieces
of
highway
tanker
equipment
and
33
tractors)
and
the
other
10%
by
rail
cars
(6
rail
tank
cars).
The
trucks
are
all
owned
by
the
appellant
and
are
part
of
the
transport
department.
The
rolling
rail
cars
are
leased
from
Procor
Limited.
3.06
The
witness
testified
that
on
June
3,
1974
the
appellant
entered
into
a
contract
with
CIL
(Exhibit
A-1)
by
which
the
latter
purchased
50,000
tons
from
the
appellant
at
$15.75
per
short
ton
(2,000
pounds).
This
purchase
was
for
the
period
of
October
1,
1974
to
December
31,
1975.
It
was
renewable
for
a
further
period
of
one
year,
at
CIL’s
option,
provided
this
option
was
declared
prior
to
June
30,
1975.
The
contract
was
signed
by
the
witness
on
behalf
of
the
appellant
and
by
Mr
K
G
Aitken,
CIL
Sulphur
Products
Manager
for
CIL.
3.07
The
product,
however,
had
to
be
moved
by
a
36-car
unit
train
owned
by
CIL.
The
appellant
in
the
contract
(clause
entitled
“Loading
facilities”)
had
to
incur
a
capital
cost
to
set
up
the
facilities
(new
storage
tank,
new
loading
platforms,
new
pumps,
etc).
These
facilities
were
for
loading
four
cars
at
a
time
and
for
loading
36
cars
in
12
hours.
Those
facilities
indeed
were
not
something
the
appellant
was
ordinarily
equipped
for
because
in
the
regular
course
of
business
his
company
dealt
with
customers
who
required
smaller
quantities
and
would
be
satisfied
with
shipments
by
tanker
trucks
and
on
occasion
the
appellant
also
used
the
tanker
cars
in
Manitoba.
3.08
Mr
Smerchanski
explained
the
circumstances
of
the
contract:
It
was
in
the
fall
of
’73
or
early
in
the
spring
of
’74
when
Mr
Aitken
phoned
me
from
Montreal
and
he
wanted
to
have
a
meeting
with
me.
He
called
my
office,
and
he
advised
me
that
there
was
a
shortage
of
sulphuric
acid
in
Canada
at
that
particular
time.
Because
there
are
large
buyers
as
well
as
sellers
on
a
national
level,
he
felt
that
we
in
Winnipeg
were
the
only
plant
that
had
some
excess
production
capacity
and
he
said
he
was
prepared
to
discuss
with
us
a
deal
where
he
would
buy
a
substantial
amount
of
product,
providing
we
could
ship
it
and
load
it
in
unit
trains.
(SN
23)
Mr
Evans,
who
was
assistant
production
manager
in
1974
and
1975
explained
in
his
evidence
the
reason
CIL
purchased
50,000
tons
of
sulphuric
acid
was
that
the
phosphoric
acid
industry
had
very
good
years
in
1973,
1974
and
1975.
Sulphuric
acid
is
one
of
the
major
raw
materials
for
producing
phosphoric
acid
and
in
the
east,
sulphuric
acid
was
in
short
supply
especially
in
1974
(SN
64).
On
2
Of
Exhibit
A-1
under
the
heading
of
“Loading
facilities”,
one
can
read:
Border
shall
provide
facilities
and
staff
to
load
CIL’s
36-car
unit
trains
within
12
hours
after
arrival.
This
responsibility
shall
also
extend
to
the
loading
and
shipping
of
single
tank
cars.
In
the
event
that
Border
does
not
provide
adequate
facilities
to
meet
these
conditions,
then
all
extra
charges
assessed
by
outside
bodies
having
jurisdiction
by
way
of
demurrage,
shunting
charges,
etc
shall
be
for
the
account
of
Border.
In
no
case
shall
Border
take
longer
than
36
hours
after
placement
to
load
and
release
CIL’s
unit
trains.
It
was
proved
and
admitted
that
the
cost
of
the
new
facilities
was
$88,761.40
(Ledger
Sheet,
Exhibit
A-3
and
Summary
of
Order,
Exhibit
A-4)
plus
$50,000
for
labour.
3.09
The
contract
A-1
was
amended
by
another
document
(Exhibit
A-2),
a
letter
from
Mr
Aitken
of
CIL
to
Mr
Smerchanski,
dated
August
12,
1974.
It
confirmed
a
meeting
in
Mr
Smerchanski’s
office
concerning
the
changes,
“.
