Addy,
J:—These
two
cases
were,
on
consent,
ordered
to
be
tried
together
on
common
evidence.
Both
appeals
involve
income
tax
assessments
for
the
1975
taxation
year
of
the
plaintiffs.
The
facts
are
really
not
in
issue.
Pendray
Farms
Ltd
(hereinafter
referred
to
as
Pendray)
and
Fortuna
Farms
(hereinafter
referred
to
as
Fortuna)
are
both
body
corporates
and
were
at
all
material
times
along
with
some
35
owners
of
dairy
farms,
members
of
a
dairy
co-operative
association
known
as
Island
Farm
Dairies
Co-Operative
Association
(hereinafter
referred
to
as
the
Association).
The
Association
which
is
incorporated
as
a
separate
entity
has
always
operated
as
and
has
been
treated
for
income
tax
purposes
as
a
non
income
producing
co-operative.
Some
of
the
members
are,
as
in
the
case
of
the
plaintiffs,
corporations
and
others
are
individuals.
Each
member
of
the
Association
is
entitled
to
one
vote
at
the
general
meetings
of
the
Association
regardless
of
the
amount
of
milk
shipped
by
the
member.
The
members
of
the
Association,
who
are
referred
to
in
the
trade
as
shippers,
all
ship
their
milk
to
the
Association
in
bulk
either
on
trucks
owned
by
the
co-operative
or
vehicles
supplied
by
outside
truckers.
The
price
which
the
shippers
are
entitled
to
receive
for
their
milk
is
fixed
from
time
to
time
not
by
the
Association
but
by
the
Milk
Board
of
the
Province
of
British
Columbia.
The
Association
pays
them
for
their
milk
in
part
by
cash
and
in
part
by
what
is
termed
revolving
loan
fund
certificates
(hereinafter
called
certificates).
The
shipper
is
obliged
to
accept
these
certificates
as
partial
payment
and
the
percentage
of
the
total
purchase
price
of
the
milk
shipped
represented
by
these
certificates
is
fixed
by
the
board
of
directors
of
the
Association
who
in
turn
are
elected
by
the
general
membership
of
the
Association.
At
the
end
of
each
fiscal
year
of
the
Association
after
making
the
usual
provisions
for
reserve
funds
etc,
the
directors
of
the
Association
distribute
the
surplus
profits
to
the
shippers
in
cash
or
by
issuing
further
certificates
or
both.
The
rules
of
the
Association
provide
in
effect
for
the
relationship
between
the
Association
and
its
member
shippers
and
for
the
general
operation
and
control
of
the
Association
from
a
constitutional
standpoint.
The
relevant
portions
of
those
rules
are
the
following:
MARKETING
OF
PRODUCTS
19.(1)
All
products
marketed
by
the
Association
for
the
Members
shall
be
marketed
upon
the
principle
that
the
Members
shall
receive
the
proceeds
from
the
sale
thereof
less
all
expenses,
amounts
placed
to
reserve
accounts
and
interest
on
issued
capital.
(2)
All
equipment
and
supplies
purchased
or
otherwise
handled
by
the
Association
for
the
Members
shall
be
so
purchased
or
otherwise
handled
upon
the
principle
that
the
same
shall
be
transferred
to
Members
at
cost
plus
expenses.
(3)
The
services
performed
by
the
Association
for
any
Member
shall
be
performed
at
cost
and
included
in
such
cost
shall
be
an
amount
to
be
determined
by
the
Directors
for
expenses.
(4)
All
produce
marketed
through
the
Association
by
the
Members
and
the
sale
proceeds
of
such
products
shall
be
pooled.
