THORSON,
P.:—This
is
an
appeal
against
the
appellant’s
income
tax
assessment
for
the
taxation
year
ending
January
31,
1953.
It
is
contended
for
the
appellant
that
it
is
exempt
from
income
tax
for
the
said
taxation
year
under
Section
62(1)
(i)
of
the
Income
Tax
Act,
R.S.C.
1952,
ce.
148,
which
reads
as
follows:
“62.
(1)
No
tax
is
payable
under
this
Part
upon
the
taxable
income
of
a
person
for
a
period
when
that
person
was
(i)
a
club,
society
or
association
organized
and
operated
exclusively
for
social
welfare,
civic
improvement,
pleasure
or
recreation
or
for
any
other
purpose
except
profit,
no
part
of
the
income
of
which
was
payable
to,
or
was
otherwise
available
for
the
personal
benefit
of,
any
proprietor,
member
or
shareholder
thereof
;’’
Counsel
for
the
appellant
submitted
that
it
is
entitled
to
the
benefit
of
this
section
on
the
ground
that
for
the
period
in
question
it
was
a
society
that
was
organized
and
operated
exclusively
for
a
purpose
‘‘except
profit’’,
within
the
meaning
of
the
term
“any
other
purpose
except
profit’’,
and
that
no
part
of
its
income
was
payable
to,
or
otherwise
available
for,
the
personal
benefit
of
any
proprietor,
member
or
shareholder
of
it.
It
is
essential
to
a
proper
appreciation
of
the
issue
in
the
appeal,
which
is
a
narrow
one,
that
the
relevant
facts
be
assessed
correctly
and
this
involves
consideration
of
events
prior
to
the
organization
of
the
appellant
as
well
as
those
happening
subsequently.
The
appellant
was
incorporated
on
January
23,
1945,
as
a
society
under
the
Societies
Act
of
British
Columbia,
now
R.S.B.C.
1948,
c.
311,
with
a
declared
object
to
which
reference
will
be
made
later.
In
the
taxation
year
in
question
it
was
one
of
a
group
of
Woodward
companies
operating
stores
in
various
cities,
namely,
Woodward
Stores
Limited,
operating
the
Vancouver
store,
and
Woodward
Stores
(Edmonton)
Limited,
Woodward
Stores
(Port
Alberni)
Limited,
Woodward
Stores
(Capilano)
Limited,
Woodward
Stores
(Victoria)
Limited
and
Woodward
Stores
(Westminster)
Limited,
operating
stores
in
the
indicated
places,
and
a
holding
company,
Woodward
Stores
(1947)
Limited,
which
held
the
shares
in
the
operating
companies.
The
last
named
company
is
a
public
one
with
its
shares
listed
on
the
Vancouver
and
Toronto
Stock
Exchanges.
To
appreciate
the
appellant’s
place
in
this
group
of
Woodward
companies
it
is
necessary
to
refer
to
the
facts
relating
to
two
Woodward
company
activities,
both
of
which
were
initiated
prior
to
the
incorporation
of
the
appellant.
One
of
these
was
the
sale
of
Woodward
company
shares
to
Woodward
company
employees
and
the
other
the
payment
of
pensions
to
Woodward
company
employees
on
their
retirement
from
service.
I
shall
deal
with
the
share
sale
activity
first.
This
was
initiated
in
1931
by
Charles
Woodward,
the
founder
and
majority
shareholder
of
the
Woodward
companies.
He
set
aside
two
blocks
of
shares,
of
which
he
was
himself
the
owner,
totalling
$148,000
in
par
value,
one
for
sale
to
Woodward
company
employees
and
the
other
for
the
Edmonton
company
employees.
Mr.
W.
Swannell,
the
former
secretary
of
the
Woodward
companies,
stated
that
Charles
Woodward
had
thus
established
trusts
in
respect
of
the
blocks
of
shares
thus
set
aside
and
described
the
transaction
as
the
Charles
Woodward
Trust,
but
it
appears
from
his
evidence
on
cross-examination
that
all
that
Charles
Woodward
did
in
1931
was
to
insert
a
sheet
of
paper
in
the
share
register
bearing
the
words
‘Charles
Woodward
in
Trust
$148,000’’
or
words
to
that
effect.
Mr.
Swannell
had
never
seen
any
trust
agreement
relating
to
the
blocks
of
shares
and
there
is
no
evidence
of
any
declaration
of
trust
having
been
made
in
respect
of
them.
Nor
could
Mr.
Swannell
say
whether
the
blocks
of
shares
were
identified.
All
that
happened
was
a
unilateral
setting
aside
by
Charles
Woodward
of
$148,000
worth
of
shares.
I
am
unable
to
see
how
his
act
could
be
regarded
as
the
establishment
of
a
trust
or
trusts.
Immediately
after
thus
setting
aside
the
blocks
of
shares
Charles
Woodward
commenced
selling
shares
to
Woodward
company
employees.
The
shares
were
sold
under
a
share
purchase
agreement
at
their
par
value
of
$5
per
share.
The
agreement
called
for
a
small
down
payment
and
the
balance
in
small
weekly
or
monthly
payments
with
interest
on
the
outstanding
balance
at
the
rate
of
4
per
cent
per
annum.
At
the
time
of
the
agreement
the
employee
gave
Charles
Woodward
an
option
to
repurchase
the
shares
at
their
par
value
of
$5
each
on
the
retirement
of
the
employee
or
his
severance
from
employment.
On
the
completion
of
the
agreement
by
the
employee
the
shares
covered
by
it
were
transferred
to
him.
