Oryx Realty Corporation and Shofar Investment Corp v. Minister of National Revenue, [1972] CTC 35, 72 DTC 6018

Heald, J:—These cases are appeals from assessments made by the respondent against the appellant corporations. It was agreed by counsel that the two cases should be heard at the same time since they are closely related matters.

The appeal of Oryx Realty Corporation (hereafter Oryx) is against the respondent’s assessment for the taxation year 1960. The appeal of Shofar Investment Corp (hereafter Shofar) is against the respondent’s assessments for the taxation years 1960, 1961 and 1962.

Both appellants appealed the said assessments to the Tax Appeal Board which Board dismissed the. appeal in each case. The said assessments now come before this Court by way of appeal from the Tax Appeal Board, reported [1969] Tax ABC 465, 479. I will deal first with the Oryx appeal.

The essential facts are as follows:

1. Oryx was incorporated under the laws of the Province of Quebec on May 7, 1958.

2. On April 20, 1959 Oryx purchased a parcel of land from Lanber Investment Corporation (hereafter Lanber). Said parcel of land was a portion of Lot 95, Cote St, Parish of Montreal and comprised 299,851 square feet. The purchase price of said parcel was $174,000 payable as follows: (a) $1,000 in cash; and (b) the balance of $173,000 in nine instalments of $17,500 each on September 1st in each of the years 1961 to 1969 inclusive with the final payment of $15,500 payable on September 1, 1970. No interest was chargeable on the unpaid balance.

3. Counsel for the appellant admits that on April 20, 1959, the date of purchase, Oryx was not dealing at arm’s length with Lanber.

Lanber, as of April 20, 1959, was owned as follows:

(a) The Berman Family — 68%

(b) The Miller Family — 25%

(c) The Zukierman Family — 7%

There is no blood relationship between these three families. Oryx, as of April 20, 1959, had the same ownership and in the same proportions as Lanber — that is to say, it was owned 68% by the Berman family, 25% by the Miller family and 7% by the Zukierman family.

Lanber had owned since 1955, a part of Lot 95, on Cote St, Parish of Montreal comprising 1,109,860 square feet. In 1959 this property was subdivided into six separate parcels and five of these parcels were sold in 1959 to five separate corporations, one of which was Oryx. None of the purchaser companies were at arm’s length with the vendor, Lanber, at the sale date in 1959. As a matter of fact, they were all owned by the same parties in the same proportions as Lanber — ie, 68% by the Berman family; 25% by the Miller family; and 7% by the Zukierman family. These were certainly attractive purchases from the point of view of the purchaser corporations in that they purchased realty valued at $544,000 for down payments totalling $4,000, with ten years to pay the balance, and with no interest charged on the unpaid balance.

4. Nothing transpired to change the shareholdings of either Oryx or Lanber until July 21, 1960.

On the morning of July 21, 1960, the Berman family, the Miller family and the Zukierman family sold all of their shares in Oryx to a Quebec Corporation known and described as The Golden Wool- stock Co Ltd (hereafter Golden Woolstock). At all relevant times, Golden Woolstock was owned, one-half by Benny Zukierman and one-half by his father, Zelman Zukierman. Said agreement recites that Oryx’s only liability was the balance of $173,000 owing on the land purchased, which outstanding balance was guaranteed by the purchaser company, Golden Woolstock. The agreement further provides that the purchase price for all of the Oryx shares shall be $151,000, payable as follows:

(a) cash in the sum of $16,000;

(b) the balance of $135,000 by three equal annual instalments of $43,750 payable July 21, 1961; July 21, 1962; and July 21, 1963; and

(c) the unpaid balance to carry interest at the rate of 6% per annum.

It is clear at this point that the sale price of the Oryx shares on July 21, 1960 was in reality $324,000 because $151,000 was payable to the shareholders and $173,000, the balance owing on the land, was assumed by the purchaser of the shares. Thus it is evident that in arriving at a value for the Oryx shares, the proposed sale of the land the same day for $373,000 was taken into consideration. The evidence establishes that the two sale transactions on July 21, 1960, that is, the sale of the shares in the morning and the sale of the land in the afternoon, were made in the light of each other.

