Scierie Landrienne Inc. v. R., [1998] 1 CTC 2066, 97 DTC 648

Garon T.C.J.:

These are appeals from income tax assessments for the appellant’s 1986, 1987 and 1988 taxation years. In those assessments, the Minister of National Revenue disallowed the capital cost allowance in respect of Class 8 property, [1] the exact nature of which was not stated, claimed by the appellant in computing its income for the 1987 and 1988 taxation years. [2] These disallowances were based on the assumption that the appellant had received additional consideration of $2,500,000 in the sale of parcels of land, buildings and machinery constituting a saw mill, hereinafter called “the saw mill”, to the business corporation Forex Inc. on November 21, 1985. The saw mill was located in Landrienne. In respect of the disposition of this saw mill, the appellant and Forex Inc. made an election under subsection 85(1) of the Income Tax Act for an agreed upon amount of $500,000.

The point at issue concerns the determination of the amount of the consideration (other than the shares of Forex Inc.’s capital stock) received by the appellant for the disposition of the saw mill having regard to the provisions of subsection 85(1) of the Income Tax Act.

Raymonde Lafontaine, C.A., and Yvon Lafontaine, C.A., testified for the appellant. Jean-Pierre Jolivet, the Minister responsible for Forestry at the relevant time, and Réjean Rodrigue, a Revenue Canada auditor, were called to testify for the respondent.

The appellant is a business corporation incorporated under the Canada Business Corporations Act having its head office at Landrienne, a municipality situated in the Abitibi region of the province of Quebec. It operated a lumber business in Landrienne. The appellant’s fiscal year ends on March 31.

During 1985 in particular, the appellant’s board of directors consisted of six members: Gilbert Gonthier, chairman of the board and president of the appellant, Gaston Dumas, vice-president and general manager of operations, Réjean Boisvert, vice-president for operations, Luc Dufour, the company’s controller, Benoît Côté, a forest engineer managing the appellant’s logging operations, and Yvon Lafontaine, an outside director. Mr. Lafontaine was consulted on the major decisions that had to be made by the appellant and played a significant role in the series of transactions in which the appellant was involved during 1985.

At the relevant time, the appellant wished to obtain a larger supply of timber for the operation of its saw mill. During the same period, another Canadian company, Forex Inc., having its head office in Val d’Or, also in the Abitibi region, and dealing with the appellant at arm’s length, was suffering serious financial difficulties and had accumulated losses. The company was managed by the Cossette brothers and had even closed its mills in 1984.

Forex Inc.’s financial difficulties affected the entire Abitibi region because the company was a major employer in that part of the province. This situation was a concern for the Minister responsible for Forestry, Jean- Pierre Jolivet. Forex Inc., however, was a party to supply agreements entered into with the Government of Quebec respecting significant forest resources. The rights granted under those agreements could not be assigned by the company that held them, Forex Inc., because they could be allotted only under a decree by the Government of Quebec.

Minister Jolivet stated in his testimony that, at that time, he had wanted to establish a forest resources adjustment plan for that region of Quebec. He had wanted to redistribute the timber supplies. Minister Jolivet did not want Forex Inc. to be forced into bankruptcy because that state of affairs would have been harmful for the region. I believe it is useful to reproduce a portion of Minister Jolivet’s testimony on this point:

[TRANSLATION]

So we have a responsibility as Minister, the present Minister has it in the same way; it is more ... because of the White Paper and the Act that followed in 1987, or rather 1986 — it entered into force in 1987 — a very specific responsibility, and that responsibility was timber supplies. That was the Minister’s responsibility, and only the Minister could say: “Such and such a mill shall increase its supply volume,” and, given that none was available and that Forex was in trouble, there were people who had their eye on those supplies. However, they could not be distributed as long as there was no agreement.

Consequently, when I entered the St-Sauveur church, very early in the evening by the way, where there were people carrying placards reading: “Jolivet, we want our jobs, and with Cossette,” and I was coming to tell them that they might not have their jobs with Cossette, maybe yes, maybe no, if we found a solution to the problem facing the potential bankruptcy of Forex.

So that’s how it happened that, at that meeting, accustomed as I was from the unionism I came from to knowing a few of the people scattered around the room, I recognized that there was more than a bodyguard in the corner; there were a number of police officers from the town of Val-d’Or watching, but in civilian clothes to avoid any trouble. There wasn’t any because we agreed on one thing and that was that we could save Forex provided there was an adjustment plan for the region as a whole.

And at that point, the Cossette brothers were to, if we put that puzzle together, because it was a puzzle, and if a piece was missing from the puzzle, the puzzle would not exist, we absolutely had to agree on a redistribution of the timber which it was my responsibility as Minister to redistribute to the extent that there were agreements to meet the banks’ requests at the time for Forex to pay what they had to pay, particularly since they owed stumpage dues to the Government of Quebec and it was out of the question that the Minister responsible would not ask Forex to pay the stumpage dues it had a duty to pay because they were dues that belonged to the population of Quebec as a whole. They did not belong to Jean-Jacques Cossette or to the Minister.

Q. Allow me to clarify one point with you: when you refer to Jean-Jacques Cossette or the Cossette brothers, these are individuals who, I believe, are related to Forex?

A. Correct. Jean-Jacques Cossette was the top person responsible. It was with him that we had a number of discussions and it was the McNeil group that were their representatives. We had extensive discussions with them, but also with all the others involved, whether they were municipalities, unions or businesses.

Because, as I told you, everyone had their eye on the supplies that might potentially become available, but for which the Minister was responsible. Mr. Cossette said: “I would like to be able to sell it.” I said: ‘‘That is out of the question. As Minister there, the supply does not belong to you. It belongs to the general public. I have a responsibility to redistribute it and selling anything inter vivos is therefore out of the question.” Besides, you have provisions that state, ‘‘You may not sell inter vivos things that do not belong to you.”

No, the Minister never sells timber; he grants supplies and, in exchange, charges stumpage dues, and that is something very important because what Mr. Cossette would have liked to do is to have a better bargaining process for his assets by selling timber that did not belong to him. I said: ‘‘We’re going to start by solving the problem. We’re going to look at the assets. We’re going to determine how that can be done. You are going to agree among yourselves. Prepare us a plan and we’ll look at it, but what I have to distribute as Minister is timber.” Once we knew that, we could make choices and decisions later. You have two versions of the typical example. You have Landrienne on the one hand and you have Groupe Saucier, Ms. Saucier, on the other.

What happened is that, to enable the bank to receive what it was entitled to receive in the circumstances in order to prevent bankruptcy and, at the same time, to keep Forex in the area, Ms. Saucier invested money. She invested $10,500,000, and Landrienne, $2,500,000 and we solved the problem by preventing the bankruptcy of Forex because we did not necessarily want Forex to go bankrupt. That might have been the easiest thing for the Minister, but it was not good for the general public, which was just emerging from an economic crisis. People were being put on unemployment and welfare and that made no sense.

