Dunrobin Motors LTD v. Minister of National Revenue, [1979] CTC 2717, 79 DTC 619

M J Bonner:—The appellant appeals from assessments of income tax for its 1973, 1974 and 1975 taxation years. In each of those years the appellant received payments from Imperial Oil Limited (hereinafter called “Imperial”). The respondent assessed on the basis that the payments were income. The appellant contends that the payments were on capital account.

The appellant was, at all material times, the owner of a parcel of lands (hereinafter called ‘‘the lands’’) at Winnipeg used for the purpose of a gasoline service station. The appellant’s shares are owned by Jacob Reimer and members of his family. Mr Reimer had been a garage keeper for thirty years. For many years before 1973 he operated a service station on the lands.

On April 18, 1973, the appellant entered into an agreement with Imperial. The agreement, called a Dealer Improvement Agreement, recited the appellant’s intention to operate a service station on the lands and that Imperial had agreed to assist the appellant in improving the operation of the business by the payment of money. The relevant parts of the agreement were:

1. Concurrently with entering into this Agreement the Dealer (the appellant) and Imperial shall enter into an Esso Dealer Sales Agreement (the ‘Dealer Sales Agreement’) in the standard form used by Imperial at the date of this Agreement.

2. (a) Imperial agrees to pay to the Dealer the sum of $92,500 (the ‘monetary consideration’) as follows:

May 1, 1973	$18,500
May 1, 1974	$18,500
May 1, 1975	$18,500
May 1, 1976	$18,500
May 1, 1977	$18,500

to assist the Dealer in carrying on his business.

(b) Imperial will loan to the Dealer and install two 5,000 gallon underground storage tanks.

3. If before the expiration of 5 years from May 1, 1973:

(a) the Dealer shall fail to observe or perform any of his covenants and agreements contained in the Dealer Sales Agreement; or

(b) The Dealer Sales Agreement shall expire or be terminated.

Imperial may by written notice (the ‘repayment notice’) require the Dealer to repay the unearned portion of the monetary consideration and the Dealer shall repay to Imperial said unearned portion of the monetary consideration within 10 days after such notice is given.

(The ‘unearned portion’ was an amount prorated by time)

4. The Dealer hereby grants to Imperial the right of first refusal to purchase or lease the premises on the terms of any bona fide written offer received by him from the first day of May, 1973 which he is willing to accept.

If Imperial does not exercise its right to purchase or lease the premises the Dealer shall be at liberty at the expiration of the said period of 60 days to sell or lease the premises on the terms and conditions containted in the bona fide written offer but subject to the terms of this Agreement including this option.

Provision was also made for security for repayment of the unearned portion of the monetary consideration.

The Dealer Sales Agreement was entered into between Imperial and the appellant on July 18, 1973. The agreement provided:

1. Imperial hereby appoints the Dealer an ESSO Dealer and the Dealer hereby agrees to act as an ESSO Dealer for the sale of ESSO petroleum products on the premises.

3. Imperial agrees to sell to the Dealer his entire requirements of gasoline and other motor fuels for sale at the premises, and such quantities of the lubricating oils, greases and other petroleum products and of the ATLAS tires, batteries, and automotive parts and accessories distributed by Imperial from time to time in the Dealer’s area as the Dealer may require in order to meet the requirements of his customers for the brands of such products distributed by Imperial.

6. The Dealer agrees to purchase from Imperial his entire requirements of gasoline and other motor fuels for sale at the premises, and such quantities of the lubricating oils, greases and other petroleum products distributed by Imperial from time to time in the Dealer’s area as the Dealer may require in order to meet the requirements of his customers for the brands of such products distributed by Imperial. The Dealer agrees that no gasoline or other motor fuels except those purchased from Imperial hereunder shall be kept, sold or otherwise dealt in on the premises. The Dealer agrees to accept delivery of the gasoline and other motor fuels into the tankage on the premises in full tank truck or such lesser quantities and at such time or times as Imperial may determine.

20.(a) If any gasoling or other motor fuels which have not been purchased from

Imperial hereunder are kept, sold or otherwise dealt in on the premises, or if the Dealer shall fail to sell any gasoline or other motor fuels stictly in accordance with the grades thereof as designated by Imperial then, in each such case, and as often as the time shall happen, Imperial shall be entitled to terminate this Agreement forthwith upon giving written notice of termination to the Dealer.

21. Notwithstanding anything herein elsewhere contained in this Agreement, Imperial shall be entitled to terminate this Agreement on ten (10) days’ written notice to the Dealer if the Dealer shall cease to carry on the business of the sale of ESSO petroleum products on the premises . . .