.
.
We
discussed
the
terms
and
conditions
under
which
this
agreement
might
be
extended
to
the
end
of
1977”.
(third
paragraph
of
Exhibit
A-2)
3.10
The
first
load
of
36
cars
left
on
October
31,
1974.
Concerning
the
method
for
fulfilling
the
contract
A-1,
Mr
Smerchanski
explained
that:
Because
of
the
complexity
of
moving
the
unit
trains
and
coordinating
with
the
railway,
our
production
had
to
be
scheduled
and
we
compared
notes
with
CIL
practically
on
a
daily
basis.
In
other
words,
I
would
call
up
and
I
would
say,
“Can
you
give
me
an
approximation
when
you
want
the
next
train?”
So
he’d
have
to
make
sure
he
could
take
the
36
cars
from
any
other
run,
put
up
to
Winnipeg,
make
sure
I
had
the
acid
to
load
them
and
get
them
out.
So,
there
was
a
lot
of
talking
on
a
week
to
week
basis.
(SN
32
and
33)
3.11
The
full
delivery
schedule
under
the
contract
A-1
was
filed
as
Exhibit
A-5.
It
shows
eight
trips,
the
last
one
being
made
on
July
22,
1975,
the
total
volume
for
the
eight
trips
was
28,840.17
short
tons.
There
were
still
21,160
tons
left
to
deliver,
but
the
appellant
was
informed
that
CIL
“would
not
require
any
more
acid”.
3.12
The
witness
gave
the
following
details:
Q.
Can
you
tell
us
what
happened
and
the
details
that
you
know
of
relating
to
the
ceasing
of
the
supplying
of
sulphuric
acid
under
this
contract?
A.
Well,
after
that
last
shipment
I
phoned
CIL,
I
guess
it
was
a
week
which
we
normally
did
to
schedule
other
trains,
and
Ken
Aitken
informed
me
that
—
he
said
“It
doesn't
look
as
though
we’ll
be
requiring
any
more
acid.”
Q.
And
how
did
you
respond
to
that?
A.
Well,
I
—
Q.
Did
he
give
a
reason,
I
might
add?
A.
No,
he
didn't
give
a
reason
and
I
didn’t
question
him.
He
was
the
customer,
but
I
told
him
that
that
wasn’t
part
of
our
contract;
that
I
wanted
him
to
understand
that
we
had
an
investment,
a
capital
investment
to
put
the
equipment
in
to
service
these
unit
trains
and
which
was
of
no
more
value
to
us,
and
I
felt
he
had
a
moral
obligation
to
do
something
about
this.
(SN
37
and
39)
The
witness
continued:
A.
No.
Actually
this
particular
call
he
told
me
they
would
not
be
requiring
any
more
acid
and
I
said,
“Well,
I’m
sorry
to
hear
this.
That
doesn’t
look
very
good
because
we
put
all
of
this
installation
in
and
now
you
are
just
cutting
us
off
without
any
notice”.
Then
I
of
course
discussed
this
whole
contract
with
my
Directors
and
we
felt
that
CIL
Had
a
moral
obligation
to
offset
some
of
the
costs
of
this
installation.
So,
I
went
back
to
Ken
Aitken
—
Q.
By
telephone
or
—
A.
By
telephone.
And
I
told
him
this
and
he
came
back
—
Q.
Can
I
just
—
you
say,
“I
told
him
this”.
Do
you
recall
what
you
said
to
him?
A.
Yes.
I
told
him
that
the
company,
our
Directors,
we
weren’t
happy
with
what
happened
and
we
felt
that
they
had
a
moral
obligation
to
give
us
something
in
the
way
of
offsetting
the
costs
of
the
equipment
which
we
won’t
be
using.
Q.
And
what
was
his
reaction?
A.
He
agreed.
And
he
said,
“Can
I
get
back
to
you
before
too
long?”
I
said,
“Certainly”.
And
he
did
get
back
to
me
—
this
all
happened
in
a
week
or
two
weeks,
and
he
offered
$50,000.
He
felt
that
was
a
fair
amount.
So
I
discussed
this
with
my
directors
and
we
didn’t
think
it
was
enough.
I
advised
Ken
Aitken
and
that
is
when
I
went
to
visit
with
Ken
Aitken
in
his
office
in
Montreal.
Q.
Do
you
remember
approximately
what
date
that
would
have
been?
A.