So, in the circumstances, we found the best plan to straighten out the industry as a whole. And it has worked very well since that time and Forex has remained smaller. Ms. Saucier invested money and at the same time decided, with the Minister’s agreement, to close certain mills, and it was not easy to convince citizens to accept that because, if we did not close them, we were endangering the Groupe Saucier as a whole. So, as Minister, I had to act, saying: “Look, if you want us to save the day with a bailout plan, help us make decisions that are difficult, but that will enable you to have jobs.” And the same thing for Landrienne.

However, if we abolished that, we had to replace it with something that made sense. What was that? Each mill had supplies based on the average of the previous five years, allowing for epidemics, fires and strikes. Consequently, we said: “This is what the C.I.P. plant in La Tuque or Perron, Normick Perron in Amos, need to survive.” So that determined a basic principle that each plant was assigned its own supply.

So what did I do as Minister when I began to talk with the others? I said: This is what we are going to do in future; we will not do in the present what we are proposing to do in future. I mean — I will restate that — we will not do what we did under the old model; we will implement it immediately, but provided the businesses accept it.

And that is how we settled the entire issue of Landrienne, Rexfor and Saucier, except that Mr. Gonthier said: “I don’t need that. Of course, if you give me timber for me alone, I will be very pleased.” However, in the context in which we invited him to reach an agreement to settle the Forex case, at least in order to protect Forex’s jobs by reducing the Forex mills, the Forex complex, by giving a portion of the part that belonged to Ms. Saucier who, you will see in the letters, where we told Ms. Saucier: “We allow you this provided that, after the agreement, such and such a plant is closed, that you consolidate at such and such a place.” What did we do? We formed a link between Forex’s supply and Landrienne’s supply.

As I could not do it directly — that was the old arrangement — I had to do it under the new arrangement that I had formed in my mind and had instilled in people’s minds and that subsequently became reality.

What happened? Mr. Gonthier did not want it. He said: “I don’t need that.” That is why there was a telephone call; we said: “If you don’t take part, the entire plan will fall apart. Ms. Saucier will not be able to do her things, Forex will go bankrupt and you’ll have to start from scratch.” So we told him: “Find a way of forming a link that will make it possible to safeguard the principle that the timber is to follow.”

So what did they do? They told Mr. Gonthier: “You sell out — and that is what I understood — to Forex; together you form a — Filifor, I forget the word — a subsidiary and, as Minister, I’m going to transfer the supplies for which I am responsible to the subsidiary, but, in order for that to happen, you are going to solve the Forex problem at the same time as well by injecting, on the same terms as Ms. Saucier, although a different amount because Landrienne is smaller, an amount of money that will make it possible to solve its problems with the bank and with the department later,” because Cossette nevertheless owed us stumpage dues. He did not want to pay them, but I could not accept that. Thus, through Filifor, Landrienne became one way of forming the link that would enable it to obtain the supplies in accordance with the principles we had established. That was my recollection of that time.^ [3]

According to Minister Jolivet, it was in these circumstances that the appellant, through Filifor Inc., was to form what was called “the link” that would enable it to obtain timber supplies in accordance with the principles that were established by Minister Jolivet, in particular that each mill be linked to a supply of timber. Minister Jolivet stated that he had not concerned himself with the tax aspects of the transactions contemplated. The Government of Quebec adopted as its guideline that it would not terminate a mill’s timber supply agreement even if the company concerned had not paid stumpage dues. In Forex Inc.’s case, the company owed $2,500,000 in stumpage dues to the Government of Quebec at the time of the discussions that culminated in the events of the November 21, 1985.

These excerpts from Minister Jolivet’s testimony help understand the reasons for the various transactions that were conducted in the last part of 1985. Those transactions are described below.

On August 30, 1985, a new company by the name of Filifor Inc., was incorporated under the Canada Business Corporations Act by the appellant, which, prior to November 21, 1985, held the only common share issued out of its capital stock.

On November 21, 1985, the following transactions were conducted:

1. Forex Inc. purchased 100 common shares of Filifor for $100.

2. Forex Inc. granted the appellant an option to purchase 100 common shares of Filifor for $100.

3. The appellant invested the cash amount of $2,765,000 in Filifor Inc. through the purchase of 2,500,000 preferred shares of Filifor Inc.’s capital stock for $2,500,000 and an additional payment of $265,000. The preferred shares in question were convertible at any time at the discretion of their holder, the appellant.

4. The appellant made a block sale to Forex Inc. of the lands, buildings and machinery, but not the rolling stock, constituting the saw mill for the price of $3,000,000. This sale was “conditional”, as appears from the following clause of that contract:

[TRANSLATION]

Conditional Sale

This sale is subject to the following conditions:

(1) That all the assets acquired under the terms hereof be resold to Filifor Inc. within five days of the date of this agreement;

(2) That Filifor Inc. obtain from the Government of Quebec (Department of Energy and Resources), within 30 days of the date hereof, a supply contract for a volume of 195,000 cubic meters annually in the Matagami Crown forest, Harricana South area, the whole in accordance with the undertakings contained in the letters to Scierie Landrienne Inc. and/or Filifor Inc. dated October 31, 1985, November 14, 1985 and November 20, 1985, from the Minister responsible for Forestry.

The clause respecting the price payable by the purchaser Forex Inc. reads as follows:

Price

This sale is further made for consideration of the sum of THREE MILLION DOLLARS ($3,000,000.00) payable as follows:

1.- To the vendor through the issue in the vendor’s name of TWO MILLION FIVE HUNDRED THOUSAND (2,500,000.00) paid-up and non-contributory preferred shares of the capital stock of the company FOREX INC. a release for which is hereby given;

2.- To pay for and on account of the vendor the balance, that is the sum of TWO HUNDRED FIFTY THOUSAND DOLLARS AND THIRTY-FOUR CENTS ($250,000.34) in principal and TEN THOUSAND SIX HUNDRED FIFTY-FOUR DOLLARS AND TEN CENTS ($10,654.10) in interest still owed to Lavoie & Frères Inc. in accordance with the aforementioned deeds registered at the Abitibi registry office in Amos under numbers 162,769 and 170.017, the obligations of Forex Inc. being limited to $260,654.44;

3. - To the vendor, the balance, that is the sum of TWO HUNDRED THIRTY-NINE THOUSAND THREE HUNDRED FORTY-FIVE DOLLARS AND FIFTY-SIX CENTS ($239,345.56) by means of an instalment payable on demand.

5. Forex Inc. “made a block sale with no guarantee” to Filifor Inc. of the property described in the deed of sale cited above which was entered into by the appellant and Forex Inc. on the same day and transacted at a price of $3,000,000 payable by Filifor Inc. as follows:

[TRANSLATION]

(A) To pay for and on account of the vendor, the sum of TWO MILLION FIVE HUNDRED THOUSAND DOLLARS ($2,500.000.00) still owed to the Royal Bank of Canada under the terms of a deed of loan and guaranteed by the following deeds: ...