5. On the afternoon of July 21, 1960, the appellant Oryx (now beneficially owned entirely by the Zukierman family through its ownership of Golden Woolstock) sold the parcel of land in question to another Quebec Corporation called Sweet Realties Limited (hereafter Sweet) for $373,000 payable as follows:

(a) the sum of $3,000 in cash;

(b) the sum of $35,000 on December 31, 1960;

(c) the sum of $300,000 by way of eight annual, equal consecutive instalments of $37,500, the first thereof to be due and payable on December 29, 1961;

(d) the balance in the sum of $35,000 to be due and payable on December 29, 1969.

It was a further term in said agreement for sale that the unpaid balance of purchase price would bear no interest.

At all relevant times the shares in Sweet were owned one-half by Benny Zukierman, and one-half by a partner of his, one Morris McDowell, not related to any of the Zukiermans, the Bermans or the Millers.

In filing its income tax return for 1960, Oryx acknowledged that it was a trading company and subject to tax on trading operations in respect of the sale of land above referred to. It claims, however, to be entitled to deduct from its income for 1960, the unpaid cost of said land in the sum of $173,000. The respondent challenges the said deduction under the authority of subsection 12(3) of the Income Tax Act. Said subsection applied to the 1960 income tax year; but has since been repealed and re-embodied with somewhat altered provisions into the present section 18. Said subsection 12(3) read as follows:

12.(3) In computing a taxpayer’s income for a taxation year, no deduction shall be made in respect of an otherwise deductible outlay or expense payable by the taxpayer to a person with whom he was not dealing at arm’s length if the amount thereof has not been paid before the day one year after the end of the taxation year; but, if an amount that was not deductible in computing the income of one taxation year by virtue of this subsection was subsequently paid, it may be deducted in computing the taxpayer’s income for the taxation year in which it was paid.

The respondent says that under said subsection 12(3) it was entitled to disallow in 1960 the sum of $155,500 out of the total land cost of $174,000. It arrives at said figure of $155,500 as follows:

On the other hand, counsel for Oryx submits that said subsection 12(3) has no application to this assessment for two reasons: (1) the cost of inventory (land) herein is not “an otherwise deductible outlay or expense” within the meaning of subsection 12(3); and (2) the transaction in question is an arm’s length transaction and therefore subsection 12(3) has no application.

I will deal first with the meaning of the words “an otherwise deductible outlay or expense” as they appear in subsection 12(3).

In support of its argument that the cost of inventory is not “an otherwise deductible outlay or expense” under subsection 12(3), Oryx submits an example of a company with $100,000 of manufacturing net profit in the course of a year and on the last day of the year venturing into a new trading enterprise and disbursing $100,000 for new inventory, none of which was sold in that year. Oryx argues that if the cost of inventory of $100,000 was “expense” and thus deductible, the company’s taxable income would be zero. Oryx says that .the income tax Department would be quick to disallow such an expense. Oryx further submits that section 14 deals with inventory and that under the respondent’s interpretation, subsection 12(3) cannot be reconciled with section 14.*[1]

With deference, I do not agree with this submission. Section 14 relates only to unsold inventory while subsection 12(3) relates only to goods sold which are thus an otherwise deductible “outlay” or “expense”. The facts in the above example are not the same as in the case at bar. In the example, the goods were not sold at year end and were thus inventory. In the case at bar, the goods (land) were sold in the taxation year 1960 and the item in dispute is the unpaid cost of the goods sold. I believe most accountants would agree that the cost price of an asset cannot be applied against revenue until the asset has been resold in normal trading operations.

Because the asset in question, ie, the parcel of land, was resold in the taxation year it would surely be “otherwise deductible”.