In
the
meantime
he
had
the
benefit
of
whatever
dividends
were
paid.
Charles
Woodward
carried
on
this
share
sale
scheme
until
his
death
in
1937.
The
control
of
the
Woodward
companies
then
passed
to
his
sons,
W.
C.
Woodward
and
P.
A.
Woodward,
and
W.
C.
Woodward
carried
on
the
scheme
in
the
same
way
as
his
father
had
done
for
a
short
period
up
to
June,
1938,
when
it
was
taken
over
by
Woodward
Holdings
Limited,
a
holding
company
that
was
the
predecessor
of
Woodward
Stores
(1947)
Limited.
This
company
carried
on
the
scheme
in
the
same
way
as
Charles
Woodward
and
W.
C.
Woodward
had
done
until
October
10,
1946,
when
the
appellant
took
it
over
and
enlarged
it
as
will
be
seen
later.
The
conduct
of
the
scheme
by
Woodward
Holdings
Limited
did
not
involve
any
element
of
trust.
The
payment
of
pensions
to
Woodward
company
former
employees
started
at
a
later
date
than
that
of
the
share
sale
scheme.
The
first
payments
were
made
in
1942.
They
were
made
by
the
operating
companies
themselves,
the
amounts
paid
were
dealt
with
as
operating
expenses
and
their
deduction
from
what
would
otherwise
have
been
taxable
income
was
allowed
by
the
Department.
The
payments
were
made
under
the
direction
of
a
committee
consisting
of
W.
Mann,
J.
W.
Butterfield
and
A.
J.
Rowse,
all
Woodward
company
executives
and
they
continued
to
direct
the
payment
of
pensions
until
October,
1951,
when
the
money
required
for
their
payment
was
provided
by
the
appellant
as
will
appear
later.
I
have
already
referred
to
the
fact
that
the
appellant
was
incorporated
on
January
23,
1945.
The
object
for
which
it
was
incorporated
was
set
out
in
a
declaration,
dated
January
19,
1945,
but
this
was
enlarged,
pursuant
to
the
Societies
Act,
on
September
15,
1947,
and
again
on
February
2,
1949,
and
altered,
pursuant
to
the
Societies
Act,
on
March
8,
1952.
Since
this
enlarged
and
altered
object
was
the
appellant’s
object
in
the
taxation
year
in
question
and
since
the
purpose
of
its
organization
and
operation
in
that
year
is
in
dispute
it
is
desirable
to
set
it
out
in
full.
It
was
as
follows:
“The
object
of
the
society
is
to
assist
in
providing
funds
for
the
payment
of
pensions
to
employees
and
ex-employees
of
Woodward
Stores
Limited
in
accordance
with
the
pension
plan
of
Woodward
Stores
Limited
as
such
plan
exists
at
the
date
hereof
or
as
it
may
be
hereafter
constituted
and
to
assist
in
providing
funds
for
the
payment
of
pensions
to
the
employees
and
ex-employees
of
Woodward
Stores
(Edmonton)
Limited,
Woodward
Stores
(Port
Alberni)
Limited,
Woodward
Stores
(Westminster)
Limited,
Woodward
Stores
(Capi-
lano)
Limited
and
Woodward
Stores
(Victoria)
Limited
and
each
of
them
and
of
the
respective
successors
of
said
six
companies
and
each
of
them
in
accordance
with
their
respective
pension
plans
as
they
now
are
or
hereafter
may
be
constituted
from
time
to
time
and
to
pay
over
its
surplus
funds
from
time
to
time
to
the
trustee
or
trustees
for
the
time
being
of
the
trust
established
in
respect
of
pensions
by
Woodward
Stores
Limited
by
Indenture
dated
the
19th
day
of
January
1945
made
between
Woodward
Stores
Limited
as
the
company
and
William
Mann,
John
William
Butterfield
and
Arthur
John
Rowse
as
trustees
and
also
to
pay
over
such
portions
of
its
surplus
funds
as
the
directors
may
from
time
to
time
decide
to
the
trustee
or
trustees
for
the
time
being
of
all
or
any
of
the
respective
trusts
as
they
now
are
or
hereafter
may
be
constituted
from
time
to
time
in
respect
of
pensions
by
all
or
any
of
such
companies
and
all
or
any
of
their
respective
successors
in
the
absolute
discretion
of
said
directors
and
for
the
purpose
aforesaid
to
acquire
by
purchase,
gift
or
otherwise
shares
in
the
share
capital
of
Woodward
Stores
Limited,
Woodward
Stores
(1947)
Limited,
Woodward
Stores
(Alberta)
Limited,
Woodward
Stores
(Port
Alberni)
Limited,
Woodward
Stores
(Westminster)
Limited,
and
Woodward
Holdings
Limited,
or
any
of
them,
to
sell
all
or
any
of
the
shares
so
acquired
and
to
take
options
on
the
re-purchase
thereof,
and
to
do
all
such
other
things
as
may
be
necessary
for
or
conducive
to
the
attainment
of
the
said
object.’’
In
the
original
object,
as
declared
on
January
19,
1945,
the
appellant
was
concerned
only
with
the
payment
of
pensions
to
employees
and
ex-employees
of
Woodward
Stores
Limited
and
paying
over
its
surplus
funds
to
the
pension
trustees
mentioned
in
the
trust
deed
of
January
19,
1945,
and
it
was
confined
in
its
dealings
with
Woodward
company
shares
to
the
shares
of
Woodward
Stores
Limited.