(5)
The
proceeds
of
sale
of
products
of
Members
marketed
by
the
Association
in
each
year
shall
be
dealt
with
as
follows:—
(d)
By
allocating
crediting
or
paying
to
Members
of
the
Association
the
whole
or
such
portion
of
the
balance
of
such
proceeds
as
shall
be
determined
by
the
Directors
at
a
rate
in
relation
to
the
quality,
quantity
or
value
of
the
products
or
goods
handled,
dealt
with,
sold
or
services
rendered
by
the
Association
for
the
Members
whether
as
principal
agent
or
otherwise
with
appropriate
differences
in
rate
for
different
classes
or
grades
or
quality
thereof
and
having
regard
also
to
the
geographical
location
of
distribution
and
the
value
of
winter
shipments
and
the
cost
thereof
or
any
other
conditions
the
Directors
may
deem
it
necessary
to
provide.
Provided
however,
that
subject
to
such
differentials
each
Member’s
Share
in
the
proceeds
shall
be
in
the
same
proportions
to
the
amount
distributed
as
his
total
shipments
are
to
the
total
shipments
of
all
Members
shipping
the
same
class
of
commodity
under
like
circumstances.
REVOLVING
LOAN
FUND
20.(1)(b)
Any
amount
allocated
or
credited
(but
not
paid)
to
any
Member
pursuant
to
Subsection
(5)(d)
of
Section
19,
of
the
Rules
shall
be
contributed
by
way
of
loan
to
the
Association
and
shall
form
part
of
the
Revolving
Loan
Fund,
the
amount
so
to
be
contributed
shall
be
recommended
by
the
Directors
and
fixed
by
the
Members
in
general
meeting
but
the
amount
so
fixed
shall
not
be
less
than
the
amount
recommended
by
the
Directors.
20.(2)
The
Director
shall
in
each
year
recommend
to
the
Shareholders
in
Annual
Meeting,
what
amount
(if
any)
shall
be
applied
in
payment
of
Revolving
Loan
Certificates,
and
the
Association
shall
declare
the
amount,
if
any,
to
be
paid,
but
no
payment
shall
exceed
the
amount
recommended
by
the
Directors.
(4)
A
Revolving
Loan
Certificate
shall
not
be
negotiable,
discountable,
assignable
or
transferable
without
the
consent
of
the
Directors
first
obtained.
BULK
HAUL
REVOLVING
LOAN
FUND
20(x)
(2)
Income
available
for
this
fund
shall
be
derived
from
freight
charges
etc,
as
assessed
from
time
to
time,
on
milk
hauled
for
purposes
of
the
Association.
These
charges
or
rates
shall
be
fixed
by
the
members
in
General
meeting
but
shall
not
be
less
than
those
recommended
by
the
Directors.
Each
member
shipper
signs
a
milk
contract
with
the
Association.
The
relevant
provisions
of
that
contract
read
as
follows:
2
And
it
is
mutually
agreed
by
and
between
the
parties
hereto;
(a)
...
(b)
That
the
Association
shall
deal
with
the
proceeds
from
the
sale
of
its
products
in
the
manner
and
in
accordance
with
the
by-laws
from
time
to
time
in
force.
(c)
That
the
Association
may
deduct
from
month
to
month
or
at
such
other
times
as
the
Directors
may
from
time
to
time
decide
out
of
the
proceeds
received
from
the
marketing
and
sale
of
the
products
of
the
Association,
such
sums
or
amounts
as
the
Directors
may
from
time
to
time
decide
for
the
following
purposes:
1.
To
provide
for
all
costs,
charges,
interest
on
indebtedness
or
the
Association,
and
all
other
expenses
necessarily
incurred
by
the
Association
in
carrying
on
the
business
of
the
Association.
2.
To
establish
such
reserves
as
may
be
deemed
necessary
for
the
purpose
of
the
Association.
3.
To
meet
any
emergencies
or
exigencies
as
may
from
time
to
time
arise.
(d)
That
the
Association
may,
if
the
Directors
deem
fit
make
advances
to
the
Farmer
on
his
share
of
the
proceeds
of
the
Association’s
products,
such
sums
and
at
such
times
as
may
be
determined
by
the
Directors
in
their
absolute
discretion,
less:
1.
