The Longueuil Meat Exporting Co Lid v. Her Majesty the Queen, [1973] CTC 386, 73 DTC 5306

Pratte, J:—This is an appeal from a reassessment of the plaintiff’s income tax for the 1966 taxation year. That reassessment was made on the basis that the plaintiff had improperly deducted from its income a capital outlay of $500,000.

The plaintiff (hereinafter referred to as “Longueuil Meat”) has carried on for many years the business of rendering in Rivière des Prairies, near Montreal. This business, according to the “Agreed Statement of Facts” filed at the hearing, includes:

(a) operation of a fleet of trucks which pick up fat, bones, grease, feathers, viscera, condemned material and tankage (referred to herein as “raw material’’) from suppliers and delivery to its plant for rendering,

(b) rendering the raw material to produce tallow, meat meal and feather meal, and

(c) selling tallow, meat meal, feather meal, mainly bulk to domestic and foreign customers.

On October 14, 1965, Longueuil Meat entered into a contract with Wilsil Limited, a wholly owned subsidiary of Canada Packers Lim- ited, for the purchase, at a price of $500,000, of all the outstanding shares in the capital stock of City Renderers Limited. This agreement read in part as follows:

1. The Vendor (Wilsil Limited) shall sell to the Purchaser (Longueuil Meat) and the Purchaser shall buy from the Vendor all but not part of the outstanding shares in the capital stock of City Renderers Limited (hereinafter called the “Company”), consisting of 500 shares of the par value of $100 each, at a price of $500,000 in lawful money of Canada, upon and subject to the terms and conditions hereinafter mentioned.

3. The purchase of the said shares shall be subject to the following conditions:

(a) . . .

(b) Contemporaneously with the transfer of the said shares to the Purchaser, the Company shall enter into contracts with Canada Packers Limited, in the forms annexed hereto as Schedules C and D, and the Purchaser shall guarantee to Canada Packers Limited performance of the Obligations of the Company under each such contract.

(c) . . .

(d) Contemporaneously with the transfer of the said shares to the Purchaser, the names and addresses of all dealers and all other suppliers, including chain stores and butchers, which supply raw materials for the operations of the City Renderers division of Canada Packers Limited and of all customers to which unground dry rendered tankage, meat meal and tallow are sold by such division shall be made available to the Purchaser to assist the Purchaser in establishing a continuing business relationship with such dealers, suppliers and customers. . . .

5. The price of the said shares shall be payable as to $200,000 on closing, as to $100,000 without interest on December 31, 1965, and as to the balance of $200,000 without interest when the Company begins to take delivery of raw materials (not including outside collections of raw materials) under the contract set out as Schedule C hereto or upon the expiration of one year from the date of closing, whichever is earlier.

Immediately after the signing of this contract, and as provided therein, Canada Packers. entered into two contracts with City Renderers Limited. Only one need be considered here. It read in part as follows:

1. City Renderers shall buy from Canada Packers and Canada Packers shall sell to City Renderers, at prices determined in accordance with and otherwise as provided by this Agreement, all such raw materials, including bones but excluding blood, hog hair and hide trimmings, produced at the plant of Canada Packers located at 1260 Mill Street, Montreal, (Montreal Plant), and at the plant operated as the Wilsil Division of Canada Packers located at 1239 Mill Street, Montreal, (Wilsil Plant), as are disposed of by Canada Packers for the purpose of inedible rendering.

8. (1) This Agreement shall continue in force until the expiration of 5 years from the commencement date or until 100,000,000 lbs of raw materials, other than raw bones and beef head fat, shall have been supplied to City Renderers hereunder, whichever first occurs, and thereafter shall continue in force to the extent provided in the succeeding provisions hereof. As used herein, commencement date means the date when City Renderers notifies Canada Packers that it is ready to accept delivery of raw materials hereunder, or one year from the date of execution of this Agreement, whichever is earlier.

(3) In the event that 100,000,000 lbs of such raw materials shall not have been supplied to City Renderers hereunder prior to the expiration of the Said 5-year period, then, at the election of City Renderers,

(i) Canada Packers shall pay to City Renderers an amount equal to 25¢ for each 100 lbs of the deficiency; or

(ii) this Agreement shall continue in force until the deficiency shall have been supplied or until the expiration of a further period of 2 years, whichever first occurs, and if at the expiration of such further period there is then a deficiency Canada Packers shall pay to City Renderers an amount equal to 25¢ for each 100 lbs thereof.