And
there
was
no
reference
in
the
original
object
to
any
exercise
of
discretion
by
the
directors
of
the
appellant.
On
the
same
date
as
that
of
the
declaration
of
the
appellant’s
original
object,
namely,
on
January
19,
1945,
a
trust
deed
was
entered
into
between
Woodward
Stores
Limited
as
the
Company
and
William
Mann,
John
William
Butterfield
and
Arthur
John
Rowse
as
Trustees
whereby
they
were
constituted
pension
trustees
for
such
employees
and
ex-employees
of
the
Company
as
might
be
eligible
to
receive
pensions.
The
said
trustees,
later
referred
to
as
the
pension
trustees,
were
the
same
persons
as
the
members
of
the
pension
committee
mentioned
previously.
They
were
also
all
members
of
the
appellant,
William
Mann
being
its
president
and
Arthur
James
Rowse
its
secretary.
Immediately
after
its
incorporation
the
appellant
took
over
the
operation
of
the
share
sale
scheme
which
Woodward
Holdings
Limited
had
taken
over
from
W.
C.
Woodward.
But
before
I
deal
with
this
activity
I
should
refer
to
another
matter
in
order
to
clear
it
out
of
the
way.
Mr.
Swannell
stated
that
W.
C.
Woodward
had
had
the
idea
of
setting
up
a
tax
exempt
pensions
society
under
Section
5(1)
(h)
of
the
Income
War
Tax
Act,
R.S.C.
1927,
ce.
97,
which
read,
in
part,
as
follows:
“5.
(1)
(h)
In
case
of
a
trust
established
in
connection
with,
or
a
corporation
incorporated
for
the
administration
of
an
employees’
superannuation
or
pension
fund
or
plan,
the
income
from
the
investment
of
the
superannuation
or
pension
funds
shall
be
exempt
if
the
trustee
or
corporation
so
elects.’’
and
that
before
the
appellant
was
incorporated
discussions
were
held
with
the
Department
at
Ottawa
with
a
view
to
ascertaining
the
requirements
of
such
a
society.
Mr.
W.
G.
Skinner,
the
vice-
president,
comptroller
and
secretary
of
all
the
Woodward
companies,
including
the
appellant,
since
June,
1959,
and
the
Woodward
companies’
executive
in
charge
of
the
appellant’s
affairs,
stated
that
it
had
never
obtained
the
Department’s
approval
under
the
section
referred
to.
There
were
two
reasons
that
prevented
it
from
becoming
a
tax
exempt
pension
society
under
the
section
as
W.
C.
Woodward
had
intended.
The
first
was
that
it
handled
the
share
sale
scheme
and
the
second
that
it
lacked
the
necessary
funds
to
meet
the
past
service
liabilities
to
the
employees
that
an
actuarially
sound
pension
fund
should
have.
The
matter
has
been
discussed
with
the
Department
on
a
number
of
occasions
but
it
is
still
in
the
air.
Consequently,
the
appellant
cannot
be
considered
as
having
been
organized
as
a
tax
exempt
pension
society.
It
has
nothing
to
do
with
the
administration
of
a
superannuation
or
pension
fund
or
plan
or
the
administration
of
a
pension
scheme.
It
does
not
pay
any
pensions.
All
that
it
does
is
to
assist
in
providing
funds
for
the
payment
of
pensions
and
it
obtains
the
desired
funds
by
operating
the
share
sale
scheme.
Mr.
Skinner
conceded
that
the
appellant’s
operations
consisted
solely
in
dealing
in
Woodward
company
shares
with
Woodward
company
employees
and
nothing
else
and
that
it
never
engaged
in
any
other
operation.
Consequently,
it
cannot
be
considered
as
a
pension
society
in
the
ordinary
sense
of
the
term
and,
to
that
extent,
its
name
is
a
misnomer.
Immediately
after
the
appellant
had
purchased
its
first
block
of
shares
on
January
26,
1945,
it
began
to
sell
them
to
Woodward
company
employees
under
agreements
similar
in
terms
to
those
of
the
share
purchase
agreement
already
mentioned,
namely,
at
their
par
value
of
$5
per
share,
with
a
small
down
payment
and
the
balance
in
small
weekly
or
monthly
payments
together
with
interest
on
the
outstanding
balance
at
the
rate
of
4
per
cent
per
annum.
At
the
same
time
the
appellant
took
an
option
from
the
employee
purchaser
to
repurchase
the
shares
at
the
par
value
of
$5
per
share
on
the
death
or
retirement
of
the
employee.
It
is
interesting
to
note
that
when
the
appel-
lant
purchased
its
first
shares
it
had
no
money
and
had
to
rely
on
the
sale
of
shares
to
employees
to
get
the
monies
necessary
to
meet
its
payments
as
they
became
due.
I
now
come
to
the
facts
of
the
appellant’s
operation
of
the
share
sale
scheme.
On
January
26,
1945,
it
entered
into
one
agreement
with
Woodward
Holdings
Limited
for
the
purchase
of
shares
of
Woodward
Stores
Limited
having
an
aggregate
par
value
of
$710,050,
at
$5
per
share,
and
agreed
to
pay
this
amount
with
a
down
payment
of
$1,
a
payment
of
$50,000
on
April
15,
1945,
and
the
balance
at
the
rate
of
$50,000
on
April
15,
annually
thereafter
with
interest
on
the
outstanding
balance
at
the
rate
of
3
per
cent
per
annum.