Mr Reimer testified that from April 1, 1973, the service station was operated by his son, or a company controlled by his son. Mr Reimer wanted to retire and have his son “take over the business”. He stated that Imperial was aware of that plan. His son had, in order to take over the station, resigned from a position which he had held for many years as an Imperial sales representative. In May of 1973 the appellant granted a lease to Mr Reimer, Jr, for a term of five years less one day from May 1, 1973. The lease provided, inter alia:

2. This agreement and everything therein provided shall be subject to and in accordance with the provisions contained in the agreement between the Lessor and Imperial Oil Limited made in April, 1973 and the Esso Dealer Sales Agreement therein referred to . . .

The evidence of Mr Reimer that Imperial was well aware of the plan that the son take over the operation of the service station was uncontradicted. Imperial billed the son’s company for gasoline delivered to the service station and, of course, the son’s company paid. It seems clear on that evidence that Imperial, by its conduct, waived its rights with respect to assignability of the Dealer Sales Agreement, at least insofar as the operation of the service station by the son or his company was concerned.

Mr Reimer stated that the money paid under the Dealer Improvement Agreement was paid for the right of first refusal. That statement reflected Mr Reimer’s conclusion or analysis and nothing more. He stated further that in the spring of 1973 he had no intention of disposing of the service station and he asserted that the right of first refusal . . is the way they (Imperial) hang on to your property”.

The Dealer Improvement Agreement, although suggesting that the payments were made to “assist the Dealer in carrying on his business”, contains no provision requiring that the money paid be used in any specified way. Mr Reimer stated that the money was not spent on the station, that it was in good shape and that his son, as lessee, had to keep it in good shape.

The evidence also established that for a period of five years before May of 1973 the property had been leased to Imperial by the appellant, or at least by a company of which Mr Reimer was principal, at an annual rental of nearly $12,000 and subleased back by Imperial at an annual rental of $1. The sublease called for operation by the sublessee of a service station and for the execution and delivery by the sublessee of a Dealer Franchise Agreement. The Dealer Franchise Agreement called for the purchase by the Dealer from Imperial of all of the Dealer’s requirements for gasoline and lubricants. During that five year period the lands were subject to a right of first refusal granted to Imperial for $1 and other unspecified considerations.

The appellant argued that the monetary consideration payable under the Dealer Improvement Agreement was paid solely in consideration of the grant by it of the right of first refusal and was a capital receipt.

The respondent included the sum of $18,500 received by the appellant in each of the years under appeal in the computation of income. The respondent’s position as set forth in the Replies to the Notices of Appeal is as follows:

9. In so assessing the appellant . . . he made the following assumptions:

(a) that the purpose of the annual payments of $18,500 from Imperial Oil Limited to the appellant was to assist the appellant in carrying on its business and in improving the operation of the business by supplementing or increasing the appellant’s operational revenues;

(b) that the Agreement as a whole related to a matter on revenue account of the appellant’s business—namely, the supply of stock and trade to the appellant by Imperial Oil Limited—so that the character of the annual payments of $18,500 were operating expenses to Imperial Oil Limited deductible on current account and revenue receipts on income account to the appellant.

10. He says in the alternative that if the annual payments of $18,500 from Imperial Oil Limited to the appellant were not income from a business, which he does not admit but denies, then he says the said payments were income from property or amounts received that were dependent upon the use of the appellant’s property.

11. He says in the further alternative that the annual payments of $18,500 from Imperial Oil Limited to the appellant were income from the carrying out of a scheme for profit making by the appellant that was an adventure in the nature of trade.

12. In the further alternative he says that if the annual payments of $18,500 from Imperial Oil Limited to the appellant were not income from a business or from property, which he does not admit but denies, then the said amounts constitute a capital gain to the appellant from the granting of an option on his property to Imperial Oil Limited half of which is income to the appellant as a taxable capital gain.

I might add that no Reply was filed for the 1975 taxation year.

In argument counsel for the appellant carefully analyzed the provisions of the relevant agreements in furtherance of his submission that the payments in issue were made solely for the right of first refusal. He pointed out that the appellant’s obligations under the Dealer Sales Agreement were not conditional upon the continued payment of the annual amounts required to be paid under the Dealer Improvement Agreement. Furthermore, he suggested, it was quite clear from the absence in the Dealer Improvement of any requirement that the money paid by Imperial to the appellant be used for any particular purpose and the fact that the appellant spent the money thus received for purposes unconnected with the service station, that the payments were unconnected with assistance to the appellant in carrying on its business. He submitted that if the Dealer Sales Agreement were terminated before April 30, 1978, the right of first refusal would continue to subsist until that date. In this regard he relied on Mr Reimer’s evidence that it was his understanding that the right of first refusal was for a term of five years. He suggested that the covenant of the appellant to enter into the Dealer Sales Agreement was not a basis for the payments because Imperial knew the appellant would not be operating the service Station.