10. (1) Canada Packers hereby represents that it is discontinuing the business of inedible rendering in and about the City of Montreal; that, except as provided in paragraph 10(2), it will not, during the 5-year period referred to in paragraph 8, engage, either directly or indirectly, in that business in or within a radius of 100 miles of the City of Montreal; and that, except as provided in paragraph 10(2), it will not for a period of 10 years following the commencement date referred to in paragraph 8(1) engage, either directly or indirectly, in or within a radius of 100 miles of the City of Montreal in the business of inedible rendering of raw materials purchased from others.

(2) Nothing in paragraph 10(1) shall apply so as to hinder, restrict or in any way interfere with the continued operation of the inedible rendering business as presently carried on by Canada Packers at its plant in the City of Hull, Quebec.

12. This Agreement shall be ‘assignable by City Renderers at any time after but not before the expiration of 30 days from the commencement date referred to in paragraph 8(1).

As contemplated by the last paragraph of this Agreement, City Renderers Limited assigned all its rights under the Agreement to Longueuil Meat. And as Longueuil Meat was unable to begin taking delivery of the raw materials on or before October 14, 1966, as required in Paragraph 8(1), the Agreement was later amended so as to postpone the “commencement date” mentioned in that paragraph to January 16, 1967.

In reassessing the plaintiff for the 1966 taxation year, the Minister of National Revenue took the position that the sum of $500,000 paid by the plaintiff to Wilsil Limited under the contract made on October 14, 1965 represented the purchase price of the capital stock of City Renderers Limited and was, as such, a capital. outlay. On the other hand, the plaintiff submits that this outlay of $500,000 was a deductible expense under paragraphs 12(1)(a) and 12(1)(b) of the Income Tax Act, RSC 1952, c 148, because it was actually the payment of a portion of the price of the raw materials that Canada Packers had agreed to supply to City Renderers Limited and to its assignee, Longueuil Meat.

In order to understand the plaintiff’s position, consideration must be given to the following facts:

1. City Renderers Limited was incorporated in 1924 as a wholly owned subsidiary of Wilsil Limited and for many years carried on the business of rendering in premises owned by its parent company;

2. In 1955, Canada Packers Limited acquired the capital stock of Wilsil Limited;

3. On December 31, 1956 City Renderers Limited entered into an agreement with its parent company Wilsil Limited. This contract makes clear that the operations of City Renderers Limited were thereafter limited to collecting carrion* [1] and shopfats for delivery to Wilsi} which itself then carried on the rendering operations (ie processed the raw materials and disposed of the finished products). It was provided that Wilsil was merely to reimburse City Renderers Limited for its costs in collecting the carrion. Moreover, City Renderers Limited assigned to Wilsil Limited all its accounts receivable (at their book value) and its inventories (at cost price). From then on, therefore, City Renderers Limited acted only as a collector of raw materials for Wilsil Limited: it was an active company, without any substantial’ asset except its goodwill, which did not make profits or incur losses since Wilsil Limited merely reimbursed it its costs. Actually, City Renderers Limited was maintained in existence after that time for the sole purpose of ensuring that the public did not associate the names of Wilsil Limited or Canada Packers Limited with the collection of carrion.

4, On June 18, 1960, Wilsil Limited sold all of its assets to Canada Packers Limited and gave it the exclusive right to the use of the name Wilsil. Pursuant to this Agreement Wilsil Limited later assigned to Canada Packers Limited its interest in the Agreement it had with City Renderers Limited for the collection of the raw materials. From then on, Wilsil Limited became a dormant company whose former activities were carried on by Canada Packers Limited. With respect to the rendering business, City Renderers Limited, using the equipment of Canada Packers Limited, continued to collect raw materials and sold them at cost to Canada Packers ‘Limited which processed them in the plant it had acquired from Wilsil Limited. It seems, however, that Canada Packers Limited operated its rendering division under the name of City Renderers Limited so: that its competitors in the rendering business, like Longueuil Meat, were under the impression that the rendering division of Canada Packers Limited was entirely run by City Renderers Limited.