Counsel for Oryx submitted several definitions in support of his argument that cost of inventory was not an “expense or outlay”. Unfortunately, most of his definitions dealt with “operating expenses”. I! would probably agree that “operating expenses” would exclude cost of inventory. However, subsection 12(3) does not have in it the word “operating” which is most certainly a limiting and a restrictive word. The Shorter Oxford English Dictionary defines “outlay” as “the act or fact of laying out or expending; expenditure (of money upon something)”. The same dictionary defines “expense” as “money or a sum expended”.

Cost of inventory is surely included in the term “expenditure (of money upon something)”. Surely it is also included in the term “money expended”.

I have no difficulty in concluding that the cost of inventory, in this case, would come within the ordinary meaning of the words “outlay or expense”.

Oryx introduced evidence at the trial by Mr Stanley Hitzig, a well qualified chartered accountant associated with the auditing firm employed by Oryx as its auditor who testified that in normal auditing practise, the consumption of inventory is not recognized as an expense. I gathered from his testimony that the practise tends more toward treating expenses as operating expenses, and thus cost of inventory would be excluded. Mr Hitzig was asked for his opinion, as an accountant, as to whether cost of inventory was a deductible outlay or expense in computing income.

In making his answer, he prefaced his opinion with the following observation: ‘‘Well, I would first have to say that the term ‘outlay’ is not a commonly used term in accounting.” He then went on to express his opinion, as an accountant, not without some hesitation, that the acquisition of inventory would not be a deductible outlay in determining income. However, I am satisfied that giving the words in subsection 12(3) their ordinary meaning, they are certainly wide enough to include cost of inventory.

The respondent also called a chartered accountant to testify, Mr Ernest J Guignard, one of the respondent’s senior assessors, with much experience in these matters. He was just as adamant in his opinion that cost of inventory in these circumstances would normally be considered as “an otherwise deductible outlay or expense”. He quoted from Canadian Accounting Practice 1956 by Leonard and Beard at page 218 as follows: “The sale of goods is regarded as revenue earned. The cost of acquiring the goods sold and the cost of incidental supplies and services are expenses of earning the revenue.” This witness also cited two other accounting authorities in support of his position: (1) Edwards, Hermanson and Salmonson, Accounting — A programmed Text, 1967, vol 2, page 167: “The cost of inventory, like any other asset, includes all outlays necessary to acquire the goods.”; and (2) Black, Champion and Brown, Accounting in Business Decisions, 2nd ed, 1967, page 185, [where] land is defined: “Items comprising the cost of land are all of the outlays necessary to obtain legal title and to prepare it for use as a location for the business.”

Mr Guignard testified as did Mr Hitzig, that there are two main methods employed in filing income tax returns, the cash method and the accrual method. On the cash method, the taxpayer is required to show all cash income received, and can only deduct expenses actually paid out in the taxation year.

On the accrual method, income is reported in the year when earned, and expenses are allowed as deductions in the year when they are incurred and not necessarily paid.

In a trading operation such as this, the accrual method is used. However, Mr Guignard says that subsection 12(3) represents a statutory departure from the general practice in that it puts the taxpayer on a cash basis for the purchase of this land. Mr Guignard says further that section 85B also puts a taxpayer in these circumstances on a cash basis for purposes of profit calculations. In this assessment, Oryx was given the benefit of section 85B in deferring the profit. The assessment shows that Oryx was allowed as a deduction from the sale price of the land, the sum of $172,726 shown as deferred income. reserve pursuant to section 85B of the Income Tax Act.

The relevant portions of subsection 85B(1) applicable to the 1960 taxation year were as follows:

85B.(1) In computing the income of a taxpayer for a taxation year,

(b) every amount receivable in respect of property sold or services rendered in the course of the business in the year shall be included notwithstanding that the amount is not receivable until a subsequent year unless the method adopted by the taxpayer for computing income from the business and accepted for the purpose of this Part does not require him to include any amount receivable in computing his income for a taxation year unless it has been received in the year;

(d) where an amount has been included in computing the taxpayer’s income from the business for the year or for a previous year in respect of property sold in the course of the business and that amount or a part thereof is not receivable until a day

(i) more than two years after the day on which the property was sold,

and

(ii) after the end of the taxation year,

there may be deducted a reasonable amount as a reserve in respect of that part of the amount so included in computing the income that can reasonably be regarded as a portion of the profit from the sale; and

(2) Paragraphs (a) and (b) of subsection (1) are enacted for greater certainty and shall not be construed as implying that any amount not referred to therein is not to be included in computing the income from a business for a taxation year whether it is received or receivable in the year or not.