Counsel continued that the amounts in question were not the proceeds of disposition of property. There was no grant of an option. There is a difference, he said, between an option and a right of first refusal.

The respondent, on the other hand, argued that the characterization of the payment depended entirely on the specific words of the agreements which were clear. He relied, inter alia, on the decisions in Evans v Wheatley, 38 TC 216 and McLaren v Needham, 39 TC 37.1 do not think that either case assists the respondent. In the former the payments in question amounted to a subsidy in the nature of an indemnity against day-to-day operating costs and the subject matter of the agreement under which payments were made was, from the standpoint of both payor and payee, stock in trade. I do not think that this case can be viewed as one in which a trader entered into a long-term agreement for the supply of stock in trade. Neither the appellant nor Imperial contemplated that the appellant would carry on the business of a service station during the period covered by the agreements.

In the McLaren case the payments were found to have been received for a particular purpose and could only be spent for that purpose. That purpose appears to have been the erection of a canopy structure of lasting benefit to the service station.

I have concluded that the appellant had succeeded in rebutting the assumptions upon which the assessments were based. As set out previously, both the appellant and Imperial well knew that the appellant intended to cease to carry on the business of operating the service station and had no intention itself of being the dealer, notwithstanding it was named as a party to the Dealer Sales Agreement. It was well known to both the appellant and Imperial that Mr Reimer, Jr, or his company, was to be the Dealer. Imperial, by its conduct, appears to have waived its right to insist that the business be carried on by the appellant.

The payments were not in the nature of a subsidy to assist the appellant in conducting a day-to-day operations of its business. I do not have to decide whether the payments were, as assumed by the respondent, operating expenses of Imperial. The characterization of the payments as deductible or otherwise by the payor does not assist in the characterization of them as income or capital in the hands of the payee.

The alternative argument advanced by the respondent at the hearing was that the payments received were dependent on the use of the appellant’s property and thus should be included in income by virtue of paragraph 12(1 )(g) of the Income Tax Act. It was, of course, open to the respondent to support the assessments in whole or in part on a basis not relied on in assessing (see Vineland Quarries and Crushed Stone Limited v MNR, [1970] CTC 12; 70 DTC 6043).

I cannot accept the appellant’s contention with respect to paragraph 12(1 )(g) that the payments in question were not dependent on the use of or production from property because it was not the intention or expectation of either party to the Dealer Improvement Agreement that the appellant itself carry on the business. I can find nothing in paragraph 12(1)(g) which excludes its operation in circumstances where “A” makes a payment to “B”, the owner of property, that is dependent upon the use of the property by “C”. No authority was cited by the appellant in support of the submission that such a restriction on the applicability of the provision exists.

In MNR v Duncan Morrison, [1966] CTC 558; 66 DTC 5368, Thurlow, J, as he then was, examined the ambit of paragraph 6(1 )(j) of the former Act and Stated at p 562 (5371):

It applies to amounts of money and is not confined to such amounts when representing rents, royalties or annuities or periodical receipts of a like nature to rents, royalties or annuities. The only qualifications required of such an amount appear to be that it be one that (1) has been “received” by the taxpayer in the year and (2) was “dependent upon use of or production from property”. While the words ‘rents, royalties annuities or other like payments of a periodical nature’, which by themselves suggest variability according to the extent of time or use or production, are not present in the section the qualification imposed by the words “dependent upon use of or production from property” in my opinion has the effect of limiting the ‘amounts’ referred to to amounts which vary with and are in that sense “dependent” in some way upon the extent of use or production from property whether according to time or quantity or some other method of measurement.

Although undoubtedly the payments were in part consideration for the grant of the right of first refusal, it is quite plain from the agreements that Imperial’s continued obligation to make them and its right to claim partial repayment were dependent upon the length of the period during which the service station property was used for purposes of a service station engaged in the exclusive sale of Imperial’s products. Paragraph 12(1 )(g) therefore applies.

The appeals for 1973 and 1974 must therefore be dismissed. For 1975, the appeal was from a notification that no tax was payable. The Income Tax Act does not authorize appeals from such notifications (see Her Majesty the Queen v Garry Bowl Limited, [1974] CTC 457; 74 DTC 6401). The respondent moved for dismissal of the appeal for 1975 on that basis. The appellant argued that Antoine Hulmann v MNR, [1977] CTC 201; 77 DTC 5153, casts doubt on the decision in Gary Bowl. Nothing in the reasons of the Federal Court of Appeal in that case leads me to conclude that the Federal Court of Appeal has in any way seen fit to depart from the rule laid down in Gary Bowl. That Court did not, in Hulmann, deal with the “nil assessment” question. No determination under subsection 152(1.1) appears to have been made. The motion must succeed.

Appeal dismissed.