Oh,
Heavens.
It
was
in
—
it
was
beyond
November,
probably
about
the
middle
of
November.
Q.
Yes,
well,
it
was
in
around
that
time?
A.
Yes.
Q.
You
went
down
to
Montreal?
A.
Yes.
And
we
went
out
for
lunch,
Ken
Aitken,
myself,
his
boss
and
there
was
another
person,
I
don’t
know
who
they
were.
And
during
the
lunch
he
offered
me
$60,000.
Q.
It
went
from
fifty
to
sixty?
A.
From
fifty
to
sixty,
yes.
And
I
told
him
that
I
wasn’t
satisfied
and
we
broke
up
on
that
basis.
(SN
38,
39
and
40).
3.13
In
the
second
part
of
November,
the
Appellant
wrote
a
letter
to
CIL
dated
November
21,
1975.
It
was
filed
as
Exhibit
A-6.
This
letter
reads
as
follows:
November
21,
1975
Mr
K
G
Aitken
Sulphur
Products
Manager
Canadian
Industries
Limited
CIL
House
Box
10
Montreal,
Quebec,
Canada
H3C
2R3
Dear
Ken:
This
will
confirm
our
meeting
with
you
in
Montreal
on
Wednesday,
November
19,
1975,
regarding
the
cancellation
of
your
sulphuric
acid
requirements,
which
is
not
in
accordance
with
our
contract
dated
June
3,
1974.
As
outlined
to
you
in
my
conversation
Border
made
capital
expenditures
in
excess
of
$100,000
and
your
C.I.L.
offer
to
settle
in
the
amount
of
$60,000
is
not
acceptable.
You
also
recognized
that
Border
spent
at
least
100,000
on
capital
equipment
to
accommodate
the
loading
of
36
car
acid
trains.
We
are
entitled
to
receive
at
least
part
of
our
capital
expenditure
which
was
a
direct
expense
in
providing
facilities
to
carry
out
our
obligations
as
agreed
to
in
our
contract
dated
June
3,
1974.
My
directors
have
instructed
me
that
you
reconsider
your
offer
of
$60,000
and
I
would
appreciate
you
contacting
me
by
telephone
on
receipt
of
this
letter
in
order
that
this
claim
be
settled
as
expeditiously
as
possible.
Yours
truly,
BORDER
CHEMICAL
DIVISION
OF
BORDER
FERTILIZER
(1972)
LTD.
T
C
Smerchanski
The
witness
said
a
few
days
later
he
called
him:
A.
Yes.
Ken
Aitken
didn't
take
too
much
time
to
call
me
back
on
the
telephone
and
he
said,
“Tom,
will
you
settle
for
$75,000.”
I
said
“I’ll
call
you
back
as
soon
as
I
can.”
I
met
with
my
directors
in
the
present
company
and
we
agreed
to
take
it
and
I
called
Mr
Aitken
back
and
said
that
was
fine
and
to
give
us
a
cheque
and
we
will
get
this
thing
over
with.
(SN
42)
This
telepfhone
converation
was
followed
by
another
letter
from
Mr
Aitken
(Exhibit
A-7)
dated
December
11,
1975.
It
reads
as
follows:
Attention:
Mr
T
C
Smerchanski
Gentlemen:
Re:
Sulphuric
Acid
Sales
Contract
CIL/Border
Chemical
14th
June,
1974
—
Settlement
of
Obligations
This
letter
will
confirm
the
understanding
reached
between
our
two
Companies
with
respect
to
release
of
Canadian
Industries
Limited
(“CIL”)
from
its
obligation,
under
the
terms
of
the
above-cited
Contract,
for
an
outstanding
balance
of
20,531
tons
of
sulphuric
acid
remaining
from
a
minimum
50,000
tons
which
CIL
contracted
to
purchase
from
Border
Chemical
between
1st
October
1974
and
31st
December
1975.
It
is
hereby
understood
and
agreed
between
us,
that
in
consideration
of
payment
by
CIL
to
Border
Chemical
of
the
sum
of
seventy-five
thousand
dollars
($75,000)
in
lawful
money
of
Canada,
by
cheque
to
be
issued
to
you
within
ten
days
following
receipt
back
of
this
letter
duly
signed
on
behalf
of
your
Company,
Border
Chemical
hereby
releases
and
discharges
CIL
from
all
further
obligation
whatsoever
under
the
said
Contract
14th
June
1974,
hereby
accordingly
terminated,
and
waives
any
and
all
claims,
rights
of
redress,
damages
or
other
compensation
present
or
future
arising
out
of
or
in
any
way
connected
with
the
former
said
Contract
between
our
Companies,
the
whole
to
be
effective
as
of
the
date
hereof.