On
October
10,
1946,
the
appellant
entered
into
another
agreement
with
Woodward
Holdings
Limited
whereby
it
purchased
shares
of
Woodward
Stores
Limited
in
the
aggregate
par
value
of
$70,900,
at
$5
per
share,
for
which
it
agreed
to
pay
$73,026,
the
difference
being
due
to
an
accrual
of
dividends,
with
a
down
payment
of
$1,
a
payment
of
$7,300
on
April
15,
1947,
and
the
balance
at
the
rate
of
$7,300
on
April
15,
annually
thereafter
together
with
interest
on
the
outstanding
balance
at
the
rate
of
3
per
cent
per
annum.
This
purchase
took
the
residue
of
the
shares
which
W.
C.
Woodward
had
turned
over
to
Woodward
Holdings
Limited
for
sale
by
it.
On
the
same
date,
namely,
October
10,
1946,
the
appellant
entered
into
still
another
agreement
with
Woodward
Holdings
Limited
whereby
it
took
over
its
rights
in
agreements
which
it
had
made
for
the
sale
of
shares
to
employees,
the
amount
remaining
unpaid
on
the
said
shares
as
at
July
31,
1946,
being
$165,140.78,
which
amount
the
appellant
agreed
to
pay
at
$17,700
on
April
15,
1947,
and
the
balance
at
the
rate
of
$17,700
on
April
15,
annually
thereafter
together
with
interest
on
the
outstanding
balance
at
the
rate
of
3
per
cent
per
annum.
Thus
far
the
appellant
dealt
only
in
shares
of
Woodward
Stores
Limited
but,
subsequently,
under
the
enlargements
of
its
object
on
September
15,
1947,
and
February
21,
1949,
it
was
enabled
to
deal
in
the
shares
of
other
Woodward
companies,
including
Woodward
Stores
(Alberta)
Limited,
Woodward
Stores
(Port
Alberni)
Limited,
Woodward
Stores
(Westminster)
Limited,
Woodward
Holdings
Limited
and
Woodward
Stores
(1947)
Limited.
Under
its
enlarged
power
it
acquired
large
blocks
of
shares
in
various
Woodward
companies
in
addition
to
those
already
referred
to.
Thus
in
September,
1947,
it
acquired
180,058
shares
of
the
aggregate
par
value
of
$900,290
of
Wood-
ward
Stores
(1947)
Limited,
which
had
been
established
on
the
reorganization
of
the
Woodward
companies
in
1947
to
hold
all
the
shares
in
all
the
Woodward
operating
companies.
It
borrowed
the
amount
necessary
to
pay
for
these
shares
from
W.
C.
Woodward
and
P.
A.
Woodward
on
a
demand
note
carrying
interest
at
the
rate
of
3
per
cent
per
annum
but
the
interest
was
later
waived
and
was
never
paid.
And
in
November,
1947,
the
appellant
acquired
from
Woodward
Holdings
Limited
its
rights
in
agreements
which
it
had
made
for
the
sale
of
shares
in
C.
Woodward
Limited,
the
original
Woodward
company
in
Edmonton,
the
predecessor
of
Woodward
Stores
(Edmonton)
Limited,
to
its
Edmonton
employees
for
$48,964.16,
being
the
amount
remaining
unpaid
on
the
said
agreements.
These
shares
were
at
the
par
value
of
$1
per
share
but
were
later
exchanged
for
$5
par
value
shares
of
Woodward
Stores
(Alberta)
Limited.
The
appellant
made
two
other
substantial
purchases
of
shares.
In
May,
1948,
it
purchased
80,000
shares
of
the
aggregate
par
value
of
$400,000
of
Woodward
Stores
(Alberta)
Limited,
which
then
held
all
the
shares
of
Woodward
Stores
(Edmonton)
Limited,
and
paid
for
them
with
money
borrowed
from
Woodward
Stores
(Edmonton)
Limited.
No
interest
was
ever
paid
on
the
amount
thus
borrowed.
And
in
December,
1948,
the
appellant
purchased
20,000
shares
of
the
aggregate
par
value
of
$100,000
from
Woodward
Stores
(Port
Alberni)
Limited
and
paid
for
them
with
money
borrowed
from
the
Vancouver
company,
Woodward
Stores
Limited.
This
amount
was
covered
by
a
demand
note
carrying
interest
at
the
rate
of
3
per
cent
per
annum
but
no
interest
was
ever
paid.
Prior
to
Woodward
Stores
(1947)
Limited
taking
over
all
the
shares
of
the
Woodward
operating
companies
the
appellant
sold
shares
of
Woodward
Stores
Limited,
Woodward
Stores
(Alberta)
Limited
and
Woodward
Stores
(Port
Alberni)
Limited
to
the
Vancouver,
Edmonton
and
Port
Alberni
employees
respectively
but
after
the
re-organization
the
only
shares
that
were
sold
to
employees
regardless
of
where
they
were,
were
those
of
Woodward
Stores
(1947)
Limited.
Previously
the
rates
of
dividend
varied
but
after
the
1947
re-organization
they
remained
constant.
Whenever
the
appellant
sold
shares
to
a
Woodward
company
employee
it
was
always
on
terms
similar
to
those
already
described
and
it
always
took
from
the
employee
purchaser
an
option
to
repurchase
the
shares
on
his
death
or
retirement.
The
option
was
always
taken
up
when
the
right
to
exercise
it
arose.
The
sale
and
the
repurchase
were
always
at
the
par
value
of
$5
per
share.
When
the
employee
completed
his
agreement
he
received
the
share
certificate
for
the
shares
purchased
by
him
but
until
then
the
shares
continued
to
be
registered
in
the
appellant’s
name.