Thus, under paragraph (b) of subsection (1), the entire sale price of the subject properties, that is, $373,000 must be included in Oryx’s income for 1960, the year of sale, unless Oryx is filing on a cash basis. As stated above, there is no argument in this connection. Oryx agrees that it has to file on an accrual basis and did, as a matter of fact, file on an accrual basis and take the entire sale price in the sum of $373,000 into income in its return.

However, under paragraph (d) of subsection (1), provision is made by which the taxpayer may deduct a reasonable amount as a reserve in respect of that part of the amount so included in computing the income that can reasonably be regarded as a portion of the profit from the sale (italics mine). And in filing its 1960 tax return, Oryx did take advantage of this provision and deducted from its 1960 income the sum of $172,726 which was allowed by the respondent as a deduction in its assessment.

Computation of this figure is as follows:

Where the dispute arises is when Oryx attempts to also deduct the cost of land in the sum of $173,000 which is resisted by the respondent under the authority of subsection 12(3) of the Act.

I agree with Mr Guignard when he says that the resultant situation is equitable to the taxpayer in that the departure from the accrual method in subsection 12(3) is offset by the deferred income credit allowed the taxpayer under section 85B which can also be considered a departure from the accrual method.

Counsel for Oryx also argues that subsection 12(3) is only intended to apply to cover abuses that might arise when non-arm’s length taxpayers are following alternative systems of reporting income — that is to say, when one taxpayer is on a cash basis and another non-arm’s length taxpayer is on an accrual basis; an example would be an agreement by an accrual taxpayer to pay a salary to a cash taxpayer, and then not pay it in a particular year — the accrual taxpayer could claim the salary as a deduction because it is payable in the taxation year; and yet the cash taxpayer would not have to show it as income because he did not receive the cash in the taxation year. Thus, by indefinitely postponing payment to the cash taxpayer from year to year, a deductible expense has been created without a corresponding taxable income item.

Counsel for Oryx concedes that subsection 12(3) is available to the income tax Department and is necessary to prevent abuse in the kind of situation described above. However, counsel says that subsection 12(3) is not necessary to cover a case such as we have here where both taxpayers are on an accrual basis, that where the vendor and the purchaser are both on an accrual basis, there is no great evil to be remedied and accordingly there is no need for subsection 12(3).

I do not agree that subsection 12(3) is intended to apply only when non-arm’s length taxpayers follow alternative methods of income reporting. Even where both vendor and purchaser are on an accrual basis, as is the case here, the vendor could still benefit under section 85B while the purchaser could deduct the unpaid full purchase price of the property were subsection 12(3) or its equivalent not in the Act.

The case of Gatineau Westgate Inc v MNR, 41 Tax ABC 440, is a decision of the Tax Appeal Board in which it was held that subsection 12(3) applied to the purchase of real estate. In that case, the appellant, a real estate company, bought real estate from its directors with whom it was not dealing at arm’s length. By the agreement for sale, the purchase price was payable over a 30 year period with a provision for prepayment. In 1962, $37,935.34 was paid off and was allowed as a deduction by the Minister. However, the unpaid balance of $40,343.61 was disallowed as a 1962 deduction applying subsection 12(3). Mr Boisvert, for the Board, held that because of the provisions of subsection 12(3), the unpaid balance was not deductible in the 1962 taxation year.

Then Oryx says that the effect of the respondent’s method of assessment would result in the imposition of a rate of tax which would run up to 200% which would, of course, be harsh and unreasonable. I cannot agree that this would be the result of the respondent’s application of subsection 12(3) to this assessment.