If
the
foregoing
correctly
sets
forth
the
understanding
between
us,
would
you
please
so
signify
by
signing
and
returning
to
us
the
attached
duplicate
of
this
letter.
Yours
very
truly
3.14
The
witness
explained
that
the
price
of
$15.75
per
short
ton
provided
in
the
contract
A-1
could
be
changed.
There
is
a
provision
indeed
to
the
effect
that
for
every
dollar
increase
in
the
combined
price
of
sulphur
and
freight
to
Winnipeg,
the
price
of
acid
would
go
up
28%
per
ton.
Mr
Smerchanski
also
said
that
the
appellant
made
a
net
profit
average
of
$4
per
ton.
3.15
In
1978,
the
appellant
sold
to
CIL,
14,532
tons
of
sulphuric
acid
and
in
1979,
21,750
tons.
Mr
Smerchanski
testified
that
CIL
was
a
customer
of
the
appellant
before
contract
A-1.
Concerning
this
contract,
the
witness
was
definite
that
Mr
Aitken
called
him
first
to
speak
about
the
purchase
of
50,000
tons
of
sulphuric
acid.
3.16
The
witness
of
the
respondent,
Mr
W
G
Evans,
professional
engineer
who
has
a
degree
in
Business
Administration
and
who
was
Mr
Aitken’s
assistant
in
1974,
testified
as
follows
in
chief
examination
concerning
the
contract
A-1
when
it
was
passed.
Q.
Are
you
aware
of
the
—
I
understand
you
met
with
people
from
Border,
is
that
correct?
A.
Mr
Tom
Smerchanski
came
to
Montreal
to
sell
sulphuric
acid
to
CIL
and
we
had
contacted
him
to
seek
additional
supplies
and
we
arranged
a
contract
with
Border
Chemical.
(SN
65)
Mr
Evans
testified
later
under
cross
examination
that
it
was
CIL
that
approached
the
appellant
for
the
supplies
of
sulphuric
acid
(SN
72).
Concerning
the
breach
of
the
contract,
Mr
Evans
testified
as
follows:
Q.
Now
sir,
you
were
not
in
court,
but
there
has
been
evidence
that
CIL
broke
the
contract
or
breached
the
contract.
Is
that
correct?
A.
In
effect
CIL
found
that
CIL
could
no
longer
purchase
the
entire
quantity
of
acid.
The
customer
that
had
agreed
to
purchase
that
acid
reneged
on
his
contract
and
CIL
went
to
Border
Chemical
and
said
that
we
can
no
longer
purchase
that
acid.
Q.
And
I
understand
that
you
were
involved
in
some
of
the
negotiations
over
the
termination
of
the
contract,
sir?
A.
Yes,
I
was.
I
was
present
at
the
final
negotiations
when
the
contract
was
terminated.
Q.
And
as
far
as
you
can
recall,
what
was
CIL
paying
for
when
it
terminated
the
contract?
A.
We
were
paying,
in
effect
to
terminate
the
contract
we
had
not
purchased
the
entire
quantity
of
acid.
In
fact
we
were
some
months
short
of
the
obligation
as
stated
by
the
contract,
and
we
paid
$75,000
to
terminate
the
contract,
leaving
us
with
no
obligation
for
further
purchases.
Q.
Is
it
fair
to
say
then
that
CIL
released
itself
from
any
further
purchases?
A.
Right.
(SN
66
and
67)
3.17
In
cross-examination,
Mr
Evans
testified
that
the
main
reason
given
by
Mr
Smerchanski
to
obtain
the
$75,000
of
compensation
for
breach
of
contract
was
the
lost
profit
of
$176,000:
A.
Well,
as
I
say,
it
is
my
recollection
and
the
recollection
of
CIL
that
Mr
Smer-
chanski’s
main
complaint
was
the
fact
that
he
would
be
out,
and
I
will
tell
you
the
number,
that
he
had
foregone
$176,000
in
lost
profit
because
he
would
not
be
able
to
sell
CIL
that
last
20,000
tons.
I
can
produce
a
letter
which
we
sent
to
the
customer
which
made
that
very
point,
and
we
asked
the
customer
to
share
in
the
termination
cost
to
Border
Chemical.