Any
monies
owing
by
him
to
the
Association
on
account
of
shipping
or
delivery
costs
incurred
in
delivering
his
milk
and
cream
to
the
Association.
2.
Any
sums
to
be
contributed
to
the
Revolving
Loan
Fund.
3.
Such
other
sums
as
may
from
time
to
time
be
assessed
on
all
members.
(e)
That
the
Association
shall
within
a
reasonable
time
after
the
close
of
the
fiscal
year
determine
the
Farmer’s
share
in
the
net
proceeds
from
the
sale
of
the
products
of
the
Association
over
the
past
fiscal
year,
and
after
allowing
for
and
deducting
all
monthly
or
other
sums
as
may
have
been
advanced
to
him
on
account
of
his
share
and
any
other
sums
properly
deductible
by
the
Association
from
his
share,
to
distribute
the
balance
of
such
share
to
him
either
in
cash
or
by
issuing
to
him
Revolving
Loan
Fund
certificates
for
the
same,
or
by
distributing
such
balance
partly
in
cash,
and
partly
in
Revolving
Loan
Fund
certificates
as
aforesaid.
(f)
And
the
Association
shall
within
a
reasonable
time
after
the
close
of
any
fiscal
year
issue
to
the
Farmer
Revolving
Loan
Fund
certificates
for
the
amount
of
money
contributed
by
him
by
way
of
deductions
or
otherwise
to
the
fund
during
such
fiscal
year.
The
only
difference
between
the
plaintiff
Pendray
and
the
plaintiff
Fortuna
which
is
relevant
to
the
issues
in
this
section
is
that
the
former
computes
its
income
on
a
cash
basis
pursuant
to
subsection
29(1)
of
the
Income
Tax
Act
while
the
latter
computes
its
income
on
an
accrual
basis.
Two
issues
were
raised:
(1)
The
plaintiff
Pendray
claims
that
since
it
accounted
for
taxation
purposes
on
a
cash
basis,
it
could
not
be
taxed
for
the
1975
taxation
year
on
the
face
value
of
the
certificates
issued
or
on
any
portion
of
the
amount
represented
by
such
certificates,
as
the
certificates
were
not
negotiable
and
could
not
be
cashed,
discounted
nor
transferred
without
the
consent
of
the
directors
of
the
Association
nor
did
they
have
any
maturity
date,
nor
could
they
produce
any
income
unless
and
until
they
were
in
fact
redeemed
by
the
Association.
This
argument
of
course
was
not
advanced
by
the
plaintiff
Fortuna
as
its
accounting
was
on
an
accrual
basis.
(2)
Both
plaintiffs
also
argued
that,
in
any
event,
the
tax
certificates,
for
the
reasons
mentioned
in
the
preceding
paragraph,
should
be
discounted
with
reference
to
their
value
for
taxation
purposes
as
opposed
to
being
considered
at
their
face
value
for
the
taxation
year.
In
this
regard
it
is
claimed
that
the
taxpayer
should
enjoy
the
benefit
of
subsection
76(1)
and
of
the
definition
of
amount
contained
in
subsection
248(1)
of
the
Income
Tax
Act.
These
provisions
read
as
follows:
SECURITY
IN
SATISFACTION
OF
INCOME
DEBT
76.(1)
Where
a
person
has
received
a
security
or
other
right
or
a
certificate
of
indebtedness
or
other
evidence
of
indebtedness
wholly
or
partially
as,
in
lieu
of
payment
of,
or
in
satisfaction
of,
a
debt
that
was
then
payable,
the
amount
of
which
debt
would
be
included
in
computing
his
income
if
it
had
been
paid,
the
value
of
the
security,
right
or
indebtedness
or
the
applicable
portion
thereof
shall,
notwithstanding
the
form
or
legal
effect
of
the
transaction,
be
included
in
computing
his
income
for
the
taxation
year
in
which
it
was
received.