Looking at these transactions in their simplest form, Oryx bought a parcel of land in 1959 for $174,000 and sold it in 1960 for $373,000. If Oryx were filing income tax on a cash basis, and this were a cash transaction, it would pay tax on the net profit of $199,000 in one year.

However, Oryx has to file and does file on an accrual basis. Accordingly, the respondent has adopted the following method of assessment:

* The figure of $181,774 is larger than the amount in the actual assessment

because of other allowable charges which are here omitted for purposes of simplification.

1961 —

Income Earned — 51.56% (profit ratio) of

$37,500 (payable by Sweet to Oryx in 1961

as per agreement for sale)	$ 19,335
Less cost of land paid in 1962 as per
subsection 12(3)		17,500
Net Profit	$	1,835

The assessment would be the same for the years 1962, 1963, 1964, 1965, 1966, 1967 and 1968 because in each of those years, Sweet is obligated to pay Oryx $37,500 per year and Oryx is obligated to pay $17,500 on its purchase agreement with Lanber.

In 1969, Sweet’s payment to Oryx is $35,000 while Oryx’s 1970 payment to Lanber is $15,500 and is deductible in the 1969 return under subsection 12(3). Thus, the respondent’s assessment of Oryx through the years would appear as follows:

From the above calculations, I am satisfied that there is nothing inequitable about the respondent’s assessment.

It the respondent were not allowed to use subsection 12(3) in these circumstances, Oryx could deduct the entire cost of the land in 1960 ($173,000), would still be entitled to the benefit of section 85B while Sweet could deduct its full purchase price of the property in filing its tax returns.

A calculation of the tax payable under Oryx’s proposed method would have the following result:

By comparing the two methods, it will be seen that if the Oryx method were allowed, the incidence of tax is amortized over ten years rather than being mostly payable in one year as is the result under the respondent’s method.

Thus, the rationale for the application of subsection 12(3) to land transactions where the parties are not at arm’s length becomes apparent. If Oryx is correct in its proposed method of assessment, it would be possible for non-arm’s length taxpayers to amortize the payment of tax over even longer periods, say 20, 30 or 50 years by simply extending the time for payment in the agreements over a lengthy period. Thus, subsection 12(3) protects the Department against undue delay in payment of the income tax which is properly payable on a transaction.

Oryx made a net profit of $199,000 in this one land transaction. Surely it would not be reasonable or equitable that Oryx be allowed to amortize this profit over a 50 year period and yet this would be possible and permissible under Oryx’s construction of subsection 12(3).

Learned counsel for Oryx cited a number of authorities dealing with the rules to be followed in interpreting statutes. He quoted from Beal’s Cardinal Rule of Legal Interpretation and Maxwell on Interpretation of Statutes to the effect that where a statute is capable of two possible constructions, the Court should give the words in question that interpretation which appears to be most in accord with convenience, reason, justice and legal principles.

In holding that the respondent was entitled to apply the provisions of subsection 12(3) to the assessment in question, I believe that I am following said rules of interpretation.

To hold otherwise, would be to distort the provisions of the Act and would allow taxpayers to circumvent or at least unreasonably delay the payment of proper tax on income.

The appellant’s second argument in the Oryx case was that even if subsection 12(3) could be applied to cost of land in these circumstances, that it should not have been applied to the facts in this case because, when the share ownership of Oryx changed under the agreement for the sale of its shares on the morning of July 21, 1960, from and after that time, Oryx was dealing at arm’s length with its vendor, Lanber. It is admitted that on April 20, 1959, when Oryx purchased the land from Lanber, the two companies were not at arm’s length — they were owned by exactly the same family groups and in exactly the same proportions — 68% by the Bermans, 25% by the Millers and 7% by the Zukiermans. This ownership remained the same until the morning of July 21, 1960. On the morning of July 21, 1960 the Zukiermans bought out the Bermans and the Millers so that after the morning of July 21, 1960 Oryx was owned solely by the Zukiermans and Lanber continued to be owned 68% by the Bermans, 25% by the Millers and 7% by the Zukiermans.

