Grant,
DJ:—This
is
an
appeal
by
Her
Majesty
the
Queen
from
a
decision
of
the
Tax
Review
Board
dated
November
25,
1977,
whereby
it
allowed
an
appeal
by
Transcontinental
Timber
Company
Limited,
hereinafter
called
“the
company”,
from
an
assessment
made
by
the
Minister
of
National
Revenue
pursuant
to
the
provisions
of
the
Income
Tax
Act,
RSC
1952,
c
148
as
amended
by
SC
1970-71-72,
c
63
in
respect
of
the
defendant’s
1973
taxation
year,
and
referred
the
assessment
back
to
the
Minister
for
reassessment.
Such
company
was
Ontario
incorporated
in
1942,
with
head
office
at
the
city
of
Toronto.
For
many
years
it
has
owned
the
surface
rights
in
land
in
excess
of
300,000
acres
in
northern
Ontario
consisting
of
seven
townships.
Four
of
these
are
west
of
Hearst
and
three
are
southeast
thereof.
Such
land
is
timbered.
The
company’s
business
consists
of
licensing
others
to
enter
on
designated
parts
thereof
and
cut
down
and
remove
the
timber.
The
company’s
income
consists
of
a
fee
paid
by
those
removing
the
timber
calculated
on
a
stumpage
basis.
It
finds
it
advisable
to
contract
with
such
cutters
on
a
long
term
basis
so
that
it
may
have
a
steady
income
therefrom
but
it
also
grants
the
right
to
cut
and
remove
timber
to
others
on
a
short
period
duration.
On
September
1,
1963,
such
company
entered
into
agreements
with
J
D
Levesque
Lumber
Limited,
Yvonne
Levesque
and
Hearst
Transport
and
Lumber
Limited
whereby
it
permitted
them
to
cut
timber
on
designated
areas
in
the
Township
of
Caithness
for
a
period
of
fifteen
years
therefrom.
Such
three
licensees
were
either
entirely
owned,
or
controlled
by,
one
family.
Each
licensee
was
obliged
to
deposit
and
maintain
the
sum
of
$15,000
by
way
of
security
for
payment
of
stumpage
dues
which
they
might
owe
the
company
from
time
to
time.
Each
licensee
was
also
bound
to
cut
minimum
but
not
to
exceed
a
maximum
of
timber
of
various
species
and
sizes
in
each
year.
The
licensee
also
had
a
right
to
first
refusal
of
renewal
of
such
license
at
the
end
of
the
term.
The
licensees
were
also
bound
to
build
a
forestry
road
for
access
to
and
from
the
areas
of
their
cutting,
with
the
company
having
a
right
to
the
same
as
well.
The
areas
of
cutting
and
the
minimum
and
maximum
amounts
to
be
cut
for
the
following
year
were
agreed
to
annually.
In
the
event
that
the
licensee
did
not
cut
the
minimum
in
any
year,
it
was
required
to
pay
for
such
deficiency
in
that
year,
but
was
permitted
to
cut
the
same
without
further
payment
in
the
following
year.
The
evidence
establishes
that,
from
the
year
1964
to
1972,
the
three
Levesque
agreements
provided
the
company
with
approximately
45%
of
the
company’s
annual
gross
income.
Through
such
years,
this
group
provided
about
68%
of
the
revenue
derived
by
the
company
from
its
long
term
licenses.
The
Levesque
group
were
confined
to
cutting
timber
in
only
one
of
the
seven
townships
in
which
the
company
owned
such
surfact
rights.
By
letter
dated
August
25,
1972,
the
Levesque
group
gave
notice
to
the
company
that
they
wished
to
terminate
such
contracts
as
soon
as
possible
and
asked
that
a
settlement
be
negotiated.
As
a
result
of
this,
an
agreement
was
entered
into
between
all
such
groups
and
the
company,
on
December
20,1972,
whereby
the
company
released
all
members
of
the
Levesque
group
from
further
obligations
under
the
contracts.
The
group
paid
the
company
the
sum
of
$95,000
in
consideration
thereof.
This
amount
was
paid
to
the
company
during
its
1973
fiscal
year.
The
settlement
did
not
disturb
or
endanger
the
company’s
surface
rights
in
such
lands
in
any
way.
The
title
to
the
bush
road
was
taken
over
by
the
Crown
so
it
formed
no
part
of
such
consideration.