I
can
make
that
letter
available
if
the
court
pleases.
Q.
I
am
more
interested
obviously
in
—
what
did
your
other
customer
say
to
that
letter?
A.
Well,
we
asked
for
half
of
the
$75,000
that
we
paid
to
Border,
the
customer
agreed
and
we
actually
received
the
$37,500.
Q.
So
you
got
compensation
as
well
then
on
your
$75,000?
A.
Yes.
(SN
84)
Q.
That
is
Exhibit
A-7
Mr
Chairman.
Mr
Evans,
did
you
at
any
time
ever
discuss
anything
with
Mr
Smerchanski
on
a
one-on-one
basis
on
this
contract?
A.
Many
times
by
telephone
and
certainly
during
the
morning
of
November
19,
Mr
Smerchanski
was
in
my
office
and
we
discussed
this
contract.
Q.
Just
the
two
of
you?
A.
Just
the
two
of
us.
Q.
That
is
the
termination?
A.
That’s
correct.
(SN
90)
4.
Law
—
Cases
at
Law
—
Analysis
4.01
Law
The
main
provisions
of
the
Income
Tax
Act
involved
in
the
present
case
are
3,
4
and
9(1),
but
it
is
not
necessary
to
quote
them.
4.02
Cases
at
Law
The
counsel
for
both
parties
referred
to
the
Board
to
the
following
cases
at
law:
1.
St
John
Dry
Dock
and
Shipbuilding
Company
Limited
v
MNR,
[1944]
CTC
106;
2
DTC
663;
2.
Bush,
Beach
&
Gent,
Ltd
v
Road,
[1939]
3
All
ER
302;
3.
Jack
Cewe
Ltd
v
Gary
William
Jorgenson,
[1980]
CTC
314;
80
DTC
6233;
4.
Robert
Donald
Sutherland
v
MNR,
23
Tax
ABC
220;
60
DTC
13;
5.
Bayker
Construction
Ltd
v
MNR,
[1974]
CTC
2318;
74
DTC
1236.
4.03
Analysis
4.03.1
Crux
of
the
Matter
The
crux
of
the
matter
is
whether
the
sum
of
$75,000
paid
by
CIL
must
be
considered
as
a
compensation
for
the
capital
spent
for
the
facilities
provided
in
the
contract
A-1
in
order
to
load
four
cars
at
a
time
and
36
cars
in
12
hours.
4.03.2
First,
it
is
clearly
admitted
by
the
parties
that
if
CIL
had
fulfilled
the
contract
A-1
which
was
a
trade
contract,
it
would
not
have
paid
compensation.
The
basis
of
the
thesis
of
the
appellant
is
found
in
the
principles
set
forth
by
the
former
Exchequer
Court
of
Canada
in
St
John
Dry
Dock
and
Shipbuilding
Company
Limited
v
MNR,
referred
to
above.
This
case
is
well
summarized
in
the
[1944]
CTC
106
at
106:
The
appellant
which
was
incorporated
in
1916
under
the
Dominion
Companies
Act,
entered
into
negotiations
with
the
Dominion
Government
to
complete
an
already
partially
constructed
dry
dock
and
applied
for
a
subsidy
under
the
Dry
Docks
Subsidies
Act.
In
1918
an
agreement
was
entered
into
under
which
His
Majesty
undertook
completion
of
the
dry
dock
to
pay
the
appellant
in
half
yearly
payments
an
annual
subsidy
of
4
/2
per
cent
per
annum
during
35
years
upon
the
sum
of
$5,500,000,
being
the
maximum
amount
allowed
under
the
Act.
Half
yearly
payments
on
account
of
the
subsidy
were
also
made
during
the
construction
of
the
dry
dock.
The
appellant,
with
the
consent
of
the
Government,
then
effected
a
number
of
bond
issues
and
assigned
the
whole
subsidy
to
the
Montreal
Trust
Company,
the
trustee
for
the
bondholders,
as
security
for
the
bonds,
the
total
issue
of
which
was
$3,826,277.34.
The
annual
subsidy
payment
of
$247,500
was
exactly
sufficient
to
pay
the
interest
and
the
instalments
of
principal
that
fell
due
each
year
so
that,
upon
the
termination
of
the
subsidy
payments,
the
bonds
would
be
fully
paid
both
as
to
interest
and
principal.