The appellant submits that the cost of the land becomes deductible only when it ceases to become inventory, therefore it only becomes deductible at the moment of sale by Oryx which was the afternoon of July 21, 1960 and that by that time, and at all times thereafter, Lanber and Oryx were at arm’s length. A necessary inference from the appellant’s argument is that it does not matter what the situation was prior to the moment of sale or moment of deductibility.

My brother Cattanach, J discussed in some detail the concept in- volved in the expression “dealing at arm’s length” as used in the Income Tax Act and the Estate Tax Act in the case of MNR v T R Merritt Estate, [1969] CTC 207. At pages 216-17 he said:

In MNR v Sheldon’s Engineering Limited, [1955] S.C.R. 637; [1955] CTC 174, Locke, J, delivering the judgment of the Supreme Court of Canada, had occasion to comment upon the expression “dealing at arm’s length” as it appeared in a provision in the Income Tax Act. He said at page 643 [p 179]:

“The expression is one which is usually employed in cases in which transactions between trustees and cestuis que trust, guardians and wards, principals and agents or solicitors and clients are called into question. The reasons why transactions between persons standing in these relations to each other may be impeached are pointed out in the judgments of the Lord Chancellor and of Lord Blackburn in McPherson v Watts (1877), 3 App Cas 254.”

He went on to say, however, that “These considerations” — ie, the reasons why transactions between persons standing in such relations as trustee and cestuis que trust may be impeached — “have no application in considering the meaning to be assigned to the expression in section 20(2)”.

Having thus put aside the principles that had been developed concerning transactions between persons standing in the relationship of trustee and cestuis que trust and other relationships giving rise to an implication of undue influence, Locke J went on to reject the argument that the provision in the Income Tax Act at that time whereby certain defined classes of persons were deemed not to deal with each other at arm’s length was exhaustive of the classes of persons who could be regarded as not dealing with each other at arm’s length for the purposes of that Act. He said:

“I think the language of section 127(5) (now 139(5)), though in some respects obscure, is intended to indicate that, in dealings between corporations, the meaning to be assigned to the expression elsewhere in the statute is not confined to that expressed in that section.”

While, therefore, the facts in the Sheldon’s Engineering (supra) case did not fall within any of the specially enumerated classes of cases where persons were deemed not to deal with each other at arm’s length, Locke, J concluded that it was still necessary to consider whether, as a matter of fact, the circumstances of the case fell within the meaning of the expression “not dealing at arm’s length” within whatever meaning those words have apart from any special deeming provision.

In this appeal, the question is whether the circumstances are such as to fall within the words “persons dealing with each other at arm’s length” in section 29(1) of the Estate Tax Act. In my view, these words in the Estate Tax Act have the same meaning as they had in the income tax provision with which Locke, J was dealing in Sheldon’s Engineering when those words were considered, as Locke, J had to do, apart from any special “deeming” provision.

It becomes important, therefore, to consider what help can be obtained from the judgment in Sheldon’s Engineering as to the meaning of the words “persons dealing at arm’s length” when taken by themselves. The passage in that judgment from which, in my view, such help can be obtained, is that reading as follows:

“Where corporations are controlled directly or indirectly by the same person, whether that person be an individual or a corporation, they are not by virtue of that section deemed to be dealing with each other at arm’s length. Apart altogether from the provisions of that section, it could not, in my opinion, be fairly contended that, where depreciable assets were sold by a taxpayer to an entity wholly controlled by him or by a corporation controlled by the taxpayer to another corporation controlled by him, the taxpayer as the controlling shareholder dictating the terms of the bargain, the parties were dealing with each other at arm’s length and that Section 20(2) was inapplicable.”

In my view, the basic premise on which this analysis is based is that, where the “mind” by which the bargaining is directed on behalf of one party to a contract is the same “mind” that directs the bargaining on behalf of the other party, it cannot be said that the parties are dealing at arm’s length. In other words where the evidence reveals that the same person was “dictating” the “terms of the bargain” on behalf of both parties, it cannot be said that the parties were dealing at arm’s length.