5. At that time the rendering division of Canada Packers Limited was the main competitor of Longueuil Meat, the. plaintiff herein.

6. Soon after 1964, the officers of Longueuil Meat, who were then planning to expand the’ plant in Rivière des Prairies, learned that Canada Packers Limited had decided to go out of the rendering business in Montreal. On January 11, 1965 the solicitors for Longueuil Meat wrote the following letter to City Renderers Limited:

Dear Sirs:—

We are acting for Longueuil Meat Exporting Company Limited, and we have today been instructed by its First Vice-President, Mr David Granofsky, to write to you with respect to the following:— —

Our clients are seriously considering the purchase of either the fixed assets of your Company, excluding building and land, or the purchase of all the issued and outstanding Common Shares, and Preferred if any, either one at a price which we think would be attractive to you.

You must of course appreciate that our client is in no position to suggest any sale price at this moment, in view of the fact that they have not examined your Financial Statements for the last five years, or at least the last Financial Statement issued by your Company.

At the same time our clients would like to receive a detailed list of all your assets, such as, amongst others, furniture, fixtures, machinery, equipment, etc, and rolling stock.

Our client feels that you are aware that they are capable of handling a purchase of this kind and I think they have communicated to you their interest in this matter.

If you would be good enough to agree to a preliminary meeting, with our client’s Auditors being present, including the undersigned or his Associate, we would be pleased to attend such meeting.

Yours very truly,

7. In the ensuing weeks the officers of Longueuil Meat met with representatives of Canada Packers Limited and, on February 26, 1965 the solicitors for Longueuil Meat wrote to Canada Packers Limited a letter which read in part as follows:

acting for our client, The Longueuil Meat Exporting Co Ltd, of the City of Montreal, (hereinafter referred to as “The Purchaser”), and ve have today been instructed by our client to submit the following Offer to you:—

a) The Purchaser hereby offers, subject to the following terms and conditions, to purchase all, but not less than all, of the outstanding Common Shares (and Preferred Shares if any) of City Renderers Ltd (hereinafter called “The Company”) as fully paid-up and non-assessable, the whole for the sale price, sum or consideration of Two Hundred and Fifty Thousand Dollars ($250,000), and also subject to The Purchaser acquiring by way of purchase at the same time, for an additional sum of One Hundred and Fifty Thousand Dollars ($150,000), all the furniture, fixtures, machinery, equipment, etc, and rolling stock utilized by The Company in the operation of its business, and which we are informed are owned by Canada Packers Ltd, . . .

b) The Purchaser is prepared to pay the aforesaid sum of Four Hundred Thousand Dollars ($400,000) in cash within Ninety (90) days following the acceptance of this Offer, and provided further that the following conditions are fulfilled, and that you provide the Warranties hereinafter stipulated, namely:—

1) Subject to the City of Montreal granting to The Purchasers a Permit to expand the Purchaser’s present Plant to accommodate the extra production, and the granting of a Permit for the construction of additional buildings for this purpose, all within a period of Ninety days from the acceptance of this Offer.

2) That the said sale includes the good will of The Company.

7) That an undertaking will be given by Canada Packers Ltd, Wilsil Ltd, and all the Shareholders and Directors of The Company that it and/or they will not, either by itself or themselves or in partnership or in conjunction with any person or persons, firm, Association, Syndicate, Company or Corporation as Principal or Agent carry on or be engaged in the business of inedible rendering in the Province of Quebec for a period of at least Ten (10) years from the date of closing.

8) The Vendors shall further covenant:—

e) That Canada Packers Ltd and/or Wilsil Ltd shall make available to The Purchaser exclusively, for a period of Ten (10) years from the date of closing, all their inedible by-products at a price based on the formula enunciated in Schedule C which is attached hereto and initialled by the undersigned for identification purposes only, and to form part hereof as if recited at length herein, and shall further warrant The Purchaser that they shall sell to The Purchaser a minimum of at least an average of Five Hundred Thousand (500,000) pounds of inedible materials per week over a period of Fifty-two (52) weeks of each year for a period of Ten (10) years;