In
its
income
tax
return
for
1939
the
appellant
included
as
income
the
Dominion
Government
Subsidy
applicable
to
Retirement
of
Bonds
of
$145,761.78
but
when
assessed
upon
this
amount
in
1943
it
contended
that
the
subsidy
was
a
capital
payment
for
the
purpose
of
aiding
in
the
construction
of
a
dry
dock
and
also
that
the
money
was
not
received
by
the
appellant
but
by
the
trustee
for
the
bondholders.
The
decision
of
the
Minister
was
that
the
subsidy
payments
constituted
income
directly
or
indirectly
received
within
the
meaning
of
Section
3
of
the
Income
War
Tax
Act
and
the
assessment
was
affirmed.
HELD
(i)
That
the
appellant
did
not
receive
the
subsidy
in
the
course
of
its
trade
and
that
it
was
not
a
trade
or
business
receipt
or
revenue
or
an
item
of
business
profits
or
gain.
(ii)
That
the
subsidy
payments
were
not
paid
or
received
as
interest
or
a
return
on
share
or
debenture
capital
but
rather
for
the
purpose
of
reimbursing
a
capital
expenditure
by
the
appellant
and
as
a
capital
contribution
in
respect
of
such
expenditure.
(iii)
That
the
appeal
be
allowed.
The
counsel
for
the
appellant
especially
stressed
the
following
quotation
[1944]
CTC
106
at
126
and
127:
The
subsidy
payments,
even
if
it
be
assumed
that
they
were
received
by
the
appellant,
were
not
trade
or
business
receipts
of
the
appellant
or
part
of
its
operating
revenues,
or
items
of
its
trade
or
business
profits
or
gains,
nor
were
they
paid
or
received
as
interest
or
a
return
on
share
or
debenture
capital,
but
rather
for
the
purpose
of
advancing
or
re-mbursing
a
capital
expenditure
by
the
appellant
and
as
a
capital
contribution
or
grant
in
respect
of
such
expenditure,
and,
furthermore,
they
were
paid
and
received
for
the
accomplishment
of
a
special
purpose
in
the
national
interest
quite
apart
from
the
trade
or
business
operations
of
the
appellant
and
not
connected
with
them.
For
these
several
reasons
I
conclude
that
subsidy
payments
in
this
case
were
not
subject
to
income
tax
under
the
Income
War
Tax
Act.
The
appellant
contends
that
the
sum
of
$75,000
was
paid
by
CIL
because
“Border
made
capital
expenditures
in
excess
of
$100,000”
as
it
was
explained
to
CIL
In
Exhibit
A-6.
4.03.3
The
thesis
of
the
respondent
is
to
the
effect
that
the
amount
of
$75,000
can
be
a
capital
receipt
only
if
the
cancellation
of
the
trade
contract
really
means
the
cancellation,
disposition
or
destruction
of
the
business
itself,
or
an
independent
part
of
that
business,
otherwise
it
is
an
income.
The
main
case
at
law
to
which
the
respondent
referred
was
Bush,
Beach
&
Gent,
Ltd
v
Road.
It
is
a
British
case
and
the
facts
are
well
summarized
in
All
England
Law
Reports
Annotated,
at
302
and
303:
From
1920
to
1933,
the
appellant
company
carried
on
business
as
chemical
merchants,
confining
their
business
to
industrial
chemicals.
In
1933,
they
entered
into
a
contract
for
the
purchase
of
agricultural
chemicals,
in
the
selling
of
which
they
were
to
have
exclusive
rights
in
certain
parts
of
the
country.
This
contract
was
terminated
on
May
1,
1935,
Upon
a
payment
to
the
appellant
company
of
£4,750.
The
question
was
whether
such
payment
must
be
treated
as
income
or
as
a
Capital
payment:
HELD:
the
sum
paid
represented
profits
which
the
appellant
company
would
or
might
have
made
under
the
contract,
and,
although
a
payment
for
the
cancellation
of
the
contract,
was
an
income
payment.
EDITORIAL
NOTE.
The
point
of
this
case
is
whether
the
payment
was
one
for
the
cancellation
of
a
contract,
where
such
cancellation
would
result
in
the
closing
down
of
a
self-contained
part
of
the
company’s
business,
or
was
made
in
the
ordinary
course
of
the
business
of
the
company,
and
in
lieu
of,
or
as
a
prepayment
of,
future
profits.