(B) To pay for and on account of the vendor the balance, that is the sum of TWO HUNDRED FIFTY THOUSAND DOLLARS AND THIRTY- FOUR CENTS ($250,000.34) in principal and TEN THOUSAND SIX HUNDRED FIFTY-FOUR DOLLARS AND TEN CENTS ($10,654.10) in interest still owed to Lavoie & Frères Inc. under the terms of the deeds registered at the Abitibi registry office in Amos under numbers 162,769 and 170,017;

(C) To pay for and on account of the vendor the sum of TWO HUNDRED THIRTY-NINE THOUSAND THREE HUNDRED AND FORTY- FIVE DOLLARS AND FIFTY-SIX CENTS ($239,345.56) still owed to Scierie Landrienne Inc. under the terms of the deed of sale executed before the undersigned notary on November 21, 1985.

In particular, this contract contains a clause respecting timber supply that reads as follows:

[TRANSLATION]

Supply Contract

This sale is subject to the signing within 30 days of the date hereof of a contract of supply by the Government of the Quebec (Department of Energy and Resources) for a volume of 195,000 cubic meters annually in the Matagami Crown forest, Harricana South area, the whole in accordance with the undertakings contained in the letters to Scierie Landrienne Inc. and/or Filifor Inc. dated October 31, 1985, November 14, 1985, and November 20, 1985, from the Minister responsible for Forestry.

6. The appellant, Filifor Inc. and Forex Inc. entered into a contract [4] providing in particular as follows:

[TRANSLATION]

1. Scierie Landrienne Inc. has sole right to appoint all the directors of Filifor Inc.

2. Forex Inc. has an option to purchase the 2,500,000 preferred shares held by Scierie Landrienne Inc. in Forex Inc. for a consideration of $1.00 for a period of 10 years from the date of this contract.

3. Further to the sale of the saw mill situated in Landrienne between Forex Inc. and Filifor Inc. on this day, the parties will make the elections provided for in section 85 of the federal Income Tax Act and the provisions of section 518 of the Quebec Taxation Act and will jointly make the elections provided for in the said sections in prescribed form and within the prescribed time periods and the provincial equivalent so as to minimize the tax effects of this transaction. The parties undertake to sign the necessary rollover forms for an agreed upon amount of FIVE HUNDRED THOUSAND DOLLARS ($500,000).

5. It is expressly agreed between the parties that no issue of common and/or preferred shares of Filifor Inc. will be permitted without the written consent of Scierie Landrienne Inc. The parties acknowledge that the only shares issued to date are:

-100 common shares to Forex Inc., which Scierie Landrienne has the option to purchase; and

-2.5 million preferred shares to Scierie Landrienne Inc.;

-one common share to Scierie Landrienne Inc.

7. As follows implicitly from clause 2 of the contract cited above between the appellant, Forex Inc. and Filifor Inc., the appellant granted Forex Inc. the option to purchase for $1.00 the 2,500,000 preferred shares of Forex Inc.’s capital stock, which were purchased on the same day by the appellant at the time of the sale of the saw mill to Forex Inc.

8. On October 16, 1985, the appellant and Forex Inc. cancelled an agreement into which they had entered. That contract contains six recitals, the third of which is of particular interest and reads as follows:

WHEREAS Forex Inc. is prepared to waive in Filifor’s favour a timber supply contract for an annual volume of 127,350 cubic metres from the Harricana South area so that Filifor will hold a total annual volume of 195,270 cubic metres from the Harricana South area;

The essential clauses of this contract contained the following undertakings:

l. the appellant undertakes to sell its saw mill for $3,000,000 payable as follows:

(a) 2,500,000 preferred shares of the capital stock of Forex Inc.;

(b) the issuing of a no-interest $500,000 demand promissory note;

2. Forex Inc. will subscribe 100 common shares of the capital stock of Filifor Inc. for $100 and an option to purchase those shares for $100, valid for 10 years, will be granted to the appellant by Forex Inc.;

3. the appellant undertakes to invest $3,000,000 for 3,000,000 preferred shares of Filifor Inc. payable as follows:

(a) “a cash payment of $2,500,000”;

(b) a transfer by the appellant to Filifor Inc. of the $500,000 promissory note subscribed by Forex Inc.;

4. Forex Inc. undertakes to resell the saw mill to Filifor Inc. for $3,000,000 for a payment of $2,500,000 and the remittance of Forex Inc.’s $500,000 demand promissory note;

5. Filifor Inc. shall obtain for the Landrienne saw mill a contract from the Department of Energy and Resources for a 15-year period, subsequently renewable, for the supply of an annual volume of 195,270 cubic metres from an exclusive area in the Harricana South area; clause 5 of the contract adds the follow-

ing: “Failing such a contract, this agreement will be considered entirely null and void and as never having existed”;

6. the contracts described in this agreement "... form a whole and no contract may be dissociated from the whole, failing which this agreement will be entirely null and void”;

7. all the contracts provided for by this agreement were to be signed within 45 days of the date of this agreement.

Five transactions were subsequently conducted as follows:

1. On November 27, 1985, the Government of Quebec issued a decree enabling the Minister responsible for Forestry to enter into a supply agreement with Filifor Inc. for the saw mill situated in Landrienne respecting the Matagami Crown forest.

2. On December 12, 1985, Forex Inc. exercised its option to purchase, for $1.00, the 2,500,000 preferred shares that it had issued to the appellant on November 21, 1985.

3. On December 12, 1985, the appellant exercised its option to purchase the 100 common shares of Filifor’s capital stock for $100 and thus acquired those shares of Filifor Inc.’s capital stock.

4. The appellant leased the saw mill, which it had owned until November 21, 1985, from Filifor Inc. for $100,000.00 a month. The date of the lease was not stated.

5. On June 25, 1986, the appellant and Forex Inc. made an election in prescribed form in accordance with section 85 of the Income Tax Act in respect of the sale of the saw mill on November 21, 1985. The agreed upon amount for the saw mill was fixed at $500,000. The fair market value of the property transferred (the saw mill) by the appellant was fixed at $3,000,000. The fair market value of the consideration received by the appellant, apart from the 2,500,000 preferred shares of Forex Inc.’s capital stock, was fixed as follows on the form:

1. Debt payable by the appellant to Lav- $260,654.44 oie & Freres Inc.

2. Demand promissory note payable by $239,345.56 “Forex”

$500,000.00

It was also indicated on the form that the appellant had received 2,500,000 class B preferred shares from Forex Inc. redeemable for $1.00 each. Those preferred shares carried no voting rights.