INTERPRETATION
DEFINITIONS
248.(1)
“AMOUNT”
“amount”
means
money,
rights
or
things
expressed
in
terms
of
the
amount
of
money
or
the
value
in
terms
of
money
of
the
right
or
things,
.
.
.
(The
Italics
are
mine)
It
is
clear
that
the
Association
is
a
separate
legal
entity
from
the
shippers
and
that
it
carries
on
the
business
of
marketing
milk
and
milk
products.
It
obtains
revenue
from
the
sale
of
the
products.
It
seems
equally
clear
that
all
of
the
income
earned
by
the
Association
is
the
income
of
the
members,
otherwise
the
Association
itself
would
be
taxable
on
its
income.
Counsel
for
the
plaintiffs
argues
however,
that,
notwithstanding
this,
each
certificate
is
in
substance
nothing
but
a
statement
of
an
account
payable
in
the
hands
of
the
Association
and
is
therefore
nothing
more
than
an
account
receivable
in
the
hands
of
the
holder.
It
is
worth
while
noting
that
in
Rule
19(1)
supra
it
is
provided
that
“the
members
shall
receive
the
proceeds
from
the
sale
thereof
less
all
expenses,”
etc.
Rule
19(5)(d)
supra
provides
that
the
members
shall
be
credited
with
the
net
proceeds
of
the
sales
“by
allocating,
crediting
or
paying”
etc.
It
is
to
be
noted
also
that
what
is
represented
by
the
certificates
is
considered
contribution
by
way
of
loan
to
the
Association.
See
Rule
20(1)(b)
supra.
Both
these
principles
are
re-affirmed
in
paragraphs
2(e)
and
(f)
of
the
milk
contract
supra.
The
books
and
records
of
the
Association
which
were
produced
at
trial
show
that
the
amounts
concerned
were
allocated
to
the
members.
What
seems
to
me
to
be
the
basic
issue
is
the
true
nature
of
the
Association
and
of
the
relationship
between
it
and
its
members.
In
this
regard
it
matters
little
how
the
relationship
may
be
expressed.
It
is
the
substance
which
must
be
taken
into
account
and
not
the
form
of
the
relationship.
In
the
present
case
however,
the
form
does
in
fact
seem
to
properly
describe
the
true
substance.
The
case,
from
a
factual
standpoint
is
surprisingly
similar
to
the
case
of
The
Horse
Co-Operative
Marketing
Association
Limited
v
MNR,
[1956]
Ex
CR
393;
[1956]
CTC
115;
56
DTC
1064,
where
it
was
held
that
an
agency
agreement
had
been
created.
This
case
concerned
co-operative
marketing
association
incorporated
for
the
marketing
of
horses
pursuant
to
the
Revised
Statutes
of
Saskatchewan.
By-law
Number
15
of
that
co-operative
outlined
on
page
15
of
the
above-mentioned
report,
contained
substantially
the
Same
provisions
as
the
above-quoted
extracts
from
Rule
19
in
the
case
at
Dar.
In
the
case
of
MNR
v
Co-Operative
Wheat
Producers
Ltd,
[1930]
SCR
402;
[1928-34]
CTC
47;
1
DTC
186,
the
Supreme
Court
of
Canada,
in
confirming
a
judgment
to
the
same
effect
by
the
Exchequer
Court
of
Canada,
held
that
a
similar
corporation,
namely
the
Saskatchewan
Wheat
Pool,
was
not
taxable
because
it
was
in
effect
but
an
agent
for
the
members.
The
same
result
was
arrived
at
for
the
same
reason
in
the
case
of
MNR
v
La
Société
Coopérative
Agricole
de
la
Vallée
D’Yamaska,
[1956]
Ex
CR
65;
[1957]
CTC
132;
57
DTC
1078,
the
finding
in
that
case
is
very
well
summarized
in
the
headnote
of
the
report
which
reads
as
follows:
Held'.