The
Levesque
group
were
in
deficiency
in
cutting
at
the
time
in
amount
of
$37,000.
They
forfeited
one
half
of
the
timber
they
were
entitled
to
cut
in
the
following
year
under
the
terms
of
such
licenses.
The
deposits
of
$45,000
were
applied
as
part
payment
of
the
$95,000
consideration.
At
the
time
of
such
settlement,
the
licenses
still
had
about
5%
years
to
run.
In
July
of
1973,
the
company
entered
into
a
further
agreement
with
one
Tremblay
whereby
he
took
over
the
cutting
rights
where
the
Levesque
group
had
previously
cut.
The
term
of
this
license
was
five
years.
For
the
year
ending
April,
1972,
the
company
had
realized,
from
stumpage
fees
on
its
properties,
the
sum
of
$250,000.
For
the
year
ending
April
30,
1973,
its
revenue
from
such
source,
without
taking
the
$95,000
into
consideration,
was
$228,000.
For
the
following
fiscal
year,
its
receipts
from
such
source
amounted
to
$350,000.
This
steady
increase
in
such
revenue
was
due
to
market
demand
for
such
timber.
One
of
the
factors
in
arriving
at
such
settlement
was
the
fact,
that,
if
the
matter
was
not
settled,
the
company
could
sue
each
of
the
Levesque
group
for
the
stumpage
fees
on
the
minimum
amounts
of
timber
specified
to
be
cut
in
any
year
during
the
5
/4
years
that
remained
in
the
license.
The
question
as
to
whether
the
company
could
realize,
on
a
judgment
against
any
or
all
of
the
three
licensees,
was
also
pertinent.
In
its
tax
returns
for
the
fiscal
year
1973,
the
company
did
not
include
such
sum
of
$95,000
or
any
part
thereof
as
income,
but
take
the
position
it
was
a
capital
receipt.
The
minister
included
such
amount
in
his
assessment
as
income
to
the
company
within
the
meaning
of
subsection
9(1)
of
the
Income
Tax
Act.
The
question
the
Court
has
to
decide
is
.
.
.
“What
did
the
$95,000
represent?
What
place
in
the
economy
of
the
taxpayer’s
business
did
this
payment
take?”
The
Court
must
identify
the
purpose
for
which
the
amount
was
received.
London
and
Thames
Haven
Oil
Wharves,
Ltd
v
Attwooll
(1967)
2
All
ER
124,
Willmer,
LJ,
at
127.
The
judgment
of
the
Tax
Review
Board,
in
reversing
the
assessment
made
by
the
Minister,
based
its
decision
on
the
assumption
that
the
present
case
was
not
dissimilar
from:
MNR
v
Import
Motors
Limited,
[1973]
CTC
719;
73
DTC
5530.
In
such
case,
Import
Motors
had
been
appointed
the
exclusive
distributor
for
the
sale
of
Volkswagen
motor
vehicles
and
spare
parts
and
for
servicing
such
automobiles
on
the
island
of
Newfoundland
for
a
definite
period
of
time.
Volkswagen
terminated
such
distributorship
at
an
earlier
date
that
it
was
entitled
to.
The
claim
of
Import
Motors
for
its
consequent
loss
was
settled
between
the
parties
by
Volkswagen
paying
Import
Motors
$100,000.
Urie,
J
decided
that
the
amount
in
question
was
paid
as
compensation
for
the
termination
of
the
distributorship
agreement
and
represented
the
price
paid
for
the
loss
of
a
capital
asset
and
was
therefore
a
non-taxable
capital
receipt.
The
settlement
agreement
had
the
effect
of
surrendering
entirely
the
taxpayer’s
distributorship.
It
had
been
a
source
of
revenue
but
its
cancellation
deprived
Import
Motors
of
any
right
to
act
as
a
distributor
further
or
to
earn
any
further
income
therefrom.
In
his
judgment,
Urie,
J
quoted
from
Commissioners
of
Internal
Revenue
v
Fleming
&
Co
(Machinery)
Ltd
33
TC
57,
where
Lord
Russell
stated
at
63:
The
sum
received
by
a
commercial
firm
as
compensation
for
the
loss
sustained
by
the
cancellation
of
a
trading
contract
or
the
premature
termination
of
an
agency
agreement
may
in
the
recipient’s
hands
be
regarded
either
as
a
capital
receipt
or
as
a
trading
receipt
forming
part
of
the
trading
profit.