Following all these transactions, the appellant, having in its possession the new timber supply granted to it by the Government of Quebec pursuant to the decree of November 27, 1985, continued the operation of its business in the same saw mill that it had sold to Forex Inc. on November 21, 1985, and that became the property of Filifor Inc. on the same day.

From the testimony of Ray monde Lafontaine, a chartered accountant with Raymond, Chabot, Martin, Paré, the Court learned that Ms. Lafontaine was given a mandate by the appellant during 1990 to hold discussions with Revenue Canada concerning the Minister of National Revenue’s proposed assessment for the appellant’s 1986 taxation year. It appears from this testimony that Ms. Lafontaine did not know to which intangible asset the Minister was referring in his proposed assessment as being the consideration that the appellant allegedly received at the time of the contract of sale of the saw mill. The letter from the auditor Mr. Rodrigue dated February 8, 1990, merely mentioned “the alienation of an intangible asset” which Forex Inc. allegedly disposed of, without specifically stating the nature of that “intangible asset”.

In a letter dated September 20, 1990, the department revised its position and admitted that the appellant had not received an intangible asset from Forex Inc., but that it had received “acknowledgement of the payment of its compensation payable to Forex”. The second and third paragraphs of Mr. Rodrigue’s letter dated September 20, 1990, illustrate the position of the Department of National Revenue at that time. Those paragraphs are reproduced below:

[TRANSLATION]

We are not claiming that Scierie Landrienne Inc. (Scierie) acquired a cutting rights contract (see point 5.1 of your letter). It is our view that Scierie had an obligation to compensate Forex for an amount of $2.5 million. We consider that payment of the compensation was made in order to preserve Scierie’s business and in order to produce income from its business (see facts 1, 2 and 3 in our letter of February 8, 1990). In the circumstances, we consider the payment of the compensation as eligible capital property in accordance with Interpretation Bulletin 467, paragraphs 6 and 7.

Scierie did not receive an intangible asset from Forex Inc. in consideration of the sale of its assets (see point 5.1 of your letter). It received acknowledgement of the payment of its compensation payable to Forex, since all of the preferred shares issued by Forex to Scierie had a real value of $1.00 (see the last paragraph of fact 5a in our letter of February 8, 1990).

The second paragraph cited above from this letter of September 20, 1990, seems difficult to reconcile with the third last paragraph of the same letter, which reads as follows:

[TRANSLATION]

Accordingly, Scierie received from Filifor Inc. as consideration for the selling price of $3 million: the mortgage assumed by Filifor Inc. of $260,654.44, a promissory note receivable from Filifor Inc. for $239.345.56 and the assumed debt of $2.5 million paid indirectly to Forex Inc., as payment of the compensation that Scierie owed it for the alienation of an intangible asset. In the alternative, Scierie is deemed under paragraph 69(1 )(£>) of the I.T.A. to have received proceeds of disposition of $3 million upon disposition.

To the question put to Ms. Lafontaine by counsel for the respondent as to whether she had requested additional explanations respecting the following passage from the second paragraph cited above from the letter of September 20, 1990: “It is our view that Scierie had an obligation to compensate Forex for an amount of $2.5 million,” she stated that she had requested additional explanations at the meeting of April 9, 1991, in Ottawa. What she remembered was that this obligation arose from the discussions as a whole and that no one had spoken to her specifically about an agreement with the Department or with the Minister. She only knew that there had been discussions on the subject.

Ms. Lafontaine subsequently added the following comments on Mr. Rodrigue’s letter of September 20, 1990:

[TRANSLATION]

Well, not precisely for this part of the letter because I paid for something, then I received, I acquired an asset as eligible capital property. As long as I had not understood — perhaps I understand less quickly than others — but as long as I had not understood that ... I did not understand that we were paying and because we were paying, that added an asset for us, whereas I was paying and I didn’t know what I was paying for. Until, and it is in the third sentence of the other paragraph, where it states: well, it’s because you had an obligation and, by paying, you released yourself from that obligation, so it was an extinction or, well, we no longer had the obligation, we were released from an obligation.

I understood that we could add an eligible capital property because we were paying an obligation. I did not see where that obligation was; I never saw it in any document. So it was on that basis that I...

...I got it ... in fact, this question of the extinction of an obligation or the payment of an obligation that we had toward Forex, that Scierie Landrienne had toward Forex, I really understood — as I said, perhaps because 1 don’t understand quickly — but I really understood that in Ottawa when I met the people from the Department.

...1 understood where ... that is I did not understand where the obligation came from, but I understood that that was eligible capital property. [5]

Ms. Lafontaine stated that she was not aware of Minister Jolivet’s requirement that the sum of $2,500,000 be paid to Forex Inc. She said she was informed that there had had to be transfers of cutting rights and that the way to proceed depended on political factors that she found hard to understand. To her mind, the political requirements were not something important. It was not until April 1991, during a meeting with representatives of the Department of National Revenue, that Ms. Lafontaine learned that this consideration could be “the extinction of an obligation”.

Counsel for the respondent then asked the witness why she had not considered the fact that the appellant had granted Forex Inc. an option to redeem its 2,500,000 shares of the latter’s capital stock for $1.00. She answered that, if one referred to the letter from the department dated February 8, 1990, it was more because this question had not been considered important. She also indicated that she had not had to explain why this transaction benefited Forex Inc.

I now turn to the most important elements that must be retained from the testimony of Mr. Lafontaine, C.A. Mr. Lafontaine stated that, in the fall of 1984, it was common knowledge that Forex Inc. was in financial difficulty. Furthermore, he admitted that the appellant wished to obtain additional timber supplies in order to ensure its saw mill survived and operated at full capacity.

In September 1985, at the request of the appellant’s directors, Mr. Lafontaine prepared a document on the planned transactions. To the question as to whether the appellant had considered the tax consequences at the time this document was prepared, Mr. Lafontaine said:

[TRANSLATION]

When the document was prepared, there was clearly no tax objective; the objective was to come to an agreement to increase supplies. There was no question of any tax aspect at that time, at the time it was prepared.

…Increasing supply: it was strictly commercial.^ [6]

Mr. Lafontaine described numerous telephone conversations and discussions that the appellant’s agents had with Minister Jolivet and the officials of the Department of Energy and Resources. Mr. Lafontaine provided many explanations which are summarized in the following excerpts from his testimony:

[TRANSLATION]

Look, I am not in politics, but it seemed that the Department’s regulations did not permit transactions between companies, inter vivos transactions respecting supply contracts, it was completely prohibited and the Department did not accept any dealings. So suggestions were made to us for the purpose of achieving these ends and we were naturally very, very, very reluctant, very, very reluctant to proceed in that manner because the first point or the second point of the memo that mentioned the sale of the Forex mill, to sell our mill to a company in bankruptcy ... and the directors were very reluctant. That is why that was delayed, delayed, delayed.