1) That The Company will permit The Purchaser to carry on the business operations of The Company from its present location until not later than December 31st, 1965, or earlier, if The Purchaser is ready to accept delivery of the physical assets and raw materials at its own plant, the whole under such terms and conditions as shall be agreed upon by the Parties prior to the date of closing;

This offer was later modified as follows:

(a) the price of $400,000 was increased to $500,000 as a result of Longueuil Meat offering $250,000, instead of $150,000, for the furniture equipment and rolling stock utilized by City Renderers Limited in the operation of its business;

(b) the period of ten years during which Canada Packers Limited and Wilsil Limited were to make available to The Purchaser exclusively . . . all their inedible by-products” was reduced to seven and a half years and the price for these inedible products was slightly increased.

None of the offers was ever accepted by Canada Packers Limited which apparently insisted that the shares of City Renderers Limited be first purchased by Longueuil Meat from Wilsil Limited and that the contract concerning the sale of the raw materials be then made between Canada Packers Limited and City Renderers Limited. As I have already said, Longueuil Meat finally assented to this arrangement.

8. At the time, the officers of Longueuil Meat were most anxious to secure a reliable and constant source of raw materials for their new enlarged rendering plant. According to the evidence of Mr Granofsky, the president of Longueuil Meat, that company finally agreed to purchase the shares of City Renderers Limited for the sole purpose of achieving this end. Mr. Granofsky further said that in determining the price that Canada Packers Limited was to be paid for the raw materials to be supplied under the contract with City Renderers Limited consideration had been given to the fact that Canada Packers Limited would receive (through its agent Wilsil Limited) an amount of $500,000 which was the equivalent of 50¢ per hundred pounds of raw materials to be supplied under the contract.

On the basis of these facts, counsel for the plaintiff submits that the substance of what occurred between Canada Packers Limited and Longueuil Meat was the sale by Canada Packers and the purchase by Longueuil Meat of 100,000,000 pounds of raw materials and that the sum of $500,000 here in question was in substance not paid for the shares of City Renderers Limited but was a pre-payment of part of the purchase price for 100,000,000 pounds of raw materials.

Even if the facts of this case are viewed in the light most favourable to the plaintiff, I am of the opinion that the sum of $500,000 paid by Longueuil Meat cannot be considered as a part of the price of the raw materials to be supplied by Canada Packers Limited. The consideration for this payment was not the delivery of the raw materials by Canada Packers.* [2] The most that could be said is that this sum of $500,000 was paid by Longueuil Meat to the agent of Canada Packers Limited in order to induce that company to enter into an agreement under which it would be bound to sell its inedible by-products to City Renderers Limited or its assignee. If it were established that such was the nature of this expenditure, much could be said in favour of the proposition that it is not to be regarded as a capital outlay*. However, in order to make such an argument one would have to disregard completely the transaction now under consideration. Even if it is assumed that Wilsil Limited acted as the agent of Canada Packers Limited and that all parties intended that the contract for the supply of the raw materials would benefit Longueuil Meat, the fact remains that under the contract that was actually entered into, the sum of $500,000 was paid by Longueuil Meat as the price of a capital asset, namely the shares of City Renderers Limited and the goodwill of the rendering business of Canada Packers Limited. In these circumstances I cannot do better, to express my reasons for rejecting the plaintiff’s submission, than adapt to the facts of this case the language of Lord Pearce in Strick (Inspector of Taxes) v Regent Oil Co Ltd.t [3] The acquisition of such a capital asset by Longueuil Meat points strongly to a capital expenditure and, in my view, dominates other indications. This indication of a capital expenditure is not diminished by the argument that Longueuil Meat might have obtained the substance of what it wanted by a revenue: payment and without purchasing the shares of City Renderers Limited. It did not do so. Instead, it chose to enter into this particular arrangement which was not a sham but a genuine commercial transaction. Longueuil Meat entered into it in order to satisfy Canada Packers Limited which was anxious to produce a genuine transaction which would. render the sum paid to it a capital receipt in its hands. There. seems no: justification for regarding this transaction as other than in fact it was, or for treating it as anything but an acquisition of the rendering business of Canada Packers Limited with the object of obtaining a supply of raw materials from Canada Packers Limited.

For these reasons, the appeal fails and the plaintiff’s action will be dismissed with costs.