It
may
be
difficult
to
formulate
a
general
principle
by
reference
to
which
in
all
cases
the
correct
decision
will
be
arrived
at
since
in
each
case
the
question
comes
to
be
one
of
circumstances
and
degree.
When
the
rights
and
advantages
surrendered
on
cancellation
are
such
as
to
destroy
or
materially
to
cripple
the
whole
structure
of
the
recipient’s
profit-making
apparatus,
involving
the
serious
dislocation
of
the
normal
commercial
organisation
and
resulting
perhaps
in
the
cutting
down
of
the
staff
previously
required,
the
recipient
of
the
compensation
may
properly
affirm
that
the
compensation
represents
the
price
paid
for
the
loss
or
sterilisation
of
a
capital
asset
and
is
therefore
a
capital
and
not
a
revenue
receipt.
Illustrations
of
such
cases
are
to
be
found
in
Van
den
Berghs,
Ltd
(19
TC
390)
(1935)
AC
431,
and
Barr,
Crombie
&
Co,
Ltd
(26
TC
406)
1945
SC
271.
On
the
other
hand
when
the
benefit
surrendered
on
cancellation
does
not
represent
the
loss
of
an
enduring
asset
in
circumstances
such
as
those
above-mentioned—where
for
example
the
structure
of
the
recipient’s
business
is
so
fashioned
as
to
absorb
the
shock
as
one
of
the
normal
incidents
to
be
looked
for
and
where
it
appears
that
the
compensation
received
is
no
more
than
a
surrogatum
for
the
future
profits
surrendered—the
compensation
received
is
in
use
to
be
treated
as
a
revenue
receipt
and
not
a
capital
receipt.
See
eg
Short
Brothers,
Ltd,
12
TC
955;
Kelsall
Parsons
&
Co
(21
TC
608)
1938
SC
238.
(the
italics
are
mine)
One
difference
between
the
Import
Motors
case
and
the
present
one
is
that
Transcontinental
did
not
lose
any
of
its
property.
It
could
and
did
continue
to
license
the
cutting
of
timber
on
the
same
lands
to
others
and
collected
stumpage
fees
therefrom.
It
developed
that
it
entered
into
a
new
agreement
to
cut
timber
with
one
Tremblay
in
July
of
1973
which
was
more
profitable
to
it
than
the
former.
The
asset
which
yielded
the
stumpage
fees
to
Transcontinental
was
not
the
license.
They
only
established
the
terms
on
which
the
parties
bargained.
The
revenue
producing
asset
was
the
timber
lands.
The
revenue
producing
asset
had
not
been
lost
as
it
had
been
in
the
Import
Motors
case.
While
the
stumpage
fees
received
from
the
Levesque
group
formed
a
substantial
part
of
the
company’s
income,
it
cannot
be
said
that
the
cancellation
of
the
licenses
made
a
very
distinct
impact
on
the
company’s
business.
The
increased
revenue
in
the
same
year
as
well
as
that
of
1974
establish
this
fact.
At
the
most,
it
created
only
a
restriction
of
the
company’s
trading
opportunities.
In
Parsons-Steiner
Ltd
v
MNR,
[1962]
CTC
231
;
62
DTC
1148,
Thurlow,
J
(as
he
then
was)
held
that
a
sum
of
money
received
by
the
taxpayer
from
Doulton
&
Co
Ltd,
as
compensation
for
cancellation
of
the
agency
relationship
between
them,
was
a
capital
receipt
as
it
terminated
one
of
the
taxpayer’s
capital
assets.
In
the
present
case,
the
settlement
ending
the
license
to
cut
timber
was
merely
a
contract
made
in
the
ordinary
course
of
the
company’s
trade.
In
Parsons-Steiner
and
Import
Motors,
the
recipient
taxpayers
were
franchisees
who
were
being
compensated
for
loss
they
had
suffered
by
reason
of
the
loss
of
their
right
to
represent
their
franchisor
and
sell
its
products.
In
Transcontinental,
the
recipient
taxpayer
was
the
licensor
who
was
being
compensated
for
the
revenue
he
would
have
received
if
the
contract
had
continued.
In
my
opinion,
therefore,
the
payment
in
the
hands
of
the
company
must
be
treated
as
income
in
its
fiscal
year
1973.
The
appeal
will,
therefore,
be
allowed
with
costs
to
be
taxed
and
the
assessment
of
the
Minister
confirmed.
Email this Content