...We were very much afraid to see a mill that was profitable, that was ours, pass to a company that was bankrupt. That’s what ... we were very, very reluctant about that. [7]

One of the appellant’s counsel then asked the witness whether it had been explained to him why it was necessary that the mill be transferred to Forex Inc., then from Forex Inc. to Filifor Inc. The witness gave the following answer:

[TRANSLATION]

It was necessary that ... first, the supply contracts that were available in the region, that were available because of this situation, became available for the Department, were in the hands of Forex.

And from the way it was explained to us, it was absolutely necessary that the mill go to Forex so that an additional volume could be allocated to that mill, which became perhaps Forex’s seventh or eighth mill, and it had to go there so that an additional volume would be allocated to the mill before it was retransferred to Filifor.

… The cutting rights are definitely attached to a mill.

...So, in the first transaction, Landrienne sold its mill to Forex; it sold its mill to Forex with the supply that was attached to that mill. And, once it was in the Forex group, the Department could allocate a portion of other supplies and attach that, increase the volume attached to that mill before restransferring it.

[the mill and the] additional [supplies] were retransferred to Filifor, to a new company. Consequently, all that was done for the department; otherwise that would not have been done. And I believe that was clear in Minister Joli vet’s press release immediately after it was accepted, around August 22. [8]

Mr. Lafontaine emphasized that the appellant’s objective was to increase its timber supply. In his view, the appellant was not the only one to benefit from this reorganization because there was a reallocation of timber supplies in the region affecting the appellant, Forex Inc. and Groupe Gérard Saucier Ltée.

The same witness stated clearly that there had been no written or oral contract between the Government of Quebec and the appellant to require the latter to give Forex Inc. an advantage. He also testified that the appellant never gave Forex Inc. a mandate to do anything whatever for it in 1985, nor had Forex Inc. acted for the appellant. In his view, there was no special or close relationship between the appellant and Forex Inc. at the relevant time; their relationship was of the same kind as with the other lumber companies in the region.

When asked to provide explanations respecting subparagraph 6(g) of the Reply to the Notice of Appeal on an allegation that the appellant had had to invest $2,500,000 in Forex Inc. as part of a comprehensive recovery plan by the latter, Mr. Lafontaine stated that no undertaking was made by Minister Jolivet, but that it had been suggested that the appellant sell its saw mill to Forex Inc., which in turn would resell it to Filifor Inc. These two sales were conditional on an additional timber supply being provided to Filifor Inc. by the Government of Quebec. In cross-examination, Mr. Lafontaine stated that the appellant had made no capital investment in Forex Inc., but, he said, what had been agreed upon concerned the sale of the saw mill to Forex Inc., and the Department had agreed to reallocate additional timber supplies to the Forex Inc. saw mill before it was retransferred to Filifor Inc.

Réjean Rodrigue, coordinator of Revenue Canada’s Rouyn-Noranda audit centre, was called to give his version of the facts relating to the tax treatment of the appellant. He had considered that Filifor Inc. was a subsidiary of the appellant since the preferred shares were convertible to common shares at the discretion of their holder, the appellant. This option gave the appellant effective control. Mr. Rodrigue also noted that, when Forex Inc.’s accounting records were examined, there was no mention of the purchase by Forex Inc., of the sale of the appellant’s saw mill by Forex Inc. or of the resale by Forex Inc. to Filifor Inc. The only entry he noted concerned the issuing of 2,500,000 preferred shares to the appellant and their redemption at a nominal value.

The auditor considered that Forex Inc. had received $2,500,000 from the appellant “in respect of compensation for the alienation of an intangible asset”, as he put it in his letter to the appellant dated February 8, 1990. He relied in particular on the letter dated March 6, 1985, sent to Mr. Cossette by Minister Jolivet. The following paragraph is particularly relevant:

[TRANSLATION]

The reorganization that you are proposing in your supplies was presented to us in detail in a letter sent to Jean-Claude Mercier on December 18, 1984, and it is essentially based on the following points:

(a) closing of the Bernetz saw mill and redistribution of the supply to Forex-Champneuf, an eventual Forex project in Matagami and Scierie Landrienne in return for an injection of funds in the amount of $2,500,000 by this last company;

(b) closing of the Barraute saw mill;

(c) amendment of the supply arrangements of the Champneuf, Val d’Or, Sullivan, and Scierie Landrienne saw mills in return for an injection of funds in the amount of $2,500,000;

(d) status quo for the Malartic and Lebel-Sur-Quévillon mills.

According to the auditor, the appellant’s eligible capital expenditure within the meaning of paragraph 14(5)(b) of the Income Tax Act lay in “the waiver of an obligation that had to be obtained upon the transfer of the value of the saw mill”. The appellant was required to pay this amount of $2,500,000 so that the Minister responsible for Forestry could do what had to be done in order to proceed with the allocation of the forest assets. Further on in the auditor’s report of November 30, 1990, it is stated that the appellant did not receive an “intangible asset” from Forex Inc. in consideration of the sale of its property. It received “acknowledgement of the payment of its compensation payable to Forex since all the preferred shares issued by Forex to Scierie had a real value of $1.00”.

In cross-examination, the auditor admitted that he had not examined among other things the recovery plan of October 16, 1985 and the Superior Court judgment dated October 18, 1985. The auditor contended that the appellant had received an eligible capital property and that “the eligible capital property was the compensation”, “it was the waiver, ... it was the extinction of the obligation to pay the compensation to Forex.” One of the appellant’s counsel asked the auditor how the payment “could be a prop erty” for the appellant when it “took the payment and gave it to Forex”. The auditor answered that it had purchased a property, which was the compensation.

The auditor confirmed the position he had taken in his examination for discovery that the Minister of National Revenue had abandoned the idea that Forex Inc. was the appellant’s agent as an argument in support of his assessment. To the question as to whether the “fiscal transgression” was in essence the restoration of the unamortized portion of the capital cost of the property, the auditor answered in the negative. During the same cross-examination, the auditor repeated that the consideration the appellant received for the sale of its saw mill was simply the “acknowledgement of the payment of its compensation payable to Forex” and that the amount agreed upon must include the amount of compensation paid to Forex Inc.; it constituted compensation other than shares. In fact, at page 11 of his report, the auditor wrote as follows:

[TRANSLATION]

Scierie did not receive an intangible asset from Forex in consideration of the sale of its assets. It received acknowledgement of the payment of its compensation payable to Forex since all the preferred shares issued by Forex to Scierie had a real value of $1.00.

The auditor also admitted that he had not considered the possible application of paragraph 85(1)(e.2) since the consideration received by the appellant was less than the fair market value of the property transferred. Nor did the auditor consider the possible application of the legal concepts of the stipulation for the benefit of a third party and of the promise of a guarantor (“promesse de porte-fort”) to the elements of this situation.