Mr Justice Cattanach held that where the “mind” by which the bargaining (italics mine) is directed on behalf of one party to a contract is the same “mind” that directs the bargaining (italics mine) on behalf of the other party, it cannot be said that the parties were dealing at arm’s length.

Following the reasoning used in MNR v Dworkin Furs (Pembroke) Ltd et al, [1967] CTC 50, and in Buckerfield’s Limited et al v MNR, [1964] CTC 504 at 507, the Berman family was the “mind” directing the bargaining on behalf of the vendor Lanber. The Berman family was also the “mind” directing the bargaining on behalf of the purchaser Oryx. The cost of the land inventory became payable by the agreement to purchase on April 20, 1959. Nothing changed until the morning of July 21, 1960 when Oryx and Lanber probably became arm’s length corporations. All the discussions, all the negotiations and all the bargaining took place when the vendor and purchaser corporations were not at arm’s length.

To give effect to Oryx’s submission, I would have to disregard everything that happened before the afternoon of July 21, 1960; to ignore the fact that there is a direct relationship between the sale price of the land and the sale price of the shares; to ignore the plan conceived whereby Lanber in effect amortized its profits on land sales 50 times by selling the land to five different non-arm’s length companies with ten years to pay; to ignore the unrealistic terms of the land sale agreements (property valued at $544,000 sold for only $4,000 down with 10 years to pay the balance and with no interest).

This question of material times for considering the arm’s length situation was discussed by Thurlow, J in Swiss Bank et al v MNR, [1971] CTC 427. At page 438 he said:

... It also appears to me that while the transactions here in question are the payments of interest and the times at which they were made are the times when the power to influence or control must be considered, evidence of a situation that was initiated and existed before the material times and continued through and after them may be considered in determining whether the parties dealt at arm’s length at the material times.

That is to say, even accepting Oryx’s argument that the material time, and the only material time is the moment of sale by Oryx to Sweet on July 21, 1960, the Court is entitled to look at what went on before the material time.

I agree with this view of the law that I am entitled to look at these transactions as a whole and having done so, I am satisfied that they are not arm’s length transactions.

Having decided that the Court is entitled to look at the transactions in question as a whole, it becomes unnecessary to deal with the argument of counsel for Oryx that the only “moment” that matters is the “moment” of deductibility.

However, without deciding the matter, I express the opinion that if the Court were to be restricted to a particular “moment” in determining the arm’s length question, I would find that the relevant “moment” for the purposes of subsection 12(3) would be the “moment” when the outlay or expense became “payable’’. Subsection 12(3) uses the words “outlay or expense payable by the taxpayer to a person with whom he was not dealing at arm’s length”. I think there is a very good argument for holding that the crucial moment would be the moment when the obligation to pay was created and this moment would be on April 20, 1959 at the time the agreement for sale between Lanber as vendor and Oryx as purchaser was executed by both corporations. I hold this opinion bcause subsection 12(3) says “payable”, not “due and payable”. Therefore all of the instalment payments became “payable” when the agreement for sale was completed on April 20, 1959, although not due until later. The legal obligation to pay was incurred or created on April 20, 1959, and if there is a crucial point in time, that point would, on the facts of this case, be on April 20, 1959, when it is conceded the purchaser, Oryx, was not at arm’s length with the vendor, Lanber.

I accordingly hold that the respondent properly applied the provisions of subsection 12(3) to the assessment of Oryx for the 1960 taxation year. The appeal of Oryx is therefore dismissed with costs.

So far as the appeal of Shofar is concerned, counsel for the appellant conceded that the transactions in the Shofar case were not at arm’s length which left him with one argument, namely the first argument advanced in the Oryx case, that the cost of inventory (land) is not “an otherwise deductible outlay or expense” within the meaning of subsection 12(3).

For the same reasons as I expressed when dealing with the Oryx appeal, I am of the opinion that the respondent properly applied the provisions of subsection 12(3) in assessing Shofar for the taxation years under review.

The appeal of Shofar is accordingly dismissed with costs.