It
did,
however,
turn
the
dividends
on
the
shares
over
to
the
purchaser
employee,
subject
to
a
provision
in
the
share
purchase
agreement
that
dividends
to
be
declared
on
the
shares
for
the
current
year
should
be
proportionately
adjusted
between
the
appellant
and
the
employee
as
of
the
date
of
the
agreement.
There
was
a
similar
apportionment
when
shares
were
repurchased
from
employees.
..
i
The
extent
of
the
appellant’s
dealing
in
Woodward
company
shares
is
shown
by
the
fact
that
in
the
eight
years.
ending
January
31,
1953,
it
had
purchased
from
the
various
Woodward
companies
a
total
of
436,248
shares,
in
addition
to
132,660
shares
in
respect
of
which
it
had
taken
over
the
equities
of
previous
vendors,
that
it
had
sold
599,272
shares
to
employees
and
repurchased
263,593
shares
from
them,
the
first
figure,
no
doubt,
including
shares
which
it
had
repurchased
and
then
resold.
Moreover,
it
is
beyond
dispute
that
the
appellant’s
operation
of
the
share
sale
scheme
was
very
profitable.
During
the
eight
year
period
since
its
incorporation
ending
January
31,
1953,
it
had
incurred
total
obligations
of
$2,395,845.94
for
the
purchase
of
shares
and
equities
in
sale
purchase
agreement
but
by
January
31,
1953,
it
had
paid
off
all
its
obligations
except
$200,000
still
owing
to
P.
A.
Woodward
and
had
built
up
a
surplus
of
$754,019.02
even
after
it
had
paid
$13,089.30
to
the
pension
trustees
in
October,
1951
and
a
further
sum
of
$42,273.23
during
the
year
ending
January
31,
1953.
And
it
is
remarkable
that
it
started
with
no
assets
at
all.
It
is
true
that
this
surplus
included
some
capital
gains.
These
came
about
as
the
result
of
Woodward
company
reorganizations.
In
August,
1947,
Woodward
Stores
(1947)
Limited
exchanged
all
the
appellant’s
shares
of
Woodward
Stores
Limited
for
shares
of
Woodward
Stores
(1947)
Limited
at
the
rate
of
114
for
1
with
the
result
that
it
made
a
capital
gain
of
$154,950
from
this
source.
And
in
1947
all
the
appellant’s
shares
in
C.
Woodward
Limited
were
exchanged
for
shares
in
Woodward
Stores
(Alberta)
Limited,
a
subsidiary
holding
company
of
the
shares
of
Woodward
Stores
(Edmonton)
Limited,
at
the
rate
of
2
for
1
with
the
result
that
the
appellant
made
a
capital
gain
of
$5,000
from
this
source.
The
total
of
the
capital
gains
thus
made
in
the
year
ending
January
31,
1948,
came
to
$160,050.
And
in
the
year
ending
January
31,
1953,
all
the
appellant’s
shares
of
Woodward
Stores
(Alberta)
Limited
were
exchanged
for
shares
in
Woodward
Stores
(1947)
Limited
at
the
rate
of
3
for
2
with
the
result
that
in
that
year
it
made
a
capital
gain
of
$25,975,
from
that
source.
Apart
from
these
capital
gains
the
rest
of
the
appellants’
surplus
was
an
accumulation
of
annual
operating
profits.
These
are
set
out
in
the
appellant’s
annual
financial
statements,
filed
as
Exhibits
El
to
E8,
which
show
how
the
surplus
was
built
up
year
by
year.
The
items
of
revenue
consist
of
interest
and
dividends
received
by
the
appellant
and
those
of
expenditure
consist
of
interest
paid
by
it
on
amounts
owing
by
it
or
on
deposits
made
by
employees
or
in
lieu
of
dividends
and
other
items
such
as
incorporation
and
legal
expenses
and
small
sundry
expenses.
The
largest
item
of
revenue,
amounting
to
$559,843.18,
as
shown
by
Exhibit
6,
consisted
of
dividends
received
by
the
appellant
either
in
respect
of
the
unsold
shares
held
by
it
or
as
its
share
of
the
dividends
on
shares
purchased
by
employees
pursuant
to
the
apportionment
provision
in
the
share
purchase
agreement.
The
total
amount
of
interest
received
by
the
appellant
from
employees
on
their
unpaid
balances
came
to
$254,280.91,
as
shown
by
the
financial
statements,
which
amount
was
reduced
to
a
net
$141,298.48,
as
shown
by
Exhibit
6,
after
the
payment
of
interest
by
the
appellant.
There
was
thus
a
net
interest
profit
of
this
amount
gained
during
the
eight
periods
from
the
employees
to
whom
shares
have
been
sold.
The
appellant
did
not
pay
any
moneys
out
of
its
surplus
to
the
pension
trustees
until
October,
1951.
The
reason
for
the
delay,
as
given
by
Mr.
Skinner,
was
that
up
to
1949
the
appellant’s
cash
position
was
low
and
it
was
not
until
1951
that
it
was
felt
that
it
was
in
a
position
to
supply
the
necessary
funds.
Up
to
that
time
the
operating
companies
under
the
direction
of
the
pension
committee
referred
to
paid
the
pensions
themselves.
The
amounts
so
paid
were
charged
as
operating
expenses
and
their
deduction
was
allowed
by
the
Department.
But
in
October,
1951,
the
appellant
took
over
the
provision
of
funds
for
the
payment
of
pensions
by
the
pension
trustees
and
thereafter
the
Operating
companies
were
relieved
of
this
expense.