Appellant’s arguments

It was first argued on behalf of the appellant that the purpose of the various transactions in which it had been involved was not to avoid tax. According to Minister Jolivet, those transactions would make it possible to “form the link” and to comply with the principles of the White Paper on forest resources, which was to become public shortly and to be the subject of legislation. It was contended on behalf of the appellant that it had wanted to increase its timber supply for its saw mill, but, to achieve this goal, it had to agree to comply with certain policies of the Government of Quebec. Counsel for the appellant admitted that there had naturally been an assess- ment of the tax effects at the time the election provided for under section 85 of the Income Tax Act had to be made.

The appellant argued that the consideration it received at the time of the sale of its saw mill was that which was indicated in the contract of sale, that is the assumption of a debt, the issuing of a promissory note and of preferred shares of Forex Inc.’s capital stock and nothing more.

As its main argument, the appellant stated that it could not be claimed that a contract had been entered into with Minister Jolivet resulting in legal obligations for the appellant. The appellant argued on this point that there could not have been a stipulation for the benefit of a third party whereby the Minister was the stipulator and the appellant made an undertaking toward Forex Inc. The appellant went on to say that Minister Jolivet alone could not contract on behalf of the Government of Quebec as it was necessary that a decree be issued by the government itself.

The appellant also claimed that the respondent could not fall back on the promise of a guarantor (“promesse de porte-fort”) and contend that Minister Jolivet had “acted as a guarantor” toward the appellant in obtaining a decree from the Government of Quebec. It referred on this point to the author Jean- Louis Beaudoin, [9] who defined the promise of a guarantor as follows:

[TRANSLATION]

The act whereby a party promises his co-contracting party that a third party will make an undertaking towards him.

In the appellant’s view, Minister Jolivet could not possibly have made an undertaking legally binding on the Government of Quebec. If the decree was not issued, there was no possible recourse against the Minister concerned. According to the appellant, for the position of the Minister of National Revenue to be affirmed, the Minister would have to rely both on a stipulation for the benefit of a third party and on a promise of a guarantor. It was also emphasized that Minister Jolivet did not want there to be any dealings over the rights arising from the supply agreements. Those rights are allocated by the Minister having authority in the matter and solely by him. To act otherwise would be to go against section 106 of the Lands and Forests Act and a judgment by the Quebec Court of Appeal in Lake Megantic Pulp Co. c. Québec (Procureur général)}® [10] confirming the decision by Letarte J. of the Superior Court.

The appellant attached considerable importance to the fact that nowhere in the Reply to the Notice of Appeal was it alleged that there was any obligation whatever between the appellant and Minister Jolivet for the purpose of securing an advantage to Forex Inc. The appellant not only argued that it had no obligation to pay any amount whatever to Forex Inc., be it an obligation arising from an agreement between the appellant and Forex Inc. or an obligation between the Government of Quebec and the appellant in favour of Forex Inc. Even assuming that such an obligation existed, the payment of that obligation could not possibly have constituted consideration other than shares in the circumstances in which the sale of the saw mill by the appellant to Forex Inc. took place. The payment of an obligation, it was stated, cannot be a consideration for the party that pays.

The appellant submitted that the tax consequences had to be applied to the transactions as they took place based on the circumstances as a whole. The substance of the transactions, it was submitted, was considered only in cases of tax avoidance. The appellant did not make a gain; it had to pay $2,500,000.

Respondent’s arguments

Counsel for the respondent argued that the respondent had brought no new facts and had not altered the assumptions of fact made by the Minister of National Revenue. The basis for the assessment was not changed. There was no reversal of the burden of proof. However, in the course of discussions held by Department of National Revenue officials they may have affixed various labels to facts with which we are dealing, such as stipulation for the benefit of a third party, promise of a guarantor and mandate.

In his analysis of the various transactions, counsel for the respondent emphasized the following facts.

The market value of the appellant’s saw mill assigned to Forex on November 21, 1985, by means of a rollover under section 85 of the Income Tax Act was fixed at $3,000,000. When the saw mill was transferred by the appellant to Forex Inc., the appellant received $500,000 from Forex Inc. representing the assumption of debts for the same amount and 2,500,000 preferred shares of the capital stock of Forex Inc. On that same day, the appellant granted Forex Inc. an option to purchase all of those preferred shares for $1.00. Counsel for the respondent therefore claimed that the appellant had sold its $3,000,000 saw mill for $500,001. That same mill, for which Forex Inc. paid $500,001, was resold on the same day to Filifor Inc. by Forex Inc. for $3,000,000, including $2,500,000 cash. In the end, he emphasized, Forex Inc. received the sum of $2,500,000. According to the respondent, the reason for the $500,001 selling price of the appellant’s plant appears in the third recital of an agreement dated October 16, 1985, between the appellant and Forex Inc. — an agreement that was cancelled on November 21, 1985, the day the appellant’s mill was sold to Forex Inc. For reasons of convenience, this recital is reproduced again below:

WHEREAS Forex Inc. is prepared to waive in Filifor’s favour a timber supply contract for an annual volume of 127,350 cubic metres from the Harricana South area so that Filifor will hold a total annual volume of 195,270 cubic metres from the Harricana South area.

Counsel for the respondent concluded from the events and the transactions that an agreement had necessarily been reached between the appellant and Forex Inc. following negotiations. In his testimony, Minister Jolivet categorically stated “that he had never advanced any figures”. Consequently, the amount of $2,500,000 could not have come from Minister Jolivet or the department concerned. In his analysis of the evidence, counsel for the respondent pointed out that Forex Inc. held supply contracts which had not been revoked by the government and that Forex Inc. therefore enjoyed bargaining power. The contract dated October 16, 1985, between the appellant and Forex Inc. confirms that Forex Inc. had agreed to waive a certain supply contract. Minister Jolivet made the agreement between the appellant and Forex Inc. a precondition for the signing of new supply agreements. Counsel for the respondent emphasized that the reason the appellant apparently paid Forex Inc. $2,500,000 could not be “anything other than to provide compensation for what Forex Inc. still had but agreed to let go”. In his view, it did not matter whether the purpose of the payment was to “to waive” the rights under the supply contract, “to speed up the process”, “to compensate” or “to buy peace”. According to counsel for the respondent, it must be determined what the consideration other than shares received by the appellant actually was.

Although section 245 of the Income Tax Act, as it read at the time, is invoked in the Reply to the Notice of Appeal, counsel for the respondent stated in his argument that he was no longer relying on that provision.

Counsel for the respondent claimed, and this was his main argument, that, in addition to $500,000, the appellant had received the sum of $2,500,000 representing the extinction of the appellant’s obligation to compensate Forex Inc. for its waiver of certain timber supply rights which the appellant would not otherwise have obtained.

Analysis

The sole issue concerns the determination of the amount of the consideration (other than shares of the capital stock of Forex Inc.) received by the appellant for the sale of its saw mill, having regard to the provisions of subsection 85(1).

