Comox Co-Operative Creamery Association v. Minister of National Revenue, [1972] CTC 2663

The Chairman (orally):—This is an appeal by Comox Co-operative Creamery Association against a reassessment of the Minister for the taxation year 1968, together with a second appeal for the taxation year 1869. Two separate appeals were filed with the Board, which were given numbers 72-168 and 71-1332 respectively. The two appeals apparently arose as the result of one transaction, and this was a transaction that took place as of January 4, 1969, in which the appellant corporation, an association duly incorporated under the Co-operative Associations Act of the Province of British Columbia, RSBC 1960, c 77, sold its assets, as distinguished from its shareholdings, to Fraser Valley Milk Producers Association, an association duly incorporated under the same Act.

The agreement between the parties, entered as appellant’s Exhibit No 1, is short and specific in detail. It refers to a Schedule B which was to be included—but never was included—and which is immaterial to the transaction.

The appellant, between March 20, 1920 and January 4, 1969 carried on a farmers’ cooperative for the marketing of milk and milk products. The sale took place as I have stated, and the designated sale price, according to appellant’s Exhibit No 1, was $275,866, the breakdown of which is set out on page 2, paragraph 2, of the agreement, showing the assets to be acquired less the liabilities outstanding. The agreement provided for the usual safeguards between vendors and purchasers of this type, and provided for an audit of January 4, 1969 to determine the exact figures involved.

The appellant argues that subsection 24(1) of the Income Tax Act, RSC 1952, c 148, applies to this transaction and that the securities in the form of shareholdings and debentures should be taken aside and valued at their true value, and not their face value, at the date of closing the transaction.

In the alternative, the appellant says that subsection 20(1) and paragraph 20(5)(e), dealing with undepreciated capital cost, should be invoked, and that what is really to be looked at is the actual cost, or the actual value received, rather than the face value.

A third and ancillary ground of argument arose as a result of the appellant’s requesting the Minister of National Revenue, in October 1969, for permission to add four days to its 1968 fiscal year, which request was granted by the Minister. Then apparently the appellant overlooked reporting the 1968 year and went directly into the 1969 year, and also reported for a fiscal year ending January 4, 1970. What the Minister did was to back up the dates, so to speak, and move the 1969 year back to 1968, and he then found that there was a greater tax benefit to the appellant if the four days were assessed as part of 1969.

The appellant argues that the Minister, having exercised his discretion to grant the additional four days, which still kept the 1968 fiscal year under the maximum 53 weeks, cannot unilaterally reverse that decision. I do not feel that I need rule on this aspect, because the point in question, in my view, is whether or not the agreement is conclusive evidence of the receipt by the vendor appellant of the entire sale price, or whether subsection 24(1) applies and I should discount, overlook, forget or disregard the agreement in so far as it refers to the percentage of shareholdings or debenture certificates and consider the actual value rather than the par or face value of these assets.

Both counsel have cited several cases, and both have cited and relied on—and the Minister to a far greater extent—the case of MNR v John Thomas Burns, [1958] Ex CR 93; [1958] CTC 51; 58 DTC 1028. Appellant’s counsel, I think in a sound fashion, knew that he would be faced with this hurdle, and raised in his argument, and attempted to show, that there was a distinction in this case, and that subsection 24(1) should apply to the case at bar.

I must say that, on all the facts, I cannot see a distinction between the principle enunciated in the Burns case and what took place in this transaction. It is true, and I have said it many times, that one must take each case as one finds it and determine its outcome on the particular facts that apply. Second, at least in my view, one must lock to the substance of the transaction and not the form.

It is true, as has been urged upon me most diligently by counsel for the appellant, that Parliament would not have inserted subsection 24(1) into the Act without intending to prevent undue hardship in given cases. With this I agree. It is also trite law to say that, under any statute, where a participant or a litigant or an appellant wishes to take advantage of the benefits of a section of an Act, he must bring himself squarely within the confines of the section. However, notwithstanding the learned arguments on the part of both counsel, I do not think I need dwell at great length on either section 24 or section 20 to determine the outcome of this appeal.

The issue, of course, is precipitated by the Income Tax Act and the relevant sections thereof in that, in the sale of a capital asset, recap- ture of depreciation is brought back as income where the purchase price is in excess of the undepreciated capital cost of the asset or assets at the time of the sale; and, in the case at bar, the material time, in my view, is the date of the closing of this transaction, that is, January 4, 1969.

It is agreed by both parties, or certainly agreed to by the Minister and not disputed by the appellant, that this was an arm’s length transaction; that the parties arrived at a fair market value for the purchase and sale of the assets (and I take that to mean the price at which a willing vendor would sell to a willing purchaser in an open market); and that, having arrived at that sum, they consummated the agreement in writing and subsequently closed the transaction.

The result of closing the transaction on the basis of the agreement was to bring back into income on behalf of the appellant company a sum, as I have said, in excess of the undepreciated capital cost of the property or, to put it another way, an amount at least equal to the depreciation that had been claimed. This, I would infer, immediately gave rise to a second look being taken by the appellant at what had transpired and, by having the assets that it took in payment of the purchase price evaluated, it learned that, at that material time, the assets were not equal to, but were rather less than, their face value. The appellant therefore felt it should be allowed to change the price at which it had sold its assets in order to bring the purchase price paid, or the sale price received into line with the actual value of the shares and loan certificates it received, which would thereby decrease, if not perhaps entirely wipe out, this recapture income.

As I have stated, I do not think that it is for this Board to renegotiate between parties agreements freely entered into at any time after they have been completed, let alone to renegotiate a contract when only one of the parties to that contract is before the Board. The appellant company fixed on a price for the sale of its assets. I can only infer and assume that it freely accepted, as payment in full for that fixed price, the securities that were transferred to it. These were not accepted in payment of an income debt but were accepted in payment of the sale of capital assets; and I say again that I find no difference

—except perhaps in form, but certainly not in substance—between this case and the Burns case already cited. Notwithstanding very able argument on behalf of the appellant, the said appellant, to use the vernacular, “has made its own bed, and must now lie in it” and be governed by the terms of the agreement that it entered into with Fraser Valley Milk Producers Association.

For these reasons, and in the light of the Burns case- and other cases cited, I find that there is no error in law or in fact in the assessment of the Minister for either of these taxation years, and both appeals are therefore dismissed.

Appeal dismissed.