Since
then
the
operating
companies
have
not
paid
any
pensions.
In
October,
1951,
the
appellant
paid
the
pension
trustees
the
sum
of
$13,089.30,
which
was
enough
to
meet
the
pension
requirements
for
the
balance
of
the
year
ending
January
31,
1952.
In
the
statement
of
revenue
and
expenditure
for
that
year
the
amount
thus
paid
is
described
as
‘‘pensions
paid”,
but
this
is
not
correct.
The
appellant
never
paid
any
pensions.
In
the
following
year
the
appellant
paid
the
pension
trustees
the
sum
of
$42,273.23,
which
was
all
that
was
required
for
pension
purposes
in
that
year.
The
pension
trustees
advised
the
appellant
each
month
of
the
amount
required
for
the
payment
of
pensions
and
the
appellant
paid
them
the
necessary
amounts.
The
sum
of
$42,273.23
was
also
erroneously
described
in
the
statement
of
revenue
and
expenditure
as
‘‘pensions
paid”.
I
should
also
refer
to
other
facts
on
which
counsel
for
the
appellant
relied
as
proof
that
it
is
not
a
commercial
company
in
the
ordinary
sense.
It
has
no
paid
officers
or
employees.
It
does
not
maintain
an
office.
Its
books
are
kept
in
the
general
office
of
the
Woodward
Vancouver
store.
It
does
not
pay
rent
or
bear
any
share
of
the
overhead
expense
of
the
Vancouver
store.
All
its
work
is
carried
on
by
the
secretary
and
his
staff
which
is
the
staff
of
the
Vancouver
store
but
it
does
not
make
any
contribution
to
the
expense
of
this
staff.
There
is
also
the
fact
that
paragraph
4
of
the
appellant’s
by-laws
requires
it
to
carry
out
the
objects
set
forth
in
the
declaration
filed
with
the
Registrar
of
Companies
on
the
incorporation
of
the
society.
This
paragraph
must,
of
course,
be
read
subject
to
the
enlargements
and
alteration
of
the
appellant’s
object
to
which
I
have
referred.
And
paragraph
54
of
the
by-laws
provides
that
upon
the
dissolution
of
the
society
all
its
assets
shall
be
conveyed,
assigned,
transferred
and
delivered
to
the
pension
trustees
appointed
on
January
19,
1945,
or
their
successors
to
be
held
by
them
or
their
successors
upon
the
trusts
declared
in
the
indenture
of
that
date.
The
circumstances
which
led
to
the
present
appeal
may
be
stated
briefly.
In
its
income
tax
return
for
the
year
ending
January
31,
1952,
the
appellant
claimed
a
deduction
of
the
amount
of
$13,089.30
which
it
had
paid
to
the
pension
trustees
and
this
deduction
was
allowed
by
the
Department.
Similarly,
its
claim
of
a
deduction
of
the
amount
of
$42,273.23,
which
it
made
in
its
Income
tax
return
for
the
following
year
ending
January
31,
1953,
was
also
allowed.
In
the
next
year
the
amount
paid
by
the
appellant
to
the
pension
trustees
exceeded
its
income
for
that
year
and
it
then
filed
an
amended
income
tax
return
for
the
year
ending
January
31,
1953,
and
sought
to
carry
back
its
1954
loss
as
a
deduction
for
that
year.
Subsequently,
on
July
25,
1957,
the
Minister
re-assessed
the
appellant
for
the
taxation
year
ending
January
31,
1953.
On
the
re-assessment
the
deduction
of
$42,273.33
claimed
by
it
was
disallowed,
but
it
was
allowed,
under
Section
28(1)
of
the
Act,
to
deduct
an
amount
equal
to
that
of
the
dividends
which
it
had
received
from
corporations
and
it
was
assessed
only
in
respect
of
the
net
interest
income
received
by
it
in
the
year,
amounting
to
$31,525.58,
less
an
expense
item
of
$22.80,
as
shown
on
the
appellant’s
statement
of
revenue
and
expenditure
for
the
year,
leaving
a
taxable
income
of
$31,503.28.
The
appellant
objected.
to
the
assessment
mainly
on
the
ground
that
it
was
exempt
from
tax
under
Section
62(1)
(i)
of
the
Act.
The
Minister
confirmed
the
assessment
particularly
on
the
ground
that
‘‘the
taxpayer
does
not
qualify
for
exemption
under
subsection
(1)
of
Section
62
of
the
Act’’.
Thereupon
the
appellant
appealed
to
this
Court.
Counsel
for
the
appellant
does
not
now
claim
a
deduction
of
the
amount
paid
to
the
pension
trustees
and
does
not
dispute
the
amount
of
the
assessment
if
the
appellant
is
found
liable
to
tax.
Thus
the
narrow
issue
in
the
appeal
is
that
the
appellant
contends
that
in
the
taxation
year
in
question
it
was
exempt
from
tax
under
Section
62(1)
(i)
of
the
Act
whereas
it
is
contended
for
the
Minister
that
it
is
subject
to
tax
on
the
net
interest
income
of
$31,503.28
received
by
it
during
the
year.
I
am
unable
to
accept
the
contention
of
counsel
for
the
appellant
that
it
was
exempt
from
tax
for
the
taxation
year
in
question
under
Section
62(1)
(i)
of
the
Act.
This
is
an
exempting
provision
and,
therefore,
subject
to
the
rule
of
construction
laid
down
in
Lumbers
v.
M.N.R.,
[1943]
Ex.
C.R.
202
at
211;
[1943]
C.T.C.