More specifically, it must be determined whether the consideration other than the shares of the capital stock of Forex Inc. received by the appellant at the time of the sale of the appellant’s mill amounted to $500,000, as the appellant claims, or to $3,000,000, as the respondent contends.

It is clear from the evidence that the contracts entered into on November 21, 1985, and in the following weeks and the transactions that were conducted on that day and some time afterward — that is, the aforementioned contracts and transactions — had been planned some time previously and that those contracts and transactions were interrelated and must be considered as forming an indissociable whole.

Considering only the contract of sale of the saw mill entered into by the appellant and Forex Inc. on November 21, 1985, I find it revealing to consider what the fair market value of the total consideration received by the appellant from Forex Inc. was at the time of that sale.

It is clear from the evidence that the appellant received as consideration from Forex Inc.:

(a) the assumption by Forex Inc. of a debt of the appellant toward Lavoie et Frères Inc. amounting to $260,654.44, including principal and interest;

(b) Forex Inc.’s undertaking to pay the appellant, on demand, the sum of $239,345.56;

(c) 2,500,000 fully paid up and non-contributory preferred shares of the capital stock of Forex Inc.

The fair market value of the first two parts of the consideration was not disputed. Those two parts had a fair market value of $500,000.

What was the value of the 2,500,000 preferred shares of Forex Inc.? No direct evidence was adduced on this question. We know, however, that Forex Inc. was suffering very serious financial difficulties and was subject to the Companies’ Creditors Arrangement Act. Furthermore, on the same day, the appellant granted Forex the option to purchase the 2,500,000 preferred shares it held in Forex Inc.’s capital stock for $1.00. This purchase option granted on November 21, 1985, was exercised by Forex Inc. on December 12, 1985. It may therefore be inferred that the 2,500,000 preferred shares of Forex Inc. had only nominal value on November 21, 1985.

Considering both the sale on November 21, 1985 and the option the appellant granted to Forex Inc. on the same day for the 2,500,000 preferred shares, one would be inclined to believe that the appellant, which it was admitted was dealing with Forex Inc. at arm’s length at the time of these transactions, made a very bad deal. It apparently transferred property worth $3,000,000 to Forex Inc. and received in return property worth $500,001, that is the assumption of its debt of $264,654.10 toward Lavoie et Frères Inc., a demand note for $239,345.50 and 2,500,000 preferred shares of the capital stock of Forex Inc. that had a value of one dollar.

An attempt must be made to find an explanation for this imbalance in the contributions made by the two parties because, on both sides, we are dealing with corporate executives who have been operating businesses in the forestry field for a number of years.

First, it should be noted that the sale of the saw mill on November 21, 1985, to which the appellant and Forex Inc. were party was subject to two conditions:

(1) “that all the assets acquired be resold to Filifor Inc. within five days” after November 21, 1985:

(2) “that Filifor Inc. obtain from the Government of Quebec (Department of Energy and Resources), within 30 days following the date hereof, a supply contract for a volume of 195,000 cubic meters annually in the Matagami Crown forest, Harricana South area”.

Both conditions were met:

• with respect to the first condition, under a contract also dated November 21, 1985, Forex Inc. sold the same property to Filifor Inc., represented by its president Gilbert Gonthier, for $3,000,000; the clause relating to the price stipulates that Filifor Inc. had to pay for and on account of Forex Inc. the sum of $2,500,000 to the Royal Bank of Canada in accordance with the terms of a deed of loan, $260,654.10 to Lavoie & Frères Inc. and, lastly, $239,345.56 to the appellant;

• as to the second condition, a Government of Quebec decree dated November 27, 1985, authorized Minister Jolivet to enter into a supply agreement with Filifor Inc. for a volume of 195,000 cubic meters annually in the Matagami Crown forest. A supply agreement was subsequently signed between the Government of Quebec and Filifor Inc.

I find it appropriate in the context of this analysis to consider who controlled Filifor Inc. or held its capital stock. First of all, the appellant admitted the allegation made in subparagraph 6(h) of the Reply to the Notice of Appeal that Filifor Inc. was incorporated on August 30, 1985, and that the appellant was its sole shareholder until November 21, 1985. As alleged in subparagraph 6(i) of the Reply to the Notice of Appeal, on November 21, 1995 [sic] Forex Inc. purchased 100 common shares of Filifor Inc. for $100 and the appellant invested the sum of $2,765,000 in Filifor Inc. by paying the sum of $265,000 and subscribing 2,500,000 preferred shares convertible into common shares at any time. Also on that day, November 21, 1985, Forex Inc. granted the appellant an option to purchase the 100 common shares of Filifor Inc. for $100, according to the allegation appearing in subparagraph 6(j) of the Reply to the Notice of Appeal. Lastly, on December 12, 1985, the appellant exercised its option to purchase the 100 common shares of Filifor Inc. for $100, as is indicated in subparagraph 6(q) of the Reply to the Notice of Appeal.

It appears from these facts, which are stated in subparagraphs 6(i), (j) and (q) of the Reply to the Notice of Appeal, which were admitted, that the appellant at all times controlled or was able to control Filifor Inc., although the latter was for a few days a subsidiary of Forex Inc. It will also be recalled that, pursuant to the decree of November 27, 1985, Filifor Inc. was awarded the supply contract for the exploitation of the Matagami Crown forest, in the Harricana South area. On this point, it is not without interest to add, as stated in subparagraph 6(r) of the Reply to the Notice of Appeal, that the appellant leased the saw mill which the appellant had owned until November 21, 1985, from Filifor Inc. for $100,000 a month. Furthermore, again according to subparagraph 6(r), the appellant continued its operations without interruption after November 21, 1985, in the same facilities, while benefiting from the new supply contract concerning the Matagami Crown forest in the Harricana South area. In other words, after the numerous transactions that were conducted on November 21, 1985, and in the weeks that followed, the saw mill in question, which was the appellant’s property until November 21, 1985, was purchased on the same day by Filifor Inc., a company solely owned by the appellant. In economic terms, it seems fair to say that the appellant did not divest itself of its interest in this saw mill. This conclusion explains why the appellant was able to agree to receive consideration of considerably less value than that of Forex Inc. when it signed the contract for the sale of the saw mill to Forex Inc. In the final analysis, the appellant was able to retain ownership of the saw mill through its wholly owned subsidiary Filifor Inc.

There remains only one more piece of documentary evidence for me to consider, namely the agreement of October 16, 1985, between the appellant and Forex Inc. This agreement, which was cancelled on November 21, 1985, provided in particular for the transactions that in fact were almost all conducted on November 21, 1985, as appears from the description of the essential clauses of that contract dated October 16, 1985, which is given above in the enumeration of the contracts and transactions that were made on November 21, 1985.