That
the
amounts
in
suit
could
not
be
considered
part
of
the
respondent’s
taxable
“income”
within
the
meaning
of
that
term
as
defined
by
the
relevant
income
tax
acts.
The
respondent
did
not
act
to
realize
a
profit
or
gain
on
its
own
behalf
but
on
that
of
its
members.
It
took
delivery
of
the
crop
as
consignee
and
acted
as
the
members’
agent
in
the
subsequent
operations.
2.
That
the
“Planter’s
Reserve”,
or
working
capital
fund,
was
created
and
maintained
out
of
the
members
own
taxable
incomes
and
consequently
belonged
to
them
and
not
the
respondent.
3.
that
the
sum
distributed
to
shareholders
out
of
the
operating
surplus
were
not
“allocations
in
proportion
to
patronage”
under
the
relevant
Income
Tax
Acts
but
the
return
of
the
members
own
money
no
longer
required
for
the
processing
and
sale
of
their
tobacco.
One
finds
the
same
reasoning
with
the
identical
result
in
Manitoba
Dairy
and
Poultry
Co-operative
Ltd
v
MNR,
[1957]
CTC
401;
57
DTC
1278
at
414
[1285]:
As
I
see
it,
it
would
be
contrary
to
the
fact
to
say
that
when
the
members
delivered
their
produce
to
the
association
they
sold
it
for
the
amount
received
by
them
on
their
delivery
of
it.
They
did
not.
The
evidence
is
conclusive
to
that
effect.
The
members
delivered
their
produce
to
the
association
to
be
marketed
by
it
for
them.
That
was
the
reason
for
the
association’s
existence.
It
had
been
formed
so
that
the
members
could
co-operate
with
one
another
through
it
in
the
marketing
of
their
produce,
and
the
fact
is
that
they
did
market
their
product
through
it.
.
.
.
It
was
not
a
trading
corporation,
in
the
ordinary
sense
of
the
term,
engaged
in
the
buying
and
selling
of
poultry,
eggs,
and
dairy
products
for
its
own
profit.
If
it
had
been
its
members
would
have
been
entitled
to
participate
in
such
profit
by
receiving
dividends
in
their
capacity
as
shareholdes.
But
their
rights
to
an
appropriate
portion
of
the
associations’
surplus
did
not
depend
on
their
shareholdings.
That
had
nothing
to
do
with
the
matter.
The
fact
is
that
the
appellant
association
was
a
co-operative
marketing
association
for
the
marketing
of
its
members’
produce,
and
when
it
earned
a
surplus
from
its
business
of
handling
its
members’
produce
for
them
it
did
not
earn
it
for
itself,
but
for
them.
Several
other
cases
were
referred
to
by
counsel
but,
in
my
view,
the
great
majority
of
them
either
dealt
with
other
legal
issues
or
were
not
applicable
to
the
factual
situation
before
me.
It
seems
clear
to
me
that
on
the
facts
and
on
the
basis
of
the
jurisprudence
to
which
I
have
just
referred,
the
Association
is
truly
an
agency
co-operative
and
nothing
else.
It
is
but
an
agent
of
the
members.
Receipt
by
an
agent
constitutes
at
law
receipt
by
the
principal
and
it
follows
therefore
that
any
net
profit
in
the
hands
of
the
agent
in
any
taxation
year
constitutes
net
profits
of
its
members
and
is
taxable
in
their
hands.
On
the
basis
of
this
finding
no
legal
distinction
can
be
made
between
a
principal
who
is
accounting
for
taxation
purposes
on
a
cash
basis
and
one
who
is
accounting
on
an
accrual
basis.
In
both
cases
they
are
presumed
at
law
to
have
received
the
money
when
it
is
in
the
hands
of
their
agent.
For
these
reasons
both
appeals
will
be
dismissed
with
costs,
but
there
shall
of
course,
be
only
one
set
of
costs
for
trial.
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