281
at
290,
which
was
stated
as
follows:
“.
.
.
a
taxpayer
cannot
succeed
in
claiming
an
exemption
from
income
tax
unless
his
claim
comes
clearly
within
the
provisions
of
some
exempting
section
of
the
Income
War
Tax
Act:
he
must
show
that
every
constituent
element
necessary
to
the
exemption
is
present
in
his
case
and
that
every
condition
required
by
the
exempting
section
has
been
complied
with.’’
This
rule
has
been
applied
in
numerous
eases.
In
my
opinion,
the
appellant
does
not
meet
the
requirements
of
the
section
and
the
Minister
was
right
in
finding
that
it
did
not
qualify
for
exemption
under
it.
The
section
presupposes
that
if
a
club,
society
or
association
is
to
be
exempt
from
tax
under
it,
it
should
be
organized
and
operated
exclusively
for
a
purpose
‘‘except
profit’’,
that
is
to
say,
for
a
purpose
other
than
a
profit
one.
That
necessary
condition
does
not
exist
in
the
present
case.
While
it
may
have
been
the
purpose
in
W.
C.
Woodward’s
mind,
when
the
organization
of
the
appellant
was
being
considered,
to
establish
a
tax
exempt
pension
society
that
would
enjoy
the
benefits
of
Section
5(1)
(h)
of
the
Income
War
Tax
Act
that
purpose
was
never
accomplished.
Mr.
Skinner’s
evidence
to
that
effect
is
conclusive.
Consequently,
any
suggestion
that
the
purpose
of
the
organization
of
the
appellant
was
to
make
it
an
element
in
the
administration
of
a
pension
scheme
for
Woodward
company
employees
and
ex-employees
is
unfounded.
The
purpose
of
its
actual
organization
was
a
much
more
limited
one,
namely,
to
assist
in
providing
funds
for
the
payment
of
pensions
by
the
pension
trustees
or,
in
other
words,
to
raise
money.
The
raising
of
money
was
its
basic
purpose
and
for
that
purpose,
namely,
the
raising
of
money,
it
was
directed
to
deal
in
shares
of
the
various
Woodward
companies
by
acquiring
and
selling
them
and
it
was
intended
that
its
dealings
should
result
in
the
raising
of
money
so
that
it
could
provide
the
necessary
monetary
assistance
to
the
pension
trustees.
Thus
the
purpose
of
the
appellant’s
actual
organization
was
a
profit
one.
It
was
certainly
not
organized
for
a
purpose
‘‘except
profit”
within
the
meaning
of
the
term
‘‘any
other
purpose
except
profit’’.
And
I
have
no
hesitation
in
finding
that
the
appellant
was
operated
for
a
profit
purpose.
Its
only
operations
consisted
in
dealing
in
Woodward
company
shares.
It
made
a
profit
from
such
dealing—indeed,
a
very
substantial
one—and
it
was
intended
that
it
should
do
so.
In
the
taxation
year
in
dispute
it
earned
a
net
interest
income
of
$31,503.28
from
Woodward
company
employees
to
whom
it
had
sold
shares,
which
was
almost
enough
to
pay
all
the
pensions
for
that
year.
In
this
connection
I
am
unable
to
accept
the
submission
of
counsel
for
the
appellant
that
its
purpose
in
operating
the
share
sale
scheme
was
to
provide
shares
to
Woodward
company
employees
at
cost
and
that
the
making
of
a
profit
out
of
the
operation
was
merely
incidental.
That
submission
runs
counter
to
the
plain
intendment
of
the
appellant’s
object.
It
was
to
deal
in
the
shares
for
the
purpose
of
assisting
in
providing
funds
for
the
payment
of
pensions,
which
plainly
meant
that
it
was
to
make
a
profit
out
of
such
dealing
so
that
it
could
assist
in
providing
the
desired
funds.
If
it
was
intended
that
the
operation
should
be
solely
for
the
purpose
of
getting
shares
into
the
hands
of
employees
why
did
the
appellant
exact
greater
interest
from
the
employees
on
their
outstanding
balances
than
it
had
to
pay
on
its
own
outstanding
balances
and
why
it
did
keep
for
itself
a
portion
of
the
current
year’s
dividends
on
shares
which
employees
had
purchased?
Moreover,
even
if
the
purpose
of
dealing
in
the
shares
was
partly
to
put
them
into
the
hands
of
employees
and
partly
to
make
a
profit
therefrom,
the
purpose
of
the
operation
was
not
exclusively
for
a
purpose
‘‘except
profit”.
Since
I
have
found
that
in
the
taxation
year
in
question
the
appellant
was
organized
and
operated
for
a
profit
purpose
it
follows,
of
course,
that
it
was
not
entitled
to
any
exemption
under
Section
62(1)
(i)
of
the
Act.
While,
in
effect,
this
finding
disposes
of
the
appellant’s
contention
I
should
deal
with
two
specific
submissions
made
by
counsel
for
the
appellant
in
support
of
his
contention
that
it
was
exempt
from
tax
under
Section
62(1)
(i).
One
was
that
the
profit
purpose
envisaged
by
the
section
was
a
purpose
of
earning
a
commercial
profit
and
that
this
element
was
missing
in
the
appellant’s
case.
I
do
not
agree.
It
seems
manifest
to
me
that
there
was
what
might
well
be
considered
a
commercial
purpose
behind
the
appellant’s
organization,
namely,
that
it
should
so
operate
the
share
sale
scheme
as
to
raise
money
by
it
and
pay
it
over
to
the
pension
trustees
and
thereby
relieve
the
operating
company
from
a
considerable
operating
expense.