This contract of October 16, 1985, also contained a recital that was highly revealing in my view. This recital describes a waiver made by Forex Inc. in Filifor Inc.’s favour of the rights that it held under a contract for the supply of timber from the Harricana South area. This recital, it will be remembered, reads as follows:

WHEREAS Forex Inc. is prepared to waive in Filifor’s favour a timber supply contract for an annual volume of 127,350 cubic metres from the Harricana South area so that Filifor will hold a total annual volume of 195,270 cubic metres from the Harricana South area.

On the whole of the evidence, I am convinced and conclude that the sum of $2,500,000 that was paid by the appellant to Filifor Inc. and by the latter to Forex Inc. was intended to obtain Forex Inc.’s consent to abandon the rights that the latter held prior to November 21, 1985, pursuant to the supply contract in question. This abandon or waiver by Forex Inc. could not, strictly speaking, be in the appellant’s favour, despite the text of the recital cited above from the contract of October 16, 1985, since Forex Inc. could not assign its rights under the supply contract. Furthermore, the Government of Quebec, through Minister Jolivet, would not have consented to this waiver by Forex Inc. in the appellant’s favour. This was quite simply a waiver, pure and simple, by Forex Inc., which then enabled the Government of Quebec to allocate to Filifor Inc. the timber that had previously been under a supply contract to which Forex Inc. was a party.

If we consider the whole of the evidence and the interdependence of the transactions conducted on November 21, 1985, and in the weeks that followed and if we try to determine in the final analysis the main financial facts with respect to the appellant and to Forex Inc., we come to the following conclusions:

• With respect to the appellant:

(1) the appellant ultimately transferred its saw mill (lands, building and machinery) to its wholly-owned subsidiary, Filifor Inc., on November 21, 1985, with the collaboration and consent of Forex Inc.:

(2) the appellant obtained a contract for the supply of timber in the Harricana South area, which had previously been exploited by Forex Inc., from the Government of Quebec for a five-year period, renewable for a 10-year period;

(3) the appellant paid a total of $2,500,000, an amount that was forwarded, for the benefit of Forex Inc., to one of its creditors through Filifor Inc.;

• With respect to Forex Inc.:

(1) Forex Inc. benefited from a disbursement of $2,500,000 made by the appellant through Filifor Inc. which was used to repay a debt of Forex Inc. of the same amount to the Royal Bank of Canada;

(2) Forex Inc. abandoned any rights that it had under its supply contract with the Government of Quebec with respect to the Harricana South area, knowing that this waiver enabled the Government of Quebec to enter into a new supply contract with Filifor Inc., the appellant’s subsidiary.

If the financial aspects of the aforementioned transactions involving the appellant and Forex Inc. are viewed together, it must be concluded that the appellant made a disbursement of $2,500,000, which in the final analysis was for the benefit of Forex Inc., which in turn abandoned its rights to a supply contract to enable the Government of Quebec to enter into a supply contract with Filifor Inc. in respect of the same forest resources. This perception of the situation is consistent with the contract of October 16, 1985, between the appellant and Forex Inc. and, in particular, reflects in essence the third recital cited above from that contract.

Does Forex Inc.’s abandon of the rights it held under the supply contract in question represent a consideration received by the appellant for the sale of its saw mill (lands, buildings and machinery) to Forex Inc. on November 21, 1985?

If we keep in mind the contracts signed on November 21, 1985, and certain subsequent transactions and agreements, we realize that the sale of the saw mill that belonged to the appellant until November 21, 1985, before it was sold to Forex Inc. and resold to Filifor Inc. were merely two transactions enabling the Government of Quebec to grant a supply contract to Filifor Inc. in accordance with its policies. The sale of the saw mill to Forex Inc. did not benefit Forex, which owned the mill only momentarily. The injection of $2,500,000 which was ultimately used to pay a debt of Forex Inc. was not related to the sale of the saw mill, but rather to Forex Inc.’s abandon of the rights it held under a contract for the supply of timber in the Harricana South area.

Having regard to these remarks, two approaches are possible, and they lead to the same conclusion.

First, if we must consider the transaction in isolation (that is to say without taking into account any other transaction conducted on that day or subsequently) the consideration received for the sale of the saw mill by the appellant to Forex Inc. on November 21, 1985 (apart from the shares of Forex Inc.) was $500,000.

If we must consider all the transactions conducted on November 21, 1985, or subsequently, it is my view that it is not realistic to link the sale of the saw mill to the abandon of the rights that Forex Inc. had under its supply contract. Instead, Forex Inc.’s abandon of the right arising from that contract is related to the appellant’s injection of $2,500,000 for Forex Inc.’s benefit. As a result, the consideration received by the appellant for its disbursement of $2,500,000 was Forex Inc.’s waiver of its rights relating to the supply agreement respecting the Matagami forest.

In my view, the Minister of National Revenue’s error was to assume, in making the assessments under appeal, that the appellant had received a consideration of $2,500,000 in addition to the elements of the consideration expressly stated in the contract dated November 21, 1985, for the sale of the saw mill by the appellant to Forex Inc. This error stemmed from the fact that the Minister linked the sale of the saw mill directly to the waiver of the rights that Forex Inc. had under a supply contract in respect of the Matagami forest, whereas that waiver of rights was related instead to the appellant’s disbursement of $2,500,000 ultimately for the benefit of Forex Inc. It seems to have been forgotten that it was not consistent with the intention of the parties concerned that Forex Inc. should acquire the saw mill permanently. This sale of the saw mill to Forex Inc. was made for the sole purpose of facilitating other transactions and in order to comply with certain policies of the Government of Quebec; that sale was merely a transitional, indeed momentary, stage.

It is not surprising in these circumstances that the Minister of National Revenue had considerable difficulty describing this additional consideration that the appellant allegedly received upon the sale of the saw mill. The Minister of National Revenue thought at one point that what he was dealing with was the disposition of an “intangible asset”. At another point, it was thought the matter concerned the extinction of an obligation to compensate Forex Inc. On another occasion, the auditor advanced the argument in a letter dated September 20, 1990, that the appellant had received “acknowledgement of the payment of its compensation payable to Forex”. This phrase “acknowledgement of the payment of its compensation payable to Forex” seems to me to be a mysterious or enigmatic sequence of words; it is a meaningless phrase. At times it appears as though the appellant’s proceeds of disposition from the sale of the saw mill were confused with the consideration that it received.

Nor is it surprising that the auditor was unable at the hearing to give a satisfactory explanation of the various wordings used by the Minister of National Revenue to describe this additional consideration received by the appellant in his correspondence with the appellant’s agents. In my view, this was an impossible task.

I therefore conclude that, apart from the shares of Forex Inc.’s capital stock, the consideration received by the appellant in the sale of the saw mill on November 21, 1985, was $500,000. No other consideration was received by the appellant in direct relation to the sale of the saw mill.

For these reasons, the appeals are allowed with costs and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessments on the basis that the agreed upon amount of $500,000 in the election made by the appellant and Forex Inc. was consistent with the provisions of subsection 85(1) of the Income Tax Act.

Appeal allowed.