The
judge,
in
considering
this
matter,
has
come
to
the
conclusion
that
this
sum
represents
the
profits
which
might
have
been
made
under
the
contract,
and
that
it
was,
therefore,
not
to
be
treated
as
the
purchase
price
of
the
cancellation
of
the
contract,
but
rather
as
the
prepayment
of
profits.
It
must
be
noted
that
the
cancellation
of
the
contract
did
not
in
any
way
exclude
the
company
from
dealing
in
any
particular
kind
of
chemicals.
The
respondent
contends
that
the
appellant
received
the
sum
of
$75,000
in
compensation
for
the
lost
profit
as
Mr
Evans
testified.
Moreover,
the
cancellation
of
contract
did
not
destroy
the
business
or
part
of
it.
4.03.4
On
the
one
hand,
it
seems
clear
from
Exhibit
A-1
that
the
main
argument
of
the
appellant
to
claim
a
compensation
for
the
breach
of
contract
was
the
capital
expenditure
made
to
provide
facilities
to
accommodate
the
loading
of
36
car
acid
trains
(para
3.13,
first
part).
Obviously,
the
testimony
of
Mr
Smerchanski
confirms
his
own
letter
(Exhibit
A-6,
para
3.13).
On
the
other
hand,
the
final
answer
of
CIL
(Exhibit
A-7)
does
not
give
the
reasons
for
capital
expenditures,
but
rather
refers
to
the
.
.
outstanding
balance
of
20,531
tons
of
sulphuric
acid
remaining
from
a
minimum
of
50,000
.
.
.”
(para
3.13,
last
part).
The
testimony
of
Mr
Evans
leaves
no
doubt
about
the
reasons
for
the
payment.
It
is
for
lost
profit
(para
3.17).
The
amount
of
$75,000
is
not
for
the
actual
lost
profit
(21,000
x
$4
=
$84,000
para
3.14).
This
figure
is
different
from
the
amount
of
$176,000
which
apears
in
the
transcript
of
the
testimony
of
Mr
Evans,
but
maybe
he
spoke
about
gross
profit,
or
maybe
this
figure
should
read
“$76,000”.
The
Board
also
states
that
the
figure
of
20,531
tons
in
Exhibit
A-7
is
different
from
the
figure
of
21,160
tons
which
is
the
balance
from
Exhibit
A-5
(para
3.11);
this
point,
however,
is
not
in
dispute.
In
his
argumentation,
the
counsel
for
the
appellant
doubts
that
Mr
Evans
was
well
informed
of
all
the
conversations
that
Mr
Smerchanski
had
with
Mr
Aitken
concerning
the
breach
of
contract
and
said:
“I
would
have
hoped
that,
if
there
was
to
be
a
witness
produced
by
the
respondent
from
the
CIL
on
this
question,
that
it
would
have
been
Mr
Aitken
.
.
.”.
Nobody
prevented
the
appellant
from
producing
Mr
Aitken
as
a
witness.
Therefore,
on
this
point,
the
appellant
contended
that
the
payment
was
made
for
the
capital
expenditure.
The
Board,
which
is
bound
by
the
evidence
and
by
the
rule
that
the
burden
of
proof
is
on
the
appellant’s
shoulders,
must
conclude
that
the
preponderance
of
evidence
is
not
in
favour
of
the
appellant.
4.03.5
Moreover,
even
if
the
evidence
on
the
above
point
showed
clearly
that
the
payment
had
been
made
because
of
the
capital
expenditure
made
for
the
facilities,
the
Board
does
not
think
that
the
conclusion
would
have
been
in
favour
of
the
appellant’s
thesis.
It
is
clear
indeed
that
the
payment
was
made
only
because
of
the
breach
of
contract,
which
was
a
trade
contract.
The
cancellation
of
the
contract
did
not
destroy
or
materially
cripple
the
whole
structure
of
the
appellant’s
business.
Since
1975,
the
appellant
has
carried
on
his
business;
the
facilities
are
still
there
and
on
occasion
are
still
used.
CIL
indeed
is
still
a
customer.
In
1978
and
1979,
the
appellant
had
to
lend
more
than
36,000
tons
to
CIL
(para
3.15).
4.03.6
Because
of
the
evidence
presented
before
the
Board,
the
respondent’s
reassessment
must
be
maintained.
5.
Conclusion
The
appeal
is
dismissed
in
accordance
with
the
above
reasons
for
judgment.
Appeal
dismissed.
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