This
was
certainly
a
commercial
purpose
and
it
was
accomplished
in
such
a
substantial
manner
that
most
of
the
money
required
to
pay
pensions
in
the
taxation
year
in
question
came
from
interest
income
received
from
employees
who
had
purchased
shares
and
still
owed
balances
of
purchase
price.
The
other
specific
submission
was
that
the
appellant
was
entitled
to
exemption
under
the
section
by
reason
of
the
fact
that
it
was
impossible
for
it
to
keep
or
distribute
its
profit
but
must
pay
it
to
the
pension
trustees
and
that,
consequently,
the
appellant
did
not
own
it.
In
support
of
this
contention
counsel
relied
strongly
on
the
decision
of
the
Supreme
Court
of
Canada
in
M.N.R.
v.
St.
Catharines
Flying
Training
School
Limited,
[1955]
S.C.R.
738;
[1955]
C.T.C.
185.
There
it
was
held
by
Locke,
J.,
who
delivered
the
judgment
of
the
Court,
that
the
respondent
in
that
case
had
no
income
liable
to
taxation
since
the
surplus
held
by
it
was,
in
effect,
held
in
trust
for
the
Crown.
In
my
opinion,
that
finding
has
no
application
to
the
facts
in
the
present
case
and
is
certainly
not
an
authority
for
the
submission
that
the
appellant
was
exempt
from
tax
under
Section
62(1)
(i).
It
would
be
unrealistic
and
fanciful
to
hold
that
the
appellant
had
no
income
in
the
year
ending
January
31,
1953.
Its
own
statement
of
revenue
and
expenditure
for
the
year,
Exhibit
E8,
shows
its
income.
The
fact
that
it
was
required
to
pay
over
its
surplus
funds
to
the
pension
trustees
cannot
possibly
nullify
the
fact
that
the
appellant
had
an
income.
The
income
was
earned
by
it
as
the
result
of
its
own
operation
in
dealing
with
its
own
property.
How
can
it
then
be
said
that
it
did
not
own
its
income?
The
fact
that
a
person
must
devote
his
property
to
a
particular
purpose
cannot
alter
the
fact
that
when
he
acquired
the
property
it
was
his.
Now
that
it
has
been
determined
that
the
appellant
has
not
qualified
for
exemption
under
Section
62(1)
(i)
of
the
Act
the
only
remaining
question
is
whether
it
was
subject
to
tax
in
respect
of
its
income
for
the
taxation
year
in
dispute
and
we
are
here
concerned
only
with
the
interest
portion
of
it.
There
can,
I
think,
be
no
doubt
about
it.
The
interest
was
earned,
as
already
stated,
by
the
appellant
on
the
result
of
its
own
operation
of
its
own
property
so
that
it
does
not
matter
whether
the
profit
gained
by
it
was
a
profit
from
a
business
or
a
profit
from
property.
And
it
is
a
basic
principle
of
income
tax
law
that
the
taxability
of
income
cannot
be
affected
by
the
purpose
to
which
it
is
applied
after
it
has
been
earned.
This
was
established
beyond
dispute
by
the
House
of
Lords
in
Mersey
Docks
v.
Lucas
(1882-3),
8
App.
Cas.
891.
There,
a
corporation
was
constituted
for
the
management
of
the
Mersey
Dock
Estate
by
an
Act
which
provided
that
the
moneys
to
be
received
by
them
from
their
dock
dues
and
other
sources
of
revenue
should
be
applied
in
payment
of
expenses,
interest
upon
debts,
construction
of
works
and
management
of
the
estate;
and
that
the
surplus
should
be
applied
to
a
sinking
fund
for
the
extinguishment
of
the
principal
of
the
debts;
and
that
after
such
extinguishment
the
rates
should
be
reduced;
and
that
except
as
aforesaid
the
moneys
should
not
be
applied
for
any
other
purpose
whatsoever;
and
that
nothing
should
affect
their
liability
to
parochial
or
local
rates.
It
was
held
unanimously
by
the
House
of
Lords
that
under
the
Income
Tax
Acts
the
corporation
was
liable
to
income
tax
in
respect
of
the
surplus
although
applicable
to
the
said
purposes
only.
The
decision
in
Mersey
Docks
v.
Lucas
(supra)
was
later
regarded
as
binding
authority
and
applied
by
the
House
of
Lords
in
Forth
Conservancy
Board
v.
C.L.R.,
[1931]
A.C.
540.
In
my
opinion,
the
principle
thus
established
is
as
applicable
in
Canada
as
in
the
United
Kingdom.
If
a
statutory
requirement
that
an
item
of
profit
must
be
applied
to
a
particular
purpose
cannot
affect
its
taxability
it
follows
as
a
matter
of
course
that
the
appellant
cannot
by
its
own
pre-determination
of
the
purpose
to
which
its
profit
is
to
be
applied
make
its
profit
non-taxable.
A
taxpayer
cannot
make
his
profit
non-taxable
by
determining
in
advance
of
his
making
it
what
is
to
be
done
with
it.
The
purpose
to
which
he
applies
his
profit
cannot
affect
his
liability
to
tax
in
respect
of
it.
Consequently,
the
fact
that
the
appellant
was
required
to
pay
its
surplus
to
the
pension
trustees
does
not
save
it
from
liability
for
income
tax
on
the
amount
in
question.
The
Minister
was,
therefore,
right
in
assessing
the
appellant
as
he
did—and
its
appeal
must
be
dismissed
with
costs.
Judgment
accordingly.